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TR Soluções Bulletin October 2016, TR Soluções, trsolucoes, energy consumption, electricity, sete, electricity tariffs, energy indicators, indicators

October 10, 2016

Analysis of Public Hearing No. 058/2016: Regulating New Distribution Concessions

Through November 8, 2016, the National Electric Energy Agency (ANEEL) is accepting contributions to Public Hearing No. 058/2016 (AP 58), which aims to regulate tariff procedures for distribution companies whose concessions were extended under Decree No. 8,461/20151, as well as for distribution companies that opt to sign an amendment with new rules under ANEEL Order No. 2,194/20162.

With the goal of keeping its clients up to date on any regulatory changes with a significant impact on electricity distribution tariffs, TR presents below an analysis of the proposed regulation covered by AP 58.

Among the points described in this public hearing, TR identified a set of measures, listed according to the items (or paragraphs) of Technical Note No. 294/2016-SGT/SRM/ANEEL, that could change current expectations for tariff projections. They are:

  • Item 17: establishes that all tariff cycles change to 5 years;
  • Item 18: changes the inflation-variation index from IGP-M to IPCA;
  • Items 21 and 25: establish a new procedure for determining Portion B's value in ordinary tariff-adjustment events;
  • Item 37: extends neutrality to all Portion A cost items, minimizing the effect of the distribution company's market variation. Currently, neutrality applies only to sectoral charges;
  • Item 87: defines the possibility for the regulator to set projected economic costs for Portion A cost items;
  • Item 107: determines that the X Factor will be calculated ex-post;
  • Item 111: allows tariff-structure changes at any time, not only during tariff-review events;
  • determines that Uncollectible Revenue costs be allocated, in BRL/MWh, among tariff groupings, the same way used to allocate Non-Technical Losses;

Items 18 through 25 of NT 294 detail the new procedures for calculating Portion B in tariff-adjustment proceedings. It's established that the new Portion B will no longer include Uncollectible Revenue costs, which will now be treated as a Portion A cost item. On the other hand, current ONS costs, treated as Portion A, now become part of Portion B. So the ONS charge stops being treated as a tariff component. Also, under the new rules, revenue from Other Revenue, Demand Overrun, and Reactive Excess will now be calculated annually during the reference period, in order to determine the new Portion B each year.

The ability to annually update billing for Other Revenue, Demand Overrun, and Reactive Excess improves how closely these billings track the economic amounts considered for tariff moderation. Beyond the change to Portion B's composition during tariff-adjustment proceedings, there was also a change to the monetary-correction factor used.

Beyond the issue of Portion B's composition for tariff-adjustment purposes, there was also a change to the monetary-correction factor used: instead of the current IGPM, the IPCA will be adopted.

Still regarding how Portion B is formed in tariff-adjustment years, B0 will no longer be calculated as the difference between Verified Revenue and Portion A0 costs. The value of B0 will be obtained by applying the current Fio B Tariff to the reference market. This change means the Fio B Tariff's value will no longer be affected by annual market variations.

Regarding expanded neutrality, per item 37 of NT 294, current Portion A cost elements related to EUST, EUSD, Energy Purchasing, and Uncollectible Revenue costs are added to the TFSEE, CDE, ESS, EER, PROINFA, and CDE ENERGIA charges in the set of costs with tariff neutrality.

Item 87 is without doubt the biggest innovation in tariff calculation, since it allows the regulator to provisionally set, as cost projections in exceptional situations, economic values that could be published over the course of the next tariff period. This measure would advance revenue to distribution companies, which would prevent financial imbalances from forming. It's worth remembering that financial imbalances are inevitably, at some point, passed on to consumer units or taxpayers.

As described in AP 58, item 87 is extremely discretionary in nature. Operationalizing it as described would bring greater uncertainty regarding the expected values for regulated tariffs. From a tariff stability and predictability standpoint, the ideal would be for the regulator to set minimum boundary conditions for prospectively determining an economic Portion A cost.

