September 9, 2020

Bill 5,877/2019

Summary

A privatization scenario for Eletrobras, as provided for in Bill 5,877/2019, and the resulting removal of its plants from the quota regime could represent an average increase of 3 percentage points (pp) in distribution companies' tariff repositioning for the tariff events from July/21 to June/22. This is the main finding of an analysis carried out using TR Soluções' SETE Platform tariff-projection model for hydroelectric plants under the firm-capacity and power quota regime. To put this in perspective, this increase practically offsets the impact avoided, via the covid-account, of the pandemic's effects on 2021 tariffs.

In November 2019, the Executive Branch submitted Bill No. 5,877/2019 [1] to Congress for consideration, addressing the model for privatizing Centrais Elétricas Brasileiras S.A. - Eletrobras. As of August 2020, checking the bill's status shows it's still awaiting action from the President of the Chamber of Deputies.

From the standpoint of electricity distribution tariff regulation, the bill has impacts on the Energy Development Account (CDE) charge component of the Distribution System Usage Tariff (TUSD), and on the energy component of the Electricity Tariff (TE).

These impact calculations were made by TR Soluções using its tariff-projection model for hydroelectric plants under the firm-capacity and power quota regime, part of the SETE Platform [2]. The methodology and main results are presented in this article.

In the process, a simulation was run of possible values for tariff components considering the removal of Eletrobras' plants from the quota system. In these calculations, we factored in that energy from Eletrobras' hydroelectric generation concessions represents about 12% of distribution companies' contract portfolio, and that this energy's average price is BRL 73.27/MWh, as detailed below.

In a letter addressed to the President of the Republic, EMI No. 00067/2019 MME ME CC [3], the reasons justifying the drafting of the Eletrobras privatization bill are presented. Regarding the tariff calculation, a few points deserve mention:

"Bill 5877/19 proposes a privatization model that will occur through a capital increase via public subscription of common shares, without the Federal Government taking part in this subscription.

Eletrobras' capitalization is conditioned on renewing the Concession Contracts for Eletrobras' Hydroelectric Plants covered by the quota regime created by Law No. 12,783, of January 11, 2013, changing these plants' regime to the Independent Power Producer regime.

As a result, companies controlled by Eletrobras will stop being required to sell the electricity they generate at a price set by ANEEL, and will instead be able to negotiate it freely in the regulated market or the free market. In exchange, the companies will take on the risks of this operation, such as hydrological risk, and will be responsible for adopting the best sales strategy.

The change in the electricity sales regime adds value to the Concession Contract, since the Company will have the flexibility to sell its energy in the regulated market or the free market, and will be able to choose its customers, at prices and terms set by itself and the market. In exchange, to mitigate the tariff impact, it's proposed that one-third of this value added to the Contract be redirected to tariff moderation, through allocation to the Energy Development Account - CDE.

Another measure worth highlighting in the proposal concerns deductions to be considered when calculating the value added to the new Contracts. This relates to amounts not reimbursed by the Fuel Consumption Account - CCC for fuel consumption in the North Region, capped at BRL 3.5 billion."

In 2020, the average tariff value for plants under the quota regime was approved by ANEEL at BRL 114.74/MWh. The full firm capacity of these plants totaled 13,298 average MW, of which 56% relate to hydroelectric plants under Eletrobras concession [4].

Table 1 presents the final tariffs by Eletrobras plant, based on the Annual Generation Revenues approved by ANEEL for 2020 [4]. The holding company's plants' average tariff came to BRL 73.27/MWh.

Table 1 - Eletrobras Hydroelectric Plants Covered by the Quota Regime

Source: TR Soluções, based on public information from ANEEL [3]

4. Constraints: Quota Energy and Application Tariffs

Under the regulation of Law No. 12,783/2013, hydrological risk came to be recognized by ANEEL as exposure to the short-term market resulting from insufficient generation allocated under the Energy Reallocation Mechanism (MRE) for hydroelectric plants contracted under the quota regime, with these risks covered by funds from the Tariff Flag Centralizing Account (CCRBT).

In 2020, energy from quota-regime plants was expected to represent about 21% of distribution companies' energy-contracting portfolio.

