Brazil: Highlights Of The Changes In The Brazilian Electric Power Sector

With the rationing crisis in year 2001, the then adopted model for the electric power system showed to be ineffectual in assuring the core objectives of any public utility service, that is, reliable supply, fair electricity rates and availability to all1.

Thus, a new - to some, the newest - model was put in place2 - based on its regulatory milestone, Provisional Measure (Medida Provisória - "MP") no. 144, of 12/11/2003, turned into Federal Act no. 10.848, of 3/15/2004.

However, recently enacted rules substantially changed this model, shown below, albeit in a succinct manner.

Ordinance MME 455, of 8/2/2012 - Registration of Energy Purchase and Sale Agreements within the Free Market Environment - ACL

Ordinance MME 455, of 8/2/2012, provides for the registration of Energy Purchase and Sale Agreements executed within the Free Market Environment - ACL.

The Ordinance above plays two essential roles: (i) to discontinue registration of ex post agreements (article 2 of the Ordinance) and (ii) to gather data on energy rates negotiated in the ACL, to enable CCEE (the Electric Energy Trading Chamber) to calculate and publish indicators to increase the levels of transparency and efficiency to the market (article 3 of the Ordinance).

For a more detailed clarification on the issues addressed in the Ordinance, some brief explanations are required.

As known, all electric power trading agreements, irrespective of the environment - whether Regulated or Free Market Environments - ACR or ALC, must be registered with CCEE, pursuant to Decree 5.163, of 7/30/2004.

The issue on registration was addressed in three different moments, allowing a gradual adjustment of the market to the new rules.

Prior to Ordinance MME 455, of 8/2/2012, and until 11/1/2012 (date set by the Ordinance), the energy trading agreements negotiated in the ACL had to be registered by no later than the month following the month of supply (MS+9du) - the so-called ex post registration - , while the quantity of energy for a certain month could be subject to adjustment after consumption metering up to the 11th business day following the month of supply (MS+11du). This registration was made every month at CCEE.

From that date through 6/30/2013, the electric power trading agreements negotiated in the ACL must be registered prior to the month of supply - thus becoming an ex ante registration -, however, the adjustment could be made after power consumption metering. To this effect, the agreements must also be registered monthly.

And lastly, as of 7/1/2013, the agreements must be registered prior to the month of supply - therefore, ex ante - and the contract amounts can only be changed before the beginning of the supply, as registration with CCEE will be on a weekly basis.

There were basically two reasons for such change: to end distortions and abuses identified upon registration of ex post agreements and make the market more efficient, as it happens in foreign energy markets, where shorter-frequency registrations allow correction of registrations of agreements that do not accurately reflect the actual consumption/supply ratio.

The other deep change introduced by Ordinance MME 455, of 8/2/2012 is the requirement as of 7/1/2013 for the parties to also inform the energy price on registration of the energy purchase and sale agreements negotiated in the ACL, further to the information that was already required (amount of energy, supply period, etc.)

Such requirement was justified as a measure to make the ACL more transparent and effective, as CCEE could calculate and publish the energy price index used in the ACL, assuring consistency between the negotiation environments (the ACR has a regulated rate, while the MCP has the PLD) and making it more attractive, as it is expected to become more transparent.

It should be reminded that Ordinance MME 455, of 8/2/2012, treats the price information as confidential, and is to be disclosed only to CCEE and to be kept confidential, with the sole purpose of enabling CCEE to calculate and publish the price index used in the ACL.

This aspect of the Ordinance is going through criticisms, on allegations that the imposition to inform the negotiated price violates one of the main characteristics of the ACL, that is, free negotiation and free price determination, given that their prices tend to be indexed by CCEE, that is, a type of intervention by the institutional bodies in the market.

Another criticism against this Ordinance is that the Ministry of Mines and Energy, the body performing governmental activities, regulated technical matters concerning energy trading, which should be dealt with by the regulatory agency (article 3, XIV, Law no. 9.427/1996).

Federal Act 12.767, of 12/27/2012 (conversion of MP 577/12) - Intervention in public utility companies

Federal Act 12.767, of 12/27/2012, basically provides for two aspects: (i) the discontinuance of the concession and rendering of temporary electric power public services and (ii) intervention in electric power utility companies, to adjust the quality of the service.

The first aspect brings no new significantly controversial provision, as it only regulates the manner of temporary electric power utility services rendering in cases of forfeiture, bankruptcy or discontinuance of the concessionaire.

The second aspect, in turn, raised several discussions on ANEEL's intervention in electric power utility companies, to assure the proper provision of services and fulfillment of the applicable contractual and legal rules.

The intervention is no news, as articles 32 through 34, Law no. 8.987, of 2/13/1995, already addressed the possibility of an intervention to assure and adjust the provision of public utility services and the full compliance with the agreement and the applicable law. As compared to Law 8.987, of 2/13/1995, however the piece of legislation at issue detailed the intervention procedure.

The major changes brought by such law, resulting from the concrete situation of some concessionaires, would be (i) the impossibility to subject the concessionaire to a court-supervised or out-of-court restructuring (similar to US Commercial Code's Chapter 11) during effectiveness of the concession, as well as (ii) the freezing of assets held by the utility company officers during the intervention period or in case of discontinuance of the concession in view of forfeiture, bankruptcy or liquidation of the utility company, until identification of their actual liabilities.

The second aspect specifically, is bringing uneasiness to the market, as the managers end up with a "preventive punishment" during interventions and cannot do anything until identification of liabilities, which may take more than 2 years.

