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Argentina's electricity sector is limping along with very low private investment and there is a risk to its long-term sustainability due to heavy-handed government policies, according to Fitch Ratings company.

"The primary market considerations for the Argentine electricity sector are the high degree of government intervention, the lack of interest from private investors, as well as the shrinking reserve margins," Fitch said in a report Wednesday.

Those shortcomings are most apparent during the hottest summer months when residents crank up air conditioners and power outages are common.

In December, the government said it would slap the country's three top power distributors with multi-million-dollar fines due to a series of blackouts. The penalties were levied against electricity distributors Edenor (EDN, EDN.BA), Endesa SA (ELE.MC, ELEZY) controlled Edesur, and AES Corp.'s (AES) Edelap. Edenor is majority-owned by holding company Pampa Energia SA (PAMP.BA), which also controls power transmitter Transener (TRAN.BA).

Argentina has kept electricity tariffs largely frozen since the 2001-2002 economic crisis, which has stifled investment and led to a high dependence on government subsidies to cover tariff deficits, according to Fitch. Although the government recently disclosed some cuts to those subsidies, they are expected to remain substantial over the medium term and keep rates basically unchanged, Fitch said.

The limited tariff increases haven't been enough to support power-transmission expansion and the companies are suffering due to high inflation, Fitch said.

Electricity generators continue to rely on imported natural gas and fuel oil, and long-term prospects hinge on new unconventional gas reservoirs and new sources such as nuclear, solar, wind, and biomass, Fitch said. According to the ratings company, Argentina will require approximately 500 megawatts of new installed capacity per year and associated transmission infrastructure to balance supply and demand.

But "given the scarce interest from private investment in the sector, most [capacity investment] is being done by the Argentine government," Fitch said.

State-run Energia Argentina, or Enarsa, and Nucleoelectrica Argentina, or NASA, are investing in thermoelectric and nuclear-generation capacity.

The private sector is just making modest investments based on long-term power-purchase agreements with state-run Enarsa and Cammesa at prices above the spot market, Fitch said.

Currently, steam turbine and natural-gas thermoelectric plants produce 59% of the country's electricity, while 22% is hydroelectric and 6% is nuclear.

Demand has surged in recent years, growing an average of 4% in each of the last 10 years, in line with the country's brisk economic growth, according to Fitch. A similar gain in demand is expected this year.

-By Shane Romig, Dow Jones Newswires; 54-11-4103-6738; shane.romig@dowjones.com