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By Luciano Costa
SAO PAULO, Sept 29 (Reuters) - Insolvency on the Brazilian electric energy market has spread to critical levels, energy traders said on Tuesday, as hydroelectric generators balk at hefty bills for which the local regulator says they are on the hook.
After nearly two years of drought and long delays in completion of new generation projects such as large scale dams in the Amazon, Brazil's hydro generators have been unable to produce enough electricity to cover their supply contracts.
And the energy market regulator Aneel said they must buy energy on the spot market to cover their commitments.
Conditions on Brazil's energy markets continue to deteriorate due to a growing number of hydroelectric companies that have secured court injunctions exempting them from paying these additional costs for costly spot energy, local energy traders said.
The CCEE is next due to settle accounts between buyers and sellers of energy again on Oct. 14-15.
Cristopher Vlavianos, president of energy trader Comerc, said 80 percent to 90 percent of the expected 5 billion reais ($1.2 billion) settlement coming due will not be paid because of financial distress among such hydropower producers.
"If you have insolvency of this size, whoever has credit (for supplying energy) will not be paid," said Vlavianos.
The problem has been growing in recent months. The CCEE was unable to settle payments in June and Aneel thought it had reached an agreement with generators by offering loans to the hydro plant operators to get them to lift their injunctions.
But now dozens of hydroelectric generators have secured court injunctions suspending their obligations to pay.
"I'd guess 80 percent of the settlement will not be paid," said Andrew Frank, president of energy trader America Energia.
Brazil's thermoelectric plants, which run on natural gas, fuel oil and diesel, have been picking up the slack in generation while the hydro plants remain partially off line but could soon run into cash flow problems if they do not receive payments due from the CCEE.
Brazil's state-run oil company Petroleo Brasileiro SA , is one of the largest operators of thermoelectric plants here, and is already struggling with cash flow problems.
Petrobras is also the main distributor of fuels for thermoelectric plants in the country.
The rules of Brazil's energy market say that in case of default by a participant, the group as a whole must cover the shortfall. And this has led to even more court injunctions by members to suspend payments, traders said. (Reporting by Luciano Costa; Writing by Reese Ewing; Editing by Christian Plumb)