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Changes in the Brazilian Power Sector Arising Out of Law 13360/2016 - (Conversion of Provisional Presidential Decree no. 735/2016)

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12/2/2016 10:59 AM Demarest News

Changes in the Brazilian Power Sector Arising Out of Law 13360/2016

(Conversion of Provisional Presidential Decree no. 735/2016)

On Nov. 18, 2016, Law no. 13360/2016, which is the Law of Conversion of Provisional Presidential Decree no. 735/2016, was published.

The initial version of the Conversion of Provisional Presidential Decree sought to facilitate privatizations in the power sector, particularly the sale of ELETROBRAS power distributors, and to change the management of fees such as CDE (power development bill) and RGR (global reserve of reversion). After an intense political movement, a Provisional Presidential Decree with 7 articles, which amended 5 Laws, was converted into a Law that, even after several bans, has 26 articles and amends 12 Laws.

The practice of legislative "smuggling" in Brazil is so usual and, at the same time, risky to the public interest, that the lawmaker found it convenient to issue a Supplementary Law (LC no. 95/1998) offering the guidelines and setting out the appropriate way to "prepare, write, change and consolidate the laws, as determined by art. 59 of the Federal Constitution."

Such fact did not prevent our lawmaker from, once again, forgetting such rules and fully deviating the initial purpose of Provisional Presidential Decree no. 735/2016.

Thus, the new Law no. 13360/2016 originates from a defined purpose, modifying a range of concepts and rules consolidated in the Sector, inaugurating some positive rules and other ones, highly questionable.

What all these changes have in common is the ever increasing fragmentation of the Brazilian Power Sector legislation, making it difficult for Law enforcers and agents, including lawyers and judges, to understand it.

Regardless of the criticism to how the new Law was produced/discussed, the new rule actually brought important and deep modifications in the Power Sector, in such a way that some of the main innovations are now explained and clarified.

In view of the expressive number of modifications to be discussed, this article will not address matters that have been vetoed and are not in the final text of Law no. 13360/2015

 

1. Attribution, management and purpose of the Power Development Bill (CDE)

Law no. 13360/2016 brought innovations as to CDE's purpose, defining, among others, that the bill will offset the discounts of power transmission and distribution costs and the tax impact of a reduced load density of rural electrification cooperatives, public-utility companies and authorized distributors, in relation to the supplying distribution concessionaire, exempting customers that benefited from the Electric Power Social Fee (discount) from paying CDE annual shares.

Additionally, the new Law includes the CDE and the Fuel Consumption Bill (CCC), as of 5/1/2017, as attribution of the Brazil's Power Trade Chamber (CCEE), which already controls the ACR Bill and the bills of the Bandeiras Tarifárias (cost flags).

Law no. 13360/2016 sets out that the revenues, expenses and beneficiaries of CDE must be monthly published by CCEE, on a website, which is a step ahead in terms of transparence and publicity of the use of this fee, which has been significantly burdening Brazilian customers since 2015.

 

2. Modifications in the Mechanism of Electric Power Reallocation (MRE)

As to MRE, the two most relevant changes were the following:

(i) prohibition of exclusion of Hydroelectric Power Stations not distributed in a centralized way, except in cases of request or loss of concession; and

(ii) change in responsibility for the payment of the cost of hydroelectric power generation arising out of (ii.1) thermal power generation above that determined by order of merits; and (ii.2) import of electric power without physical guarantee (limit acquired).

While first modification sought an isonomy among generators distributed or not by the Electric System Brazilian Operator (ONS), the second one sought to release the generator as to costs arising out of the hydraulic distribution for non manageable reasons, which previously was a claim from hydraulic generators since the discussions within the scope of Presidential Decree no. 688/2015, which gave rise to Law no. 13.203, of the same year.

