Getting the Deal Through - Electricity Regulation 2010 - Brazil by Araujo e Policastro Advogados

Electricity Regulation in 29 jurisdictions worldwide Contributing editor: Earle H O’Donnell

2010 Published by getting the deal through in association with: Anzola Robles & Associates Araújo e Policastro Advogados Arthur Cox Boden Law Office Cavelier Abogados Coeler Legal Consulting EOOD d’Urso Gatti e Associati Dundas & Wilson LLP Erdinast, Ben Nathan & Co, Advocates Faludi Wolf Theiss Attorneys-at-Law Garrigues Portugal SL Gorrissen Federspiel Headrick Rizik Alvarez & Fernández Kelemenis & Co King & Spalding LLP Kocián Šolc Balaštík Larraín Rozas Lackington Rencoret & Urzúa Lehman, Lee & Xu López Velarde, Heftye y Soria Maćešić & Partners Nestor Nestor Diculescu Kingston Petersen Osborne Clarke Pillsbury Winthrop Shaw Pittman LLP Schönherr Rechtsanwälte SimmonsCooper Partners Smaliukas, Juodka, Beniušis & Partners Wierciński Kwieciński Baehr Spk WMCZ Lawyers-Mediators Yukov, Khrenov and Partners

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Electricity Regulation 2010 Contributing editor Earle H O’Donnell White & Case LLP Business development manager Joseph Samuel Marketing managers Alan Lee Dan Brennan George Ingledew Edward Perugia Robyn Hetherington Dan White Tamzin Mahmoud Ellie Notley Subscriptions manager Nadine Radcliffe Subscriptions@ GettingTheDealThrough.com Assistant editor Adam Myers Editorial assistant Nick Drummond-Roe Senior production editor Jonathan Cowie Chief subeditor Jonathan Allen Production editor Joanne Morley Senior subeditor Kathryn Smuland Subeditors Laura Zúñiga Ariana Frampton Charlotte Stretch Editor-in-chief Callum Campbell Publisher Richard Davey Electricity Regulation 2010 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 © Law Business Research Ltd 2009 No photocopying: copyright licences do not apply. ISSN 1479-2310 The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of October 2009, be advised that this is a developing area. Printed and distributed by Encompass Print Solutions. Tel: 0870 897 3239

Argentina Martin Lythgoe King & Spalding LLP

Austria Christian Schmelz and Bernd Rajal Schönherr Rechtsanwälte

Brazil M aria Aparecida Seabra Fagundes and Rafaella Ferraz Araújo e Policastro Advogados

Bulgaria Shana Kaloyanova and Frank Schmitz Coeler Legal Consulting EOOD

Canada Chad Eggerman WMCZ Lawyers-Mediators

Chile José Manuel Larraín Larraín Rozas Lackington Rencoret & Urzúa

China Edward E Lehman and Aldo Settimio Boni de Nobili Lehman, Lee & Xu

Colombia Gabriela Mancero Cavelier Abogados

Croatia Miroljub Maćešić Maćešić & Partners

Czech Republic Václav Rovenský and Ján Béreš Kocián Šolc Balaštík

Denmark Jan-Erik Svensson and Anne Kirkegaard Gorrissen Federspiel

arisol Vicens Bello and Carolina Silié Dominican Republic M Headrick Rizik Alvarez & Fernández

Germany Thomas Funke Osborne Clarke

Greece Yannis Kelemenis Kelemenis & Co

Hungary László Kenyeres Faludi Wolf Theiss Attorneys-at-Law

Ireland Alex McLean, Patrick McGovern and Geraldine Kearney Arthur Cox

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Israel Uri Noy and Yehudit Libin Hirsch Erdinast, Ben Nathan & Co, Advocates

110

Italy Riccardo de Vergottini d’Urso Gatti e Associati

116

Lithuania Inga Martinkutė Smaliukas, Juodka, Beniušis & Partners

122

Mexico Rogelio López-Velarde and Amanda Valdez López Velarde, Heftye y Soria

128

Nigeria Babatunde Irukera and Ikem Isiekwena SimmonsCooper Partners

135

Panama A lbalira Montufar, Erika Villarreal and Nadia Halman Anzola Robles & Associates

