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Investor Relations

Brazilian Market of Electric Energy

Regulatory Environment

Introduction

The Brazilian Federal Constitution determines that the exploration of services and electric power facilities may be performed directly by the Federal Government or indirectly by means of the granting of concessions, permits or authorizations. Historically, those services were mainly explored by the Federal Government. Over the last years, the Federal Government has adopted several measures to reformulate the Brazilian electricity sector. Overall, these measures aimed at increasing private investments and eliminating restrictions to foreign investments, thus increasing competition in the sector.

On February 13, 1995, the Federal Government enacted the Concessions Law and on July 7, 1995, the Law 9,074/1995, which set forth rules for the granting and extension of concessions of existing electric power public utilities.

As of 1995, a portion of the stake representing the control block of generating and distributing companies owned by Eletrobrás, by the federal government and by various states was sold to private investors. In 1998, the Federal Government enacted the Electricity Sector Law, with a view to renovating the basic structure of the sector.

In 2000, ANEEL established limits to the concentration of certain services and activities within the electricity sector.

In 2000, Decree 3,371, as of February 24, 2000, created the Thermal Electricity Priority Program – PPT, aimed at diversifying the Brazilian energy matrix and reduce its heavy dependence on hydroelectric power plants. The benefits provided to thermal power plants according to PPT included guaranteed gas supply for 20 years, guarantee to transfer its acquisition cost by distributing companies up to the normative amount, pursuant to ANEEL regulation, and guaranteed access to a special financing program of BNDES for the electricity sector.

In 2001, as a result of severe energy crisis faced by the Country and that endured until the end of first two months of 2002, the Federal Government implemented measures that included: the establishment of the Rationing Program in the regions that were most affected by the electric power shortage, such as Southeast, Mid-West and Northeast regions of Brazil; and the creation of the GCE (through Provisionary Measure 2,198-5/2001), which approved a series of emergency measures establishing reduction targets for electric power consumption by residential, commercial and industrial consumers located in the regions affected by the rationing, by implementing special tariff systems that promoted the reduction in the electric power consumption. The targets to reduce consumption by residential and industrial classes reached 20%.

In March 2002, the GCE suspended the emergency measures and the Rationing Program, in view of the increased offer (thanks to the substantial hike in the water level of reservoirs) and the moderate reduction of demand. On April 29, 2002, the Federal Government, through Law 10,438, and further amendment by Law 10,762, as of November 11, 2003, enacted new measures, such as refunding distributing companies for the financial losses derived from the Emergency Program for the Reduction in Electric Power Consumption,–the creation of the Incentive Program to Alternative Sources of Electric Power - PROINFA, aiming at creating certain incentives for the development of alternative energy sources, such as wind power projects, PCHs (Small Hydroelectric Power Plants) and biomass projects and the establishment of rules for the universalization of electric power distribution public utility, which consists of serving all requests for supply, including load increase, without any burden for the requesting consumer, as long as in compliance with the required regulatory conditions.

Law of New Model of Electricity Sector

On March 15, 2004, the Federal Government enacted the Law of New Model of Electricity Sector, in an effort to restructure the sector, the main goal of which is to provide consumers with a safe supply of electric power at moderate tariffs. The Law of New Model of Electricity Sector introduced material changes to the regulations of the electricity sector with the purpose of:

  • Creating a stable regulatory framework: it requires a clear definition of the duties and attributions of institutional agents;
  • Promoting moderate tariffs: the main instrument to promote moderate tariffs is the auction where distributing companies contract energy, through the lowest tariff criterion. In addition, activities restriction is established for distributing companies, so as to ensure that distributing companies will focus exclusively in providing the distribution public utility, in order to guarantee a more efficient and reliable service to captive consumers (deverticalization) and the prohibition of the so-called selfdealing, aiming at stimulating distributing companies to purchase electric power at the lowest available prices instead of purchasing electric power from related parties;
  • Guaranteeing the safety in supply: all consumption agents must contract 100% of their loads. Each energy sales agreement must have a physical generation coverage, so that no contracts will exist without the corresponding physical supply capacity. Distributing companies are encouraged to over-contract by up to 130%, safekeeping their right to transfer the surplus to the tariffs charged from end consumers; and
  • Guaranteeing the efficient construction of new ventures: new projects will be made feasible through the following measures, which significantly reduce investor´s risk, thus, enabling project financing at more attractive rates, with the following benefits to the consumer:
  1. specific auctions for contracting energy generation new ventures;
  2. signing of bilateral long-term agreements between distributing companies and auction winners, with guarantee of transferring energy acquisition costs to tariffs of end consumers; and
  3. previous environmental license of participating hydroelectric ventures.
  • Specifically, the new model clarifies the strategic role of MME, in the capacity as mandatory body of the Federal Government, reinforces ANEEL's roles of regulating, inspecting and mediating and organizes the planning roles of expansion, operation and commercialization. Another premise of the new model is the compliance with agreements signed prior to the enactment of the Law of New Model of Electricity Sector, so as to ensure legal safety to the operations performed prior to its enactment.

Institutional Structure of the New Model of Electricity Sector

National Council of Energy Policy – CNPE:

In August 1997 the CNPE was created, in order to provide assistance to the President of the Republic to create and develop the national energy policy. The CNPE is presided over by the Minister of Mines and Energy and most of its members are ministers of the Federal Government. CNPE was created with a view to optimizing the utilization of Brazilian energy resources and ensuring the supply of electric power to the Country.

