Policy and law
What is the government policy and legislative framework for the electricity sector?
Over the past 30 years, the electricity sector has gone through changes that help explain the current Brazilian government policy and legislative framework, as summarised below:
- prior to the 1990s, electricity activities were carried out by government companies;
- mid-1990s to 2003: owing to the fiscal crisis (government budget pressures) and high inflation in the 1980s and early 1990s, which impaired the ability of government companies to invest in infrastructure as well as to recover their costs through adjustments to tariffs, a new legislative framework was approved and implemented based on privatisation of government companies and facilities and free initiative to foster private sector investments. The Brazilian Electric Power Agency (ANEEL) was created;
- 2003 to 2012: after severe droughts while relying upon hydropower generation in the Brazilian electricity matrix, there was an energy supply crisis in the early 2000s. By the end of 2003, the government had implemented a major reform in the sector based on government planning for its expansion, energy supply reliability through the obligation of distribution companies (on behalf of their own consumers) and other consumers to have their demand 100 per cent contracted (or otherwise evidence self-generation to such effect), and on fair tariffs (the lowest possible tariff to comply with reliability standards); and
- 2012 until 2018: in 2012, the government approved specific rules for anticipation of renewal of generation, transmission and distribution concessions, which were to expire as early as 2015. The rules targeted lower future tariffs, through the indemnity of assets and investments still not amortised nor depreciated and allocation of electricity to distribution companies through a new system of quotas. As a result of involuntary exposure of distribution companies as well as a high increase in thermopower generation owing to consecutive years facing droughts, among other issues, the electricity sector companies and consumers ultimately faced high costs of electricity and delinquency or default rates that were unprecedented. Other changes were made to the legislative framework to deal with each specific issue and many agents of the sector sought protective measures in the courts, resulting in a ‘judicialisation’ of the sector.
More recently, as a result of excess of contracted power by distribution companies and also delays in construction of new power plants, ANEEL issued new regulations on mechanisms for adjustments to the contracted energy by way of bilateral agreements, as well as on new mechanisms to reduce the distribution companies’ excess of contracted energy. Accordingly, assignment of amounts related to new-project power purchase agreements (PPAs) among themselves and competitive bids to terminate agreements were authorised. In addition, recent legislation enabled the termination of back-up energy agreements through a competitive mechanism, as well as the negotiation of agreements for the sale of excess contracted energy between concessionaires for electric power distribution services and independent power producers (IPPs) or free consumers, subject to ANEEL’s regulations.
The federal government reviewed contributions made by players in the industry as part of a public consultation on legislative changes to correct problems and settle disputes in the sector, and a bill of law is under discussion in Congress. Although legislative changes were expected by the end of 2017 and early 2018, it is now hard to estimate the legislative schedule owing to presidential, state government and legislative elections in October 2018. In any event, the main principles of the legislative framework are not supposed to be modified.
The legislative framework is based on the Brazilian Federal Constitution of 1988, as amended, pursuant to which the federal government shall have the authority to operate, directly or through authorisation, concession or permission: electricity services and facilities; and the exploitation of watercourses for electrical energy purposes.
The Constitution was initially regulated by: Law No. 8987, dated 13 February 1995, which establishes rules for public service concessions in general; Law No. 9074, dated 7 July 1995, which set forth specific rules for restructuring and renewal of concessions; and Law No. 9427 dated 26 December 1996, which created ANEEL.
The 2003 reform was basically implemented by Provisional Measures issued by the president of Brazil, which were converted into Laws No. 10847 and 10848, both dated 15 March 2004. The government aimed at ensuring the supply of power at fair prices within a more reliable scenario as regards planning of demand and offer of power in the market through regulated auctions. Such reform went further into the unbundling of all levels of the supply chain (power generation, transmission, distribution and trading) by imposing limits on activities of distribution companies, while ensuring competitiveness in the generation and trading segments.
The Energy Research Company (EPE), a government-owned company, was created with the purpose of conducting technical studies and researches to give grounds for the planning of the sector by the Ministry of Mines and Energy (MME).
Two new trading environments were also created for commercialisation of power in the National Integrated System (SIN) - the regulated contracts environment (ACR) and the free contracts environment (ACL), replacing the former wholesale energy market.
2Organisation of the market
What is the organisational structure for the generation, transmission, distribution and sale of power?
The market is basically organised as a highly integrated system through transmission lines connecting generation facilities and consumers in all five regions of Brazil, covering most of its population and industries, forming the SIN. A few areas are not integrated and are deemed isolated systems, subject to specific features and regulations.
The SIN allows a mechanism for reallocation of energy whereby the hydrological risk is shared by hydropower generation companies, as a general rule. Such mechanism permits the sharing of upsides resulting from excess of hydropower generation as compared to the contracted energy as well as the downsides in case of shortfall, through the generation scaling factor (GSF).
There are basically three legal entities responsible for power generation: the ones holding a concession of public service; the IPP, which receives a concession or authorisation to generate power for commercialisation; and the self-producer (SP), which receives a concession or authorisation to generate power for its exclusive use. Subject to applicable regulations, however, IPPs may also use the energy produced and SPs may sell the excess energy to qualified third parties.
