Brazil tightens rules for power distribution concessionaires

Brazil’s mines and energy ministry (MME) has sent to the chief of staff’s office a draft decree establishing guidelines for extending electricity distribution concessions. 

The document, which was obtained by BNamericas (and is in the Documents box in the top-right corner of the screen), increases the requirements for quality of service and proof of companies' financial health, as well as non-compliance penalties.  

In addition to the possibility of canceling the concession contract for non-compliance with obligations, the decree would allow the government to limit the distribution of extraordinary dividends by companies that fail to meet the requirements. 

The move follows several cases of power distribution failures in key Brazilian cities, such as São Paulo and Rio de Janeiro, which put concessionaires such as Italy’s Enel under heavy political pressure. 

Alexei Vivan, partner at CGM Advogados and CEO of electric power association ABCE, says the draft decree improves the rules on the renewal of concessions. 

According to the lawyer, the text correctly delegates to watchdog Aneel the definition of obligations, requirements and quality indexes for the renewal of concessions and includes provisions to promote the competitiveness of some energy services currently provided by distributors. 

But he criticized the possibility of Aneel interfering in the management of the distribution concessionaires, when dealing with criteria for the composition of boards of directors – the draft also foresees respect for diversity criteria when hiring for management bodies and boards – and the possibility of limiting dividends. 

"Interfering in the management of companies and limiting dividends, as well as being open to legal challenges, brings legal uncertainty and has an impact on attracting investment," Vivan told BNamericas. 

Another problematic point, he said, is the lack of a clear rule on compensation for non-depreciated assets and non-amortized investments of the distribution utilities. 

"See the endless discussion about indemnification of the basic network [RBSE] of transmission assets, as a result of the ill-fated MP 579," said Vivan, referring to the provisional measure published in 2012 to reduce energy prices. 

Paula Padilha, a partner in the energy practice at Vieira Rezende Advogados, says the draft decree reinforces existing regulations, especially with regard to the possibility of changing control and the forfeiture of the concession due to failure to meet the quality parameters of the services provided.

However, she foresees potential resistance to the continued requirement to prove the concessionaire's financial health. 

"The concessionaires already had legal and regulatory obligations, as well as contractual provisions, regarding the quality of the service provided, intervention in the concession and forfeiture," she told BNamericas. 

In a statement, Brazil’s power distributors association Abradee said it was concerned about some points in the draft decree.  

One of them is the limitation on the distribution of dividends to shareholders in the event of non-compliance with quality indexes, linked to the commercial component. 

In the association’s view, this could run counter to the legal bases that sustain the flow of investments in the economy, bringing insecurity, driving away investments and impacting the services provided to consumers. 

Regarding the quality of services, Abradee said it is in favor of presenting a plan to improve services and argued that the quality levels, as well as any changes in the measurements, should be established by Aneel regulation.

It drew attention to the problem of extreme weather phenomena, saying the management of these situations goes beyond the scope of electricity distribution, requiring joint action. 

OVERVIEW

By 2031, concession contracts for the following power utilities expire: EDP (Espírito Santo and São Paulo), Enel (Ceará, São Paulo and Rio de Janeiro), Equatorial (Pará), Elektro, CPFL Piratininga and CPFL Paulista, Light, Energisa (Borborema, Mato Grosso do Sul, Mato Grosso, Sergipe and Paraíba), Celpe, Cemar (Maranhão), Coelba (Neoenergia, Bahia), Cosern and RGE.      

    

Source: Abradee

The most urgent cases are those of EDP Espírito Santo, Light and Enel Rio de Janeiro, whose concessions expire in 2025 and 2026.