UPDATE 1-Brazil power regulator proposes rate hike; may stoke inflation

Tue Feb 11, 2014 1:59pm EST

By Leonardo Goy and Alonso Soto

BRASILIA Feb 11 (Reuters) - Brazil's electricity regulator ANEEL on Tuesday proposed a 4.6 percent increase in rates paid by consumers to help cover power subsidies, a move that could add pressure to already-high inflation in Latin America's top economy.

ANEEL expects a deficit of 5.6 billion reais ($2.33 billion) this year in the so-called Energy Development Account, or CDE. That does not include the cost of using more expensive thermal energy to make up for a drop in hydroelectric output.

Last year, President Dilma Rousseff made a deal with power utilities to slash electricity prices in a bid to bolster Brazil's slow-moving economy and tame a surge in prices.

A year has passed and the economy remains fragile and inflation high, which has threatened Brazil's investment grade rating as investors worry about the country's fiscal health.

Finance Minister Guido Mantega has promised to pay for any extra energy costs to avoid an increase in consumer bills. That cost, which some media reports say could reach 5 billion reais, also threatens to derail government efforts to show markets it is becoming more fiscally responsible.

The government has budgeted 9 billion reais to pay for energy costs this year. Most of that amount would be loaned to power distributors to pay for thermal energy as a severe drought has lowered water reservoir levels at hydroelectric power plants.

Another inflationary risk stemming from the drought is a potential increase in the price of soy and corn, used to feed livestock. Producers say yields on recently planted soybeans could be affected by a month and a half of dry weather in much of Brazil.

But any impact on inflation would be milder than the food shock felt in late 2012 after a drought in the United States bolstered the price of global grains, government officials say.

"There is a risk and we are monitoring the situation very closely, but so far the drought has not had a significant impact on agriculture," said a government official, who asked not to be named. "There is no expectation for lack of grains in Brazil."

Most weather forecasters expect rain to return to Brazil's parched southeast in the second half of February and the government forecasts a record soybean crop.

Sao Paulo-based agricultural research institute Cepea said in a report on Tuesday that the hot, dry weather was affecting tomatoes, potatoes and lettuce crops, possibly raising prices of those foods for consumers.

Many vegetables are currently being harvested, however, moderating the impact, Cepea said.

INFLATIONARY IMPACT

ANEEL's rate hike proposal will be discussed at public hearings between Feb. 13 and March 16 before a decision. The subsidies in the CDE cover energy distribution to the remote northern regions and lower rates for poor consumers.

If the regulator opts to hike rates by 4.6 percent it could add 0.4 percentage point to this year's inflation, said Flavio Combat, chief economist with the Concordia brokerage in Rio de Janeiro.

Combat said the rate adjustment would increase his year-end inflation forecast from 5.9 percent to 6.3 percent, very close to the official target ceiling of 6.5 percent.

High inflation is a political liability for Rousseff, who is expected to run for a second term in elections on Oct. 5.

Although annual inflation eased in January to 5.59 percent, Brazil has struggled to keep prices in check due to a combination of more public spending, a weaker local currency and robust consumption.

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