Sale of power shall depend on the assurance of energy, which may be evidenced by the physical guarantee of the power plant or PPAs with other agents.
The National Electric System Operator (ONS), as the independent operator of the SIN, is responsible for determining when each generator shall generate power and provide to the system.
As to electricity sources, Brazil still relies upon hydropower as its main source of energy - approximately 65 per cent of the installed capacity and the power generation - with thermal power as an important supplementary source of energy, accounting for approximately 27.5 per cent of the installed capacity and 26 per cent of power generation. The participation of wind power plants is around 6.5 per cent of the installed capacity and 6 per cent of power generation, while solar power installed capacity is around 0.1 per cent but had an increase of more than 800 per cent in power generation between 2016 and 2017.
Transmission facilities may be designed to integrate the SIN or be restricted to a certain area applicable to a specific distribution agent, or to a certain area applicable to a specific generation agent.
The transmission system integrating the SIN is also operated by ONS and public services related to the transmission system are remunerated through tariff policies approved by ANEEL based on the annual permitted revenue (RAP) of each transmission company.
Sale of power
Two trading environments apply for sale of power in the SIN:
- ACR - power sale and purchase transactions carried out between agents selling power (holders of concession, permission or authorisation to generate, import or commercialise power) and distribution agents, as purchasers, through public auctions conducted by the government, whereby the sellers compete by the lowest bid price (Brazilian real per megawatt (MWh)) and shall also observe terms and conditions established by applicable legislation and auction rules. The winning generation company enters into long-term (10-30 years, depending on the source) regulated power purchase agreements (ACR PPAs); and
- ACL - sale and purchase transactions carried out through bilateral agreements freely negotiated by both parties, subject to commercialisation rules and proceedings. As a mechanism to reduce exposures, the distribution companies were also recently authorised to sell power in the ACL, specifically in case of excess of power contracted to meet the demands of their market as discussed above.
Consumers that do not meet requirements to be eligible as ‘special consumers’ (which have a load from 500kW to 3,000kW and may purchase power from renewable sources) or ‘free consumers’ (load equal to or higher than 3,000kW) shall be deemed as ‘linked consumers’ and may purchase power only from the applicable distribution company.
Existing generation companies may participate in ‘existing energy’ auctions, by which they execute PPAs whose terms may vary from one to 15 years. Those companies may also choose to sell their plants’ output within the free market, where electricity is freely traded among generation and trading companies, as well as free consumers and special consumers.
As a general rule, ACR PPAs may have the following modalities: quantity or availability. The costs related to hydrological supplying risks shall be assumed by the selling agents in ACR PPAs in the quantity modality, while purchasing agents shall assume such costs in ACR PPAs in the availability modality. Financial exposures in the short-term market shall be assumed by distribution agents, to guarantee the final electric energy repass to final consumers. As a result of consecutive droughts, the government has established specific rules for transfer of hydrological risk among users.
PPAs have to be registered with the Electric Power Commercialisation Chamber (CCEE), also created by Law No. 10848/2004, which consists of a non-profit, private entity authorised by the granting authority. PPAs are also subject to registration, approval or ratification by ANEEL, as applicable.
Compliance with contracted obligations is verified on a monthly basis by CCEE and failure to comply therewith shall result in penalties to be paid by the applicable CCEE agent (power producer, consumer, commercialisation agent or otherwise) in accordance with the Commercialisation Convention, which is a body of rules and procedures approved by ANEEL to regulate the commercialisation of power in Brazil.
The Commercialisation Convention provides for general rules on the commercialisation of power, such as, obligations and rights of agents of the electricity sector; financial guarantees; penalties; and rules and procedures for commercialisation, including those with respect to the international exchange of power. The Rules of Commercialisation and the Commercialisation Procedures have a more technical and operational nature, being proposed by CCEE and then approved by ANEEL.
The settlement among power generated, contracted and consumed in the ACR and ACL is carried out by CCEE in the short-term market and shall result in the settlement price (also known as PLD).
Regulation of electricity utilities – power generation
Authorisation to construct and operate generation facilities
What authorisations are required to construct and operate generation facilities?
Pursuant to Law No. 9074/1995, construction and operation of generation facilities shall be subject to:
- concession regime, upon previous bidding process: exploitation of hydraulic potentials and implementation of thermopower plants (except for nuclear power plants) above 50,000kW designed for public services; exploitation of hydraulic potentials above 50,000kW designed for independent power production; and use of public assets, exploitation of hydraulic potentials above 50,000kW, which are designed for exclusive use of the SP;
- authorisation regime: thermopower plants (except for nuclear) above 5,000kW designed for exclusive use of the SP and for independent power production; and small hydropower plants (PCHs) above 5,000kW and equal to or below 50,000kW designed for exclusive use of the SP and for independent power production; and
- registration with the granting authority: hydraulic potentials and implementation of thermopower plants equal to or below 5,000kW.
