June 1, 2020

Decree No. 10,350/2020 and Tariff Scenarios

Summary

TR Soluções estimates that the Covid Account could reduce the average variation in electricity tariffs by 2.28 percentage points (pp) in 2020 and 2.85 pp in 2021. This estimate already factors in an additional average Covid-Account component of BRL 5.02/MWh in the Electricity Tariff (TE) and BRL 3.78/MWh in the Distribution System Usage Tariff (TUSD) starting as early as 2021. Assuming distribution companies draw on all the funds potentially available through the Covid Account, tariffs are expected to rise, on average, 7.30% in 2020 and fall 1.48% in 2021. The calculations consider a set of 38 distribution companies, representing 98% of the market. Projections suggest the solution should benefit both distribution companies and electricity consumers.

Decree No. 10,350, of May 18, 2020 [1], authorized the creation and management of the Covid Account by the Electric Energy Trading Chamber (CCEE). The account's purpose is to raise funds to cover deficits or advance revenue to electricity distribution public-service concessionaires and permission holders, in order to soften the tariff repositioning expected for 2020 and 2021. The amounts advanced through the account will be amortized over five years starting in 2021.

The decree allows distribution companies and permission holders to advance revenue related to energy over-contracting; to authorized balances not yet amortized and still being built up in the Compensation Account for Variation in "Portion A" Item Values (CVA); to sectoral-charge neutrality; and to the deferral of results from tariff proceedings carried out in April and May 2020. It also permitted advancing the regulatory asset related to Portion B.

TR Soluções estimates the Covid Account could reduce the average variation in electricity tariffs for all consumers by 2.28 pp in 2020 and 2.85 pp in 2021.

On May 18, 2020, TR Soluções published an analysis of the potential effects of the Covid-19 crisis on electricity distribution tariffs [2]. At the time, TR assumed that distribution companies would have the financial means to withstand cash-flow imbalances caused by the crisis, mainly driven by lower consumption, a rising dollar, deferred tariff adjustments, and falling short-term market energy prices.

Two weeks after that study's publication, the market significantly revised its projection for the country's economic performance (Focus Bulletin) for the year, from a 5.00% drop to a 6.25% drop in Gross Domestic Product (GDP). Additionally, ANEEL approved suspending tariff-flag activation through the end of the year.

Under the new scenario, the outlook for 2020 and 2021 shifted to average energy-tariff increases of, respectively, 9.58% and 1.37%. These projections disregard the Covid Account.

For this study, and based on the direction set by Decree No. 10,350, TR reworked its projections. Assuming distribution companies draw on all the funds potentially available through the Covid Account, tariffs are expected to rise, on average, 7.30% in 2020 and fall 1.48% in 2021.

TR estimates that the items covered under items I through VI of Article 1 of Decree No. 10,350 could make available, to the 38 distribution companies analyzed, a total amount of approximately BRL 15.9 billion. The figures relate to the following line items, detailed in Table 1:

• (I) over-contracting pass-through (April to December): BRL 7.2 billion;
• (II) CVA balance being built up (through December): BRL 1.3 billion;
• (III) charge neutrality (April to December): BRL 1.2 billion;
• (IV) recognized, unamortized deferrals: estimated at BRL 937 million;
• (V) CVA balance already recognized in the last tariff proceeding, but not yet amortized and therefore still being charged in current tariffs: BRL 464 million;
• (VI) regulatory asset associated with Portion B and estimated growth of the Portion B regulatory asset through December: TR estimates these regulatory assets total BRL 4.7 billion.

Table 1 - Estimated Costs

Source: TR Soluções

Based on the estimate of how much of the Covid Account's funds each distribution company could access, TR presents, in Figure 1, how this amount would be divided among the concessionaires covered by this study.

Figure 1 - Expected Potential Allocation of Covid Account Funds

Source: TR Soluções

Regarding item VI of the decree, it should be clarified that the methodology ANEEL presented for quantifying the regulatory asset provides for the possibility of advancing, over 12 months, via the Covid Account, the volume of Capital Remuneration (RC) and the Regulatory Reintegration Quota (QRR) already included in Portion B. However, it caps the pass-through of the funds advanced via the Covid Account at the lower of two amounts: the total amount explained by ANEEL's expectations for items I through VI, totaling BRL 35.7 billion, and ANEEL's forecast for the pandemic's effects, totaling BRL 14.4 billion (Market Reduction, Collection, and Group A Deferrals).

In the regulation proposed by ANEEL under Public Consultation No. 035/2020, an estimate puts the Covid Account at a total of BRL 15.3 billion for all distribution companies in the country. Added to the deferral of tariff events carried out through June 2020 and the possible deferral of the effect of tariff reviews for recently privatized distribution companies, the total funding cap for the credit operation set by ANEEL comes to a total of BRL 16.0 billion.

It's important to note that, as set out in Technical Note No. 077/2020, each distribution company must declare and request the amounts of funds it actually intends to use through December 2020, respecting the individual caps established.

