Distributors appeal injunctions against rate increases

Brazilian northeastern power distributors Coelce, Cosern and Celpe are appealing court injunctions brought by the local population, consumer protection associations and trade groups against rate increases granted by regulator Aneel. Coelce, which distributes power in Ceará state, is appealing a decision that limited its rate increase to 11.3% instead of the 23.6% granted by Aneel in April. Cosern, in Rio Grande do Norte state, is questioning a lower court ruling that reduced its rate increase to 11.1% from the 19.6% authorized by Aneel in April. Celpe, in Pernambuco state, has also appealed a local court injunction limiting its 32.5% power increase granted by Aneel. Aneel is also appealing the court decisions. "It is very positive for the investor that Aneel is trying rigorously to stick to contracts, but Brazil has to strike a balance between following contracts and finding a solution for social problems," a power sector analyst for ABN Amron Sudameris, Rosangela Ribeiro, told BNamericas. "I think power companies will win in the end, although they will have to agree to parcel out the rate increase over a longer period," she said. Local courts have tended to align themselves with local consumers who argue that rate increases granted by Aneel are excessive since inflation measured by the IGP-M index is only around 12% in 12 months. The problem is that while rates are increasing faster than inflation, salaries have not kept pace and unemployment remains high at over 10%. Unlike in the south and southeastern parts of the country, in the less industrialized northeast a large percentage of distributors' sales are to residential consumers, which must bear the full brunt of the increase. This has led to street protests and support from local politicians for the injunctions. Aneel and the power companies have countered that the adjustments account for higher costs from recent increases in transmission rates, higher sector contributions levied by the government, investments in facilities and for costs withheld in the past by government decrees that aimed to control inflation in 2002-2003. FINANCIAL RESULTS The rates increases are the main factor behind the companies' improved results in the first quarter of 2005 compared to the same period of 2004. Although power consumption has grown in line with economic recovery, distributors have been losing large industrial clients to the non-regulated market, reducing their sales. However, overall revenues and profits have increased due to the rates increases. A study by consulting firm Economática showed that the combined 2005 first quarter net profit of Coelce, Cosern and Celpe rose 142% to 1.65bn reais (US$671mn) from 681mn reais in 1Q04. By the same comparison their combined operating revenue rose 10.7%, the study showed. If the injunctions are successful the lower rate increases are not likely to affect the companies' results this year, since the higher costs have been mostly absorbed by their 2004 results. "It just means that companies would not be able to change their current investment policies," Riberio said. "The companies have to find a way to explain to consumers that the adjustments are needed to allow them to grow." COURT DELAYS Aneel and the association of Brazilian power distributors Abradee believe that higher courts will overturn the injunctions because the rates hikes comply strictly with the companies' contacts and are essential to avoid losses for the distributors. But the final court decisions could drag on for months. "This problem indicates that neither the lower nor upper courts in Brazil are prepared to deal with this kind of regulatory conflict," the president of consulting firm DCT Energia Ericson de Paula told BNamericas. "The lower courts because they don't have the expertise and the upper [courts] because they have a huge backlog of cases to study and cannot be as expedient in their decisions as they should be," he said. The solution would be to create special tribunals to solve such regulatory conflicts, said de Paula, who was hired by the World Bank to study regulatory reform in Brazil's power sector. Coelce is controlled by Spain's Endesa, while Cosern and Celpe are controlled by Neoenergia, a holding company of Spanish firm Iberdrola's Brazilian assets.