In ‘new energy’ project auctions, aside from PPAs, generation companies also bid for a regulatory licence to operate the power plant. While hydropower plants with an installed capacity above 50MW are required to participate in those auctions to obtain the corresponding concession (whose granting must be preceded by a public bid and shall be for a period of up to 35 years), power plants subject to authorisation may obtain the respective regulatory licence without the need for an auction.
In addition to regulatory approvals, construction and operation of power plants shall also be subject to other permits and licences, including with respect to the protection of the environment and cultural heritage, among others.
Grid connection policies
What are the policies with respect to connection of generation to the transmission grid?
The legislative framework grants open access to transmission and distribution systems for the different agents supplying or consuming power.
Such access shall be subject to charges owing to transmission or distribution costs involved (TUST and TUSD tariffs, respectively), and may require capital expenses by the accessing party, as it would be the case of transmission facilities of exclusive interest of the power producer.
The general terms and conditions for the contracting of access to transmission or distribution systems are regulated by ANEEL, as discussed in question 10.
Alternative energy sources
Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?
The government has implemented different policies over time to foster alternative energy sources.
As a response to the energy supply crisis in the early 2000s, Law No. 10438, dated 26 April 2002, contemplated incentives for alternative sources in the electricity matrix. The law included:
- creation of the Alternative Energy Source Incentive Programme (PROINFA) aimed at the construction of 3,300MW of installed capacity, through a feed-in tariff mechanism;
- creation of the Energy Development Account (CDE) to foster competitiveness of power produced by wind plants, thermo solar, photovoltaic, small hydroelectric plants, biomass, other alternative sources and natural gas; and
- a waiver for IPPs that generate power exclusively from wind, solar, biomass, PCHs and qualified cogeneration with respect to the obligation to apply at least 1 per cent of net operational revenues per year in research and development.
In addition, specific energy auctions were used to foster alternative sources, including the Reserve Energy Auction and the Alternative Sources Auction.
Pursuant to Law No. 9427/1996, as amended, ANEEL shall also stipulate a discount of at least 50 per cent (or 80 per cent in case of certain solar plants) to the TUST or TUSD charged from ‘incentivised sources’ (small hydroelectric plants, solar, wind power, biomass and qualified cogeneration, provided that they do not exceed the applicable capacity).
The concept of special consumers established a lower threshold (load higher than 500kW) as compared to free consumers to allow purchase of power from IPPs and SPs that generate power from small hydroelectric plants with capacity lower than 5,000kW or solar, wind or biomass plants with capacity lower than 50,000kW.
ANEEL also regulated in 2012 the net metering mechanism for distributed generation, which plays an important role in increasing the use of photovoltaic solar generation in Brazil, among other alternative energies. Such regulation was also recently amended to level the distributed generation of hydropower plants with other sources at a maximum of 5MW and further regulatory changes are expected in 2019 upon public consultation currently being conducted by ANEEL.
The 2026 Energy Plan published recently by EPE reflects relevant growth of wind and solar plants installed capacity. In the case of solar photovoltaic plants, more than 2,500MW have been contracted through Reserve Energy Auctions since 2014. Although solar energy installed capacity is still not significant, it is expected to maintain its growth.
Renewable energy sources are also entitled to some special credit lines from the Brazilian and the Northeast public banks, the National Bank for Economic and Social Development (BNDES) and the Brazilian Northeast Bank (BNB).
What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?
As discussed, the Brazilian electricity matrix is already mostly renewable as hydropower and wind power are responsible for more than 70 per cent of the installed capacity.
Environmental concerns, on the other hand, limit Brazil’s ability to expand its hydropower generation capacity with large reservoirs. As a result, large hydropower plants, like Belo Monte, Jirau and Santo Antônio, are run-of-the-river power plants.
Does the regulatory framework support electricity storage including research and development of storage solutions?
Law No. 9991 dated 24 July 2000 established mandatory investment in research and development projects as well as energy efficiency.
Based on this legislation, ANEEL recently approved 11 proposals for research and development projects submitted to ANEEL Public Call for Strategic Research and Development Projects No. 21/2016, which aims at developing projects for the insertion of electricity storage systems in the electricity sector. Twelve other proposals were approved with recommendations.
Does government policy encourage or discourage development of new nuclear power plants? How?
Brazil currently has two nuclear reactors in operation (Angra 1 and Angra 2), representing approximately 1.3 per cent of the installed capacity. A third plant is under construction (Angra 3).
Pursuant to the Brazilian Federal Constitution of 1988, the federal government shall have the power to operate nuclear energy services and exercise state monopoly over research, prospecting, mining, enrichment and reprocessing, industrialisation and trade in nuclear ores and their by-products. Therefore, private investors are not allowed to participate in nuclear power in Brazil.
In 1997, nuclear operations of Furnas Centrais Elétricas SA merged with Nuclebrás Engenharia SA (Nuclen) (both government companies of the electricity sector) to form Eletrobrás Termonuclear SA (Eletronuclear), a new subsidiary of Centrais Elétricas Brasileiras SA (Eletrobrás) responsible for construction and operation of nuclear power plants in Brazil.
