When customers of Brazil’s electric utilities get their bills in March, they will find they owe anywhere from 18 percent to 32 percent less than they did in February. Credit Brazilian President Dilma Rousseff for the drop, part of her effort to boost growth. If her plan works, consumers will spend the savings on Brazilian goods and services, while Brazilian companies will profit from the drop in costs to improve productivity and become globally competitive. Subsidiaries of multinationals such as aluminum giant Alcoa (AA) will also benefit from cheaper power.
There’s been collateral damage, though. Since Rousseff first announced the plan on Sept. 11, the country’s four largest power companies have lost a combined 17.6 billion reais ($8.8 billion) in market value, as investors figured the impact on industry profits. Two of those companies, Energética de Minas Gerais (CIG) and Energética de São Paulo, have decided not to renew their concessions—which give them the right to operate government-owned power plants and transmission lines—rather than accept the rate cuts.
Brazilian consumers pay more for their power than their peers in China, the U.S., and most of the European Union and Latin America. Although they will save money now, the move could damage state-controlled Centrais Elétricas Brasileiras (EBR), known as Eletrobrás. South America’s largest power company announced in February that it will offer voluntary retirement to up to 15 percent of its 28,000 employees as it restructures after agreeing to the lower rates. The new prices will wipe out profits at the plants that generate the cheaper power, Chief Financial Officer Armando Casado said in December. Eletrobrás stock, which trades in New York as well as São Paulo, has dropped 50 percent in the past year.
A shortfall in rain from November to mid-January threatened to undo the government’s plans as hydroelectric power dried up. With water levels at the country’s dams at record lows, spot power prices surged in December to their highest level since January 2008. Reserve power plants that run on coal, oil, and gas—all of which are more expensive than hydro plants—had to be switched on and are now working at full capacity to ensure supply.
The inadequate rainfall has not held Rousseff back. On Jan. 23 she announced an additional price reduction, which will be subsidized in part by the treasury and will take the biggest discount for companies to 32 percent. “This was not well done because the government ends up subsidizing the lower rates,” says Adriano Pires, head of the Brazilian Center for Infrastructure, a consulting firm. “The government is too focused on cheap energy rather than making electricity more competitive.”