"The Brazilian electrical power sector was designed with a model for a developing country. The rules of the sector did not have an answer for the economic crisis"

Paulo Pedrosa, executive secretary of the Ministry of Mines and Energy

The federal government announced in January that it intends to hold a specific auction for reserve power contract divestment this year, a still unprecedented dispute in Brazil, in anticipation of an average structural surplus of 8.4 GW of energy (difference between physical supply and the system load) by 2018 and the expectation that few new power generation projects could break ground. This is yet another move to adapt the rules of the sector to the scenario of economic stagnation, the so-called "sectoral realism."

The general auction rules are in Decree No. 9,019, of March 30, 2017, which amended Decree No. 6,353/2008 to allow the contract divestment of reserve energy through the conducting of a competitive mechanism. The criterion for the definition of the winner(s) of the dispute will take into account the price negotiated in the respective reserve auctions (advantageousness of contract divestment), associated with the payment of the premium.

The premium, in turn, will be deposited in the Reserve Energy Account (Coner) and must be used to pay for the energy that will remain contracted. The details of the rules, however, have not yet been released by the Ministry of Mines and Energy (MME) and should be defined soon by the Brazilian Energy Research Company (EPE), as well as the amount to be divested.

Up to now, it is known that those projects whose energy has been contracted in a reserve energy auction and which meet the following conditions cumulatively at the date of publication of the notice of the divestment mechanism will be eligible for divesting:

• currently have a Reserve Energy Contract (CER); and
• did not start an operation under test.

The winners of the auction will:

• have their energy contracts cancelled, as well as those associated with the use of the transmission and distribution facilities of the undertakings that are part of the winning proposal, subject to any associated costs [subject to any costs arising therefrom]; 
• have their registration with the Special Incentive Regime for the Development of Infrastructure (Reidi) canceled; and 
• be obliged to waive any right to any compensation arising under the rescinded contractual instrument.

The termination of the CER will be automatic for those contracts that relate to a single plant. In the case of a CER with more than one plant, the contract must be amended to cover the reduction of amounts sold in installments equivalent to the projects included in the proposal, without applying a fine for termination.

The guarantee of faithful fulfillment of the divestment projects will also be released and, with regard to the maintenance of the concession, which was doubtful for a good part of the sector, the decree establishes that the concessions of the divestment projects will be automatically extinguished. Nothing is reported about the projects that have their amounts partially reduced. The logic in their case demands the maintenance of the concessions, an indispensable requirement for the validity of the commitments.

The decree brings in an important and controversial provision pertaining to the possibility that the sellers with divestment projects participate in future reserve auctions.

Paragraph 8 of the new Article 7-A of Decree No. 6.353 establishes that "the sellers who have their proposals ratified by Aneel will be unable to participate in the two auctions to contract reserve energy subsequent to the realization of the divestment mechanism." The following paragraph goes further, providing that such prohibition may be extended "to the controllers, subsidiaries and controlled companies of sellers who have their proposals approved by Aneel, pursuant to the notice of the divestment mechanism."

In a first analysis, the restriction seems too severe. On the one hand, according to the executive secretary of the MME, Paulo Pedrosa, the rule seeks to curb "opportunistic" moves to sell the energy of a divested project for a higher amount in a new auction. On the other hand, however, to extend this prohibition to controllers, subsidiaries, and shareholding controlled companies, or even to the seller itself (who may be entitled to rights for other ventures in different stages), imposes a penalty on anyone who voluntarily assents to the divestment, with perhaps a much greater burden than an at-fault unjustified rescission of the CERs.

As the rules are likely to be subject to public discussion between agents and regulator, it is expected that the limitations on future participations in reserve auctions will be adequate for the purpose of the rule, thus avoiding disproportionate restrictions on the exercise of the economic activity of these agents.

The responses given by the regulator to the industry's concerns have been adequate and, when implemented in a timely manner, effective. However, the slow pace of adoption of the measures remains the biggest enemy of the advances expected. It was hoped, for example, that the divestment auction would be held as early as April 2017. So far, not even the public notice has been approved, nor has the amount to be divested been disclosed.

The fear of all is that, due to the delay in implementation, the actions will end up becoming maladapted to Brazil’s constantly evolving reality. This would make it impossible to break the normative-reactive system, which is so damaging to the already shaken legal and regulatory stability of the sector, thereby harming the attraction of new investments and economic growth.