By Inés de Alvear, Julio López Quiroga and Ana Montero

1. Introduction

On March 15, 2004, Law Nos. 10,847 and 10,848 were enacted establishing the guidelines for the "New Regulations on the Electrical Energy Sector" (the "New Regulations").

The New Regulations are intended to provide incentives to both private and public entities in order to maintain sufficient output capacity to guarantee electricity supply to the whole of Brazil and at the same time providing reasonable consumer rates through competitive electricity bidding processes.

The main objectives of the New Regulations, pursuant to the Explanatory Preamble No. 95, enacted by the Ministry of Mines and Energy ("MME") on December 11, 2003, are:

  • to provide cheaper rates;
  • to implement the principles of continuity and quality of the public services contained in the Brazilian Constitution;
  • to establish a fair return to investors in order for them to expand their services;
  • to make public services available to the public at large.

The mentioned laws do not regulate the New Regulations comprehensively, they only provide the main guidelines. Therefore, the details of the new structure and its implementation have not yet been enacted through secondary legislation.

2. The New Model

The most significant novelties introduced by the New Regulations can be summarized as follows:

2.1. Creation of two different scenarios to purchase electricity: a free trade environment and a regulated environment.

2.1.a. The regulated environment consists of purchasing electricity between distributors - who must now take part compulsorily - and producers by means of a public bid; alternatively, electricity can be sold and purchased between distributors and independent electricity producers, who can act in both environments.

2.1.b. Each producer shall enter into a "CCEAR Agreement" (Contrato de Comercialização de Energia no Ambiente Regulado) with all distributors. The CCEAR Agreement will be approved by the Granting Authority and shall replace the National Electricity Agency (ANEEL).

2.1.c. The following requirements must be complied with by the distributors before executing the CCEAR Agreements: (i) the said agreements must be guaranteed by a security; and (ii) a sufficient amount of energy must be purchased to attend the demand of all its captive consumers. The regulations which are pending to be enacted will fully implement the New Regulations and set forth the consequences of the failure to comply with such requisites.

2.1.d. If the purchased electricity derives from existing generation projects ("old energy"), then its delivery shall start the year after the public bidding process. The relevant CCEAR Agreement shall have a term of 3 to 5 years. However, if the purchased electricity derives from new generation projects ("new energy"), then its delivery shall start in the third or the fifth year after the public bidding process and the relevant CCEAR Agreement shall have a term of 15 to 35 years. In the event there is an unexpected demand for electricity, the distributors are allowed to enter into "adjustment agreements", which term shall not exceed 2 years.

2.1.e. The free trade environment - comprises freely negotiated agreements, which involve, on the one hand, consumers, energy traders or importers and, on the other hand, producers or independent energy producers.

2.1.f. Free consumers shall include new consumers creating a demand of at least 3,000 Kw at any voltage and existing consumers with a demand of at least 3,000 Kw, supplied at 69 Kv or above.

2.1.g. Existing consumers that choose to become free consumers will be able to exercise such right by providing their respective distributors with 36 months’ notice or less if so determined by the provisions of the New Regulations. Once a consumer has decided to become a free consumer, it will only be allowed to act as a captive consumer if it has provided its local distributor with at least 5 years’ notice. The local distributor can reduce this term at its sole discretion.

2.2. Creation of a "Trading Convention" by ANEEL

The "Trading Convention" will determine (i) the rights and obligations of the agents of the electric energy sector; (ii) the different types of guaranties; (iii) the penalties applicable for breaches of commercialization rules; and (iv) the commercialization rules and procedures, including those related to the international trading of electricity.

2.3. Information provided by the Granting Authority

Producers, distributors, traders and consumers shall inform the MME about the energy demand necessary to meet the requirements of all their respective market. There is a sensitive issue which is not dealt with in the New Regulations that concerns such persons’ liability for providing inaccurate estimations. It may however be taken into account by the regulations which are pending to be enacted.

2.4. Creation of the Electric Energy Trading Chamber - "CCEE"

2.4.a. The CCEE will be a non-profit making private company, regulated and supervised by ANEEL, which will replace the MAE (Mercado Atacadista de Energia).

2.4.b. The ANEEL is responsible for the transition until the CCEE is fully operative. Such transition process shall be concluded within 90 days from the publication of the provisions of the New Regulations.

