January 24, 2022

Ten Years Since MP 579/12 Took Effect: Some Lessons Learned

Paulo Steele*

Exactly ten years ago, the effects of the controversial Provisional Measure No. 579/2012 (MP 579) took effect, which, aiming mainly to reduce residential tariffs through an Extraordinary Tariff Review (RTE), led, in the years that followed, to substantial sector-wide expenses, especially in the energy-transport system (Basic Grid). To this day, these additional costs still haven't been fully amortized.

On January 24, 2013, Brazilian consumers saw an average 18% reduction in their electricity bills, resulting from the RTE process that covered every distribution concessionaire in the National Interconnected System (SIN).

Figure 1 - Cumulative Average Tariff Variation in Brazil Over the Last Ten Years

Source: TR Soluções' SETE.

The effects of this reduction didn't last long. As Figure 1 shows, with just the ordinary tariff events carried out throughout 2013 and 2014, the entire reduction the RTE delivered was lost. In other words, the average tariff quickly returned to the level seen before MP 579 was applied.

In the years that followed, tariff jolts and water crises kept pressuring energy costs. Combined with MP 579's rebound effect, which put pressure on transmission (Basic Grid) and charges (CDE) expenses, these effects culminated in a tariff trajectory that, over the last ten years, has accumulated a 93% increase.

Compared to cumulative inflation over the same period, whether measured by the IGP-M or the IPCA, we can see that tariffs have their own evolution dynamic, sometimes tracking below inflation, sometimes above, and sometimes right alongside the indexes.

Figure 2 - Average Tariff Evolution in Brazil Since 2012

Source: TR Soluções' SETE.

Founded in 2011 — shortly before MP 579, then — TR Soluções has always focused on understanding each of these movements in order to anticipate their effects through the Energy Tariff Estimation Service (SETE).

Figure 3 - Evolution of Sector Costs Over the Last Decade

Source: TR Soluções' SETE.

Looking at power-sector data from the last ten years, especially in the energy-distribution segment, it's clear that the regulatory framework has been built, over time, in a way that eases abrupt tariff swings. In this context, financial tariff components act as true tariff shock absorbers.

The fact is everyone wants competitive tariffs, but also predictability. For there to be predictability and efficient costs, abrupt movements need to be avoided. The power sector's complexity requires decisions to be as technical as possible, without political interference threatening the sector's balance. Otherwise, history teaches us that sooner or later the bill comes due, and tariff instability can quickly take hold in the sector and wipe out any momentary gains.

* Paulo Steele is a founding partner of TR Soluções.

Note: The chart data in this document is available for download by clicking the icon