Contracts come to an end as of 2025 and government has gathered guidelines in technical note that details conditions for procedure
06/27/2023
The Ministry of Mines and Energy (MME) announced Thursday the opening of a 30-day public consultation to discuss the proposed guidelines for the renewal of the concessions of 20 power distribution companies that were privatized in the mid-1990s and whose concession contracts expire between 2025 and 2031.
These companies account for 62% of the domestic market and serve 55.6 million consumer units, with gross revenues of R$168 billion. The guidelines have been summarized in a technical note that details the conditions for them to renew their concessions.
The public consultation, which ends on July 24, and the proposed guidelines were expected by the market. The government had signaled that it would require so-called “social compensation” from companies to renew their contracts. However, the terms of these compensations were not clear. The government also decided not to require a bonus payment by the concessionaires to extend their contracts.
The companies that bought these assets signed 30-year concession contracts that expire in 2025. The current controlling shareholders of these distribution companies have 36 months to express their interest in signing new contracts, and the MME has 18 months to respond to these companies.
First in line is EDP Espírito Santo, whose contract expires in June 2025. Light and Enel Distribuição Rio are next, with contracts that end in June and December 2026, respectively. The last is Energisa Paraíba, whose contract ends in March 2031.
The government decided not to adopt the automatic renewal of concessions because of the costs that the process would entail and the risk of compromising the provision of services to consumers, although an auction has the role of revealing the real market value of a given asset, according to the government.
The government has decided that distribution companies must prove that there is no “economic surplus” in the provision of the service. The surplus occurs when the concessionaire makes greater economic gains than expected in operating the concession.
Thus, the government has proposed a methodology to measure the possible existence of economic surplus, which, if verified, will be converted for the presentation of social compensations, a requirement that the government has not abandoned.
The Brazilian Association of Electricity Distributors (Abradee) believes that there is no economic surplus to be calculated, since distribution companies undergo periodic tariff reviews that would reveal such a situation. In the reviews, additional profits are considered in the redesign of the tariffs. Abradee sees scope for distributors to transparently demonstrate the absence of such surpluses.
“The association’s position is that there is no such value to realize the social compensation,” said Marcos Madureira, president of Abradee, about possible economic surpluses. “There are other mechanisms, including in tariff adjustments, that can make it so that possible gains can be reversed.” Mr. Madureira explains that since the points raised by the MME are still proposals, there is room for debate on how distribution companies can find a way to meet them. “We are still analyzing. What the MME is proposing is a way to evaluate the existence of this added value. If it exists, it can be used for this purpose [of social compensations].”
Angela Gomes, technical director of PSR, said the compensation is welcome in the context of the country, but contracts must to be flexible. “If the process tries to price the future based on the results of the past, it will end up tying the regulation and preventing the desired evolution.”
The ministry proposed the presentation by distributors of social compensations, mandatory actions with emphasis on energy efficiency and actions that benefit low-income consumers. In the technical note, the ministry cites investments in the efficiency of public buildings in concession areas with high commercial losses, in metering systems and solar panels to reduce energy costs in the operation of cisterns and artesian wells in communities “subject to water insecurity.”
The investments in social compensations would have, in principle, four sources of funds: the economic surpluses that will eventually be determined with the application of the methodology proposed by the MME; the funds that are currently destined to the energy efficiency program; the revenues related to the ancillary activities and penalties on distributors; and the funds called “surplus of regulatory cost of capital,” generated by the tax liabilities in certain regions of the country.
If the funds for social compensation are not used, the MME has proposed that these amounts must be returned in order to offer reasonable tariffs – it consists of the calculation of adjustments or revisions of the distributors’ tariffs, helping to cushion possible increases or provide reductions in electricity bills.
If a concessionaire decides not to renew the concession, the MME will hold public auctions for possible interested buyers. In this case, the companies will be compensated by the federal government for investments in assets not amortized. The MME may refuse to renew the contract if the distribution companies fail to meet the quality of service indicators or the economic and financial sustainability indicators.
Recent cases are the distribution company in Amapá (CEA) and CERR, controlled by the government of Roraima. Both had the expiration of the concession declared by the federal government. CEA was temporarily operated by Eletrobras until its privatization. CERR had its concession area merged with that of Boa Vista Energia and was privatized.
The MME left room for the early renewal of EDP Espírito Santo, Light and Enel, as long as they accept the final conditions within 30 days of the publication by Aneel of the final version of the contracts and the investment compensation.
The distribution companies will also have to use the Extended Consumer Price Index (IPCA) to adjust their tariffs, replacing the General Market Price Index (IGP-M), which is more sensitive to exchange rates.
*Por Fábio Couto — Rio de Janeiro
Source: Valor International