Although nuclear power seems to continue to hold a place in the energy plans of Brazil, it appears that further expansions would be pursued only in the long term, rather than in the mid-term.
Regulation of electricity utilities – transmission
Authorisations to construct and operate transmission networks
What authorisations are required to construct and operate transmission networks?
Transmission facilities that are contemplated in the SIN are subject to concession of public service upon previous public bidding.
On the other hand, transmission facilities designed for international interconnections and connected to the basic network are also subject to previous execution of the applicable international treaty.
Eligibility to obtain transmission services
Who is eligible to obtain transmission services and what requirements must be met to obtain access?
Law No. 9074/1995 and Law No. 9648/1998 granted open access to the transmission and distribution systems for different agents supplying and consuming electricity.
In this regard, ANEEL regulations establish general conditions for obtaining access to the transmission system, including contracts for connection to and use of the system. The power generator requesting access to the transmission system shall carry out technical and economic studies, and undertake projects and activities, related to its facilities of exclusive use (if any) and proper access to the system. The conditions for access shall be consolidated in the access report issued by ONS.
Such ANEEL regulations also set forth standardised clauses for contracts to be entered into with transmission companies being accessed and ONS (contracts for the use of the transmission system and for connection to the transmission system), as well as provisions with respect to charges for connection to and use of the transmission system.
Transmission facilities of exclusive use of an agent may also be accessed by another interested agent or consumer that complies with the applicable legal and technical requirements and specific regulation issued by ANEEL.
Government transmission policy
Are there any government measures to encourage or otherwise require the expansion of the transmission grid?
EPE shall prepare studies required for the transmission system expansion plans on a short-, mid- and long-term basis. Such expansion is a result of auctions called by the government for construction and operation of transmission facilities.
Pursuant to Law No. 9648/1998, ONS shall also propose the expansion of transmission facilities to the granting authority.
Rates and terms for transmission services
Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?
The transmission system integrating the SIN is operated by ONS and each transmission agent must enter into specific agreements with ONS to ensure that the operation of its facilities will occur in accordance with ONS’s determinations.
Public services related to the transmission system are governed by ANEEL tariff policies, which basically consist of the stipulation by ANEEL of a RAP to be perceived by each concessionaire or permissionaire by means of the TUST to be paid by each agent that accesses the transmission grid. In order to determine the TUST, ANEEL shall consider the results of the applicable transmission public auctions conducted by the government and the RAP to be paid to the transmission agents as from the commencement date of operation of their respective facilities. RAP is subject to periodical revisions in accordance with each applicable concession agreement.
Entities responsible for grid reliability
Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?
Both ONS and ANEEL are responsible for the reliability of the transmission grid.
Pursuant to Law No. 9648/1998, ONS is responsible for:
- the planning and programming of operations and centralised dispatch of power generation, envisaging optimisation of interconnected systems;
- the supervision and coordination of operational centres of electric systems;
- the supervision and control of the operation of electricity systems for national and international interconnections;
- the contracting and administration of transmission services and the respective access conditions;
- proposing to the granting authority the expansion of transmission facilities; and
- proposing rules for the operation of transmission facilities of the SIN, which are approved by ANEEL.
ANEEL is responsible for regulation and overview of production, transmission, distribution and commercialisation of power, in accordance with policies and guidelines established by the federal government.
Regulation of electricity utilities – distribution
Authorisation to construct and operate distribution networks
What authorisations are required to construct and operate distribution networks?
Electricity distribution is subject to concession of public services granted by the granting authority based on previous public bidding.
The federal government has recently approved the renewal of distribution concessions under Law No. 12783 of 11 January 2013, as regulated by Decree No. 8461 of 2 June 2015.
Concessionaires, permissionaires and companies authorised to render public services of distribution which act within the SIN may not carry out other activities in the electricity sector, albeit with a few exceptions.
Access to the distribution grid
Who is eligible to obtain access to the distribution network and what requirements must be met to obtain access?
Law No. 9074/1995 and Law No. 9648/1998 granted open access to distribution systems for the different agents in the supply and consumption of power.
Such access shall be granted upon payment of TUSD, which is stipulated by ANEEL. ANEEL also establishes general conditions for contracting of access to the distribution system.
The power generator requesting access to the distribution system shall carry out technical and economic studies, and undertake projects and activities, related to its facilities of exclusive use (if any) and proper access to the system.
Government distribution network policy
Are there any governmental measures to encourage or otherwise require the expansion of the distribution network?
ANEEL regulations establish the periodical tariff revision based on concessions contracts, to be carried out considering changes in the costs structure and market of distribution agents, as well as tariff levels observed in similar companies, in a national and an international context, and stimulations to the efficiency and lowest bid prices.
ANEEL regulations also approve the Procedures for Distribution of Electric Energy in the National Electricity System, which set forth rules and obligations for distribution agents envisaging the planning of expansion of the distribution network, among other matters.
