October 21, 2021

The Free Market as an Alternative for Reducing Electricity Distribution Permission Holders' Tariffs

Paulo Steele*

Summary

The free electricity market hasn't benefited only large industries: permission holders have managed to cut input costs by about 50% by purchasing energy in this contracting environment, compared to what they previously paid distribution companies. The savings were calculated using TR Soluções' Energy Tariff Estimation Service (SETE), factoring in 13 public bidding processes cooperatives ran between June 2019 and May this year. The article also describes the legal and regulatory evolution on the topic, particularly regarding the discounts these permission holders have gradually been losing on the energy they used to buy from distribution companies.

1.Introduction

Paragraph 1 of Article 23 of Law No. 9,074, of July 7, 1995, allowed the Granting Authority to formalize rural electrification cooperatives as public-service distribution permission holders. Through December 2020, 52 cooperatives had already been formalized as permission holders.

Figure 1 - Permission Holders' Location

With annual revenue exceeding BRL 1.8 billion, they serve 668,000 consumer units, across six states, with predominantly rural distribution grids. Most permission holders are in Santa Catarina (46%), followed by Rio Grande do Sul (29%), São Paulo (14%), Rio de Janeiro (7%), and Paraná (5%), among other states (2%). This geographic distribution is mainly explained by the fact that, in the early 20th century, these regions were, in most cases, home to a large number of small and medium rural landowners who banded together in cooperatives to gain access to electricity.

Converting a cooperative into a permission holder involves rule changes that reduce historical subsidies. On the other hand, new offsets are created, such as subsidies via the Energy Development Account (CDE), for those with low load density relative to the size of their electrical grid. In this context, this article analyzes the different energy-purchasing strategies these permission holders use given the new regulatory conditions.

2. Out With Tariff Discounts, In With Low-Load-Density Subsidies

ANEEL Normative Resolution No. 704, of 2016, approved Sub-module 8.4 of the Tariff Regulation Procedure (Proret), establishing a new methodology for setting permission holders' tariffs. Under this methodology, the tariff-setting process begins with the permission holder submitting its funding need to cover Portion B (manageable costs, corresponding to operating and capital costs), duly approved by the cooperative members' assembly. This amount is capped, per permission holder, calculated in advance by ANEEL. Additionally, to determine required revenue in tariff events, sectoral charges, energy-purchasing expenses, and financial costs are added to Portion B's value.

In this context, it's worth noting that, as indicated in Technical Note No. 222/2021-SGT/ANEEL, of 9/22/2021, some permission holders requested significant reductions in Portion B figures relative to the previous year.

Table 1 - Portion B Reductions in the 2021 Tariff Repositioning

Law No. 13,360, of November 17, 2016, in turn, created the CDE subsidy to offset the tariff impact of rural electrification cooperatives' low load density. ANEEL was tasked with setting it up. So, on October 24, 2017, Normative Resolution No. 788 approved Sub-module 8.5 of Proret, addressing the Subsidy for Cooperatives With Low Load Density.

Historically, tariffs for supplying cooperatives were subsidized, with discounts granted under Articles 50, 51, and 52 of Decree No. 4,541/2002. These were discounts on supply tariffs of up to 70% on the Distribution System Usage Tariff (TUSD) and up to 90% on the Electricity Tariff (TE). With Law No. 13,360, these discounts are being gradually replaced by the CDE subsidy. Through September 2021, about BRL 410 million in annual CDE subsidies had already been set for 52 permission holders.

Under the previous model, in which permission holders received discounts on energy purchasing and on distribution-grid usage costs, the burden of these discounts was limited to the distribution concessions supplying them. Depending on the volume of energy traded, these discounts raised those concessionaires' tariffs by up to 7%. The new subsidy system results in a nationwide tariff impact, on the order of BRL 0.94/MWh.

Under the current model, setting the CDE subsidy assumes annually phasing out tariff discounts, with that phase-out capped at a 10% impact on the final tariff felt by consumers. Given this cap, through September 2021, only 16 of the 52 permission holders had already lost all their supply-tariff discounts, as shown in the chart below.

