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tax-credit, energy consumption, electricity, sete

June 28, 2016

Analysis of Provisional Measure No. 735/2016

With the goal of keeping TR's clients up to date on important regulatory and legal changes affecting electricity distribution tariffs, we report that last Thursday, June 23, 2016, Provisional Measure No. 735/2016 (MP 735) was published, whose main effects are presented below.

In short, the legal changes MP 735 brings are:

  • Assigning responsibility for managing the Energy Development Account (CDE) to the Electric Energy Trading Chamber (CCEE);
  • Establishing a structural plan to reduce the CDE's expenses, plus letting the granting authority set spending and expense caps;
  • Changes both to how the CDE is allocated among consumers in different Brazilian submarkets, and to the tariff structure tied to allocating the account across different voltage levels;
  • Setting new criteria for electricity concessions, permissions, and authorizations for facilities and services; and
  • Shifting costs tied to Itaipu Binacional's energy from taxpayers, via the National Treasury, to consumers, via the tariff.

The full text of MP 735 can be found at: http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2016/Mpv/mpv735.htm

Regarding the tariff impacts brought by the measure, TR presents its analysis of those arising from changes to the CDE's tariff structure and from obligations added to the Itaipu tariff.

Regarding CDE allocation, equalizing tariffs paid by consumers in the S/SE-CO and N/NE submarkets will begin with the payment of 2017 CDE quotas, happening gradually and uniformly through 2029.

The CDE quota set for 2030 will no longer factor in any difference between submarkets when setting CDE quotas. It's worth remembering that this equalization between submarkets was already provided for in Provisional Measure No. 706/2016 (converted into Law No. 13,299/2016), but that equalization was previously set to begin in 2018 and conclude in 2034.

Another change to the CDE brought by MP 735 concerns each voltage-level range's responsibility for paying the CDE:

  • Consumer units connected at a voltage level equal to or above 69 kV (A3, A2, and A1) will pay, starting in 2030, one-third of the CDE tariff set for consumer units connected below 2.3 kV (Low Voltage);
  • Consumer units connected at medium voltage, between 2.3 kV and 69 kV (AS and A4), will pay, also starting in 2030, two-thirds of the CDE tariff set for low-voltage units.

This distinction in responsibility across voltage levels will also be applied gradually and uniformly, between 2017 and 2029. Given TR Soluções' expectations for electricity-market growth, as well as its revenue and expense projections for the CDE, TR quantified the combined effect of the transitions related to allocating the quota between submarkets, together with the new responsibilities each voltage-level range has for paying the CDE. The results shown in Table 1 show the average annual variations for CDE tariffs, in BRL/MWh:

tax-credit, energy consumption, electricity, sete

Besides changes to CDE-related figures, MP 735 also shifted responsibility for paying Itaipu energy-purchasing expenses from the National Treasury to electricity consumer units. In 2009, after reviewing the agreement, Brazil accepted Paraguay's proposal to raise the amount paid for the energy. The price tripled, and the annual bill rose from US$120 million to US$360 million1. That agreement, signed on September 1, 2009, by then-presidents Luiz Inácio Lula da Silva and Fernando Lugo, was enacted through Decree No. 7,506, of June 27, 2011.

The expense's annual value to be allocated to the consumer is estimated at BRL 900 million, representing an increase of about 11% in the current Itaipu power pass-through tariff. The value published in ANEEL's REH No. 2,001/2015 is US$25.78/kW. TR estimates that including these additional costs would result in a new Itaipu power pass-through tariff of about US$28.63/kW.

Including this expense should result in an average increase of 2.36% in the Electricity Tariff (TE) for distribution companies that buy Itaipu energy, and 0.37% in the Usage Tariff (TUSD), due to recalculating energy losses, priced at the new TE. These percentages represent an average increase of 1.56% in the Application Tariff.

1Source: http://istoe.com.br