143

Poland J erzy Baehr, Rafał Przystan ´ ski and Jakub Pokrzywniak Wierci´nski Kwieci´nski Baehr Spk

149

Portugal João Rosado Correia and Sara Castelo Branco Garrigues Portugal SL

154

Romania G abriela Cacerea and Bianca Pop Nestor Nestor Diculescu Kingston Petersen

160

Russia Alexander Khrenov and Andrey Lebedev Yukov, Khrenov and Partners

168

Turkey Deg˘er Boden Akalın Boden Law Office

174

avid McGowan, Peter Willis and Louise Macleod Dundas & Wilson LLP 181 United Kingdom D ichael S Hindus, Robert A James, Joseph H Fagan and Becky M Bruner United States M Pillsbury Winthrop Shaw Pittman LLP

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Brazil Maria Aparecida Seabra Fagundes and Rafaella Ferraz Araújo e Policastro Advogados

Policy and law What is the government policy and legislative framework for the electricity sector?

Two types of system can be found in the structure of the Brazilian electricity sector: the National Interconnected System (SIN), linking the south, south-east, centre-west, north-east and part of the northern regions, providing service to 98 per cent of the energy market; and the ‘isolated systems’, based mainly on thermoelectric generation. The electricity sector has undergone two institutional reforms: one in the 1990s and one in 2003, which aimed to modify the rules applying to SIN and resulted in its current form. The first adjustment in the sector started after the enactment of Law No. 8,987 of 1995, which established the system for the concessions and permissions for rendering public services (the Concessions’ General Act), with the enactment of Law No. 9,074 of 1995, which set forth specific rules for the concession of electricity public services. This law: • established the granting, terms of duration and their extension of concessions and permissions, as well as cases concerning concession of authorisations; • introduced the independent power producer; • released the great power consumers from the commercial monopoly of distribution concessionaires, leaving at their discretion the choice of a supplier; and • set forth the free access principle for the transmission and distribution systems. This law is regulated by Decree No. 1,717 of 1995, which established the procedures for extending the concessions, and by Decree No. 2,003 of 1996, governing the independent producers’ and self-producers’ system. Next, Law No. 9,427 of 1996 created the National Electric Energy Agency (ANEEL), aiming to regulate and supervise the production, transmission, distribution and trading of electricity, regulated by Decree No. 2,335 of 1997. This law further assigned to the ANEEL the authority, inter alia, to run the public biddings for concessions and permissions, as well as to execute and manage the agreements for concession and permission of public services and to issue authorisations, acting as the granting power. Law No. 9,478 of 1997 created the National Committee on Energy Policy (CNPE), chaired by the Minister of Mining and Energy, with the duty of advising the President of the Republic on the national policies in this area. This first phase of reforms was finally established with the enactment in May 1998 of Law No. 9,648, which aimed to cover competition in the electricity sector. Among many other provisions, it sets forth rules for: • the trading, import and export of power; • the division, into separate agreements, of the purchase and sale of energy, and the free access to the transmission and distribution systems;