 

3. Change in the Matter of Acknowledgement of Exclusions of liability

This is maybe one of the most controversial topics of the new legislation. Either for the treatment given to the issue, or for how it was treated. Let us explain why.In 2015, art. 4 of Law no. 13203 brought the first innovation on the topic:  it removed from ANEEL (Brazilian Electricity Regulatory Agency) the task of judging cases on exclusions of liability as well as any change to the period for granting the undertakings involved. Such task was then assumed by the Government, by means of the Ministry of Mines and Energy (MME), agency of the State Direct Government.Against the best legislative techniques and in clear violation of the Principles of Motivation, Publicity and Reasonability, some months after the publication of Law no. 13203/2015, Provisional Presidential Decree emerged, which, in the last item of its penultimate article, revoked article 4 of Law no. 13203/2015.The matter is not related to the topic covered in the Provisional Presidential Decree and, besides, the revocation of article 4 created a legislative gap. Has ANEEL's task been revalidated? How must the procedures in course be treated?

With no answer to any of these questions, the Law of conversion of Provisional Presidential Decree no. 735/2016 brought new rules to the matter, laying down, in short, that: (i) the task of analyzing and judging the requests for exclusion of liability will be conducted again by ANEEL; (ii) if ANEEL admits there was exclusion of liability, it must recompose the period for concession of the undertaking to make it compatible with the delay; and (iii) for the first time, a rule clearly and explanatorily brought new facts that must be understood as exclusions of liability.

The benefit brought by the rule, when exemplifying facts that must be understood as exclusions of liability (with causal relation, obviously) is the possibility for us to have more predictability and legal certainty as to the Regulatory Agency's decisions on the topic.

Some criticism quite frequent in the market is the lack of more objective criteria and even some incoherence in ANEEL's administrative orders regarding processes that involve the acknowledgement of exclusions of liability.

Thus, one expects the new Law to assist the Regulatory Agency in the analyses and judgements from now on, so as to distinguish the behavior and expectation of the Agents in the Sector.

 

4. Sale of power by Distributors at the Free Acquisition Environment (ACL)

In the Government's package of measures seeking to solve/minimize the crisis over acquisition faced by most power Distributors, Law no. 13360/2016 brought another conceptual innovation to the Brazilian Power Sector: the creation of the possibility for Distributors to sell contractual excesses in the Free Acquisition Environment - ACL.

Thus, Distributors may execute Power Trade Agreements in the Free Acquisition Environment (CCEALs) with free customers, provided that such agreements "are based on the excess in the power acquired for distribution to the whole market." The new rule represents a break from the original concept of ACR and ACL, provided for in Law no. 10848/2004, according to which Distributors could only sell their power under regulated conditions, to captive customers or customers potentially free from their concession area.

The article of the new Law is not self-applicable as it needs a regulation to be issued by ANEEL, which must hold an Open Public to discuss soon the rule with society.

As this is a sensitive topic, ANEEL must pay attention, when the respective Normative Resolution is prepared/approved, to several extremely relevant aspects, such as:

        • Criteria for the definition of "power excess." What will be considered a predictable reduction in demand? How will Distributors identify efficiency failures during the acquisition of power at Auctions? What will be considered unpredictable migrations to ACL?
        • Will this excess be sold on a monthly basis, considering the measurement data previously known by the Distributors, or may the Distributors execute power trade agreements for future periods?
        • In the event of sale of power excess for future periods, how will treatment be if the Distributor's prediction is not fulfilled and this becomes a subcontractor?
        • How will any possible gains arising out of successful negotiations in ACL be treated? Will they be allocated to Distributors, encouraging the most efficient practices, or will be they allocated to Costumers, who have been constantly bearing additional costs from the Sector's structural and economic unbalance over the last years?

The answers to these points are complex and demand a detailed Regulatory Impact Analysis and a wider debate with the economic players and the society, so that all sides are assessed and the legal "solution" does not become another problem for the Sector.