Figure 2 - Energy-Supply Tariff Discounts, by Number of Permission Holders

As shown in Figure 2, discounts on energy purchasing and distribution-grid usage costs were fully phased out for 16 permission holders. What are they doing to ease the tariff impact of eliminating these discounts for their cooperative members?

3. New Energy-Contracting Strategies

Although the mechanism replacing tariff discounts with the CDE subsidy affects every sector agent, its effects are more strongly felt by the concessions that used to supply the permission holders, and by those supplied permission holders' tariffs.

In the tariffs of concessions doing the supplying, we see a tariff reduction due to increased revenue. For the permission holders being supplied, however, if no energy re-contracting strategy is implemented, a tariff increase is expected, mainly due precisely to rising energy-purchasing costs.

To illustrate, Table 2 describes tariff projections, calculated by TR Soluções, for two electricity distribution permission holders, both initially served by the same energy supplier (Celesc). The differences in application tariffs between Cejama (Cooperativa de Eletricidade Jacinto Machado) and Cooperzem (Cooperativa de Distribuição de Energia Elétrica), which can reach almost 34% in 2023, are mainly due to the fact that the former chose to negotiate energy in the Free Contracting Environment (ACL), while Cooperzem kept its traditional supply arrangement with the distribution company.

Table 2 - Effect of Changing Suppliers on Energy Tariffs

The contracting approach Cooperzem adopted, sticking with only the original supplying agent, is the most common of the options set out in Sub-module 11.1 of Proret, which establishes that permission holders can purchase electricity through the following modalities:

• Regulated Contracting Environment (ACR) auctions;

• distributed generation (DG);

• the current supplying agent, at a regulated tariff; and/or

• running a public bidding process in the free market.

Of the 16 permission holders without tariff discounts, 11 have already run public bidding processes to purchase energy. Data presented in ANEEL Technical Note No. 17/2021–SRM indicate these processes have delivered them reductions on the order of 50% in energy-purchasing prices compared to the prices they previously paid the concessionaires that supplied them. The average energy-purchasing prices resulting from these auctions, adjusted by the IPCA through September 2021, sit around BRL 150.00/MWh, as shown in Table 3.

Additionally, the same table shows that even permission holders that still have some discount are already seeking more competitive energy-supply sources in the market. This is the case with Certel (Cooperativa de Distribuição de Energia Teutônia), for example, which, despite still enjoying a 33% discount on RGE-Sul's supply tariff, contracted 71% of its required energy from Electra Comercializadora, in November 2020.

Table 3 - Overview of Public Bidding Processes Already Run by Permission Holders

With average typical demand of 16 MW, permission holders that already have some volume of energy contracted via bidding account for 58% of the required-energy¹ volume among the 52 national cooperatives.

4. Tariff Impact

As shown above, at least three developments can be listed as impacting the setting of distribution public-service permission holders' new tariffs: subsidies established via the CDE; the phase-out of supply-tariff discounts; and energy contracting via bidding. With these developments, what changes in permission holders' electricity tariffs?

Before discussing tariff impacts, it's necessary to understand how traditional supply tariffs are formed, and how purchasing energy in the market, via public bid, changes the composition of permission holders' Electricity Tariffs (TE).

Traditional Electricity Tariffs (TE)

Concessionaires' traditional Electricity Tariffs (TE) for supplying permission holders in the South, Southeast, and Center-West regions, which previously carried discounts of up to 90%, are made up of energy-purchasing costs, Itaipu transport expenses, sectoral charges, basic-grid losses, and financial costs, where:

• Energy purchasing (Pmix): Electricity Trading Contracts in the Regulated Environment (CCEAR), Firm Capacity Quota Contracts (CCGF), Nuclear Energy Quota Contracts (CCEN), Itaipu Quotas, and Bilateral Contracts;

• Sectoral charges: Research and Development Program; System Service Charge (ESS), Reserve Energy Charge (EER);

• Financial costs: Hydrological Risk; Renegotiation Risk Premium; CCEAR-D Expenses; Over-Contracting or Exposure Pass-Through, Tariff Flag Revenue, and other financial costs.

Specifically for South-region concessionaires, the TE's average value should reach BRL 290.40/MWh in 2021.