• the creation of the Electric System National Operator (ONS), a legal entity organised under the provisions of private law, in charge of the coordination and operational control of the facilities for the generation and transmission of interconnected electric systems in the country; and • the free negotiation of energy, within the scope of the Wholesale Market of Electricity (MAE), to be created by a Market Agreement. In force since 24 July 2000, Law No. 9991 addresses the realisation of investment in research and development and energy efficiency regarding concessionaires, permit-holders and authorised companies in the electric energy sector. ANEEL establishes the guidelines that regulate and elaborate research and development projects. Law No. 9991/2000 instituted the mandatory application of at least 1 per cent of the annual net operational revenue of companies in the Brazilian electric sector to research and development and energy-efficiency projects. The second reform redefined the sector’s institutional model, mainly concerning the energy trade, by setting forth as chief guidelines the need for the system’s expansion plus the tariff’s low cost, but keeping the competition concept in the power generation. Another issue that deserves mentioning is the resuming of the sector’s planning. The new institutional framework was established in Provisional Measures No. 144 and 145 of 2003, which later became Laws No. 10,848 and 10,847, respectively, of 2004. The new model kept ANEEL as the institution in charge of the activities for mediation, regulation and inspection of the sector, but assigned to the Ministry of Mining and Energy the attributions of granting power. The ONS continued to be the entity in charge of the control and coordination of the operation of the power generation and transmission of the interconnected system, and it underwent changes in its governance structure. Law No. 10,848 introduced relevant changes in the energy trade rules, defining the following basic principles: • auctioned sales of energy, separated in new and existing power generation, on the lowest tariff basis; • the granting of concession or authorisation to the auction’s winning bidder, for the sale of the energy produced by the new power generation undertaking; • the coexistence of two environments for energy agreements: a regulated one, for the protection of the dependent customer, and a free one, for encouraging free consumers; • the introduction of the multilateral contracting arrangement, in which each power generator contracts energy with all the distributors; • the prohibition imposed to distributors, to perform the activities of power generation and transmission; • the extinguishment of self-dealing among affiliates; and • the obligation to contract 100 per cent of the consumer market. Getting the Deal Through – Electricity Regulation 2010

Araújo e Policastro Advogados The same law created the Chamber of Electric Energy Trading (CCEE), in substitution for the MAE, with the power to manage the agreements for the purchase and sale of energy in the regulated contracting environment (ACR) and the ascertainment and settlement of contractual differences in the free contracting environment (ACL). Said law further authorised the institution of the Committee on the Monitoring of the Electricity Sector (CMSE), in the scope of the government, with the attribution to follow up the supply conditions of the electricity market and the advising of preventive actions for guaranteeing this supply. Pursuant to Law No. 10.847, the Energy Research Company (EPE) was created, a public company, linked to the Ministry of Mining and Energy, in charge of preparing the studies for the integrated planning of energy resources and the expansion plans of the electricity sector, as well as the execution of studies of the energy potential and feasibility for new power plants, including the holding of a previous license for hydroelectric uses. These laws were regulated in 2004, by five Decrees: • No. 5,081 set forth amendments to the ONS governance; • No. 5,163 regulated the energy trade within the ACR and ACL and the short-term market; • No. 5,175 regulated the organisation of the CMSE; • No. 5,177 governed the organisation, attributions and operation of the CCEE; and • No. 5.184 governed the creation and organisation of the EPE. Also regarding the SIN, more recently, on 16 January 2008, Decree No. 6,353, published by the government, regulated, among other things, the contracting of reserve energy first mentioned by Law No. 10,848, which aims to ensure the energy supply in the ‘interconnected system’. The ‘isolated systems’ must comply with provisions in Law No. 5,899 of 1973 and 8,631 of 1993, with some rules of the above-mentioned statutes regarding the SIN, and with several specific ANEEL Resolutions. Planning and following up the systems’ operation in the North Region are coordinated by the North Region’s Operational Technical Group (GTON), created by Ordinance MINFRA No. 895 of 1990. Other than that, it is also important to point out the publication of the Provisional Measure No. 466 of 29 July 2009. This aims to encourage the competitiveness of power suppliers in the ‘isolated systems’, establish the provisions for the interconnection of part of an ‘isolated system’ to the SIN and determine quality and safety standards similar to those set forth in the SIN. It also redefines the distribution criteria of the CCC – the Fossil Fuel Compensation Account, created by Law No. 5,899 of 1973 – which is a fee paid by consumers of power distribution companies that operate in the ACR. The governmental policy for the sector has further emphasised the commitment to environment conservation and sustainable development, and the interaction between the Ministry of Mining and Energy and the Ministry of the Environment. 2

Organisation of the market What is the organisational structure for the generation, transmission, distribution and sale of power?

