UPDATE 1-Brazilian sponsor of Eletrobras privatization bill removes key clause from text

(Recasts, adds changes to privatization bill text)

SAO PAULO, May 19 (Reuters) - The sponsor of a bill to privatize Brazilian state power utility Eletrobras on Wednesday dropped a provision tying the sale to government contracts for natural gas-powered generation after uproar from industry groups.

Lawmaker Elmar Nascimento made the decision shortly after a Brazilian forum of power sector associations, known as FASE, called on Congress to reconsider the bill due to the risk of “market distortion.”

FASE said in a letter reviewed by Reuters that the bill was “unbalanced” and could “increase the cost of electricity in Brazil.”

One of the red flags it raised was the proposal conditioning privatization of Eletrobras on the government establishing contracts with new gas-fired plants and small hydroelectric plants this year.

Nascimento had said on Tuesday that this condition would not affect the timetable of the company’s sale, but he removed it from the bill on Wednesday.

The government has said it hopes the sale of state-run Centrais Eletricas Brasileiras SA, as the company is formally known, will deliver 25 billion reais ($4.7 billion) to Treasury coffers.

Shares in Eletrobras jumped over 5% on Wednesday on expectations the lower house will approve the bill later in the day, but pared gains to around 3% after the letter from FASE.

Eletrobras Chief Executive Rodrigo Limp said last Thursday that lower house Speaker Arthur Lira had indicated his optimism that the vote would pass.

Earlier this month, privatization secretary Diogo Mac Cord said he expected Eletrobras would be privatized by January 2022 and that congressional support for the decree being put to lawmakers is “fantastic.”

$1 = 5.31 reais Reporting by Luciano Costa; Writing by Jamie McGeever; Editing by Brad Haynes and Richard Pullin