Figure 1 - Distribution companies' energy-contracting portfolio

Removing Eletrobras' plants from the quota regime in 2021 would raise this contracting modality's average tariff value by 64%, from the BRL 114.74/MWh shown in the chart below to BRL 188.11/MWh.

Figure 2 - Average Economic Price by Energy Contracting Modality

For comparison purposes, to the cost of energy from quota-holding plants one must add the cost associated with hydrological risk for those plants. Hydrological-risk expenses within the tariff-flag account balance totaled BRL 2.23 billion in 2019. Considering the total firm capacity of quota-regime plants, we can estimate that the average price associated with hydrological risk observed that year was BRL 24.10/MWh.

In June 2020, the final average price for the full set of contracts explaining the contracting portfolio, considering economic and financial expenses (the energy component of the Application Tariff's TE), was BRL 225.93/MWh for Group B1 consumers.

Table 2 - Brazil Average Composition of the Group B1 Application Tariff

Removing Eletrobras' plants from the quota regime in 2021¹ would result in a 3-percentage-point (pp) impact on the expected tariff repositioning, due to a 56% reduction in quota-energy volume.

Table 3 describes the effect of removal from the quota system on the main tariff components. The average 3 pp impact seen in the Application Tariff (TUSD+TE) arises from a 5 pp increase in the TE, plus another 4 pp in TUSD LOSSES.

To quantify the impact of removal from the quota system, we assumed that short-term prices expected for the next two years would approach the values observed in 2019. We also adopted a macroeconomic scenario based on the Central Bank's Focus Report expectations as of 8/28/2020.

Table 3 - Impact of Removal from the Quota Regime on Application Tariffs

On the other hand, to mitigate the tariff impact, Bill 5,877/2019 proposes that one-third of the value added to the contract of the new concession holders be redirected to tariff moderation, via the CDE. Another measure worth highlighting in the proposal relates to deductions to be considered when calculating the value added to the new contracts. This concerns amounts not reimbursed by the CCC for fuel consumption in the North Region, capped at BRL 3.5 billion. However, these effects weren't addressed in the scenario adopted by TR Soluções.

Given the current context of energy over-contracting, about 24% in 2021, TR Soluções' projections indicate that removal from the quota system has the potential to help reduce contractual surpluses to approximately 7%.

Regarding financial costs, there would be a reduction in expenses associated with hydrological risk due to the reduction in energy volume. This is because removal from the quota system implies a 56% reduction in the full firm capacity of quota-holding plants. The average price associated with this risk, as well as the possible results from settling energy surpluses, will depend on short-term prices in 2021 and 2022.

It's important to note that the values indicated for tariff components are averages. Each distribution company will experience different values depending on its energy balance and the composition of its energy-purchasing portfolio.

In November 2019, the Executive Branch submitted the text of Bill No. 5,877/2019 [1] to Congress for consideration, addressing the model for privatizing Eletrobras.

Considering that energy from Eletrobras' hydroelectric generation concessions represents about 12% of electricity distribution companies' contract portfolio, and that this energy's average price is BRL 73.27/MWh, TR Soluções simulated possible values for tariff components considering the "removal from quota status" of Eletrobras' plants.

Removing Eletrobras' plants from the quota regime in 2021 would result in a 3-percentage-point (pp) impact on expected tariff repositioning. This average impact felt in the Application Tariff (TUSD+TE) arises from a 5 pp increase in the TE and 4 pp in TUSD LOSSES.

The possible effects of Provisional Measure 998/2020 on tariff events expected from 2021 onward were not considered in the adopted scenario. Additionally, the values indicated for tariff components are averages: each distribution company will experience different values depending on its energy balance and the composition of its energy-purchasing portfolio in each concession.

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¹ Since the regulatory dynamics related to Annual Generation Revenues for hydroelectric plants under the quota regime begin in July, the tariff events considered in a scenario WITH and WITHOUT removal from quota status covered the period from June/21 to July/22

[1] Source: Bill No. 5,877/19

[2] Source: Energy Tariff Estimation Service - SETE

[3] Source: EMI No. 00067/2019 MME ME CC

[4] Source: RAG 2020/2021