The activities for the generation of power, a competitive area, may be performed by concessionaires of electric power (of public utility or of use of public property), independent power producers and selfproducers. In general, the concessionaires of public utility supply power to distributors, which in turn supply dependent customers, in the ACR. Nowadays, this first category is represented by power generating companies controlled by Centrais Elétricas Brasileiras SA (ELETROBRÁS), a company controlled by the federal union, or by some companies controlled by federation states. The independent producers may trade power in the ACR and in the ACL and act as a concessionaire of use of public property or as an authorised concessionaire, depending on the features of the plant to be executed. The self-producer, on the other hand, generates power for its own www.gettingthedealthrough.com

brazil consumption; however, it may trade its surplus power. The self-producer may also be granted a concession or an authorisation. It is usually a company from the electro-intensive industries, such as metallurgy, chemistry, cellulose pulp, paper, etc. Transmission activities, designed not to hold a competitive feature, are explored by transmission companies under the system of concession of public utility. However, the statute establishes that the transmission sections bearing a restricted interest to the power generation or distribution are also part of the relevant concession. The activities of electricity distribution are performed by concessionaires of electricity and holders of the distribution nets, and they are forbidden to perform any other activity alien to the purpose of the concession. These activities may also be performed if based on an authorisation, such as a rural power cooperative company restricted to supplying its members, or permission, such as a cooperative that supplies other customers. Energy trade may be regulated or free. In the first case, distributors buy, in the regulated environment (ACR), the required power to guarantee its market of captive consumers, and they execute with each electric generator company the Agreement for Energy Trade in the Regulated Environment (CCEAR). Free trade is conducted by energy purchase and sale transactions between power generators, traders, importers and free consumers. In regard to the sale of other electric products, they are the purpose of purchase and sale agreements freely negotiated under the rules of private law.

Regulation of electricity utilities – power generation 3

Authorisation to construct and operate generation facilities What authorisations are required to construct and operate generation facilities?

The procedures to construct and operate large hydroelectric power plants are the most complex. Broadly speaking, feasibility studies should be registered with ANEEL before the power sale auction, and shall run parallel to the conduct of environmental impact assessments and environmental impact reports, to be approved by the proper environmental agency, which shall also grant the aforementioned environmental licence. In this phase, the statement of availability of water shall be obtained from the National Water Agency or from the proper state agencies that manage the water resources. The Energy Research Company shall be in charge of getting the aforementioned licence and the statement above, if it selects undertakings for an auction. After the auction, the concession shall be granted by a presidential decree, and the agreement for the concession of public utility or use of public property shall be executed with the granting power, and duly registered and filed with the ANEEL. In the declaration of public interest, the agreement may be applied for with the ANEEL, pursuant to Law No. 9,074 of 1995, and ANEEL Resolution No. 279 of 2007, for the purpose of condemnation or water rights. Later, the installation licence and operation licence should be obtained from the environmental agencies; the former before construction works begin and the latter after their conclusion. These procedures will be simpler if the hydroelectric undertakings are smaller, such as the small hydroelectric power plants (PCHs), which are regulated by ANEEL Resolution No. 395 of 1998, or if it is about thermoelectric power plants, as defined in ANEEL Resolution No. 112 of 18 May 1999. 4

Interconnection policies What are the policies with respect to interconnection of generation to the transmission grid?

Pursuant to the laws, the transmission facilities are divided into three types: (i) those from the basic grid of the interconnected system, (ii) those within the distribution concessionaire’s own scope

brazil and (iii) those bearing exclusive interest to the power generation plants. Upon payment of a toll, the full access to the transmission and distribution systems is guaranteed to power generators, pursuant to provisions in Law No. 9,074/95 and several ANEEL Resolutions regulating the matter. 5

Alternative energy sources Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?

