March 10 (Bloomberg) -- President Luiz Inacio Lula da Silva's bills to lure $5 billion a year to Brazil's power industry may backfire as investors withhold funds to press for less government control, the head of an industry panel said.

Brazil's Senate last night passed the second of two energy bills, setting the stage for Lula to sign them once the lower house approves changes made in the first bill last week. The bills give the government more power to set rates and oversee utilities in a bid to avoid a repetition of power rationing in 2001 and 2002 that slowed the economy.

Companies such as Tractebel SA, a unit of France's Suez SA, and Duke Energy Corp., the biggest U.S. utility owner, may maintain last year's freeze on investment in Brazil on concern the legislation will make it harder to pass on higher electricity costs to consumers, said Claudio Sales, the head of the Power Industry's Association of Foreign Investors.

``To me, this bills look like a house with no walls or sewage pipes or floor: no one will buy it till it's finished,'' said Paulo Tavares, vice president at utility Cia. Paulista Forca e Luz SA, which serves more than 5 million customers across the country. ``The company won't put a cent on new plans this year because we lack of conditions to invest.''

Duke executives declined to comment until they have had a chance to review the legislation, a spokeswoman in the company's Rio de Janeiro office said. Sales, in a phone interview from Sao Paulo, said his group plans to lobby for changes in a bill to increase oversight of independent regulators that will be presented to congress soon.

Auctions

Forca Luz and other power distributors will be hurt by new rules, Tavares said.

The legislation will forbid city distributors from buying electricity from the plants and instead force them to buy power via state auctions, where prices would be based on supply and demand. Those provisions prompted Tractebel to postpone plans to spend $1 billion building new hydroelectric plants, Mauricio Bahr, president of Tractebel's Brazilian unit, said in an interview in January.

The new rules will raise prices for the energy produced by utilities operating after 2000 in a bid to encourage new investment.

``This new model of ultra regulation won't necessarily deliver what the government is looking for,'' said opposition senator Arthur Virgilio Neto as the Senate debated the bill last night. ``It is just a bunch of more rules for an industry that needs to attract investment in a favorable set of conditions.''

Energy Shortages

Lula has said the rules will lure the investment needed to avert energy shortages in Brazil within a few years. Sales, though, said companies are wary of investing more in Brazil, where the government is also planning to boost oversight of independent industry regulatory agencies.

There were no new investment plans carried out last year in the country and ``this year will surely be exactly the same,'' Sales said.

The package also bars the sale of state-controlled utilities such as Centrais Eletricas Brasileiras SA, which generated about half of Brazil's electricity, and bans the trading of energy futures. The government also would create an agency to oversee construction of new power plants and the sale of electricity to city utilities.

Shares of Electrobras, as Centrais is known, fell 4.3 percent to 36.7 reais in Sao Paulo at 12:50 p.m. New York time. Shares of Forca Luz, a group comprising power generators, distributors and sellers in Sao Paulo, Rio Grande do Sul and other Brazilian states, plunged 2.4 percent to 1.65 reais.

Power Rationing

Lula says the measures will help avert a repeat of the electricity shortages of 2001 and 2002 that pushed Brazil into an economic slump. Lower revenue caused by power rationing and higher debt costs caused by a 30 percent currency devaluation, pushed companies such as U.S.-based AES Corp.'s Eletropaulo Metropolitana SA into default.

Passage of the bill came after Lula pledged $1 billion of loans to help distributors such as Electricite de France's Light Servicos de Eletricidade SA. Forca's Tavares estimates that only new investments worth more than $5 billion a year will avert electricity shortages.

Energy Minister Dilma Rousseff has said the new rules will create a stable regulatory framework that guarantees returns for investors and lower prices for consumers.

Critics of the plan said the new rules will discourage investment by politicizing the energy market and by giving the energy minister power to break long-term contracts with utility concessionaires.

To contact the reporter on this story: Michael Smith in Rio de Janeiro at mssmith2@bloomberg.net.

Last Updated: March 10, 2004 13:32 EST