October 11, 2012 / 10:33 PM / 7 years ago

UPDATE 1-Eletrobras may sell units to cut costs as tariffs fall

* Government now backs Eletrobras utility sale - source

* Cuts in power rates expected to reduce Eletrobras cash

* Distributors considered a growing drain on Eletrobras (Updates with details, prices and background)

By Leonardo Goy

BRASILIA, Oct 11 (Reuters) - Eletrobras, Brazil’s state-led electricity holding company, is studying the sale of loss-making power distribution units as it tries to slash costs ahead of planned government rate cuts, two sources familiar with the plans told Reuters.

The six distributors, which operate in the remote and thinly populated states of Piauí, Rondônia, Acre, Amazonas, Alagoas e Roraima, have racked up repeated losses and won’t turn a profit until at least 2014, according to Eletrobras.

Brazilian President Dilma Rousseff, a former energy minister who reorganized Brazil’s electricity system, would not oppose such a move, said one source, a government official, speaking on condition of anonymity.

Rousseff, as a minister under former President Luiz Inacio Lula da Silva, once pushed for Electrobras to take over the distributors. Now, though, she accepts Eletrobras arguments that the company won’t have enough cash to support them after it slashes rates as part of a government drive to lower Brazilian energy prices.

The president’s press office couldn’t immediately be reached for comment late Thursday.

An official at Eletrobras confirmed that the Rio de Janeiro-based company is studying the sale of the distributors. The source asked for anonymity because the official is not allowed to talk to the press.

Last month, Rousseff announced that power generators will have to slash rates if they want to renew existing concessions for hydrolectric dams. Rousseff wants to reduce Brazil’s energy costs, some of the world’s highest because of taxes and other costs, to make Brazil’s economy more efficient.

Concessions for power plants with 22 gigawatts of generation capacity, or nearly one-fifth of Brazil’s total, expire between 2015 and 2017. Transmission concessions are also expiring.

Generation and transmission provide the bulk of Eletrobras’ cash flow.

On Sept. 12, Reuters reported that regulators plan to renew licenses for electric generators at an average price of 30 reais per megawatt-hour, or less than half the 78 reais per megawatt-hour to be charged at Belo Monte, a hydroelectric dam still under construction.

The planned reduction has hurt electrical utilities at the stock market.

The Brazilian electrical utility index, which tracks the main power companies on the Sao Paulo BM&FBovespa exchange, has fallen 12 percent since Rousseff announced the rate cuts. Eletrobras’ most traded share has fallen 8.5 percent.

When Brazil first began privatizing public utilities in the 1990s, Eletrobras did not initially want to operate the distributors, which had difficulties under ownership by Brazilian states. But the company, as Brazil’s government sought to improve electrical services in poor and remote regions, was eventually forced to acquire them.

Still, the government official said, they are considered poorly run and remain vulnerable to political interference, especially by state governments.

In all the states where Eletrobras runs the distributors, the utility is one of the region’s biggest employers.

Five of the six distribution utilities had a combined loss of 507 million reais ($249 million) in the first half of 2012.

One plan under consideration for the sale is that Eletrobras would sell part of the distributors, remaining as a minority investor, the government source said.

The pension funds of large state companies, which are often used as vehicles for government investments, could be called on to provide capital. Meanwhile, Electrobras would seek a private buyer to hold a separate stake and operate the utility.

Eletrobras’ press office said the company is studying all its businesses in an effort to reduce costs and raise revenue. (Writing by Jeb Blount; Editing by Paulo Prada)

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