Rates and terms for distribution services
Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?
ANEEL is the agent responsible for determining rates and terms for provision of distribution services based on applicable concession agreements.
Distribution tariffs are subject to annual adjustments as well as to periodical revisions based on certain components of the tariff: price of electricity; transmission cost; sector charges; cost of the distribution activities; inflation; and productivity and scale gains.
Regulation of electricity utilities – sales of power
Approval to sell power
What authorisations are required for the sale of power to customers and which authorities grant such approvals?
Sale and purchase of power shall involve agents that are concessionaires or permissionaires and authorised for generation, commercialisation companies, importers, exporters and free or special consumers.
The commercialisation activity may be carried out only upon obtaining the necessary authorisation from ANEEL and adherence to CCEE in accordance with applicable regulations. Import and export activities shall also be subject to authorisation of the MME.
Power sales tariffs
Is there any tariff or other regulation regarding power sales?
Power sales in the SIN shall occur either in the ACR - between the applicable generation agents and distribution companies, or in the ACL - between generation or commercialisation agents, importers, exporters and free or special consumers.
The price in the ACR is determined by the applicable auction, while the price in the ACL is freely negotiated by both parties, with due regard to certain commercialisation rules and proceedings.
The tariff charged by distribution companies shall be subject to periodical adjustments and revisions based on ANEEL regulations.
Rates for wholesale of power
Who determines the rates for sales of wholesale power and what standard does that entity apply?
The price in the ACR is determined by the applicable auction conducted by the government, whereby sellers compete by the lowest bid price per MWh and observe specific terms and conditions established by applicable legislation and auction rules, as discussed above.
Public service obligations
To what extent are electricity utilities that sell power subject to public service obligations?
Distribution companies are subject to public service obligations, including: to render adequate services for full requirements of users, as established by law, applicable rules and the respective contract; and to provide regular, continuous, efficient, safe, up-to-date general services rendered courteously under moderate charges.
Free consumers that exercise the option to purchase power from other suppliers, rather than the applicable distribution company, may return to the distribution company and be subject to a regulated tariff, provided that such free consumers shall provide a five-year advance notice to the concessionaire, permissionaire or authorised distribution company, except if such term is reduced by the distribution company.
Which authorities determine regulatory policy with respect to the electricity sector?
The following governmental authorities are in charge of regulatory policy:
- the Brazilian Energy Policy Committee (CNPE);
- the Power Sector Monitoring Committee (CMSE); and
- the Energy Research Company (EPE).
Certain supervision activities may also be delegated to state regulatory authorities.
In addition to governmental authorities, ONS and CCEE also play an important role in implementation of the regulatory policy of the sector.
Scope of authority
What is the scope of each regulator’s authority?
MME is the ministry that represents the federal government as granting authority, in charge of issuing regulations and granting concessions and authorisations.
CNPE is formed by ministries of state and representatives of civil society. Its main function is to propose to the president of Brazil national policies and specific measures to:
- promote the rational exploitation of energy resources;
- ensure the supply of energy inputs to remote areas or those difficult to access; and
- establish guidelines for specific programmes, such as the usage of energy sources, among others.
ANEEL is the regulatory agency, related to the MME, responsible for regulation and overview of production, transmission, distribution and commercialisation of power, in accordance with policies and guidelines established by the federal government. ANEEL shall, among other things:
- promote, by delegation of powers, based on policies and guidelines approved by the granting authority represented by the MME, bidding procedures for hiring concessionaires and authorised entities of public services for the production, transmission and distribution of power and the granting of concessions to exploit hydraulic potential;
- manage concession agreements and authorisations for public services of electricity, as well as agreements for the concessions of use of public assets; and
- resolve, at an administrative level, disputes between concessionaires, authorised entities, IPPs and SPs, as well as any other disputes between agents and their consumers.
Moreover, ANEEL has the authority to intervene in the concession for electric power services to ensure its adequate performance and compliance with contractual, regulatory and legal rules. The intervention shall be of one year, which may be extended only once, up to two more years, subject to ANEEL’s discretion. Concessionaires of electric power services are not subject to judicial and extrajudicial recovery, as provided by the Brazilian Bankruptcy and Reorganisation Law (Law No. 11,101, of 9 February 2005), except after the termination of the applicable concession.
ANEEL has also issued joint resolutions with other regulatory agencies, including the Brazilian Petroleum, Natural Gas and Biofuels Agency (ANP) and the Brazilian Telecommunications Agency (ANATEL) to regulate sharing of infrastructure among companies subject to such authorities.
CMSE is responsible for the permanent monitoring and analysis of the continuity and safety of the electricity supply. One of its main functions is to follow the development of generation, transmission, distribution, commercialisation, import and export activities related to electricity, natural gas and petroleum.
EPE is a government-owned company that prepares studies and undertakes research to underpin planning in the energy sector. EPE also plays an important role as regards auctions in the sector.
Establishment of regulators
How is each regulator established and to what extent is it considered to be independent of the regulated business and of governmental officials?
The MME is a body of the executive branch subordinated to the president of Brazil.