The enactment of Law No. 10,438 of 2002 led to the development of a policy fostering alternative energy sources and also to cogeneration, which formulated several strategies – such as the reduction of the tariffs for the use of the transmission and distribution system, or the shortening of the grace period for consumers with a certain demand for power to choose to buy it from undertakings identified as small hydroelectric power plants, and also from those producing energy from wind, solar, and biomass sources. The most important initiative in this area is the Programme for Fostering Alternative Sources of Electricity (PROINFA), whereby ELETROBRÁS undertakes to purchase energy from undertakings based on wind, small hydroelectric power plants and biomass, in the interconnected system, and its value is divided among the final consumers supplied through the interconnected system, pursuant to the conditions set forth in law and its regulation. The National Bank for Economic and Social Development has opened a credit line for investments in PROINFA projects. The same law created the Energy Development Account, the funds of which may be used for the payment of the difference between the ‘economic value corresponding to the specific technology of each source’ and the ‘value corresponding to the generation of competitive energy’ from plants that do not take part in PROINFA. On the other hand, for the isolated systems, Law No. 9,648 of 1998 established incentives to use renewable alternative energy sources which substitute the oil-based thermoelectric generation, and, in this case it is possible to use the benefits from the calculation of apportionment of the CCC. Furthermore, pursuant to Law No. 11,097 of 2005, which introduced biodiesel into the Brazilian energy matrix, the minimum percentage required for the addition of biodiesel to diesel oil sold in the country was set at 5 per cent, this percentage being achieved eight years after the publication of such Law.

Araújo e Policastro Advogados participate in the auction. After the auction, the concession is granted by a presidential decree, followed by the execution of the concession agreement, which is registered and filed with the Agency. Next, the concessionaire should apply for ANEEL’s approval of the Basic Project for Transmission Facilities bound to the concession. The previous licence and the installation licence should be obtained in different stages from the environmental agencies, as well as the application for the Declaration of Public Interest with ANEEL for the purposes of condemnation or achievement of easement. For operating, an operating licence issued by the environmental agency is required, as well as the release certificate issued by the ONS. 8

Who is eligible to obtain transmission services and what requirements must be met to obtain access?

The regulation in force sets forth that the contracting of transmission services should be executed through transmission agreements, ie, transmission services agreements (CPSTs), agreements for transmission system use (CUSTs), connection agreements and supplementary services agreements. The CPSTs are executed between the ONS and the concessionaires of public utility for electricity transmission (the owners of the transmission assets). The CUSTs are executed among the ONS, the transmission concessionaires represented by the ONS and the users of the basic grid, and the latter may be: • agents holding concession or permission for providing public service of power distribution; • power generation agents directly connected to the basic grid or not connected to the basic grid but operating centrally, whether concessionaires or authorised companies; • consumers connected to the basic grid; and • importers and exporters of electricity directly connected to the basic grid. There are three types of connection agreements: agreements for transmission system connection (CCTs), agreements for facilities sharing (CCIs) and transmission system connection compliance agreements (CCT-TAs). They are executed between the transmission concessionaires and the connecting agents, and ONS is the interested third party to the agreements. 9

Government incentives

Climate change

Are there any government incentives (such as rate or tax benefits) to

What impact will government policy on climate change have on the types

encourage expansion of the transmission grid?

of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?

The Brazilian government has been encouraging the private sector to invest in the construction of hydroelectric power plants, which are notably less harmful to the environment once they are operational. However, during their implementation phase, large areas are necessarily flooded leading to deforestation, among other negative impacts, so there is considerable pressure to postpone or prevent such constructions. Power generation based on alternative energy sources, although encouraged, is not sufficient to meet electricity demand on a short-term basis, but if these hydroelectric power plants are not built, there will probably be an adverse impact on energy prices.

Regulation of electricity utilities – transmission 7

Eligibility to obtain transmission services

Authorisations to construct and operate transmission networks What authorisations are required to construct and operate transmission networks?

Before the auction for the concession of transmission lines, the environmental impact assessment and environmental impact reports shall be conducted and must be approved by the proper environmental agency, and should also be submitted to ANEEL for eligibility to

There are special credit lines available to entrepreneurs from the National Bank for Economic and Social Development. Also, Law No. 11,488, of 15 June 2007, created the Special Incentive Regimen for the Development of Infrastructure (Regime Especial de Incentivos para o Desenvolvimento da Infra-Estrutura (REIDI)), which is a general tax incentive to infrastructure projects, but which directly applies to the expansion of the transmission grids. More recently, on 28 May 2009 Provisional Measure No. 450 of 2008 became Law No. 11943, which authorises the federal government to participate in the Guarantee Fund for Electric Energy Enterprises (Fundo de Garantia a Empreendimentos de Energia Elétrica) or FGEE. The fund aims to provide a financial guarantee proportionate to the participation – direct or indirect – of federal state companies of the electric industry in specific purpose companies, created for the development of electric related projects of the Growth Acceleration Program (Programa de Aceleração do Crescimento) or PAC. 10 Rates and terms for transmission services Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?