Ministry of Mines and Energy – MME:

The MME is the main body of the Brazilian energy sector, acting as a Granting Power on behalf of the Federal Government, and having as its main duty the establishment of policies, guidelines and regulations of this sector.

Brazilian Electricity Regulatory Agency – ANEEL:

In observance to the MME authority, the Brazilian electricity sector is regulated by ANEEL, federal autonomous entity. As of the enactment of the Law of New Model of Electricity Sector, ANEEL's main responsibility became to regulate and inspect the electricity sector according to the policy determined by the MME and to the duties attributed thereto by the Federal Government, through the MME.

Electric System National Operator - ONS:

The ONS was established in 1998. The ONS is a private, non-profit legal entity, composed of Free Consumers and companies dedicated to the generation, transmission and distribution of electric power, in addition to private agents, such as importers and exporters. The Law of New Model of Electricity Sector granted powers to the Federal Government to appoint three members of the ONS Board of Executive Officers. The main role of the ONS is to coordinate and control the generation and transmission operations at the SIN, in accordance with the regulation and supervision of ANEEL.

Electric Power Commercialization Chamber – CCEE: 

The main purpose of the CCEE is to make feasible the commercialization of electric power in the SIN, performing, as long as empowered by ANEEL, the electric power purchase and sale auctions. The CCEE is liable for:

  • The registration of all Energy Purchase Agreements in the Regulated Environment – CCEAR and the agreements resulting from adjustment auctions, as well as from the amounts of power and energy of the agreements entered into in the Free Contracting Environment – ACL; and

  • For the accounting and settlement of electric power amounts traded in the short-term market, among other attributions. The CCEE is composed of the concessionaires, permittees and entities authorized to provide electric power services and by Free Consumers, and its Board of Directors is composed of five members, four of which appointed by said agents and one by the MME, who shall hold the position of chairman;

Energy Research Company – EPE:

On August 16, 2004, the Federal Government enacted a decree establishing the EPE and approved its bylaws. EPE is a federal public company, whose organization was authorized by law, and which is responsible for conducting studies and researches targeted at subsidizing the planning of the energy sector, including the industries of electric power, oil, natural gas and its by-products (mineral coal, renewable energy sources, and others), as well as in the energy efficiency area. Studies and researches developed by the EPE subsidize the preparation, the planning and the implementation of MME initiatives under the scope of the national energy policy.

Electric Sector Monitoring Committee – CMSE:

In August, 2004, the Federal Government enacted a decree creating the CMSE, which is presided over and coordinated by the MME and composed of representatives of ANEEL, of the National Petroleum Agency, of CCEE, of EPE and of ONS. The main duties of the CMSE are:

  • To monitor the activities of the energy sector
  • To assess the conditions of supply and service to the electric power market;
  • To prepare proposals of preventing or remedying-related actions, aiming the maintenance or recovery of the safety in the electric-energy supply and service which will then be forwarded to the CNPE;

Parallel Environments for Electric Power Commercialization

Pursuant to the Law of New Model of Electricity Sector, the electric power purchase and sale operations will be performed in two different segments of the market, which operate under the scope of CCEE:

Regulated Contracting Environment – ACR:

In the ACR, distributing companies purchase their projected needs of electric power for distribution to their captive customers. Distributing companies must contract the purchase of electric power from generating companies through bidding, in the form of an auction, coordinated by ANEEL, directly or through CCEE. In addition, distributing companies may have as suppliers:

  • Itaipu Power Plant: distributing companies that have mandatory quotas established by ANEEL fully purchase the energy derived from Itaipu Binacional (Brazil and Paraguay) which is allocated to Brazil.This energy is traded by Eletrobrás. The tariff associated with the energy generated in Itaipu is denominated in US Dollars and contracted pursuant to an agreement entered into between Brazil and Paraguay;
  • Bilateral Agreements signed prior to the new model (March 16, 2004);
  • Distributed generation – small-sized power plants connected to the concession area of a distributing company; and
  • Power plants participating in the Incentive Program to Alternative Sources of Electric Power (PROINFA) – this energy is traded by Eletrobrás.

Free Contracting Environment – ACL:

The ACL encompasses electric power sales that are freely traded between generating concessionaires, Independent Electric Power Producers, self-producers, electric power traders, electric power importers and Free Consumers. The ACL will also include bilateral agreements between generating companies and distributing companies, signed prior to the Law of New Model of Electricity Sector, which will remain effective until their respective expirations. Upon their expiration, such agreements must have to be executed pursuant to the guidelines of the Law of New Model of Electricity Sector.

Electric Power Distribution in Brazil

 The electric power distribution sector in Brazil is highly fragmented, operating with 64 distributing companies throughout the Brazilian territory and of which, the 10 largest ones account for 63% of energy sold in the country. Approximately 7.3% of all energy sold in the country is under the control of the federal government and the largest distributing company in Brazil in terms of quantity of energy sold, CEMIG, is controlled by the state government of Minas Gerais.

The federal government, by means of its National Privatization Program (PND), decided to privatize the distribution sector, which took place as per table below. Before PND, energy distributing private companies were responsible for only three per cent (3%) of energy sold in the country.

Currently, the distributing companies may only offer its services to its captive customers within its area of concession, under conditions and tariffs regulated by ANEEL. Thus, should the distributing company decide to practice any discount in the amount of regulated tariff, the principle of isonomy must be taken into account. The distribution is made by 64 concessionaires, 24 private companies, 21 privatized companies, 4 local companies, 8 state companies and 7 federal companies.

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