CNPE is formed by ministries of state, as well as representatives of civil society, and is chaired by the Minister of Mines and Energy.
ANEEL was created as an independent special regulatory agency related to MME. Members of the board of directors of ANEEL are appointed by the President of Brazil and must be approved by the Senate.
CMSE was created as a public body coordinated by the executive branch and is chaired by the Minister of Mines and Energy. It has the following composition: four representatives of the MME; and members of ANEEL, the ANP, CCEE, EPE and ONS.
EPE is a federal state-owned company related to the MME. The board of directors of EPE is composed of: one chairman appointed by the Minister of Mines and Energy; the chief executive officer; one member appointed by the Minister of Planning, Budget and Management; and (iv) three other members appointed pursuant to the terms of its regulations.
Challenge and appeal of decisions
To what extent can decisions of the regulator be challenged or appealed, and to whom? What are the grounds and procedures for appeal?
ANEEL may impose certain penalties on companies that violate rules of the electricity sector, through the relevant punitive administrative proceeding, which is governed by ANEEL Resolution No. 63 of 12 May 2004.
An appeal to the board of directors of ANEEL may be filed against the infraction notice imposing the penalty. The board may confirm, change, annul or revoke, either totally or partially, the imposition of the penalty.
The development of the appeal in the ANEEL administrative procedure shall follow specific procedures established by applicable regulation to assure the party the right to defend itself against the penalties.
In any event, the agents may ultimately appeal to the courts as the law shall not prevent the judiciary branch from analysing any damages or threat to rights pursuant to the Constitution.
Acquisition and merger control – competition
Which bodies have the authority to approve or block mergers or other changes in control over businesses in the sector or acquisition of utility assets?
ANEEL and the Administrative Council for Economic Defence (CADE) are the responsible bodies.
ANEEL shall establish restrictions, limits and conditions for companies, economic groups and shareholders with respect to the transfer of concessions, permissions and authorisations aiming at allowing actual competition among agents and prohibit economic concentration in electricity services and activities.
CADE is the Brazilian competition authority with jurisdiction to review mergers in general under the provisions of Law No. 12529 of 30 November 2011. The request for approval of mergers is reviewed by the General Superintendency (SG) of CADE. SG may approve the transaction without restrictions or present an objection to the board of CADE, in case SG understands that the transaction must be rejected, be approved with restrictions or if there are no conclusive elements to determine the effects of the applicable transaction in the market. If requested by SG, the board of CADE may fully approve the transaction, reject it or partially approve it, in which case it will determine restrictions to be observed as conditions to validate the transaction.
Review of transfers of control
What criteria and procedures apply with respect to the review of mergers, acquisitions and other transfers of control? How long does it typically take to obtain a decision approving or blocking the transaction?
Law No. 8987/1995 contemplates that the granting authority may terminate the transaction if the transfer of the concession or the transfer of the corporate control of the concessionaire is not submitted to its previous consent. For the purposes of obtainment of such consent, the envisaged new concessionaire or controller of the concessionaire shall: observe requirements related to technical, economic and financial capacity, as well as legal and tax requirements necessary for the service; and agree to perform all clauses of the concession contract and applicable legislation in effect.
The proceedings to be observed by concessionaires, permissionaires and authorised agents for request of prior consent from ANEEL are regulated by ANEEL Resolution No. 484 of 17 April 2012. Such Resolution provides an indicative term of at least 60 days for ANEEL to analyse and resolve on the prior approval for the transfer of control.
Under Law No. 12529/2011, parties to a transaction must submit to CADE any mergers, acquisitions and other transfers of control, in which, cumulatively: at least one of the economic groups involved in the deal registered gross annual turnover or total trading volume in Brazil equal to or above 750 million Brazilian real, in the year before the deal; and at least another economic group involved in the transaction has posted an annual gross turnover or overall volume of business in Brazil equal to or above 75 million real, in the year before the deal.
Notifications to CADE must take place prior to closing, and consummation of a transaction cannot take place before it is approved by CADE, otherwise declaration of annulment of the transaction and the imposition of sanctions may apply.
Transactions may be submitted under a fast-track procedure or under an ordinary procedure. Under a fast-track procedure, CADE has a term of 30 days to review the request (a period of 15 days shall be added to such term for potential appeals or request for review by CADE’s board). Under an ordinary procedure, CADE has 240 days, which can be extended for no more than 90 days, to analyse transactions.
Prevention and prosecution of anti-competitive practices
Which authorities have the power to prevent or prosecute anti-competitive or manipulative practices in the electricity sector?
Anticompetitive and manipulative practices in the electricity sector are also regulated and monitored by ANEEL. Pursuant to Law No. 9427/1996, ANEEL shall observe compliance with competition protection legislation, monitoring market practices of agents in the electricity sector.
ANEEL has entered into certain agreements and commitment terms with the Secretary of Economic Law of the Ministry of Justice, the Secretary of Economic Monitoring of the Ministry of Finance and CADE. In addition, ANEEL shall assist such governmental bodies and may prepare opinions or technical notes to instruct them in assessing and punishing companies that violate laws of free competition.
