Overview

The Brazilian constitution provides that the generation, transmission and distribution of electricity may be undertaken directly by the Brazilian government or indirectly through the granting of concessions, permissions or authorizations.

The new electric industry model law

On March 15, 2004, the Brazilian government enacted the New Electric Industry Model Law in an effort to further restructure the power industry with the ultimate goal of providing incentives for private and public agents to build and expand energy generating capacity with secure provision of energy supplies in Brazil at reasonable tariffs through public bidding processes for buying and selling electric energy. Starting in May 2004, the Brazilian government enacted a number of decrees to regulate the law, which is still subject to further regulation by ANEEL and the MME, as discussed below.

The main features of the New Electric Industry Model Law include:

• Creation of two parallel environments for energy trading and marketing:

1. one for the distribution companies, known as the Regulated Market (Ambiente de Contratação Regulada), or ACR; and
2. another market for free consumers and energy trading firms, independent producers, imported energy agents, exporters and other generating agents, in which purchase and sale of electric energy is transacted freely among participants, but at prices controlled by ANEEL.

• Restrictions for certain distributors’ activities to ensure they are aimed only at their chief business, in order to ensure more efficient and reliable services for their consumers.
• Prohibition of self-dealing, not allowing distributors to contract energy from related parties, in order to ensure reasonable tariffs for users.
• Fulfillment of contracts signed before the New Electric Industry Model Law in order to ensure stability for transactions made before its enactment.
• Not allowing distributors to exercise electric generating and transmitting activities or directly or indirectly have holdings in other companies.
• Excluding Eletrobras and its subsidiaries from the National Privatization Plan, a program introduced by the government in 1990 to promote the process of privatization of state enterprises.

Trading of electricity – environments for procurement

Regarding the marketing of energy, as described above, two environments were established to award contracts for the purchase and sale of energy: the Regulated Market (ACR), which involved agents of generation and distribution of electric energy and the Free Market (ACL), which involve agents for generation and trading, Importers and Exporters of Energy and free consumers.

The energy generated by projects for generation of low capacity near the point of consumption (such as co-generation plants and small hydroelectric plants), by plants qualified under the PROINFA, and by Itaipu, are not subject to the auction process for the supply of energy to the Regulated Market.

Regulated market (ambiente de contratação regulada ), or ACR

On the Regulated Market, distribution companies buy energy for captive consumers through public auctions regulated by ANEEL and operated by the Electric Energy Trading Chamber, or CCEE. Purchases of energy will be made through two types of contracts: (i) Contracts for Quantity of Energy, and (ii) Contracts for Availability of Energy.

Under a Contract for Quantity of Energy, the generator undertakes to provide a certain quantity of energy and assumes the risk of the supply of energy being affected by hydrological conditions or low water levels of reservoirs. Under a Contract for Availability of Energy, the generator undertakes to provide buyers with a specific volume of capacity. In this case, a generating company’s of revenue is guaranteed and any hydrological risks are allocated to distributor companies. However, any additional costs incurred by distributors will be passed on to consumers. Together, these contracts are described as Contracts for Electric Energy Trading on the Regulated Market (Contratos de Comercialização de Energia Elétrica no Ambiente Regulado), or CCEAR.

Free market (ambiente de contratação livre), or ACL

Under the Free Market, electricity is traded between generation concessionaires, independent energy producers, self-producers, trading agents, importers of energy and free consumers.

Potentially free consumers are those whose demand exceeds 3 MW at a voltage of 69 kV or more or at any voltage if supply started after July 7, 1995. In addition, consumers whose contracted demand is less than 500 kW may be served by suppliers other than their local distribution company, and may contract energy from alternative sources such as wind, biomass or SHPs.

Short-term market and contracting environments

The existence of two trading environments for contracting energy in Brazil does not eliminate the need for a place where the differences between physically produced / consumed energy and contracted energy are calculated and settled. This environment is the short-term “market”, which is administered by the CCEE. Participation in this market is compulsory for generators, distributors, importers, exporters, traders and free consumers in the SIN. Exceptions to this are generators of over 50 MW and distributors who sell less than 500 GWh per year, for whom participation is voluntary.

The CCEE’s market price is known as the price for settlement of differences or PLD. Due to the predominant share of hydroelectric generation in the Brazilian energy industry, mathematical models are used to calculate the PLD with the aim of finding the optimal solution for balancing the present benefit of this use of water against the future benefit of its storage, measured in terms of expected savings in fuel burned by thermoelectric plants. Based on hydrological conditions, demand for energy, fuel prices, the cost of a deficit, the entry of new projects and the availability of generating and transmitting equipment, the pricing model calculates the optimum level of dispatch (generation) for a certain period, thus defining hydroelectric generation and thermal generation for each sub-market. As a result of this process, for the period studied, CMOs are obtained for each load level and each sub-market.