 

5. Change in the Regime of Concessions in the Power Sector

The changes in the regimes of concessions was another relevant aspect covered by Law no. 13360/2016, with significant impact and of interest to the Sector's economic players.

Renewal conditions and requirements for classification as a public-utility company or an authorizing agent of services and installations of electric power have been reviewed.

The several changes established by this law include:

  • The renewal of the concessions of hydraulic undertakings between 5MW and 50MW may be extended, only once, but now with consideration.
  • The concession regime, upon a bidding process, was aimed at hydraulic and thermal power use, of power greater than 3MW and 5MW, respectively, provided that they are aimed at the performance of public services. Under the new law, the installed power increased to 50MW, both for hydraulic and thermal power stations.
  • For hydroelectric power stations, intended for the independent production of electric power, it will mandatory the form of concession for undertakings with power greater than 50MW, and in the prior legislation, the number was 10MW. The numbers were also changed to hydroelectric undertakings aimed at self-production and, in this case, the regime will be Concession of Use of Public Goods; and
  • Finally, the maximum limit for the undertaking to exempt from concession will be, for hydroelectric and thermal plants, 5MW.

As to the extinction of concessions, Law no. 13360/2016 provides that, also in an innovative manner, the public-utility company, permit holder or authorized company of services and installations of electric power may present a plan of transfer of the corporate control as a way of avoiding the extinction of the concession.

Thus, in case of a process tending to revoke the concession of an undertaking, the legal entity may provide ANEEL with a plan for the adjustment/continuity of the service to be provided. If the operation is approved and corporate control is transferred within the period of time established, the process of extinction of concession will be shelved.

 

6. Rules Related to the Bidding Process of Companies under the Government's Direct or Indirect Control

Pursuant to a Guideline existing since the original text of Provisional Presidential Decree no. 735/2016, Law no 13360/2016 brought rules to facilitate and enable the bidding process of companies under the direct or indirect control of the Government, States, Federal District and Cities.

Such rules include the possibility of the Government to promote bidding processes associated with the transfer of the public-utility company's corporate control, granting a new concession agreement for the period of 30 years.

The possibility of inverting the phases of classification and trial of the Auction was also provided, seeking to make the bidding process quicker and more efficient.

Under on this premise, the President of the Republic vetoed some provisions that represented interference with Eletrobras' operations or that could make the sale of its assets difficult, such as the case of the text that set out the maintenance of 90% of the employees existing at the moment of publication of the Bid Notice on transfer of the controlling interest.

 

7. Auctions of Power in the Regulated Acquisition Environment - ACR

As to the Auctions of power held by ANEEL in ACR, Law no. 13360/2016 brought some innovations regarding the theme.

Firstly, as to the Existing Power Auctions, it allowed the delivery of the power to start within 1 (one) to 5 (five) years after the Auction. Previously, the period for starting the delivery was 1 (one) to 2 (two) years.

Secondly, the period for construction and delivery of power in relation to the New Power Auctions also changed. Previously, 2 (two) types of Auction were provided: for the delivery within 3 (three) or 5 (five) years, also called Auctions A-3 and A-5.

However, now the Auctions may be held for power delivery within 3 (three) to 7 (seven) years.

Thirdly, the very definition of "new power undertakings" changed. Initially, the text of the Bill of Conversion sought to expand the concept, so that plants under commercial operation for less than 2 (two) years could be taken into account in the Auctions for expansion of the System.

However, with the veto by the President of the Republic, it was defined that only undertakings that have not been under commercial operation yet may be considered "new power."

Thus, the rule ended up more limited than the prior one, which allowed plants under commercial operation for less than 1 (one) year from the date of the bidding process to participate in New Power Auctions.

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Considering the relevance and extent of the normative changes launched by Law no. 13360/2016, the Demarest Advogados's Energy Team carefully monitors the topic, remaining at your service to offer assistance in these and other topics relevant to the Brazilian Power Sector.

Demarest Advogados


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