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The “Old Energy” Transition Phase - MME 117/2013

This April, as a result of Law 1.2783/2013 (MP579/2012), the Ministry of Mines and Energy (MME) issued Ordinance 117/2013, regulating the provision of electricity generation through hydroelectric plants which have not had their concessions extended, in order to ensure continuity of service.

This is the solution which the Federal Government has found to the problem that has ensued due to a number of generation concessionaires opting to return part of their assets, considering the new rules applicable to “old energy” concessions (i.e. those plants in operation before 1995), in particular with regard to the new remuneration system for the concession, which will no longer obey the forces of the free market (i.e. with prices set at energy auctions, following the rules of the new market model adopted in 2004) but will be established by the National Electrical Energy Agency (ANEEL), through fees calculated on each plant’s operational costs.

The new rules will apply to scenarios in which, upon expiry of the concession period, the incumbent concessionaire shall remain in as such until the new concessionaire takes over. In another scenario – whereby the previous concessionaire declines this undertaking – the Grantor will designate an agency or entity of the Federal Public Administration to remain in charge of the management of the asset until the proper bidding is held. During the transition phase, the party responsible for the provision of the service will have “autonomy” in the direction of the business, subject to sectoral legislation and the rules established in the designating act.

The new quota system applicable to the old energy will be implemented, with its division between the distributors designated by ANEEL, whilst the party responsible for the service will receive an annual generation revenue (RAG) also approved by ANEEL, subject to adjustments due to unavailability or generation performance. As mentioned, the RAG will be based upon the operational costs and efficiency parameters, a substantial change in the dynamic of the hydropower generators until the issue of MP579/2012, where the rules of free competition prevailed (after 2004 ) and the values ​​of MW / h were established as a result of energy auctions of plants already in operation or greenfield projects.

It should be noted that the party responsible for the service during the transition period will remain obliged to make the necessary investments to keep service delivery at an acceptable level, which may entail a revision of the parameters of the RAG as the “X Factor” used to encourage the concessionaires’ productivity gains. The Administrative Ruling also includes compensation for those responsible for service provision in the event that their investments are not amortized or depreciated when taken over by the new concessionaire following the bidding. In practice, almost all the rules applicable to the former holder of the concession remain applicable, i.e., a long list of obligations that apply to public service providers, including prior control of corporate transactions, compliance with all standards and sectoral accounting, performance of duties and regulatory charges, among others.

Also of particular note are the powers conferred to ANEEL in its supervisory function which, according to art. 11, §4, in addition to the recognized powers of inspection and access to the premises and documents of public service generation concessionaires, “could provide the party RESPONSIBLE FOR THE SERVICE PROVISION with the power to terminate any contract it has signed”. The provision of the service during the transition period is still of a precarious nature and may be terminated by the Grantor. The Administrative Ruling also provides for preference to be given in the hiring of Brazilian suppliers of materials and equipment connected with power plants.

Felsberg & Associados is available for further clarification on the matter.

The Felsberg team can assist you in the following areas:

  • Public procurement;
  • PPP (s);
  • Legal opinions;
  • Financial Law and Contract Law;
  • Structuring legal investments;
  • Negotiation of O&M (s), EPC (s);
  • Post-closing;
  • Environmental Law.

If you have any queries, please contact Felsberg’s infrastructure team.

This alert has an informative character and does not constitute legal or tax advice.

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