Assuming the funding availability estimated by TR is fully used and that the Covid Account loan is amortized over five years, TR Soluções' estimate is that, in the 2021 tariff events, an additional average tariff will be set, in the form of a component called CDE-Covid, of BRL 5.02/MWh in the Electricity Tariff (TE), attributed only to captive consumers. An average CDE-Covid tariff of BRL 3.78/MWh should also be set, allocated to the Distribution System Usage Tariff (TUSD), attributed to both captive and free consumers.

Table 2 - Cost Allocation Within Tariffs

Source: TR Soluções

It's also important to note that, since the quotas for amortizing the loans will be individualized and proportional to the amounts passed on to each distribution company, each company will see the impact of allocating the actual Covid Account loans within the TUSD and TE differently, as shown in Figure 2.

Figure 2 - Possible Cost Allocation Within Tariffs

Even if all distribution companies choose to access Covid Account funds, tariffs should rise, on average, 7.30% this year. The most significant increases should be seen at Equatorial PI, ETO, CEA, Ceron, and AmE, as shown in Figure 3.

On the other hand, without any funding to distribution companies, the average tariff variation would be 9.58% for the year. This projection is associated with: i) higher energy-purchasing costs, notably from the rising dollar (which affects both the Itaipu tariff and some bilateral contracts) and passing on the loss associated with contractual surpluses settled at a Settlement Price of Differences (PLD) below the value of distribution companies' average purchasing mix; ii) an expected increase in transmission costs, due to new facilities being factored in and the revocation of an injunction filed by trade associations; and iii) a 24% increase in the Energy Development Account (CDE) quota set in December 2019.

Figure 3 - Possible Tariff Repositioning for 2020 (WITH and WITHOUT the Covid Account)

Figure 3 shows how advancing revenue to companies, via the Covid Account loan, can soften the tariff repositioning expected for the second half of 2020.

Equatorial Piauí's tariff repositioning stands out from the rest due basically to two factors: a tariff review and energy surpluses on the order of 40%. The company's last tariff review, back when it was still known as Cepisa, took place in 2013. Over the last seven years, about BRL 1.3 billion in additions were made to its remuneration base that, only now, in the 2020 tariff-review event, will be converted into RC and QRR within Portion B.

For 2021, with Covid Account funding, the average tariff variation should be a 1.48% reduction. Without Covid Account funds, that variation could instead be a 1.37% increase.

Behind these projections is the fact that the CDE quota is expected to fall in 2021. Two factors mainly explain this reduction: the first relates to reduced subsidies for rural consumers; water, sewage, and sanitation; small businesses; and irrigators [3]. The second is tied to falling fuel prices and, consequently, the Fuel Consumption Account (CCC), which represents the CDE's largest expense item.

Another factor pushing tariffs down is the reduction in the energy-purchase component. With the higher average purchasing mix in 2020, there would be, in 2021 repositioning, a significant financial refund to consumers tied to quota energy. The same effect would occur with Quantity-modality Energy Purchase Contracts in the Regulated Environment (CCEAR-Q). There's also a refund of amounts over-collected relative to Availability-modality (CCEAR-D) contracts.

Figure 4 - Possible Tariff Repositioning for 2021 (WITH and WITHOUT the Covid Account)

The variations expected for 2021, factoring in the Covid Account's potential effects, also already account for the suspension of tariff-flag activation through December 2020, as approved by ANEEL's board at a meeting held on May 26 [4].

TR Soluções estimates the Covid Account could reduce the average variation in electricity tariffs by 2.28 pp in 2020 and 2.85 pp in 2021. Besides lowering the tariffs that would otherwise be approved through ordinary tariff proceedings, the account should ensure distribution companies have the financial means to honor their short-term financial commitments.

The solution set out in Decree No. 10,350 simply advances financial revenue already recognized or deferred in previous tariff proceedings, but not yet fully recovered. It also advances revenue that would be recognized in tariffs in 2020 and 2021 tariff proceedings, resulting from financial balances being built up through December 2020 within the CVA.

TR believes that, given the current situation, the solution benefits both distribution companies and electricity consumers. On the companies' side, it eases some of the pressure on cash flow by advancing revenue already recognized or that would still be recognized in tariffs. Given that the base interest rate should remain relatively low over the coming years, and therefore the cost of the financial operation enabled through the Covid Account should also be reduced, on the consumer side it seems worth spreading, over the next five years, the increases that would otherwise be felt in the short term.

Given how relevant these calculations are for companies specifically and for the power sector in general, TR invites users of its systems to check the online information already available to improve their own decision-making analyses.

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[1] http://www.planalto.gov.br/ccivil_03/_ato2019-2022/2020/decreto/D10350.htm

[2] https://www.trsolucoes.com/conteudo/possiveis-efeitos-da-crise-da-covid-19/

[3] http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2018/Decreto/D9642.htm

[4] https://bit.ly/3c95Ec1