Law that allows the privatization of Eletrobras published

On July 13, 2021, Federal Law No. 14.182/2021 was published, providing for the privatization of the company Centrais Elétricas Brasileiras S.A. (“Eletrobras”), part of the National Privatization Plan. Such Law is the result of the conversion of Provisional Measure No. 1.031/2021 (“MP”), after having gone through intense discussions and amendments by the House of Representatives and the Senate.

The main criticism in relation to Federal Law No. 14.182/2021 is that it was not limited to regulating the conditions of the privatization of Eletrobras, having expanded the scope to create public policies related to energy planning, whose attribution is to other Government bodies, which establish the technical skills necessary for this planning.

Demarest’s Energy and Natural Resources Team has separated the main highlights of the Law below:

HIGHLIGHTS OF THE PRIVATIZATION OF ELETROBRAS

Modality of Privatization. The privatization of Eletrobras will be carried out by means of an increase in its capital stock, through the public subscription of common shares with waiver of the subscription right by the Federal Government (§1 of art. 1), and may be accompanied by a secondary public offering of shares owned by the Federal Government or by a company controlled by it, directly or indirectly. The privatization process will be carried out by the National Bank for Economic and Social Development (“BNDES”). According to the Ministry of Economy, the privatization process must be completed by February 2022;

New concession grants. The Federal Government is authorized to grant new concessions for power generation projects, under the independent energy production regime and with the assumption of hydrological risk management to: (i) contracts renewed in 2013, by Law No. 12,783/2013 through the quotas regime; (ii) to HPP Sobradinho, Itumbiara, Tucuruí and HPP Mascarenhas de Moraes (art. 2), under the conditions established in art. 4 of the Law. The Law sets out a series of conditions for these new grants, such as (a) the payment of an amount equivalent to 50% (fifty percent) “of the value added to the concession by the new contracts”, allocated to the Energy Development Account (“CDE”), and (b) the payment of a bonus for the granting of new electricity generation concession contracts corresponding to 50% (fifty percent) of the value added to the concession by the new contracts (with some deductions). The “value added by the new concession contracts” will be calculated by the National Energy Policy Council (“CNPE”);

Conditions for privatization. Privatization will be subject to approval by the general shareholders meeting of the conditions provided for in art. 3 of the Law;

Corporate restructuring. One of the conditions for privatization is corporate restructuring, with the creation of a mixed capital company or public company, in order to maintain the companies Eletrobras Termonuclear S.A. (Eletronuclear) and Itaipu Binacional under the direct or indirect control of the government. The responsibility of this company under the control of the Federal Government will also be: (i) the contracting and administration of the obligations related to the Proinfa contracts, which will be extended for 20 years, (ii) the management of the financing contracts that use RGR resources entered into up to November 17, 2016; and (iii) management of the assets of the Union under the administration of Eletrobras provided for in Decree-Law No. 1.383/1974;

Golden Share. One more of the conditions for privatization is the amendment of Eletrobras’ bylaws to create a special class preferred share, exclusively owned by the government, which will give the power of veto in certain corporate resolutions (art. 3, item III, ‘c’);

Revitalization projects. One of the obligations imposed in the privatization process is the development of projects for (i) revitalization of the water resources of the São Francisco River and Parnaíba River basins, (ii) structural reduction of energy generation costs in the Legal Amazon and for the navigability of the Madeira River and the Tocantins River and (iii) revitalization of the water resources of the hydrographic basins in the area of ​​influence of the reservoirs of the hydroelectric plants of Furnas (art. 3, item V). The generation concessionaires related to the projects must contribute amounts determined in the Law to comply with the measures (articles 6, 7 and 8);

Tucuruí Line. Privatization will not impede the continuation of works on the Tucuruí Line, which will link the State of Roraima to the National Interconnected System (SIN). Once the Basic Environmental Plan-Indigenous Component (PBA-CI) is concluded, the government will be able to commence works (§§ 9, 10 and 11 of art. 1);

Creation of a Company for the government to maintain corporate control, directly or indirectly, of Eletronuclear and Itaipu Binacional;

Repeal of certain legal mechanisms. Articles 7 and 12 of Law No. 3.890-A/1961 (creation of Eletrobras), which dealt with the subscription of the Company’s initial capital by the Federal Government and company management are repealed; as well as §1 of art. 31 of Law No. 10,848/2004 (marketing of energy), which dealt with the exclusion of Eletrobras and its subsidiaries from the National Privatization Program (“PND”) (art. 32);

OTHER TOPICS ON THE LAW NOT RELATED TO ELETROBRAS’ PRIVATIZATION PROCESS

Contracting of TPPs. Gas-fired thermoelectric plants will be contracted for 15 years, even in regions not yet served by a gas pipeline, which will be installed in the Northeast, North, Midwest and Southeast regions, totaling 8,000 MW (§1 of art. 1);