Federal Act 12.783, of 1/11/2013 (conversion of MP 579/12) - Renewal of the Concessions

Perhaps the most discussed change in the sector is defined by Federal Act 12.783, of 1/11/2013, which provides for the renewal of electric power service concessions, further to the reduction in electric power rates.

As of enactment of MP 579/12, of strong political nature, the provisions therein raised much criticism, with debates on the constitutionality of such measure, as it addressed the matter in a provisional measure (MP, which even ruled out a previous debate in the Congress) and renewed concessions that had already been extended once.

Anyhow, the MP was turned into Law and brought deep changes in the market model currently in effect in the country.

The first major change concerned the renewal of the concession for electric power generation services, which depended on the acceptance of a series of conditions by the utility companies applying for renewal of their concessions.

One of the most important conditions is participation in the so-called quota system, where quotas of the physical guarantee of utility companies with renewed concessions are to be allocated to electric power distributors, which would be remunerated only for the operation & maintenance (O&M) costs, given that they would receive a compensation for the non-amortized investments made on the assets related to the public utility service provided. This reduction is to be transferred to consumers in general, by means of reduced electric energy rates.

Several criticisms were made to this system, which even ended up creating a "special" generator, which did not fit within the definitions of sector agents, introduced by Decree 5.163, of 7/30/2004.

Moreover, unfavorable remarks were made as to consequences that had not been provided for, such as the unpredicted situations to generating companies that did not agree to the renewal and thus were not subject to the conditions provided for in the system. Such fact was, to a certain extent, remedied by MME Ordinance 117, of 4/5/2013.

The same renewal was offered to power transmission companies, which were compensated for non-amortized investments on assets, and started to adopt a rate based on O&M. It should be stressed that the issue on compensation to transmission companies, which considered all existing assets on May 31, 2000 as amortized, raised so much uneasiness and a considerable pressure by the government, that the provision on such issue was amended by Provisional Measure 591, of 12/29/2012.

Another deep change introduced by this Law was the electric energy rate reduction through reduced charges, e.g., exclusion of the payment of a Global Reversion Reserve - RGR to some agents of the sector.

This reduction raised criticism as to possible uncertainty and lack of predictability to the electric system, in the long-term, as the charges would be required for maintenance of the system in years to come.

This Federal Act introduced further major changes, such as the possibility for free consumers to assign surpluses and the extension of the term for special consumers (those who chose to use energy enjoying governmental incentives for being of clean sources) to return to the ACR. Such changes also raised debates and a certain uneasiness to some sector agents.

ANNEL Resolution 531, of 12/21/2012 - Change in the Financial Securities Calculation Method

An agent negotiating energy under the CCEE system must contribute with financial securities that in a certain way mitigate the risk of a possible exposure in the MCP (the so-called short transaction).

The main change, among others, to end or at least mitigate the "loopholes" in the previous security contribution system, is the energy purchaser's liability for the seller's credibility and fulfillment of the agreement.

The reason why is because in case the security offered by seller is not sufficient for the sale made, the registered sales agreement will be adjusted to conform to the security offered, whereas the purchaser must seek a means to compose its reduced security with the adjustment made by CCEE, that is, the amount of energy sold by an agent will be reduced and be equal to the guarantee offered, in case the guarantee is insufficient for the sale made, and purchaser will bear the consequences of such reduction, including a possible exposure in the MCP (short position).

These are a series of changes, some of which yet to be fully implemented, such as the imposition of a financial institution to guarantee the agent's operating limits and the establishment of a fund to guarantee the electric power market, designed to bring it closer to the system currently followed by financial markets.

CNPE Resolution 3, Of 3/6/2013 - Payment Of The Cost Resulting From Deployment Of Power Plants Off The Cost-Based Merit System In View Of Energy Security

For energy security purposes the ONS may deploy power plants off the cost-based merit system to assure the energy security of the system, that is, power plants with a higher generation cost (usually thermal electric plants), so as to assure the supply of energy to the entire country.

One of the events imposing such action by the ONS is a long-lasting drought which jeopardizes the reservoirs of the hydroelectric power plants (which normally have lower generation costs), such as those faced in late 2012 and early 2013.

With such resolution, CNPE decided for the provisional sharing of the costs to deploy thermal electric plants, which is then borne through the System Service Charges - ESS (50% of it), and even imposed an order for the power generation companies to pay the charge (previously paid only within the ACR system and by free consumers) and the differences between the recently established PLD1 and PLDfinal (the remaining 50%).

The PLD1 is used by agents negotiating surpluses in the MCP (long), that is, those that sold their energy through specific registered agreements. This PLD does not take into account the power generation extra costs resulting from deployment of power plants to assure the energy security.

The PLDfinal, in turn, is used by agents with an exposure (short) in the MCP, that is, agents that sold more energy than they had. This amount would include the costs of the energy generated by power plants deployed off the cost-based merit system.

These are some of the several changes introduced in the Brazilian electric power system as of establishment of the current model, which in turn raised several criticisms and have a potential to bring significant consequences to the market, either good or bad. Time will tell.

Footnotes

1 To this effect: TOLMASQUIM, Maurício T. Novo Modelo do Setor Elétrico Brasileiro, [New Model for the Brazilian Electric Power Sector] Synergia Editora, 2011, page 21 et seq.

2 PACHECO, Adriane Cristina Spicciati. A Contratação da Compra e Venda de energia Elétrica pelas Concessionárias de Distribuição [The Electric Power Purchase and Sale Agreements by Distribution Concessionaire], sinRegula ção Jurídica do Setor Elétrico, Coordenação LANDAU, Helena.,Lumen Juris Editora, 2006, page 377

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