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The Effect of the A-0 Auction and the ACR Account

Last Wednesday, April 30, the long-awaited A-0 electricity auction took place, in which 2,045 average MW were traded at an average price of BRL 268/MWh.

Media reports on how successful the auction was ranged between 60% and 85%. (Source: Jornal Energia)

Considering the 28 distribution companies tracked by the Integrated Tariff System (SIT), the A-0 auction's success rate was 74%.

Regardless of the exact figure, part of the needed energy volume remained uncontracted due to a lack of bidders, meaning distribution companies will keep buying about 26% of their energy at the short-term market price (PLD) to cover their involuntary exposure.

Since the energy was bought at BRL 268/MWh in the A-0 auction, and will be passed on to consumers until the next tariff event at an average value of BRL 155/MWh, the 74% of contracted energy will reduce distribution companies' current financial expenses, but won't eliminate the problem of buying high and selling below cost.

ACR Account

Decree No. 8,221, of April 1, 2014, established the ACR Account and determined that costs from involuntary exposure on the short-term market, and additional expenses related to dispatching thermal plants tied to Energy Trading Contracts in the Regulated Environment (CCEAR), under the availability modality, would be covered in 2014 through loans to distribution companies.

In February, BRL 4.7 billion was lent to distribution companies through the ACR Account, as published in ANEEL Order No. 1,256. Another BRL 3.3 billion is planned for distribution companies' March costs, and another BRL 3.0 billion in April.

With involuntary exposure reduced to a level of 26%, a result of the A-0 auction, smaller loans are expected to cover expenses from May through December 2014. TR Soluções expects the ACR Account's total value to reach BRL 22 billion in 2014.

These loans will be adjusted at an annual rate of 1.9%+CDI and, as set out in paragraph 3 of Article 4-C of Decree No. 8,221/2014, "will be recovered by distribution concessionaires in the subsequent tariff proceeding" in the form of a financial component. In other words, in 2015 about BRL 70/MWh more should be applied to captive consumers' tariffs, just relating to the ACR Account, resulting in an average adjustment of 25% in 2015.

Should these loans be split into two payments, as has been reported in the media, the average adjustment expected for 2015 drops to 15%.

The detail here is that the total loan cost will be distributed equally among all distribution companies, regardless of whether a given distribution company took out loans or not.

The Following Cost-Evolution Scenario Was Considered:

• IPCA: 6.50%; IGP-M: 7.2%; Dollar: BRL 2.35/US$; Selic Rate: 11.06% (Focus 2014 scenario - Market Report, Central Bank of Brazil, April 25, 2014);
• IPCA: 6.00%; IGP-M: 5.5%; Dollar: BRL 2.48/US$; Selic Rate: 12.00% **(Focus 2015 scenario - Market Report, Central Bank of Brazil, April 25, 2014); **
• 2014 average annual PLD of BRL 701.00/MWh (official figure from the Newave output deck for the April/2014 PMO) ;
• 2015 average annual PLD of BRL 358.00/MWh (official figure from the Newave output deck for the April/2014 PMO);
• 100% of quota energy from plants whose concessions expire between 2015 and 2017 allocated to the captive market;
• Treasury contribution of BRL 9 billion to the CDE's 2015 budget;
• the BRL 22 billion in costs from involuntary exposure and thermal-plant dispatch for 2014 will be covered with ACR Account loans, paid in two installments (2015 and 2016);
• the A-1 auction planned for 2014 covering 30% of decontracting at a price of BRL 200/MWh.