Brazilian Electricity Market Reforms

Author:Mr Ted Rhodes
Profession:CMS Cameron McKenna LLP

On 11 September, Brazil's President Dilma Rousseff announced major tax cuts in the electricity sector in order to lower prices, keep inflation at bay and hopefully reinvigorate Brazil's stagnant economic performance. According to President Rousseff "The reduction of energy costs generates a systemic effect which will impact the economy as a whole... It will promote Brazil's international competitiveness, reduce inflation and stimulate investment... Businesses and consumers will benefit".

The measures will come into effect in 2013 and consist of the abolition of the general reserve reversion tax (reserva global de reversão or RGR) and the fuel consumption account tax (conta de consume de combustiveis or CCC), as well as a 25% reduction in the energy development tax (conta de desenvolvimento energetico or CDE). These taxes were enacted during previous governments to subsidise investments in the electricity sector and help fund improvements to Brazil's vast electricity grid. Although they were initially intended to be temporary measures, they have persisted and increased over the years, resulting in Brazil having one of the highest electricity costs in the world. According to a 2011 study based on data from the International Energy Agency, Brazil's electricity costs an average of US$180 per megawatt hour (MWh); the third most expensive of the countries studied.

President Rousseff's announcement also confirmed that the government will renew a number of electricity concessions due to expire between 2015 and 2017. Pursuant to Brazil's electricity regulatory regime, concessions are granted for periods up to 30 years and at the end of the concession period the government acquires ownership of all assets and infrastructure, it is then free to either auction them off in another concession round or operate them directly.  The Brazilian government has indicated that it is willing to extend existing concessions on revised terms, which may require additional investments in electricity infrastructure and efficiency measures.  Only if utility companies do not accept the revised concession terms on offer, will the government auction the relevant concessions to other bidders.

Energy Minister Edison Lobão announced that the relevant electricity concessions comprise 20 in generation (comprising 18% of the total), 9 in transmission (67% of the total) and 44 distribution contracts (35% of the total).  The company that will be most widely affected is Centrais...

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