Amid government pressure, company risks losing concession; process would be slow and complex
10/15/2024
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The crisis opened by the blackout in São Paulo is expected to complicate the renewal of Enel’s concession, which expires in June 2028, according to experts interviewed by Valor. The current perception is that the contract would head towards a bidding scenario at the end of the term. Faced with government threats, the company risks losing the operation even before that, although analysts point out that a forfeiture process would be complex, lengthy, and fraught with uncertainties about who would take over the service in such a case.
São Paulo’s power distribution company is under strong pressure from federal, state, and municipal governments since a storm hit the city last Friday (11) causing a power outage that affected 2.1 million people. By Monday (14), about 400,000 customers in Greater São Paulo were still without power.
The minister of Mines and Energy, Alexandre Silveira, set a three-day deadline, until Thursday (17) morning, for Enel to restore power to most of the city. “The company has the next three days to solve the major volume problems. After that, it can only present, if necessary, specific issues regarding locations that cannot be accessed due to unforeseen events,” the minister said in a press conference held on Monday (14).
The minister also criticized the Brazilian Electricity Regulatory Agency (ANEEL) for not yet opening a forfeiture process against Enel—which could strip the Italian company of the contract—and said the agency is promoting a “boycott” against the government.
Following the criticism, the regulatory body issued a statement reiterating its autonomy and saying it is taking all measures to resolve the crisis. “ANEEL informs that it is conducting a rigorous and technical investigation into Enel SP’s work during this critical period,” it said. “The agency will not hesitate to adopt the sanctioning measures provided for by law, which may include severe fines, administrative intervention in the company, and opening a forfeiture process of the company’s concession.”
The risk of Enel losing the contract due to forfeiture exists but it would not be simple, experts say. A lawyer experienced in the field said Enel is not expected to lose the concession in São Paulo for now, as there are other stages before, such as fines and warnings.
Diogo Lisbona, a researcher at the Center for Studies in Regulation and Infrastructure at Fundação Getulio Vargas (FGV Ceri), points out that the most recent contracts in the sector include an automatic trigger providing for forfeiture in cases of repeated failure to meet targets. However, the Enel SP concession is previous to that. The contract provides for forfeiture but within an administrative procedure following a series of steps. “We would have to wait for this procedure, and it is not a quick process.”
Lawyer Ligia Schlittler, a partner at TozziniFreire, points to another challenge—finding another company interested in the contract. “It’s a big headache. If the government penalizes the concessionaire, it must hand it over to a competent party.”
Another industry source, who requested anonymity, mentioned the case of Amazonas Energia, where, although the inability of the concessionaire is even more evident, the forfeiture process is hindered by the transfer to a new concessionaire.
While forfeiture is an unlikely scenario at the moment, the crisis is likely to complicate a possible renewal of Enel São Paulo’s concession, experts say. In June, the federal government published a decree with the rules for extending electricity distribution concessions for another 30 years, and ANEEL should open a public consultation with drafts of the amendments this week.
Bruna de Barros Correia, from BMA Advogados, said an option could be for the concessionaire to present ANEEL with a plan for transferring corporate control as an alternative to the termination of the grant, as long as it benefits the proper provision of public service.
Enel São Paulo could benefit from that but analysts see an adverse scenario for the company. In addition to the current crisis, São Paulo experienced a severe power outage in November 2023, which generated a dispute with ANEEL over the payment of large fines and enormous public opinion wear and tear.
“I’m not sure Enel would have the political and administrative conditions to continue, there were two serious occurrences in a very short period,” said former ANEEL director Edvaldo Santana. He notes that the refusal cannot be arbitrary and that conditions must be equitable. “The government can do everything to not renew but the rule has to be the same for everyone.”
Mr. Lisbona points out that, according to government rules, if a forfeiture process is opened, even if not concluded, it halts the progress of discussing a possible renewal. “The path [of renewal] is halted until a final decision in the administrative proceeding.”
If Enel is interested in renewing, it would have to apply at least 36 months in advance, meaning in 2025. An industry source points out that a possible renewal would require institutional alignment between the governments and ANEEL, a scenario far from the current reality.
Valor questioned Enel regarding the deadline for service resumption, the risk of forfeiture, and the possibility of contract renewal, but the company did not respond.
Without forfeiture or renewal, the path would be to let the concession reach its end and open a new bidding. Industry analysts claim it is difficult to foresee a scenario but doubts arise about the impact of the current crisis on a future bidding.
“Undeniably, it is a city with a high population density, dealing with its asset management issues, challenging to manage. There is a combination of challenges, and the intensification of climate change makes São Paulo an asset of greater operational complexity,” Ms. Schlittler pointed out.
A person close to distributing companies said that, behind the scenes, the topic of new bidding is already being discussed among companies. Experts point out that the area under Enel’s concession is too large for one single concessionaire and that some groups will likely seek to split the area. An industry analyst points out that if there are no arbitrary decisions by public authorities during the process, there will likely be interest. However, if the technical procedure is not followed, it could deter the market.
Enel acquired the São Paulo concession, previously controlled by AES, in 2018, after an intense dispute with Neoenergia, owned by Spanish company Iberdrola. In the competition, the Italian state-owned company paid R$ 5.55 billion for a 73.38% stake.
(Cristian Favaro contributed reporting from São Paulo.)
By Taís Hirata, Matheus Oliveira, Kariny Leal — São Paulo and Rio de Janeiro
Source: Valor International