March 6, 2020
Projection of Transmission's Permitted Annual Revenue
Basic-grid usage tariffs should see significant drops in 2023 and 2025, according to SETE. These negative variations stem mainly from two moves: the end of payments for Existing Systems Basic Grid (RBSE) transmission assets, and generation-tariff stabilization.
Since some SETE users have reached out to TR Soluções' team for clarification on these tariff variations, this TR Bulletin aims to clarify the factors behind the effects seen in TR Soluções' 2023 and 2025 projections, as well as flag the possibility that the National Electric Energy Agency (ANEEL) may refine the methodology addressing tariff stabilization applied to the generation segment. Any such change would result in higher tariffs than those currently projected in SETE.
This TR Bulletin also covers the assumptions used in SETE regarding the treatment of the revocation of the injunction issued in favor of the associations Abrace, Abividro, and Abrafe, under MME Ordinance No. 120/2016. That injunction led ANEEL to extend the court decision's application to all transmission-system users, reducing by about BRL 1 billion per year (over a total of eight years) the amount to be recognized in the Permitted Annual Revenue (RAP) and, consequently, in the demand tariffs tied to the Fio A component.
Drops in Transmission Tariffs: RBSE Assets' Economic and Financial Portions
When Provisional Measure No. 579/2012 was published, all transmission agents whose concessions were due to expire starting in 2015 opted into the early concession-renewal process. However, nine transmission companies holding RBSE assets weren't compensated, nor were they remunerated for those assets.
This situation dragged on between January 2013 and June 2017, when, following the direction set by MME Ordinance No. 120/2016, ANEEL began recognizing remuneration for these assets in the RAP. Two portions tied to the RBSE's RAP were defined, one economic and one financial.
The economic portion corresponds to remuneration for RBSE assets, which returned to the RAP and began being remunerated the same way as other basic-grid assets, through the end of their useful life. Under the methodology ANEEL adopted for the 2018/2019 cycle, an annual series was set under which RBSE assets will continue being remunerated through the 2022/2023 cycle. This is one of the reasons behind the reduction in basic-grid tariffs projected for 2023: in the 2023/2024 cycle, the end of paying the economic portion should represent a reduction of about BRL 4.2 billion relative to the previous period.
The financial portion corresponds to the liability arising from the fact that the nine RBSE agents weren't compensated or remunerated between January 2013 and June 2017. It was established that this liability should be paid over eight years, starting in the 2017/2018 cycle and ending in the 2024/2025 cycle. So, for the 2025/2026 cycle, there will be practically no expense associated with RBSE assets. The expected reduction from one tariff cycle to the next is about BRL 8.5 billion.
Effects of the Generator Tariff-Stabilization Rule
In theory, the RAP is split equally between the generation and consumption segments. In practice, it ends up being split in different proportions between the two segments due to the tariff-stabilization rule1 generators are subject to. There are basically two types of stabilization. Ten-cycle stabilization applies to new generation facilities, including self-production and independent power production. And stabilization for the entire duration of the generation grant applies to generators participating in regulated auctions. In both cases, tariffs are adjusted each cycle by the Transmission Update Index (IAT), which corresponds to the composition of the indexes (IGP-M or IPCA) for transmission contracts tied to the basic grid, weighted by each contract's revenue.
Roughly speaking, once the RAP is set for a given cycle, revenue from the generation segment is calculated by multiplying each generation agent's contracted MUST2 by their stabilized tariff. The difference between the total RAP and the RAP paid by the generation segment is exactly the RAP the consumption segment will recover.
TR Soluções' projections indicate that the portion of the RAP to be borne by the consumption segment is 37% in 2023 and 2024, and below 7% in 2025. This pattern in TR's projections suggests that the generator tariff-stabilization rule may not have been well calibrated by ANEEL.
Combining this apparent distortion in the generation tariff-stabilization rule with the end of RBSE-related payments results in a significant reduction in transmission tariffs projected starting in 2023.
In an informal conversation with ANEEL, in which this possible distortion was reported, especially for the 2025/2026 cycle, an agency specialist commented that the regulator hadn't yet noticed this possible effect from tariff stabilization, but that it could indeed occur.
In that same conversation with ANEEL, TR was informed that, even though it's not on its two-year regulatory agenda, the Tariff Management Superintendence (SGT) is expected to revisit the generator tariff-stabilization methodology, since some agents have been using the current rules applied to generators participating in regulated auctions to get their tariffs stabilized for the entire grant period. And that, at the same time the stabilization rules are revisited, ANEEL would take the opportunity to analyze the possible distortion TR Soluções identified, which will likely only happen in the second half of 2020, according to ANEEL.
For now, TR is keeping its current projection, which points to a significant reduction in transmission tariffs, especially in 2025, as indicated above. However, TR warns SETE users about the possibility that ANEEL might revise the methodology for calculating stabilized tariffs, which could result in a regulatory improvement at some point in the future, as well as a change in the portion of the RAP charged to the consumption segment. So it's important for SETE users to keep this possibility in mind when building their projection scenarios.
Revocation of the Associations' Injunction and Treatment Starting With the 2020/2021 Cycle
MME Ordinance No. 120/2016, in setting the rules to remunerate/compensate RBSE transmission agents due to the early concession renewal, established in Article 1, §3, that "The capital cost not incorporated from the concession extensions through the tariff proceeding, established in §1, must be updated and remunerated at the real cost of equity capital for the transmission segment, as defined by ANEEL under the Periodic Tariff Review methodologies for Existing Concessionaires' Revenue."
The associations Abrace, Abividro, and Abrafe secured a court injunction ordering ANEEL to exclude the so-called "remuneration" portion from the calculation, applying only the "update" portion.
Unable to apply that decision only to the parties that filed the petition, ANEEL's board decided to extend the injunction's effects to all transmission-system users. The regulator's decision resulted in an annual RAP reduction of about BRL 1 billion, over the eight years of paying the financial portion mentioned earlier.
With the associations' injunction revoked, ANEEL should apply, starting with the 2020/2021 cycle, the full requirement set out in MME Ordinance No. 120/2016. By TR Soluções' calculations, the total liability disregarded by ANEEL due to the court decision is BRL 9.2 billion, at June 2020 values.
In the same conversation in which TR Soluções discussed the transmission tariff-stabilization methodology for generators with ANEEL, the agency signaled that, given the injunction's revocation, the liability in question would be spread out through the end of the period during which the financial portion is paid (2024/2025 cycle). In other words, ANEEL's intention would be to spread the BRL 9.2 billion across an annual series lasting five years, starting with the 2020/2021 cycle.
Given this signal from ANEEL, even if unofficial, TR Soluções began factoring, in SETE version 12.90, released to users on March 6, 2020, that this liability will start being paid in the 2020/2021 cycle and will last five years. TR Soluções will keep monitoring the topic in order to refine SETE's projections should any development leading to a tariff change materialize.
1There are two main normative resolutions addressing transmission tariff stabilization applied to generators: REN 267/2017 and REN 599/2013.
2The Transmission System Usage Amount (MUST) refers to the capacity (demand) amount contracted by the generator (or the distribution company or consumer connected directly to the basic grid) with the transmission company, at each basic-grid busbar.