Transmission companies are assured a ‘yearly allowed income’, regardless of the use of their facilities, which is available to the ONS Getting the Deal Through – Electricity Regulation 2010

Araújo e Policastro Advogados and users. This income results from the TUST, the tariff for the use of the transmission system which, in turn, arises out of the distribution among the transmission users of amounts such as the yearly allowed income of all the transmission companies; the services provided by the ONS; and the sector’s fees. 11 Entities responsible for assuring reliability Which entities are responsible for assuring reliability of the transmission grid and what are their powers and responsibilities?

The ONS is in charge of the activities of coordination and operation control of the power generation and transmission in the SIN, and it advises the granting power on the enlargement of the basic grid facilities and reinforcements in the existing systems.

brazil 16 Power sales tariffs Is there any tariff or other regulation regarding power sales?

As stated in questions 14 and 15, in sales to dependent consumer, the power distribution company sets regulated tariffs, while in power purchase and sale in the free environment, the prices are fixed at the bilateral agreements. The power traded in the short-term market shall be accounted and liquidated in the CCEE at the Price of Differences’ Settlement (PLD), pursuant to provision in Decree No. 5163/04 and provisions in the abovementioned Trading Convention. 17 Rates for wholesale of power Who determines the rates for sales of wholesale power and what standard does that entity apply?

Regulation of electricity utilities – distribution 12 Authorisation to construct and operate distribution networks What authorisations are required to construct and operate distribution networks?

Broadly speaking, the requirements are similar to those for the construction and operation of transmission lines.

18 Public service obligations

13 Access to the distribution grid Who is eligible to obtain access to the distribution grid and what requirements must be met to obtain access?

Pursuant to article 15(6) of Law No. 9,074/95, suppliers and free consumers have full access to the distribution grid, by paying the the tariff for the use of the distribution system (TUSD). The users of this grid execute with distribution concessionaires the agreements for the use of the distribution system (CUSD). 14 Rates and terms for distribution services Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?

The tariffs, according to Law No. 9,427/96, are based on ‘service for the price’ fixed in the concession agreement or in a specific document from ANEEL, which authorises the application of new values as a result of an adjustment or revision. Tariffs established by ANEEL refer to the supply to the dependent consumer and to the use of the distribution system. Tariffs for consumers vary according to the voltage of their connection to the grid, subject to the rules set forth in Decree No. 62,724 of 1968, as amended by Decree No. 5,287 of 2004.

Regulation of electricity utilities – sales of power 15 Approval to sell power What authorisations are required for the sale of power to customers and which authorities grant such approvals?

Only the power distribution companies may conduct sales of power to captive consumers. They are granted the concession of public service by the granting power and, therefore, the sales are subject to the regulated market rules and are supervised by ANEEL. On the other hand, the purchase and sale of power in the ACL is conducted among power generating concessionaires, permissionaires and authorised companies, traders, importers, exporters of electricity, which are agents that have been granted concession or authorisation from the granting power, and free consumers. The conditions for this purchase and sale may be freely convened in bilateral agreements, subject to the Trading Convention, established by ANEEL Rule No. 109 of 2004. These agreements are registered with the CCEE.

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Pursuant to Decree No. 5,163, ANEEL is responsible for establishing the rate for sales of wholesale power according to the criteria indicated in articles 56 and 57. Broadly speaking, the maximum rate is calculated taking into account the variable costs of operational thermoelectric power plants generation in the SIN, and the minimum rate is calculated taking into account the operational and maintenance costs of hydroelectric power plants.

