Rousseff to cut power rates to sharpen Brazil's edge

Reuters News
Posted: Sep 06, 2012 8:22 PM
Rousseff to cut power rates to sharpen Brazil's edge

By Alonso Soto and Jeb Blount

BRASILIA (Reuters) - Brazilian President Dilma Rousseff announced sweeping cuts to electricity rates on Thursday in a new effort to lower some of the world's highest business costs that are stifling a once-booming emerging-markets star.

In a widely anticipated announcement, Rousseff said that cuts could drop industrial electricity rates by as much as 28 percent, while residential consumers would see rates fall on average by 16.2 percent.

With growth in the world's sixth-largest economy stalled for nearly a year now, Rousseff's measures will bring needed relief to local industries that are losing market share to foreign competitors that have lower costs.

"This reduction in the cost of the electricity will make our productive sector even more competitive," Rousseff said in a televised address to the nation ahead of the country's independence day on September 7.

She said cuts will take effect in early 2013 but did not detail how the government plans to carry them out. Officials have said her administration plans to reduce federal taxes on electricity companies.

Rousseff, a trained economist, has pushed ahead with more than a dozen stimulus measures such as tax cuts and subsidized lending to pull the economy out of its lull. However, growth continues to disappoint and industry leaders say her targeted measures miss meeting more structural challenges.

She has been laboring to bring down the infamous "Brazil Cost" or mix of high taxes, infrastructure bottlenecks and red tape that makes her country one of the most expensive places to do business in the world.

In her speech, Rousseff made a call to political opponents and business leader to start a dialogue to improve Brazil's Byzantine tax system. She vowed to continue lowering taxes without compromising fiscal responsibility.

Mining giant Vale SA and steel-maker Cia Siderugica Nacional, some of the country's biggest electricity users, are up against a plunge in global demand. Iron ore has fallen by 50 percent in the last year, and steel prices have slumped by a fifth or more.

"This cut comes at the right time for industry," said Adriano Pires, head of the Brazilian Infrastructure Institute, a Rio de Janeiro energy think tank.

"But ... we have to remember that energy is only one part of the cost of doing business in Brazil."

In August, Rousseff opened up $66 billion worth of road and railway concessions in hopes of bolstering private investment and speeding up transportation of grains and minerals in the commodity powerhouse.

In coming weeks, she plans to announce more tax cuts for industries, the simplification of federal taxes and a new round of multi-billion dollar concessions of airports and ports. She will also detail the electricity rate cuts in an official announcement to business leaders next week.

Lower electricity rates could also help her government tame stubbornly high inflation that began to pick up again the recent weeks and could lead the central bank to halt a year-old rate-cutting cycle in their meeting next month.


Brazil's average electricity cost of $180 per megawatt hour is exceeded only by Italy and Slovakia, the Getulio Vargas Foundation, a private think tank, said in a 2011 study based on data from the International Energy Agency.

Those high electricity costs destroyed Brazil's once-large primary aluminum industry. With electricity being one of the main costs of turning bauxite ore in to alumina and eventually aluminum, production has move out of Brazil.

Alcoa Inc., the world's largest aluminum producer, has been in talks with the government for years trying to lower electricity costs and has considered reducing its presence in the Brazil after 50 years.

Brazil's electricity industry includes state-run companies such as Eletrobras as well as multi-nationals like AES Corp and GDF Suez.

(Writing by Alonso Soto; Editing by Anthony Boadle and Reese Ewing)