September 10, 2020

Provisional Measure 998/2020

Summary

Provisional Measure 998/2020 produces both transitory and permanent effects on energy tariffs, with different timelines. Analysis carried out by TR Soluções' team shows that the proposed changes tend to marginally worsen the Energy Development Account's (CDE) result in the short term. In the long term, however, ending the ability to grant new tariff benefits for consumption and generation from incentivized sources halts the growth of a significant share of the account's expenses. The article also covers changes related to loan repayments taken from the General Reversion Reserve (RGR) and the use of Research, Development, and Energy Efficiency Program (R&DEE) funds to cushion tariffs.

On September 1, 2020, Provisional Measure No. 998/2020 [1] was published, aiming, among other things, to amend legal provisions to soften the tariff repositioning expected over the next five years, especially for designated distribution companies whose concession contracts weren't extended by the MME, as well as those serving Isolated Systems.

This article highlights and analyzes the points in MP 998/2020 with the greatest potential impact on electricity tariffs for all consumers across the country. The calculations consider a set of distribution companies and permission holders, accounting for 98% of the market, tracked by TR Soluções' SETE Platform.

The changes proposed in the first and second articles of MP 998 to Law No. 9,991, of July 24, 2000, affect the Energy Development Account (CDE) both on the revenue and the expense side. This section covers revenue-related matters.

Research, Development, and Energy Efficiency Program - Regarding CDE revenue, a new flow of funds through 2025 was established, coming from the Research, Development, and Energy Efficiency Program (R&DEE). It should be clarified that, of the total annual amount, 75% goes to the Research and Development Program (R&D) and 25% to Energy Efficiency (EE).

Importantly, under Law No. 9,991/2000, the following percentages are actually applied by the distribution utilities and permission holders themselves:

• 40% (forty percent) of total R&D funds (Art. 4, II);
• 80% (eighty percent) of total EE funds (Art. 5, I, a);

Since paragraph 1 of MP 998/2020 caps the use of funds on projects at 70% of the total available, only 30% of the amounts managed by the distribution companies and permission holders can be converted, over five years, into CDE revenue.

Given these conditions, what will actually be transferred to the CDE as revenue through 2025 is 15% of total R&DEE funds, of which 9% (75%*40%*30%) will come from R&D funds and 6% (25%*80%*30%) from EE.

In 2019, the total R&DEE amount set in distribution companies' tariff repositioning was BRL 1.6 billion. This means MP 998/2020 establishes a new annual flow of funds to the CDE, over five years starting in 2021, of about BRL 238 million.

MP 998/2020 also establishes that R&DEE funds not committed to projects contracted by September 1, 2020, and those tied to projects rejected or whose execution hasn't been proven, will be directed to the CDE in favor of tariff moderation.

Estimates published in the press indicate these funds are on the order of BRL 4.6 billion [3], a figure that hasn't yet been formally established.

For analysis purposes, regardless of the actual amount, simulations run through SETE indicate that a BRL 1 billion increase in CDE revenue can produce an average effect of a 0.44 pp reduction in the application tariffs expected for 2021.

General Reversion Reserve - On the other hand, it's also important to note that revenue from amortizing General Reversion Reserve (RGR) loans and financing totaled about BRL 250 million in the CDE's 2020 budget, or 17% of the revenue explaining the RGR account's result.

So, ending the obligation for designated distribution companies whose concession contracts weren't extended by the MME to repay RGR loans reduces the RGR's result and, consequently, part of the CDE's revenue.

As for the account's expenses, the changes proposed in the third and seventh articles of MP 998 deserve attention, since they affect the tariff discount for incentivized-source projects and the Fuel Consumption Account (CCC).

Tariff Discount for Incentivized Sources - Halting the growth of discounts granted for consumption and generation from incentivized sources should only take effect starting in 2026. In the CDE's 2020 budget, expenses tied to these discounts increased by BRL 510 million compared to the previous year, totaling BRL 4.1 billion.

Figure 1 - Evolution of Tariff Discounts for Incentivized Sources

Source: TR Soluções, based on public ANEEL information

CCC - The Fuel Consumption Account (CCC) figure in the CDE's 2020 budget was BRL 7.5 billion. This expense was only not higher because part of the total cost of generating electricity to serve Isolated Systems is paid by consumers in those areas at the average cost of energy and capacity traded by distribution agents in the Regulated Contracting Environment (ACRméd), which corresponds to the average tariff paid by consumers connected to the National Interconnected System (SIN), under a methodology set by ANEEL. For calendar year 2020, this value was set at BRL 306.55/MWh [2].

Revenue from pricing consumed energy at the ACRméd value resulted in about BRL 2.8 billion in the CCC's 2020 budget. MP 998/2020 changes the formula for calculating the ACRméd. The new parameters considered reduce the ACRméd value by 10%, which implies an increase in CCC expenses, based on 2020 figures, of BRL 280 million (specific to Amazonas Distribuidora de Energia S.A., Boa Vista Energia S.A., Companhia de Eletricidade do Amapá, Centrais Elétricas de Rondônia S.A, and Companhia de Eletricidade do Acre).

Other Discounts - It's also worth noting there's another legal provision underway addressing expenses not covered by MP 998/2020, which has been helping reduce the CDE since 2019.

This is Decree No. 9,642/2018, which changed tariff discounts for the Water, Sewage, and Sanitation; Rural; Irrigator; and Cooperative modalities. Published on December 28, 2018, this decree added §4 to the decree regulating the CDE, stating: "starting January 1, 2019, in the respective ordinary tariff adjustment or review procedures, the discounts referred to in §2 will be reduced at a rate of twenty percent per year on the initial value, until the rate reaches zero."

Figure 2 - Evolution of Tariff Discounts After Decree No. 9,642/2018

Source: TR Soluções, based on public ANEEL information

Another change brought by MP 998/2020 establishes that the distribution companies Ceron and Eletroacre will now be subject to the CDE tariffs set for the N and NE submarkets. These two distribution companies are electrically connected to the SE-CO submarket and are therefore currently subject to the short-term prices and charges related to that submarket. This measure, which applies only to how the charge is billed, benefits consumers of the two distribution companies by cutting their CDE tariffs by almost three times. But the impact on other consumers in the S and SE-CO submarkets is minimal.

It's possible to identify both transitory and permanent impacts on tariff projections resulting from MP 998/2020, with short- and long-term effects.

Regarding the CDE budget, the proposed changes tend to marginally worsen the account's result in the short term. In the long term, however, ending the ability to grant new tariff benefits for consumption and generation from incentivized sources halts the growth of a significant share of the account's expenses.

The tariffs of designated distribution companies whose concession contracts weren't extended by the MME are, without a doubt, the most affected, benefiting from the elimination of the need to repay RGR loans; they're also granted a temporary reduction of about 10% in the cost of generating electricity to serve Isolated Systems, on top of having their annual CDE quotas calculated based on geographic location rather than electric-system interconnection (specific to Ceron and Eletroacre).

Meanwhile, other distribution companies' and permission holders' tariffs may benefit temporarily in the short term from the use of R&DEE funds not committed to contracted projects.

---

[1] Source: http://www.planalto.gov.br/ccivil_03/_Ato2019-2022/2020/Mpv/mpv998.htm

[2] Source: Technical Note No. 177/2019-SGT/ANEEL from Proceeding: 48500.004352/2019-48

[3] Source: MP should 'reduce' the covid account by 48% of its value, Canalenergia, September 2, 2020