Keywords: Brazilian government, ANEEL, MP 577

As a response to the current situation of Centrais Elétricas do Pará S.A. – CELPA, an electricity distribution concessionaire within Rede Group that filed for court-assisted reorganization last February 28, the Brazilian government passed Provisional Measure No. 577, published on August 30, 2012 ("MP 577"), which establishes specific rules for intervention by the concession-granting authority, acting through the Brazilian Electric Energy Agency ("ANEEL"), in the management of concessionaires of electricity as a public service. The purpose of the measure is to ensure a proper provision of services and full compliance with the applicable contractual, regulatory and legal provisions. On the day following publication of MP 577, ANEEL published eight resolutions that will lead to intervention in the other eight distributors within Rede Group that are also facing difficult economic and financial conditions.

Administrative intervention in relation to concessions was regulated by Law No. 8,987, dated February 13, 1995 ("Brazilian Concessions Law"), but MP 577 sets forth stricter rules solely applicable to concessions of electricity as a public service, because such service is "an essential service, indispensable to the basic and immediate needs of each citizen", according to the Explanatory Memorandum of MP 577. These new rules were based on the rules established by Law No. 6,024, dated March 13, 1974, regarding intervention in financial institutions by the Brazilian Central Bank ("Law 6,024/74").

One of the innovations in relation to the Brazilian Concessions Law is the extension of the period for completion of the mandatory administrative procedure (that seeks to establish the causes for intervention and determine liabilities) from 180 days to one year. Accordingly, MP 577 provides that an intervention may last up to one year and may be extended at ANEEL's discretion.

MP 577 establishes that the terms of office for officers and members of the supervisory board should be suspended during the intervention. This seeks to ensure that the intervenor appointed by ANEEL has full authority to manage the concessionaire. Section 11 of MP 577, which refers to officers' liabilities, contains language inspired by sections 39 and 40 of Law 6,024/74, without, however, resolving the controversy relating to the interpretation of such sections with respect to the standard of liability imposed on officers of financial institutions— negligence or strict liability. Recent judicial decisions have reinforced the interpretation that the standard of liability applicable to officers of financial institutions is based on negligence and willful misconduct. At the same time, these judicial decisions have admitted a presumption of liability in relation to officers of financial institutions, thus reversing the burden of proof in such a way that each officer must prove that he/she acted without negligence or willful misconduct. In case MP 577 is converted into law with the current language of its Section 11, the same controversy is likely to arise in relation to the standard of liability applicable to officers of concessionaires of electricity as a public service, but it is also likely that the judicial precedents relating to the interpretation of Law 6,024/74 will be taken into consideration.

Pursuant to MP 577, within 60 days after ANEEL's request the shareholders of the relevant concessionaire have to file a plan for recovery and correction of the problems and breaches that gave rise to the intervention. Once the recovery plan is approved by ANEEL, the intervention ceases and within one hundred eighty (180) days the concessionaire has to submit to ANEEL tax clearance certificates issued by the Federal Treasury and the Employee Severance Indemnity Fund (Fundo de Garantia por Tempo de Serviço – FGTS) as well as quarterly reports on the implementation of the recovery plan until its completion.

In case the recovery plan is not approved by ANEEL or is not submitted to ANEEL within the deadline established by MP 577, the concession-granting authority is entitled to (i) declare the forfeiture of the concession, pursuant to Section 38 of the Brazilian Concessions Law, (ii) spin off, take over, or restructure the company holding the relevant concession, incorporate a wholly owned subsidiary, or assign shares in the company holding the concession, provided that the rights of shareholders are preserved, pursuant to applicable legislation, (iii) change the control of the company holding the concession, (iv) increase the capital of the company holding the concession, or (v) incorporate a special purpose entity to assign the assets of the company holding the concession by way of payment to creditors.

MP 577 expressly provides that the procedures applicable to court-assisted reorganization and reorganization by way of general composition with creditors regulated by Law No. 11,101, dated February 9, 2005, are no longer applicable to concessionaires of electricity as a public service, except in relation to the period after termination of the concession. Nevertheless, after termination of the concession, the feasibility of any such reorganization will be limited because upon termination of the concession the company will no longer be entitled to undertake its main activity, which is the source of its income.

MP 577 also established a new event for the forfeiture of concessions. In case a concessionaire does not comply with a request from the concession-granting authority to submit the applicable tax clearance documents within one hundred eighty (180) days, the concession-granting authority may declare the forfeiture of the relevant concession.

MP 577 regulated the procedure to be adopted after the termination of a concession due to (i) declaration of forfeiture, or (ii) bankruptcy or termination of the company holding the concession pursuant to items III and VI of Section 35 of the Brazilian Concessions Law, respectively. Once a concession is terminated, the concession-granting authority will temporarily provide the applicable services through an entity of the federal public administration until a new concessionaire is retained under a procurement procedure.

According to MP 577, the concession-granting authority will not inherit any liability in relation to taxes, charges, liens, obligations or commitments due to third parties or employees and assumed by the company that used to hold the terminated concession, except in relation to rights and obligations arising out of agreements entered into with the National Operator of the Electric System (Operador Nacional do Sistema Elétrico – ONS) and/or the Electricity Trade Chamber (Câmara de Comercialização de Energia Elétrica – CCEE) and power purchase agreements, subject to the terms and conditions originally agreed upon with the other parties to such agreements. In any event, such agreements will be assigned to the entity responsible for the temporary provision of the applicable services after the concession termination date.

MP 577 also clarifies that the obligations assumed by the entity responsible for the temporary provision of services will be assigned to the new concessionaire in accordance with the terms of the public procurement.

Finally, in the same manner as Law 6,024/74, MP 577 adopts the rule of freezing the assets of officers of a concessionaire undergoing intervention or whose concession was terminated as a result of forfeiture or bankruptcy or termination of the company holding the concession until final determination and payment of their liabilities. The rule is also applicable to the officers that were in charge during the 12 months before the act that determined the intervention or declared the termination of the relevant concession.

In principle, the deadline for conversion of MP 577 into law is October 28, 2012, but this deadline may be extended for an additional period of 60 days.

Originally published October 1, 2012

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.