To what extent are electricity utilities that sell power subject to public service obligations?

The electricity utilities that are subject to public service obligations regarding the power sales, are the power generators that comply with the condition of public concessionaires of electricity (see question 2) and the power distributors, as well as public service concessionaires (see question 15).

Regulatory authorities 19 Policy setting Which authorities determine regulatory policy with respect to the electricity sector?

The regulatory policy for the sector is established by the ANEEL. In regard to competition matters, it should act jointly with the Secretary of Economic Law (SDE) of the Ministry of Justice. 20 Scope of authority What is the scope of each regulator’s authority?

ANEEL has the authority to regulate the production, transmission, distribution and trade of electricity, pursuant to the Federal Government policies and guidelines. These policies are advised to the President of the Republic by the CNPE and are given effect by the Ministry of Mining and Energy. The SDE has the authority to oversee the compliance with Law No. 8,884, of 1994, by monitoring and following up the market practices aiming to prevent and curb infractions against the economic order. 21 Establishment of regulators How is each regulator established and to what extent is it considered to be independent of the regulated business and of governmental officials?

ANEEL was established by Law No. 9,427 of 1996, as an autonomous government entity linked to the Ministry of Mining and Energy. This law sets forth the rules for the Agency’s attributions and powers as well as provisions that aim to preserve its independence, under a triple autonomy. The management autonomy would result from the execution of a management agreement between the executive board and the government, and it would be subject only to the control of its purposes. The financial autonomy would be assured by the collection of a supervisor’s fee. The management autonomy would come in the

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form of appointment and removal of its head managers, the former within the power of the president, subject to the senate’s approval; the latter would necessarily require just cause. The SDE is part of the Ministry of Justice and therefore of the government.

• restrain, disguise or otherwise harm free competition and free enterprise; • control the relevant market of goods and services; • arbitrarily increase revenues; and • abusively exert a ruling position.

22 Challenge and appeal of decisions

Some of these practices are explained in article 21 of said law, for example: • setting, in a settlement with the competitor, arbitrary prices and conditions for products and services; • obtaining or engaging in the approval of standard or concocted commercial practice among competitors; • dividing up the markets of services and goods, or the raw materials’ and middle products’ supply sources; and • boycotting the entrance of new companies in the market.

To what extent can decisions of the regulator be challenged or appealed, and to whom? What are the grounds and procedures for appeal?

ANEEL’s relationship with the sector’s agents is subject to the due process of law, as established in the Federal Constitution. Pursuant to ANEEL Resolution No. 273 of 2007, which deals, inter alia, with the steps of proceedings in the Agency, the procedures regarding them shall comply, other than with the specific rules set forth therein, with the general criteria of Law No. 9,784 of 1999, which rules the administrative proceeding in the scope of the Federal Public Administration. The decision rendered by the Agency is subject to a motion for reconsideration to the authority that rendered the judgment, and appeal, and the executive board is the highest jurisdiction for appeal in the administrative area. If the matter deals with the economic order, the highest administrative jurisdiction is the Administrative Council for Economic Defence (CADE). Decisions rendered by ANEEL and CADE are subject to appeal to the judiciary.

Acquisition and merger control – competition 23 Responsible bodies Which bodies have the authority to approve or block mergers or other changes in control over businesses in the sector or acquisition of utility assets?

The authority to decide on these practices is vested in ANEEL, always acting jointly with SDE, according to item VIII and sole paragraph of article 3 of Law No. 9,427 of 1996. 24 Review of transfers of control What criteria and procedures apply with respect to the review of mergers, acquisitions and other transfers of control? How long does it typically take to obtain a decision approving or blocking the transaction?

27 Preclusion and remedy of anti-competitive practices What authority does the regulator (or regulators) have to preclude or remedy anti-competitive or manipulative practices?

