Could Enel's São Paulo concession contract be terminated?

Brazil’s electric power regulator Aneel has been instructed to take action against the São Paulo electricity distribution unit of Italy's Enel.

Mines and energy minister Alexandre Silveira has asked Aneel to step in due to a "history of service failures" and the need to assess the company’s performance in its concession area, and even consider the termination of Enel’s contract, which is due to expire in 2028, according to a ministry press release. 

"There are several failures in the provision of electricity services, which have shown an inability to provide quality services to the population. Therefore, in the investigation, all possibilities of punishing the company must be considered," Silveira said. 

The Enel subsidiary said in an email that it complies with contractual and regulatory obligations and is implementing a plan to invest in strengthening and modernizing the network, digitizing the system and expanding communication channels with customers, as well as mobilizing teams in the field in advance in case of contingencies. The plan also includes a significant increase in staff.

Enel will invest US$3.65bn in Brazil between 2024 and 2026, of which around 80% will go to energy distribution.

The subsidiary also highlighted that it has paid part of the fines imposed by Aneel and that its operating indicators have improved by almost 50% since 2017.

Legal experts told BNamericas that a contract cancellation is unlikely. 

BNamericas talked to Guilherme Schmidt, partner at law firm Schmidt Valois Advogados; Gustavo Fiuza Quedevez, partner at BVA - Barreto Veiga Advogados; and Paula Padilha, energy partner at Vieira Rezende Advogados.

BNamericas: Is it possible to cancel the concession contract?

Schmidt: In theory it’s possible, but very unlikely. The termination or forfeiture of a distributor's concession only occurs in extreme cases, where the concessionaire has defaulted on its contractual obligations and cannot fulfill the services for which it was contracted. It can only occur after a specific process of its own, where the concessionaire will be guaranteed an adversarial hearing and a full defense.

In Enel's case, its quality and performance indexes have been good over the years, despite the bad perception due to some recent events. A termination process does not seem justified at the moment.

Quedevez: It’s possible, although it is not simple for a number of reasons. The main one, in this case, stems from the fact that this is a public service concession contract, governed by specific legislation and subject to a series of rules. These range from the process of choosing the concessionaire that will provide the services, the concession regime, investments to be made over the course of the contract and the effective counterparts of the public authority, to the SLA [service level agreement] to be observed for the operation of electricity distribution services. 

Contracts of this size require compliance with a series of procedures, formalizations and notes linked to non-compliance with contractual terms. 

The cancellation of the contract must necessarily be treated as a project to be structured, insofar as, due to the size of the operation involved, it cannot be equated with a simple service that can be canceled and replaced by another market player without major difficulties. 

Padilha: In theory, without assessing the merits of the breach of contract related to issues of the quality of the service provided, it’s possible to terminate Enel's contract. 

The main ways in which the concession could be terminated, in this case, would be to take over or resume the public service; forfeiture, i.e. termination due to default by the concessionaire; contractual termination, by agreement between the parties; a unilateral act by the public administration; or a court decision.

BNamericas: What would be the legal grounds for the cancellation?

Schmidt: In a nutshell, the concessionaire's inability to fulfill its energy supply obligations must be proven, as well as its failure to fulfill its obligations.

I think it would be very difficult to terminate the contract at this point, but a process should be opened with Aneel, to discuss the quality of services and ways of improving them. 

Quedevez: Within the process of managing a contract of this size, non-compliance is the subject of analysis and the application of penalties such as fines, which can be lower or higher depending on the degree of the infraction or even its recurrence, and can go as far as cancellation, which in this case will be identified as forfeiture of the concession. 

Forfeiture is provided for by law and in the contract itself and represents the act of the public authority that will terminate the concession granted on the basis of repeated or serious breach of contractual obligations, from which point it will intervene directly in the execution of the services, without prejudice to the liability of the excluded concessionaire for the losses to which it has effectively contributed.

Padilha: The federal law governing concessions and permissions establishes that an adequate service is one that meets the conditions of regularity, continuity, efficiency, safety, timeliness, generality, courtesy in its provision and affordability of rates.

If it's proven that the public service provided is not within the parameters established by law and regulation, the public administration can intervene in the concession or even seek its termination.