TR raises a few questions and reflections on the topic:

  • What counts as exceptional costs? The regulator cites the expected 2017 RAP adjustment3 as an exceptional event. Ideally, control parameters would be established to characterize what counts as an exceptional event. An expected change to a given cost that results in a tariff impact greater than X% could easily characterize an event as exceptional;
  • How far in advance can distribution companies get economic coverage for exceptional costs? Distribution companies whose adjustments happen 1 to 4 months ahead of an exceptional event would likely have advance cost expectations factored into their tariff events. What treatment would be given to distribution companies whose adjustments happen, say, more than 10 months ahead? Would they also be covered by this procedure?

Would sharp, expected variations in economic costs that are negative in nature — that is, that would reduce distribution tariffs — also be treated as exceptional costs? NT 294 only cites examples of exceptional cost-increase events.

In short, TR considers it essential to establish clear rules on which costs will be treated as exceptional for advance inclusion in tariffs. Predictability in the treatment the regulator gives to tariff events represents greater process transparency, which is essential for regulatory maturity.

Another development is noted in item 111 of NT 294. From now on, ANEEL will allow tariff-structure changes in any tariff proceeding, not just review proceedings. Indeed, the new rule establishes greater flexibility for tariff design, since the criterion for allocating costs among consumer units can be continuously revised. However, it's important that these changes be preceded by discussions with the consumer units affected by the change to the tariff structure. In this regard, it would be worthwhile for the regulatory process for proposing new tariff designs to include specific public hearings.

Another change proposed in AP 58 is covered in item 107, comparatively less impactful than the others. The new rule introduces annual volatility into calculating the Productivity Factor (Pd), part of the X Factor. This happens because the Productivity Factor's calculation will now be quantified annually based on (ex-post) market and consumer-unit variations. However, applying the X Factor ex-post can only happen starting with each concessionaire's next tariff review (17 tariff reviews will happen in 2017). Changes to the methodology currently used, which factors in Total Factor Productivity, can only happen in 2019, when the X Factor calculation methodology will be fully revised.

Finally, adopting a new criterion for allocating Uncollectible Revenue across voltage levels, following the same structure currently used to allocate Non-Technical Losses, tends to push up tariffs for consumer units connected at low voltage. It's worth remembering that Uncollectible Revenue is currently allocated among consumer units according to the tariff structure based on marginal capacity costs, which is the current criterion for allocating Fio B costs among consumer units. By changing the criterion for allocating Uncollectible Revenue, a new tariff component will be created, with no time-of-use signal, to be included in the Distribution System Usage Tariff and billed based on energy consumption, in BRL/MWh.

Distribution companies that haven't yet amended their contracts or whose contracts could still be renewed (expiration year and the respective distribution company) are:

  • 2025: ESCELSA;
  • 2026: AMPLA and LIGHT;
  • 2027: AES-SUL, COELBA, COSERN, CPFL-Paulista, EMT, ESE, and RGE;
  • 2028: BANDEIRANTE, CELPA, COELCE, ELEKTRO, and ELETROPAULO;
  • 2029: CAIUÁ, ETO, CFLO, CNEE, COPEL, EDEVP, BRAGANTINA, EMG, and FORCEL;
  • 2030: CELPE, CEMAR, CERR, EBO, and JARI;
  • 2031: EPB;
  • 2032: CPFL-Piratininga;

1Decree No. 8,461/2015: regulates the extension of electricity distribution concessions, covered by Article 7 of Law No. 12,783, of January 11, 2013, and Article 4-B of Law No. 9,074, of July 7, 1995.

2Order No. 2,194/2016: approves the draft amendment to the electricity distribution concession contract, optional in nature, for concessionaires whose contracts weren't extended, allowing them to opt into all items of the concession contract resulting from ANEEL Public Hearing 038 of 2015, and establishes that, should the concessionaire opt into these items, the contract — which may include a new date for periodic reviews and tariff adjustments, and the anticipated indicators — must be the subject of a specific public hearing for each concessionaire.

3Compensation payments to RBSE transmission companies will begin taking effect starting with the 2017 RAP cycle (July 1). Under the current rules, only distribution companies with tariff proceedings in the second half of 2017 would feel the roughly 300% RAP increase in 2017. The rest would only feel it in 2018. Under the new rules proposed in AP 58, once the future impact of the transmission tariff is known, ANEEL could advance, to the first-half-2017 tariff proceedings, transmission-compensation costs that would otherwise only take effect in the second half.