CADE is also responsible for monitoring free competition in the market and is able to investigate and decide, ultimately, on competition matters. In case of violation of Law No. 12529/2011, CADE may apply the following penalties, among others: fines; registration of the wrongdoer with the National Registry for Consumer Protection; and the wrongdoer be prohibited from carrying on trade on its own behalf or as representative of a legal entity for a period of five years.
The General Controller of the Federal Government (TCU) and the General Controller of the State Government (TCE) are active in the review of the application of public funds. TCU has engaged in reviewing potential anticompetitive acts, as cartels, in the scope of public biddings of the federal government. TCU may impose a fine on wrongdoers in the amount of 100 per cent based on damages caused to the federal government. TCEs are active in the review of the application of state funds and may apply sanctions to cartelists that acted in state public biddings.
The Ministry of Transparency, Oversight and Comptroller’s General Office (CGU) may also investigate and impose sanctions on cartels in the scope of public biddings promoted by the federal government. The main penalties that may be imposed by CGU are fines and debarment.
Determination of anti-competitive conduct
What substantive standards are applied to determine whether conduct is anti-competitive or manipulative?
The definition of the wrongful acts that may be considered harmful to competition is provided by Law No. 12529/2011, and is as follows, regardless of fault:
- to limit, restrain or in any way harm open competition or free enterprise;
- to control a relevant market of a certain product or service;
- to increase profits arbitrarily; and
- to abuse a dominant position.
Such legislation also establishes behaviour that characterises anticompetitive practices, such as:
- agreeing, combining, manipulating or arranging with competitors, in any way;
- promoting, obtaining or influencing the adoption of a uniform or concerted business conduct among competitors;
- limiting or impairing access to the market by new companies;
- posing difficulties to establishment, operation or development of a new competitor or of a supplier, buyer or financier of goods or services;
- imposing on distributors, retailers and representatives of goods or services specific retail prices, discounts, payment conditions, minimum or maximum volumes, profit margins, or any other marketing conditions related to their business with third parties thereof; and
- discriminating against purchasers or suppliers of goods or services by establishing price differentials or discriminatory operating conditions for the sale or performance of services.
Preclusion and remedy of anti-competitive practices
What authority does the regulator (or regulators) have to preclude or remedy anti-competitive or manipulative practices?
According to Law No. 12529/2011, three types of procedure may be initiated to analyse alleged anticompetitive practices: preliminary administrative inquiry; administrative inquiry into anticompetitive practices; and administrative proceedings. The first two procedures aim at gathering data in relation to the alleged practice, while the latter may result in penalties on defendants (eg, at the end of the first two proceedings, CADE may initiate a formal administrative process, in which penalties may be imposed on the parties).
Fines may vary from 0.1 per cent to 20 per cent of the gross revenues of a given company, group or conglomerate, in the field of the business activity, in the year prior to the beginning of the investigation. CADE may also impose, on members of management directly or indirectly liable for their company’s violation, a fine varying from 1 per cent to 20 per cent of the fine imposed on said company. Further, CADE may impose a fine on other individuals or public or private legal entities as well as associations (non-corporate), that may vary from 50,000 to 2 billion reais based on the cartel investigation.
CADE may also impose other penalties, such as: a half-page publication of the summary of the decision in newspapers; ineligibility for official financing or participation in governmental bidding procedures; and sales or transfer of company assets.
Penalties for antitrust violations shall be calculated based on the following mitigating and aggravating factors:
- the severity of the offence
- the offender’s good faith;
- advantages obtained or envisaged by the offender;
- actual or threatened occurrence of the offence;
- the extent of damages or threatened damages to open competition, the Brazilian economy, consumers or third parties;
- the negative economic effects on the market;
- the offender’s economic status; and
TCUs and the TCEs may impose a fine on cartelists in the amount of 100 per cent based on damages caused to the federal or to the state government, under their jurisdiction.
CGU may impose the following penalties:
- a fine, as provided in the bid announcement or in the contract itself;
- temporary suspension from participating in public bidding and prohibition from contracting with the government (and government-controlled entities), for up to two years; and
- statement of lack of good standing to bid or contract with the government (and government-controlled entities) while the reasons for punishment persist or until such time as the contractor is considered eligible to participate in public bidding by the same authority that imposed the sanction.
Acquisitions by foreign companies
Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?
Except with respect to nuclear activities, there are no specific requirements or limitations in the electricity legislative framework for acquisition of interests by foreign companies in Brazilian companies carrying out activities in such sector, as compared to requirements otherwise applicable to Brazilian purchasers.
In any event, certain activities shall be granted only to companies organised under Brazilian laws, with headquarters and management located in Brazil. Accordingly, foreign investors shall incorporate a special purpose company under Brazilian laws to have the applicable concession, permission or authorisation granted. If Brazilian and foreign companies bid jointly as a consortium, the Brazilian company shall be the leader of the consortium.