R&D Resources. Companies operating in the electricity generation, transmission and distribution segments may allocate R&D resources in the form of contribution to support and develop of research and technology institutions linked to the electricity sector (art. 14 – inclusion of §5 into art. 4 of Law No. 9.991/2000);

CDE Resources. One of the resources of the CDE will come from the annual quotas paid by electricity generation concessionaires whose obligation is provided for in the respective concession contracts mentioned in the Eletrobras privatization Law, which should be used only for the purpose of sliding scale tariffs in the ACR (art. 15 – inclusion of item V of §1 and §15 into art. 13 of Law No. 10.438/2002);

Regulated contracting and public call. In compliance with the obligation to ensure the service of the entirety of their market in the regulated market, distribution concessionaires and licensees may, subject to the limit of 10% (ten percent) of their annual expansion needs, contract energy from generation projects directly connected to their electrical system, including hydraulic or thermal generation projects with power capacity of less than 5MW, and for the purpose of transferring the cost of acquisition of this energy to the tariffs, the Specific Annual Reference Values ​​(“VRES”) must be observed, which will be calculated by the Energy Research Company (“EPE”) and defined by generation source by the Ministry of Mines and Energy (“MME”). This contracting must take place through a public call (art. 16 – amendment of item “a’ of §8, art. 2 and inclusion of art. 2-B into Law No. 10,848/2004);

Hydrological risk. Compensation for the extension of the grant period to the holders of HPPs participating in the Energy Reallocation Mechanism, referring to the effects caused by the hydroelectric projects with priority for bidding and implementation indicated by the CNPE, will be advanced to all the holders of HPPs participating in the MRE in proportion the amounts of assured energy established for the respective plants, including those that were qualified as structuring projects (art. 18 – amendment to §4 of art. 2-A of Law No. 13,203/2015);

Contracting for reserve capacity. The granting authority can contract the power plant for reserve capacity in the Northeast, North, Midwest and Southeast regions (art. 20);

A-5 and A-6 auctions. Auctions A-5 and A-6 must allocate at least 50% of the demand declared by distributors to the contracting of hydroelectric plants up to 50 MW, until reaching 2,000 MW (art. 21);

Revision of Annex C to the Treaty of Itaipu. Any economic surplus arising from the revision of Annex C to the Treaty of Itaipu will be: (i) by 2032, 75% allocated to CDE and 25% for the government to apply in the federal government’s income transfer program; and (ii) from 2033, 25% allocated to the mixed capital company or to the public company that will be created so that the government remains the controlling shareholder of the Eletronuclear and Itaipu Binacional companies (Art. 9 and ref. to item I of Art. 3 of the Law), 50% for the CDE and 25% for the government to apply in a federal government income transfer program (Art. 22);

Operational rules for reservoirs. The National Water Agency will establish operating rules for the SIN hydroelectric power plant reservoirs, located in Rio Grande and Rio Paranaíba, starting with the headwater reservoirs of seasonal, annual and multi-year regularization capacity (Art. 28);

VETOS

14 provisions of the Conversion Bill (“PLC”) of  the Provisional Measure were vetoed, among which we highlight the following:

Acquisition of shares by employees. Possibility of acquisition, by current employees and employees terminated from the company, of 1% of the remaining shares held by the Federal Government, after the capital increase (Veto to §§ 6 and §7 of art. 1 of the PLC);

Prohibitions on subsidiaries. Prohibition of extinction, incorporation, merger or change of domicile, for at least 10 years, of the company’s subsidiaries (i) Companhia Hidrelétrica do São Francisco – Chesf, (ii) Furnas Centrais Elétricas SA – Furnas, (iii) Centrais Elétricas do Norte do Brasil SA – Eletronorte, and (iv) Electric Power Generation and Transmission Company of the South of Brazil – CGT Eletrosul (Veto to art. 3, VII of the PLC);

Financial results as source of CDE. Inclusion of the financial results of the new state-owned company, resulting from the corporate restructuring to keep under control companies, facilities and interests, held or managed by Eletrobras as a source of funds for the Energy Development Account – CDE (article 15 of the PLC).

Populations in easement ranges. Relocation by Eletrobras, within 5 years after privatization, of the population in the easement range of transmission lines with a voltage equal to or greater than 230 kV in the metropolitan region of the state capitals (Veto to art. 26 of the PLC);

ONS. Need for approval by the Senate of the appointment of directors of the National Electric System Operator – ONS (Veto to art. 29 of the PLC).

Demarest’s Energy and Natural Resources Team is at your disposal for any queries and clarifications regarding the new Law.