In review: energy regulation in Brazil

An extract from The Energy Regulation and Markets Review - Edition 10

Regulation

The federal government is empowered by the Constitution to provide services and facilities within the power sector. Private companies are entitled to enter the market through government delegation by concession, permission, or authorisation.

The main government body responsible for formulating public policies within the energy and mines sectors is the Ministry of Mines and Energy (MME). There are currently other arms of the federal government that have an important role in this sector, namely:

1. the National Council on Energy Policy, which is the presidential cabinet for energy policy affairs created by Law 9,478/1997; and
2. the Committee for Monitoring of the Electricity Sector, part of the MME, which was created mainly as a response to the rationing in 2001 (by Law 10,848/2004) and is responsible for monitoring security of supply and suggesting correction measures.

Since the market's liberalisation, the industry's participants have been regulated by the National Electric Energy Agency (ANEEL),³ which has been granted autonomy by central government but is nevertheless attached to the MME. ANEEL, created by Law 9,427/1996, regulates, and supervises power generation, transmission, distribution, and trading activities to ensure the correct balance between the interests of companies and consumers.

The agency is responsible for implementing the policies and guidelines outlined by the MME, and for monitoring the activities developed in the sector by verifying compliance with its rules and regulations and supervising contract performance. Some of ANEEL's activities are undertaken by delegation from the MME, such as the carrying out of power auctions and the granting of certain regulatory licences. It is important to note that the performance of complementary supervision activities may be decentralised to state regulatory authorities, under the terms established by law.

ANEEL is managed by an executive board composed of a managing director and four other directors, is organised into technical divisions and is charged with performance of administrative functions in various areas, such as economic regulation, market studies, supervision, mediation and the granting of concessions and authorisations.

The restructuring processes undergone by the power sector have involved the creation of new institutional authorities. The National Electric System Operator (ONS) was created by Law 9,648/1998 as a non-profit association to coordinate and control the operations of the electrical grid; its governance system was granted even more independence as part of reforms in 2004. Under the previous regulatory framework, an operational institution was created to manage the wholesale market, which was succeeded by the Electricity Trading Chamber (CCEE) following 2004's regulatory reform. The CCEE, introduced by Law 10,848/2004, is mainly responsible for the registration of power purchase agreements (PPAs), and for the measurement, accounting, and financial settlement of electricity trading operations. Within 2004's reform, another institutional entity was created: The Energy Research Company (EPE), a publicly held company responsible for studies and research on the energy industry with a view to enabling planning within the sector, as foreseen in Law 10,847/2004.

Since the federal government has the authority to provide electricity services and facilities, private companies need government approval to enter the market. The regulatory licence required for entrepreneurs to operate in the power sector depends mainly on the segment (generation, transmission, distribution, or trading) to be joined, and the extent to which regulation is exercised in each of them. Under the provisions of the legislation currently in force, the MME is the granting authority and may delegate its powers to ANEEL.

Power generation may be operated by means of a concession of use of public assets, a public service concession, an authorisation or even a communication. The regulatory licence required, and the applicable regime depend on the plant's installed capacity, the power source and the size of the reservoir (a requirement for hydropower plants). Given that regulation of the power sector is constantly evolving, there are several legal frameworks in existence, each from different points in time. As a result, the rules relevant to one power plant may not apply to others, even though they fall under the same regimen. The specifics of the applicable law must always be assessed individually, alongside the provisions of the specific concession agreements.

In general terms, as for new large hydropower plants (HPPs) that have an installed capacity in excess of 50MW, the entrepreneur must participate in power auctions to be granted a concession to operate new generation projects (new project auctions) and is required to sell a minimum percentage of the plant's output on the regulated market (the remainder may be sold on the free market). The bid entitles the winning bidder (selected by lowest price criteria) not only to operate the new project (by being granted with a concession of use of public asset), but also to sell electricity to the distribution companies participating in the auction. Companies with hydropower plants in operation may participate in power auctions conducted specifically for purchasing electricity from existing projects (existing project auctions) or may sell their output on the free market.

However, authorisation is required for companies willing to operate small hydropower plants (SHPPs) – which have an installed capacity of up to 30MW and a small reservoir – and plants with a capacity of not more than 50MW that do not have HPP characteristics. Although the granting of authorisation does not require an auction, the existence of more than one interested company in the same hydroelectric potential triggers a competitive process by which ANEEL selects the entrepreneur, under the provisions of ANEEL's regulations.

Other energy sources, such as thermal, wind and solar, are subject to an authorisation regime, for which the process is conducted by ANEEL. All of these, including hydropower plants subject to authorisation, may participate in power auctions (either new project, existing project, or backup energy auctions) to sell their production on the regulated market, or may sell it in the free market.