Foreign companies may also be required to have a legal representative in Brazil with powers to receive service of process and to represent them in judicial and administrative proceedings.
Also, as a matter of process, foreign documents (which may be necessary for review and approval of transactions by applicable authorities) must be notarised and legalised with the Brazilian consulate or apostilled abroad before being sent to Brazil. To be presented to Brazilian authorities, such documents shall also be translated by a certified translator and, if required, registered in Brazil.
Foreign companies (or Brazilian companies controlled by foreign companies) are otherwise subject to restrictions in the ownership and lease of rural land, which must be taken into consideration when developing any project.
Authorisation to construct and operate interconnectors
What authorisations are required to construct and operate interconnectors?
Transmission facilities destined to international interconnections granted as from 1 January 2011 and connected to the basic grid shall be subject to concession of public service of transmission by means of public bidding in the modality of competition or auction and shall also be preceded by an international treaty.
Transmission facilities for international exchange of power granted until 31 December 2010 may be compared, for technical and commercial effects, to concessionaires of public service of transmission, in accordance with specific regulation issued by ANEEL.
According to Decree No. 7246, dated 28 July 2010, the definition of transmission facilities shall be established by a specific ordinance issued by MME, while ANEEL shall carry out, either directly or indirectly, the public bidding for implementation of such transmission facilities.
Interconnector access and cross-border electricity supply
What rules apply to access to interconnectors and to cross-border electricity supply, especially interconnection issues?
ANEEL Resolution No. 442 dated 26 July 2011 establishes the provisions related to transmission facilities for international interconnections that connect to the basic grid of SIN. In the case of facilities that result from public bidding for public service of transmission destined to international interconnections, the RAP is established by public bidding.
With respect to transmission facilities granted until 31 December 2010, the RAP shall be calculated based on a comparison between such facilities and interconnection transmission facilities granted as a result of public bidding with due regard to: establishment by ANEEL of the base of remuneration of facilities to be compared; use of the weighted average capital cost established for periodic review of revenues of transmission concessionaires, applicable on the date of the comparison; and use of operational costs established for periodic revision applicable on the date of comparison.
Transactions between affiliates
What restrictions exist on transactions between electricity utilities and their affiliates?
ANEEL controls transactions to be performed between concessionaires, permissionaires, authorised entities and related companies, applying restrictions or even prohibitions.
Transactions with related parties shall be established strictly on an arm’s length basis, without any disproportionate burden to the parties. ANEEL regulations establish various criteria to be adopted to verify if the referred proportionality is complied with or not. Specific rules apply in connection with the following types of agreement between related parties, among others: acquisition of technology; services agreements; loan agreements; and infrastructure sharing agreements. The transaction may be either subject to prior approval by ANEEL, prohibited or deemed previously approved if in compliance with applicable requirements.
Enforcement and sanctions
Who enforces the restrictions on utilities dealing with affiliates and what are the sanctions for non-compliance?
According to ANEEL regulations, the following conduct with respect to related parties transactions are considered an infraction subject to a fine:
- failure to request ANEEL approval, when required according to regulations, as well as the implementation of such transactions before obtaining ANEEL approval;
- implementation of agreements that do not comply with general and specific criteria described in a specific ANEEL regulation; and
- execution and implementation of an agreement different from the version approved by ANEEL.
The fine may be converted into a warning, provided that the violator has not been fined for a similar infraction during the previous four years; and consequences of the infraction have a low offensive potential.
Update and trends
Update and trends
Are there any emerging trends or hot topics in electricity regulation in your jurisdiction?
As discussed in question 1, the federal government reviewed the contributions made by players in the electricity sector as part of a public consultation on legislative changes to correct problems and settle disputes in the sector, and a bill of law, which envisages a new reform in the sector, is currently under discussion in Brazilian Congress. Therefore, relevant legislative changes may be expected in the near future. Such legislative changes may impact issues discussed in this chapter, including with respect to incentives for renewable sources and types of electricity products (quantity of power, availability of power plant and assurance of energy).
The federal government was also considering the privatisation of Eletrobrás, which is a mixed-capital company created by Law No. 3890-A dated 25 April 1961 and is a major participant in the electricity sector, either directly through its subsidiaries or together with the private sector in joint-venture arrangements. However, the Federal Supreme Court recently granted an injunction to prevent the federal government from selling shares of government-controlled companies or their subsidiaries without prior approval from the Brazilian Congress, except if such sale of shares does not involve a transfer of control.
In addition to such injunction granted by the Federal Supreme Court, other courts have suspended divestment transactions conducted by government-controlled companies. Notwithstanding that, four distribution companies (Companhia Energética do Piauí - CEPISA, Companhia de Eletricidade do Acre - Eletroacre, Centrais Eleétricas de Rondônia SA - CERON, and Boa Vista Energia SA) were transferred in public auctions in June and August 2018. Amazonas Distribuidora de Energia SA - Amazonas Energia is expected to be auctioned in the near future.
Such divestments and privatisations, if fully implemented, will certainly represent a game changer for the electricity sector in Brazil.