--Brazil considering proposal to cut residential tariff 11.8%, source says

--Existence of talks confirmed by industry, mines and energy ministries

--Potential effect on government coffers estimated at BRL1-4 billion

By Diana Kinch

RIO DE JANEIRO--The Brazilian government is considering proposals to cut electrical energy tariffs by an average of 17.4% for industries and 11.8% for residential consumers in September, a person in the government familiar with the matter said Wednesday.

The proposals have been discussed on a technical level with trade and industry minister Fernando Pimentel, said the person, who declined to be named because of the sensitivity of the matter. An in-depth analysis of the effect of the proposed reduction on industrial costs will now proceed, the person said.

The trade and industry ministry confirmed late Wednesday the existence of discussions on reducing industrial and residential energy tariffs, without confirming the percentage reductions considered. The mines and energy ministry is also participating in talks, a spokeswoman said.

Brazilian industrialists, including from the aluminum and steel sectors, have complained vociferously in recent years about the so-called "Brazil Cost"--a conjunction of high tax rates, energy tariffs and insufficient infrastructure--which has eroded Brazilian products' competitiveness on international markets.

Franklin Feder, chief executive of Alcoa Inc. (AA)'s Latin American operations, said in June after a meeting with Brazil's President Dilma Rousseff the Brazilian aluminum sector's competitiveness had "disappeared," not due to currency factors but to energy costs which have become the highest in the world due to surcharges and taxes which account for about half of the final price.

The measures now under study include elimination of four charges--known as CCC, RGR, CDE and Proinfa--on industrial energy use, and the concession of benefits to Brazilian states that reduce value-added tax on their energy bills, said the person familiar with the matter, who said he had been involved in drawing up the proposals. In some cases these measures could reduce industrial energy charges by up to 30%, he said.

"The biggest impact will be in energy-intensive sectors, which should reap an immediate benefit," the person said.

In the short term, elimination of these charges would cut families' electricity bills by 2.8 billion Brazilian reais ($1.39 billion) annually and reduce industrial costs by BRL5.2 billion a year, according to the person.

"This would serve as an important stimulus to consumption and production costs," he said. "The tariff reduction would also have a relevant impact on inflation rates, as residential energy tariffs account for around 3.5% of consumer inflation."

The measures proposed could initially work out costing between BRL1 billion and BRL4 billion to the government in terms of subsidies, as it proceeds with plans to foot the bill for the charges to be eliminated. However, this cost would fall as Brazil's minimum salary rises and the country expands its integrated electricity supply circuit, the source said.

State-owned generator Centrais Eletricas Brasileiras (ELET6.BR), or Eletrobras, would stand to lose up to BRL1.9 billion annually from the loss of RGR revenues, but this should be offset by the boost given to Brazil's industrial activity as a whole, according to the source. However, analysts say that because Eletrobras merely manages the public works projects financed by the funds, it shouldn't suffer from the elimination of those charges.

-Paulo Winterstein in Sao Paulo contributed to this article

Write to Diana Kinch at diana.kinch@dowjones.com

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