Small plants – with an installed capacity of up to 5MW for thermal and renewable energy, including hydropower plants – do not need authorisation, but require a communication to ANEEL, considering their reduced impact on the system.

The regulatory licences mentioned (except for new hydropower concessions, currently only operated by independent producers) can be granted either under an independent power production regime or under a self-production regime.⁴ The table below gives a general summary of the regulatory licences required by private investors to enter the Brazilian power generation segment.

There are currently discussions on whether private investors can participate in nuclear power plants in the country. It has long been understood that private participation is forbidden on account of the federal government's operation monopoly, foreseen in the Constitution. For that purpose, the state-owned company Eletrobrás has a subsidiary, Eletronuclear, which operates the two nuclear power plants that are currently active. However, more recent opinions argue that the Constitution establishes the monopoly of limited parts of the supply chain, such as research, extraction, enrichment, reprocessing, manufacturing and trade of nuclear mining and metals, which would be restricted to the federal government, and that private partners could participate, for example as partners of Eletronuclear. Furthermore, Law No. 14,120, of 1 March 2021, recently enacted, provides a change in relation to the grant for thermonuclear exploration (called Angra 3) that depended on authorisation from the National Energy Policy Council (CNPE). The Law provides for a 50-year concession period for Angra 3, extendable for another 20 years, and sets forth that a power purchase agreement with duration of 40 years will be executed for backup energy with costs shared among all energy consumers.

Power transmission and distribution activities are considered natural monopolies, given their dependence on the electrical grid. Therefore, most Brazilian power distribution consumers are still legally locked into purchasing energy from only one intermediary: the local distribution companies to which they are connected. In addition, considering their importance, their operation requires a public service concession, preceded by a mandatory public bid.

Power trading companies wishing to operate in the power market need authorisation under the provisions established by ANEEL's regulations.

Consumers need a minimum load to participate in the free market of electricity. The lower limit is being reduced and is currently 1.5MW. There is a class of 'special consumers' for those that use between 500kW and 3MW that may migrate to the free market under the strict condition of purchasing their energy supply from 'special energy' sources only, which include solar, wind, biomass and hydro with a maximum capacity of 50MW. Consumers who cannot or have not migrated to the free market are bound to purchase energy from their local power distribution company and are referred to as 'captive consumers'.

The Constitution establishes that hydropower generation activities must be carried out by Brazilian citizens or companies organised under Brazilian laws, with headquarters and managing offices located in Brazil. The bidding rules of electricity auctions usually do not forbid the participation of foreign companies, but normally establish that:

1. foreign companies shall organise a special purpose company under Brazilian law to have the regulatory licence granted; and
2. if foreign companies bid jointly with a Brazilian company in a consortium, the leadership shall always be exercised by the Brazilian company.

In addition, the bid notice usually establishes that foreign companies shall have a legal representative in Brazil with powers to receive service of process and provide answers in the judicial and administrative spheres, as well as represent them in all phases of the proceedings.

Legislation does not forbid electricity companies, organised under Brazilian laws, from being controlled by foreign companies or private equity investment funds organised under foreign legislation (except for nuclear power plants). ANEEL requires, however, also that these companies have a legal representative in Brazil, duly vested with powers to receive service of process and provide answers in the judicial and administrative spheres.

Also, there are specific restrictions for the activities of power distribution companies. When the market was restructured in the 1990s and later reformed in 2004, the Law imposed limits on their participation in other activities within the supply chain, in order to avoid conflicts of interest. As such, generation and distribution companies operating in the interconnected system are required to maintain separate legal entities and individual accounting, although they may be part of the same corporate group or share infrastructure and human resources when authorised by ANEEL.

As a rule, the transfer of a regulatory licence or of a controlling interest⁵ in an industry participant is subject to ANEEL's prior consent, mainly to adhere to the bidding process and transparency principles.

The regulation in force (ANEEL Resolution 484/12) sets forth that the prior consent of the regulatory agency is required for transfer of controlling interests of public service providers, hydropower companies and nuclear-fuelled energy companies, as well as in any companies, regardless of the power source, whose intended controlling company makes up the corporate group holding or which, with the intended transaction, becomes the holder of 'a significant share of the power generation market for the safety of the regulated market'⁶ – a concept yet to be established by the regulatory agency. Some transactions are exempt from consent, under the terms established by ANEEL's regulations. Nonetheless, the exempt agent has a deadline within which to inform ANEEL of the implemented transaction and may be required also to maintain a dossier available for inspection.

The rules currently in force may be further amended after forthcoming regulation by the regulatory agency on how 'a significant share of the power generation market for the safety of the regulated market' is enacted. This matter has been under discussion at the regulatory agency for a while, without any formal pronouncement yet.