CADE, besides imposing the penalties provided for in Law No. 8,884/94, may rule the cessation of said practices and set deadlines for carrying out measures such as divestment, transfer of control, sales of assets, partial cessation of the activity and any other measure to remedy the harmful effects. Moreover, it may take other measures, such as the publication of the judgment abstract in a newspaper, at the offender’s expense; the prohibition to make agreements with government financial institutions and with the Public Administration; and enrolment with the National Record for Consumer Defence. There is further possibility of the imposition of preventive measures by the SDE for the cessation of the practice in any stage of the proceeding in order to avoid the accomplishment of an irreversible damage. Finally, the decision taken by CADE is an extrajudicial debt instrument. This foreclosure proceeding will have precedence over all other proceedings, except habeas corpus and injunctions.

International 28 Acquisitions by foreign companies Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?

Since ANEEL and CADE share the authority in dealing with anticompetition practices, a concrete case would require a decision on which procedures would be applicable to it: ANEEL’s or CADE’s or even both, CADE’s procedural rules being established in Law No. 8,884/94. One cannot be precise on how long it takes to obtain a decision approving or disapproving the transaction, but ANEEL Resolution No. 273/07 establishes that, once the proceeding has been documented, the Agency as a rule shall have the term of 90 days to decide on petitions and motions. On the other hand, Law No. 8,884/94 sets the limit at 60 days for CADE to make statements on practices having competition concerns, provided that the proceeding has been duly documented.

For the granting of a concession of public services or the use of public property, it is required the organisation of a company under the Brazilian statutes, having principal place of business and management in the country. The invitations to bid for concession allow that foreign companies may participate severally in auctions, provided that if they win the bid they will organise a corporation (a special purpose company) and will have a legal representative in Brazil. In the stage of eligibility for the auction, these companies may submit organisation documents equivalent to those required from the Brazilian companies, duly certified by the Brazilian consular authorities and translated by a sworn translator.

25 Prevention and prosecution of anti-competitive practices

29 Cross-border electricity supply

Which authorities have the power to prevent or prosecute anti-competitive or manipulative practices in the electricity sector?

The SDE is vested with this power by Law No. 8,884/94. 26 Determination of anti-competitive conduct What substantive standards are applied to determine whether conduct is anti-competitive or manipulative?

Law No. 8,884/94, article 20 describes in detail the practices that are considered violations of the economic order; they are any act that may:

What rules apply to cross-border electricity supply, especially interconnection issues?

In general, this matter is regulated by international treaties. The energy importers and exporters have anauthorisation from ANEEL to perform these activities, which encompass the execution of associated transmission systems under article 26, item III, of Law No. 9,427/96. Recently, Law No. 10,847/2004 included among EPE’s duties support and participation in the discussion aiming towards energy integration.

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Transactions between affiliates

31 Enforcement and sanctions Who enforces the restrictions on utilities dealing with affiliates and what

30 Restrictions What restrictions exist on transactions between electricity utilities and their affiliates?

Other than the general rules set forth in Law No. 6,404 of 1976 (the Corporation Act), ANEEL Resolution No. 22 of 1999 establishes the conditions for technology transfer, technical assistance, and the provision of services between agents of the electricity sector and affiliates, and it limits the annual disbursements corresponding to such settlements to percentages over the net operating income. It should be further noted that Law No. 9,074 of 1995, as amended by Law No. 10,848 of 2004, prohibits power generation companies working within the SIN from being affiliated or the parent companies of those performing distribution activities.

are the sanctions for non-compliance?

In the scope of corporate law, the enforcement agency for publicly held companies is the Brazilian Securities and Exchange Commission (CVM). In the scope of electricity law, ANEEL is the enforcement agency. ANEEL Resolution No. 63, of 12 May 2004, lists the penalties applicable in the event of breach of rules governing the relationship among parent company, controlled company and affiliates. These penalties range from fines calculated over the income or the estimated amount of the yielded energy, to the intervention or the declaration of forfeiture, and the right to full defence is guaranteed at all times.

Araújo e Policastro Advogados Maria Aparecida Seabra Fagundes Rafaella Ferraz Marcel Hiratsuka

afagundes@araujopolicastro.com.br rferraz@araujopolicastro.com.br mhiratsuka@araujopolicastro.com.br

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electricity regulation 2010

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