TR Soluções Bulletin March 2017 - I, Tariff Flags, electricity tariffs, energy consumption, electricity, sete, TR Soluções, trsolucoes, indicators

March 2, 2017 - I

Hydrological Risk and Tariff Flags

Among the updates included in SETE's latest version (11.52), which went live on February 21, TR Soluções highlights two and analyzes them in this TR Bulletin.

The first update leads to significant tariff impacts and concerns advancing BRL 5 billion related to hydrological risk for hydroelectric plants participating in the Energy Reallocation Mechanism. The second incorporates into SETE a tariff treatment for the balance of the Tariff Flag Centralizing Account (CCRBT).

Hydrological Risk

Under ANEEL Public Hearing No. 091/2016 (AP 91), which discussed activation ranges and levels for tariff flags, ANEEL presented the results of a CCEE study on hydrological risk for 2017. However, it was only when presenting that public hearing's results, decided at ANEEL's board meeting held on February 14, that a proposal emerged to allocate to tariffs, as financial coverage for each distribution company in 2017 tariff proceedings, half of 2017's hydrological risk, estimated at BRL 10 billion, per paragraph 29 of Technical Note No. 10/2017-SGT/ANEEL (NT 10), which discusses AP 91's results.

In NT 10, ANEEL presented a chart with the CCEE's forecast for 2017's hydrological risk:

GSF forecast, Tariff Flags, electricity tariffs, energy consumption, electricity, sete, TR Soluções, trsolucoes, indicators

The proposal to advance part of the hydrological risk into 2017 tariff events is presented in paragraph 31 of NT 10, as shown in the figure below, taken from that technical note:

Projected GSF, Tariff Flags, electricity tariffs, energy consumption, electricity, sete, TR Soluções, trsolucoes, indicators

So, given the signal from AP 91's conclusion and the subsequent opening of Public Hearing No. 04/2017 (AP 04), which aims to discuss "tariff treatment for hydrological-risk forecasts," TR Soluções once again got ahead of likely changes to the tariff calculation and estimated, for each distribution company, what the cost associated with hydrological risk should be in each 2017 tariff event, given that the total funds to be recovered as hydrological risk are estimated at BRL 5 billion. The result was incorporated into SETE's most current version – 11.52.

Knowing that hydrological risk is tied to: i) the Firm Capacity Quota Contract (CCGF) – Law No. 12,783/2013; ii) the Electricity Purchase Contract in the Regulated Environment (CCEAR), signed under the Risk Renegotiation Agreement – Law No. 13,203/2015; and iii) the Itaipu Binacional energy contract – Decree No. 8,401/2015 — that is, to firm capacity of about 33,178 average MW — it's possible to attribute each contractual modality's share of the hydrological-risk amount to be recovered in the tariff.

So TR estimates the BRL 5 billion should be recovered via the financial energy tariff following this ratio: 34% (CCGF); 45% (CCEAR); and 21% (Itaipu). Knowing each distribution concessionaire's share of contracting under each contractual modality, it's possible to define the hydrological-risk amount each distribution company is responsible for, and factor it in as a financial component to be recovered via tariff in 2017 tariff events. Once the amount is defined, SETE calculates the tariff based on each company's market and incorporates it into the Electricity Tariff.

To find the hydrological-risk amount TR estimated for each distribution company, just log into SETE, load the data for the distribution company of interest, and click on Financials, open the 2017 accordion, and then click on Other Financial Components.

AP 04, through the proposed draft for Sub-module 4.4 of the Tariff Regulation Procedures (Other Financial Components), proposes regulating this matter as follows:

Financial component, Tariff Flags, electricity tariffs, energy consumption, electricity, sete, TR Soluções, trsolucoes, indicators

In short, the regulation proposed in AP 04 establishes that the hydrological-risk value projected for the next 12 months must be quantified 30 days before each distribution company's tariff event. So the BRL 5 billion figure, estimated by the CCEE and used by TR, should change over time.

Given this understanding, TR will start monitoring the GSF curve the CCEE reports monthly in order to calibrate new hydrological-risk estimates for the following 12 months.

Tariff Flags

Revenue from activating tariff flags hasn't been enough to honor the Tariff Flag Centralizing Account's – CCRBT commitments tied to power generation, namely¹:

a. Electricity Trading Contracts in the Regulated Contracting Environment under the Availability Modality (CCEAR-D); b. Involuntary Exposure to the short-term market due to insufficient contractual backing relative to actual load; c. System Service Charge (ESS) arising from plants dispatched out of merit order and by merit order with Unit Variable Cost (CVU) above the Settlement Price of Differences (maximum PLD); d. Exposure to the short-term market from insufficient generation allocated under the Energy Reallocation Mechanism (MRE) for hydroelectric plants contracted under the quota regime, covered by Article 1 of Law No. 12,783, of 2013 (Quota Hydrological Risk); e. Exposure to the short-term market from insufficient generation allocated under the MRE for hydroelectric plants whose energy was contracted in the Regulated Contracting Environment (ACR), and that signed a Risk Renegotiation Agreement under Law No. 13,203, of December 8, 2015 (CCEAR Hydrological Risk); and f. Exposure to the short-term market from insufficient generation allocated under Itaipu Binacional's MRE (Itaipu Hydrological Risk), as well as the corresponding relief from exposure to price differences between submarkets.

The most recent information available, for December 2016, indicates the CCRBT had a deficit of BRL 1.6 billion at that time. Since PRORET's Sub-module 6.8 establishes that any balances, whether positive or negative, must be settled at each concessionaire's tariff event:

If actual costs exceed projected costs (CCRBT in Deficit), the difference is passed on to consumer tariffs in distribution companies' tariff proceedings, meaning there's an increase in tariffs to cover this deficit.
If the CCRBT is in Surplus, the excess revenue is allocated to distribution companies, so that in tariff proceedings these funds are captured by consumers.
TR Soluções started monitoring the CCRBT's monthly balance so it can also factor any deficits or surpluses into distribution companies' tariff events' financial components. Since the account's balance can change drastically depending on tariff-flag activation, only balances known up to four months before distribution companies' tariff events are factored into SETE's tariff projections.

To check a distribution company's financial standing regarding the CCRBT balance, just log into SETE, load the data for the distribution company of interest, and click on Financials, open the 2017 accordion, and then click on Other Financial Components.

¹Per paragraph 19 of Sub-module 6.8 of the Tariff Regulation Procedures (PRORET).