Taos Turner

Of DOW JONES NEWSWIRES

BUENOS AIRES -(Dow Jones)- After years of waiting, Argentina's electricity companies finally got a bit of good news: The government will let them raise rates on residential customers for the first time in seven years.

But the new rates are no panacea, executives say.

New tariff levels may not be enough to increase strained capacity, but just enough to keep the lights on. Nor will they do much to lessen the fiscal burden on the government that its subsidies to power utilities generate.

Rates will rise an average of 21% for residential users and 10% for commercial clients, retroactive to July 1, the government said Wednesday.

"This is long overdue," said an official familiar with balance sheets at the country's leading power distributors. "It's certainly a positive announcement."

The new rates "are a good start that will allow the sector to invest in infrastructure and keep operating capacity up to par," said another official.

"We've been struggling to adhere to quality standards while keeping rates frozen," the official said. "Our operating costs have risen because of inflation and rising union wages, so this will bring some relief. However, it does not solve all the sector's problems."

Higher rates will ease pressure on distributors such as Edenor (EDN), Edesur, run by Endesa SA (ELE) and Edelap, controlled by AES Corp. (AES). But the increase is not enough to compensate for inflation accumulated since 2002.

Economists estimate annual inflation is currently running around 30%.

Edenor President Alejandro Macfarlane said Thursday the company will need even higher rates to be profitable.

"When we sit down next February to discuss rates with the government, we will revise all of this so we can have a company that not only delivers a service but also makes money," Macfarlane said in a radio interview.

Edenor said in November that it would invest $1 billion over the next 10 years to improve operations. But Edenor and others have had trouble meeting basic operating costs and will still have low margins despite higher rates.

"Even with the new rate system, this part of the country has the cheapest electricity prices," an official said.

Edenor, Edesur and Edelap deliver electricity to clients in Buenos Aires and the broader area surrounding it.

The average household in this area pays $20 every two months for electricity. In Cordoba, residents pay $52 and in Santa Fe the bill averages $57. In contrast, residents in Rio de Janeiro, Brazil pay about $185.

Argentine officials have said energy should be kept inexpensive to foment economic growth.

In 2005, though, the government lifted the cap on some industrial rates, but kept residential prices limited.

To crimp prices, the government subsidizes them. This year, subsidies will total $6.6 billion, according to a report from the consulting firm Ecolatina.

Subsidies have risen each year to keep pace with inflation. In the first half of 2008, they were up 200% from a year earlier.

"Initially, these compensations were not so unwieldy because prices were not so distorted, and there was an excess supply of natural gas, which is the main input for the energy industry," Ecolatina said. "However, as international energy prices rose, and gas became more scarce (because of a lack of investment) , the gap between rates and real costs became more notorious."

Many companies now depend on the subsidies to subsist.

Energy subsidies, and others to the transportation and food industries, will total an estimated 107% of Argentina's primary fiscal surplus this year.

Planning Minister Julio De Vido said one goal of the rate hike is to eliminate the need to increase subsidies.

"This announcement is surely good because it shows the government is breaking with the logic that's it applied since 2001, when rates were last increased," said an industry official. "This is a good sign for shareholders."

Still, officials say further hikes are necessary to spur significant new investment.

"The only investments we can make now will go to improving quality," said one official.

De Vido said the government has no plans to raise natural gas prices, meaning providers like Metrogas, which has not been allowed to raise rates, may have trouble increasing revenue.

Meanwhile, the rate hike will affect only households that consume more than 650KW every two months.

De Vido said this represents 24% of about 5 million clients. He said higher rates will "distribute the cost of new investment among those households that consume the most and have the greatest purchasing power."

By raising rates, the government avoids the need to pay $100 million in new subsidies to distributors.

This leaves the level of subsidies already planned for 2008 unchanged. As a result, the subsidies will continue to pressure Argentina's primary fiscal surplus.

"This savings of $100 million is like putting makeup on a much more complex situation," said Ricardo Delgado of Ecolatina. "Government spending on subsidies will continue to be very strong."

-By Taos Turner, Dow Jones Newswires; 5411-4590-2421; taos.turner@dowjones.com

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  07-31-08 1525ET
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