Under the traditional model, in which the permission holder is supplied only by concessionaires, these tariffs consist solely of energy-purchasing costs.

For Certrel (Cooperativa de Energia Treviso), supplied by Celesc, the TE discount for its 2020 supply was 81.36%, meaning that, while the distribution company's TE was BRL 273.57/MWh, Certrel's was only BRL 43.28/MWh

Table 4 - Evolution of the South-Region Supply Electricity Tariff

The permission holder Coopermila (Cooperativa de Eletrificação Lauro Muller), meanwhile, continues to be fully supplied by concessionaire Celesc, but its 2020 discount was only 3.34%, meaning Coopermila's TE was approved at BRL 257.51/MWh last year.

Electricity Tariffs (TE) With Bidding

With energy purchases made in the market, via public bids, new costs start forming permission holders' required revenue, including mandatory Nuclear-energy purchases (BRL 249.64/MWh) and Firm Capacity Quota - CCGF purchases (BRL 122.65/MWh).

As Opinion 128/2020/PFANEEL-PGF-AGU clarifies, by joining the CCEE (Electric Energy Trading Chamber) as an agent, the permission holder takes on various obligations with variable costs, such as those arising from allocating costs like the System Service Charge (ESS), the Reserve Energy Charge (EER), and expenses tied to Hydrological Risk. Any financial repercussions, positive or negative, seen by permission holders resulting from changing how they purchase electricity and from participating as a CCEE agent, should be understood as scenarios that alter the contractual balance, requiring compensation in future tariff proceedings.

In other words, the composition of permission holders' new TE, for those contracting energy via public bidding, should also add, on top of the bid energy's price: nuclear energy; CCGF; ESS; EER; Hydrological Risk; plus financial costs (CVA). Regarding financial costs specifically, the matter hasn't yet been regulated for permission holders.

Coprel Cooperativa de Energia was the pioneer in purchasing energy via public bidding. In 2019, through its own bidding process, it contracted 32 average MW with Electra Comercializadora, for delivery from January 1, 2021, through December 31, 2035.

In 2021, the permission holder's average energy-purchasing value was BRL 154.00, made up of:

• 0.23% supplied by concessionaire RGE Sul, where TE discounts no longer apply, at BRL 297.12/MWh;

• 65.54% energy obtained through the 2019 bidding process;

• 34.23% from Nuclear Energy quotas (3.85%); CCGF (28.4%); and Proinfa (1.98%);

Also added to the average energy-purchasing value is another BRL 7.36/MWh for ESS and EER charges, bringing Coprel's total TE to BRL 161.44/MWh. In other words, the TE tariff impact, in 2021, of a public-bidding decision made in 2019, was a 46% reduction.

5. Homework

The examples above described three real cases with three different strategies regarding the anticipated phase-out of tariff discounts:

• benefiting from supply-tariff discounts while still possible;

• fully passing on to cooperative members the increase in energy-purchasing expenses due to reduced supply-tariff discounts;

• signing new energy-purchase contracts with traders offering competitive prices compared to traditional suppliers.

Coprel's pioneering move served as an example for another 19 permission holders that also ran bidding processes throughout 2020 and 2021. The way these processes were structured also innovated in format, with two cases of joint proceedings involving Ceripa, Cervam, Cerim, Cetril, and Cemirim, and Creral, Cooperluz, Cermissões, and Certhil, both in 2020.

In an environment of economic uncertainty, heightened by supply-tariff adjustments and sector-wide changes, long-term tariff planning becomes essential. Seeking competitive prices, besides ensuring moderate tariffs for cooperative members, prevents consumer units from migrating to the ACL.

For now, of the 52 permission holders, 33 still haven't contracted via public bidding. That means 42% of these companies' required energy, about 200 average MW, is still supplied by electricity distribution concessionaires.

There's therefore a promising market to be tapped by energy traders, one where security stands out. After all, these are energy contracts for companies with assets and receivables. Even better, with real potential gains for cooperative members who will pay lower tariffs if their permission holders buy electricity at more competitive prices.

* Paulo Steele is managing partner at TR Soluções, a technology company specializing in electricity tariffs.

---

¹ Based on 2020 market conditions