2.5. Division of the activities performed in the electrical energy sector

2.5.a. Except in a small number of cases, distributors are now prohibited from performing activities related to the production and transfer of energy. Distributors are also precluded from selling energy to consumers who are not located in the areas where a concession or permit has been granted. Moreover, distributors cannot hold a stake, directly or indirectly, in other companies and furthermore, they will not be allowed to perform activities that are not within the purpose of the concession, permit or authorization.

2.5.b. Producers are prohibited from being affiliated to or controlling the distributors (companies of the same group). As a consequence of this prohibition, self-dealing, which consists of distributors purchasing electricity form their affiliated companies, is no longer permitted.

2.5.c. Producers and distributors will be granted an 18 month term to comply with such rules, as from the official publication of the New Regulations. ANEEL may extend this term for another 18 months in the event that producers and distributors can prove that they are unable to carry out the necessary corporate restructuring within the prescribed time limit.

2.6. ANEEL’s duties are reduced

The Granting Authority has replaced ANEEL in the formalization of contracts for the concession or authorization to provide public services of electrical energy and the use of public assets for the issuance of authorizations.

2.7. Structural change within the National System Operator - ONS

Three of the five Directors of the ONS will be appointed by the Granting Authority (including the General Director), and the remaining two will be appointed by agents of the electrical energy sector. This new provision together with the creation of the regulated environment, have allowed for a greater interference of the government in the electrical energy sector. This provision is contrary to the prior legal framework.

2.8. New rules for producers controlled by the Public Authority

There is no further need to conduct public bidding processes for the sale of electricity by producers under Federal, State or Municipal control. Furthermore, the surplus energy not traded through the tendering process established under Law No. 10,848 may be settled by the mentioned producers in the short-term market of the CCEE. According to the pre-existing legislation, producers under Federal control could only trade their surplus energy at public auctions; producers under State control had to trade their surplus energy by means of a "procedure that ensures the publicity, transparency and equal access for all contenders" (this achieves the same objectives as an auction).

2.9. Authorization for the creation of the Electrical Sector Monitoring Committee (Comitê de Monitoramento do Setor Elétrico - CMSE)

The main role of this new Committee will be to determine and evaluate, on a permanent basis, the continuity and safety of the supply of electromagnetic energy in the Brazilian territory.

2.10. Authorization for the creation of the Energy Research Company (Empresa de Pesquisa Energética - "EPE")

2.10.a. The EPE will be a public company linked to the MME whose purpose will be to carry out analysis and research in order to provide assistance in the planning of the electrical energy sector.

2.10.b. The EPE is responsible for obtaining the required environmental licenses for new electricity generation concessionaires.

2.10.c. The EPE can be contracted by government entities with authority to auction, but solely with respect to the activities that are within its corporate purpose.

2.11. Compliance with current electrical energy commercialization agreements

The Explanatory Preamble of the MME provides that compliance with the electrical energy commercialization agreements currently in full force and effect is one of the main objectives of the New Model of the Electrical Sector. Nevertheless, Law No. 10,848 prohibits the amendment of electrical energy commercialization agreements which have already been ratified, approved or registered by the ANEEL whose purpose is to extend the term or increase the amount or prices agreed following publication of the mentioned law.

2.12. Exclusion of Eletrobrás and its controlled companies from the National Privatization Scheme - NPD

Eletrobrás and its controlled companies, Furnas, CHESF, Eletronorte, Eletrosul and CGTEE have been excluded from the NPD. This is evidence of the increasing interference of the government in the electrical energy sector.

2.13. Initial Supply Agreements

Until 2006 (final term of the transitional period to a free and competitive energy market), purchases and sales of electrical energy between producers and distributors shall take place in accordance with Initial Supply Agreements (with prices and quantities approved by ANEEL). According to the New Regulations, public electricity generation companies are allowed to amend their Initial Supply Agreements in force as of March 2004.

3. Conclusion

To summarize, it seems reasonable to conclude that the complete development of the New Model of the Electrical Energy Sector greatly depends other rules being enacted, which we expect will take place as soon as possible.

The distribution companies will undoubtedly feel the major impact of the New Regulations as they can only act at the base of the regulated environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.