Investors Lose Confidence in Brazil’s Power Sector

As Brazil’s government cuts power bills in a bid to help struggling consumers, utilities begin to lose investors.
Published: Wed 17 Oct 2012

What happened                                                                         

Brazil’s electricity companies are losing investors to the country’s water utilities due to the government’s decision to cut electricity rates, writes Bloomberg.

Background          

While Eletropaulo Metropolitana SA, Brazil’s biggest electricity distributor, witnessed a drop of 44% in market shares, Sabesp, the Americas’ largest publicly traded water utility, posted a total return of 76% this year thus far.

Investors are making the move as water companies are providing stable earnings. Investors are leaving the power sector thanks to President Dilma Rousseff’s plan to force power companies to cut rates by as much as 28%. Water companies offer protection from Rouseff’s interventionist policies because states have more control over rates than the federal government, explains Jose Francisco Cataldo, chief strategist at brokerage Agora CTVM SA. In addition, the low cost of Brazil’s water is unlikely to attract price cuts, explains Erick Scott Hood, an analyst at Sao Paulo-based brokerage SLW Corretora. Hood adds that water utilities’ sales are unaffected by international crisis and the sector is set to expand since 20% of the population in Brazilian cities and 75% in rural areas are without sewage services. 

For a long time, investors in Brazil's stock market favored shares in the power sector due to power utilities' more stable, predictable revenue streams, often allowing those investments to be likened to holding a bond, explains Reuters. But Rousseff's recent decision may change that perception. Analysts say that the unpredictability of the power sector and more difficult fundraising conditions may increase caution amongst investors.

Brazil’s government is forcing the tariff cuts in order bring down some of the world’s highest electricity bills (Brazil’s power rates are the third-highest in the world) and reduce costs for the country’s struggling manufacturers, therefore boosting competitiveness.  The government aims to cut power costs by 16% for households and up to 28% for businesses and large consumers, writes Bloomberg. The government says that utilities will only be able to charge consumers for operating and maintenance costs.

Approximately 25% of power-generation licenses and 80% of power-transmission licenses are due to expire in 2015. These will be renewed for 30 years if utilities agree to reduce rates. Companies have until October to file a request for renewal. Expired licenses that are not renewed, will be put up for sale at an auction.

Utilities are in the dark about what price they are able to charge their customers, reports Fox Business. The government recently announced that generation prices could fall from the current US$49 (BRL100) per MWh to US$15 (BRL30) per MWh.

Alexei Macorin Vivan, president of ABCE, or the Brazilian Association of Electric Companies, says that utilities such as Furnas and Chesfare already considering jobs cuts as a result of the tariff reduction.

Last Word                                                                                                                            

Although the power cuts will offer Brazil’s consumers great relief in a struggling economy, utilities will need to tighten their belts. Power is essential to running a prosperous economy so it is essential for the government to work alongside utilities to ensure that its electric al infrastructure and power generation does not suffer due to cost-cutting measures. It will be interesting to see which utilities are left standing and how they manage financially in the future.

Sources               

Bloomberg-Rousseff-Proof Sabesp Soars as Buy Calls Grow: Corporate Brazil

Fox Business-Brazil Utilities Wary of License Renewal Ahead of Deadline

Reuters-DEALTALK-State action boosts funding costs for Brazil utilities