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The Globe and Mail

Brazil cuts electricity costs to boost stalled economy

Brazil’s President Dilma Rousseff speaks during a ceremony to announce a package of benefits for the electricity sector in Brasilia Sept. 11, 2012.


Brazil announced a major cut in electricity taxes on Tuesday that will lower high energy costs for industries and residential consumers, the latest attempt by President Dilma Rousseff to re-energize her country's once-booming emerging economy.

Energy Minister Edison Lobo said the tax cuts for electricity producers and distributors – first reported by Reuters in May – will "drastically" lower production costs and reduce power rates by up to 28 per cent for industries and 16 per cent for households.

"This is the biggest reduction in electricity rates that the country has ever seen," Ms. Rousseff said after signing the measures before an audience of business leaders.

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"Reduced energy costs … will improve Brazil's international standing, slow inflation and encourage investment," Ms. Rousseff said. "It will benefit both the businessman and the consumer."

Cheaper electricity will help contain inflationary pressures next year when economic growth is expected to pick up again. Above all, it will help Brazilian companies suffering from sky-high production costs improve their competitive edge abroad.

The reduced electricity costs will bring much-needed relief to Brazilian industries, especially in energy-intensive areas such as steel, aluminum and petrochemicals. Energy costs in Brazil are currently the world's third-highest.

Ms. Rousseff, a former energy minister, gave a sneak preview of the electricity tax cuts in a nationally televised address on Thursday in which she said they would make Brazil more competitive.

The world's sixth-largest economy has been on the brink of recession since mid-2011 as high taxes, a strong local currency and other structural problems squeeze what had previously been one of the world's most dynamic emerging economies.

Ms. Rousseff has in recent months announced targeted tax cuts for stagnant sectors such as the car industry. The cut in power rates is part of her government's strategy to reduce Brazil's high business costs and stimulate its struggling economy.

Brazil's electricity industry includes state-run companies such as Eletrobras as well as multinationals like AES Corp and GDF Suez. Hydroelectric power supplies about three-quarters of Brazil's electricity needs, with nuclear, thermal and wind power accounting for the rest.

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Electricity prices are a big component of the so-called "Brazil cost" – the mix of taxes, high interest rates, labour costs, infrastructure bottlenecks, and other issues that have caused the economy to become less competitive.

After a decade of strong performance, Brazil grew below the Latin American average in 2011 and so far this year.

If the electricity initiative is successful, Ms. Rousseff plans to use a similar blueprint to reduce taxes for other industries in coming months, possibly including telecoms, officials have told Reuters.

To ensure continued investment in power generation, Energy Minister Mr. Lobao announced the renewal of 20 concessions for electricity generators due to expire between 2015 and 2017, accounting for about one-fifth of the country's generating capacity.

Under Brazil's current concession law, the government gets the electricity assets at the end of the concession and can auction them to the highest bidder or operate them itself.

Without renewals of these concessions, Eletrobras and other Brazilian utilities such as CESP and Cemig would have had to bid in auction to regain their operations against companies that may have more cash. Eletrobras lost a $3.5-billion (U.S.) bidding war last year with China's Three Gorges for Energias de Portugal.

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