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May 11, 2021

What Is the Difference Between Electricity Tariff Review and Tariff Adjustment?


Electricity tariff reviews and tariff adjustments are mechanisms for updating Brazil electricity sector tariffs and rates, as provided for in concession contracts. These mechanisms aim to preserve the legal principle of the economic and financial balance of utilities. However, there is a clear distinction between an electricity tariff review and a tariff adjustment. Find out more in this article!

What Is the Difference Between Electricity Tariff Review and Tariff Adjustment?

Tariff adjustments and reviews are mechanisms for updating electricity tariffs in Brazil, as provided for in concession contracts. These mechanisms aim to preserve the legal principle of the economic and financial balance of utilities. However, there is a difference between an electricity tariff review and a tariff adjustment. Find out more in this article!

What Is an Electricity Tariff Review?

The primary goal of a tariff review is to ensure that the tariff/rate is fair for both consumers and investors, while also encouraging increased efficiency and quality of services provided by utilities. During the review, the National Electricity Agency (ANEEL) redefines the tariffs/rates associated with the public service of electricity distribution, evaluating:

  • Changes in capital costs;
  • Operational costs;
  • Market structure;
  • Investments in system expansion;
  • Productivity increases; and
  • Technological advancements.

Other costs, such as Portion A costs (those over which the utility has little or no control, including electricity purchases, transmission costs, and sector charges), are calculated the same way as during tariff adjustment events. There are two types of tariff reviews: ordinary and extraordinary.

Ordinary Tariff Reviews

Ordinary reviews occur every four or five years and aim to restore the economic and financial balance of the distribution concession. This type of electricity tariff review ensures that changes in market conditions, operational costs, and efficiency improvements are reflected in the regulated electricity rates charged to consumers.

Extraordinary Tariff Reviews

An extraordinary review can be requested by the utility at any time if there are significant, proven changes in its costs. These changes may result from modifications or the removal of taxes and charges after the contract was signed, provided their impact on the company’s costs is demonstrated. This type of tariff revision is less frequent but can have a significant impact on regulated tariff changes.

What Is a Tariff Adjustment?

A tariff adjustment is a mechanism to update the price of electricity paid by the consumer, with the goal of restoring the purchasing power of the utilities. During this process, changes in Portion A costs are passed on to the tariffs/rates.

Meanwhile, costs that are fully managed by the utilities are adjusted based on the inflation index specified in the contract (IGP-M or IPCA), minus the X Factor, which encourages productivity gains in distribution activities and captures them in favor of keeping tariffs and rates affordable. This tariff adjustment process allows utilities to maintain their financial stability while ensuring that regulated tariff changes are fair to consumers.

Unlike tariff revisions, the tariff adjustment schedule occurs annually on the “anniversary” of the concession contract, making it a key part of the annual process for electricity price adjustment in the Brazil electricity sector tariffs/rates.

What Is the Main Difference Between an Electricity Tariff Review and a Tariff Adjustment in Terms of Timing?

In addition to the specific characteristics of each process, the timing of when a tariff review and a tariff adjustment take place is a key difference. A tariff adjustment happens annually, on the "anniversary" of the concession contract. In contrast, a tariff review occurs every four or five years, also on the company's anniversary, or at any time (in the case of an extraordinary review). It is important to note that annual tariff adjustments only occur in years when there is no ordinary tariff review.

Did you enjoy learning about the difference between electricity tariff reviews and tariff adjustments? Be sure to also check out our article on PLD and how it impacts electricity tariffs.