Introduction
Potential violations
Comment
As widely reported over the past few months, Brazil is facing a serious energy crisis as a result of the worst drought in 91 years, with hydropower reservoirs falling to a record low. Hydropower produces almost 60% of the nation's electricity, followed by thermoelectric plants at around 25%. This has led to a sharp increase in prices for final consumers, largely due to the fact that more expensive thermal alternatives are needed.
In light of this, the competition authority (CADE) launched a preliminary investigation(1) into potential antitrust violations in the energy sector, focusing on both thermoelectric plants and Petrobras, the country's largest state-run fuel supplier. As part of the investigation, CADE requested a large volume of information relating to:
- the types of fuels that are supplied to thermal plants;
- their prices;
- monthly volumes;
- shares in energy generation; and
- production costs and charges for power generated from thermal sources.
CADE's knowledge of the electrical energy sector is that it is divided into four markets: generation, commercialisation, distribution and transmission. Notably, the authority's experience of the generation market largely comes from its involvement in frequent fast-track merger cases in a low-concentration market, rather than from in-depth analyses.
Because of this, CADE does not have a strong stance on the exact parameters of the generation market and, so far, has only been weakly defined:
- the market's product dimension, both by analysing different sources as substitutes and dividing the market according to each generation source; and
- the market's geographic dimension, assuming both national and regional scenarios.
Despite the preliminary investigation yielding weak results given CADE's inexperience in the market, it is still possible to anticipate and evaluate the two main infractions that the authority would argue are in violation of antitrust law.
Unilateral practices
It is highly unlikely that CADE will prosecute thermal plants for unilateral practices, especially as there have been no reports of such practices by these players. Furthermore, the clear lack of market power that these players possess reduces the probability of future prosecutions. As of now, it seems most likely that the price hikes are the result of striking a balance between demand and supply caused by a shortage of cheaper hydropower. CADE has repeatedly stated that the market in question is under enormous pressure, which has resulted in the authority's inexact understanding of the market.
Collusive agreements
Just as unlikely are collusive agreements among plants, both for bid rigging procurements (private and public) for energy commercialisation and for acquiring fuel from suppliers. This is due to the large number of competitors in the energy generation market and the bargaining power of fuel suppliers, which CADE has already observed in other cases, in addition to a highly regulated bidding environment.
The preliminary investigation may enable CADE to carry out its first in-depth analysis of the power production sector. It remains to be seen how such an analysis can refine the authority's perception of the market, especially if is able to identify and demonstrate any competitive vulnerabilities that could have major repercussions for its approach to merger control and for the national economy.
For further information on this topic please contact Vinicius Marques de Carvalho, Henrique Felix Machado or Arthur Sadami at VMCA by telephone (+55 11 3939 0708) or email ([email protected], [email protected] or [email protected]). The VMCA website can be accessed at http://www.vmca.adv.br.
Endnotes
(1) Further information is available here.