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Electricity Regulation

2012 Published by Getting The Deal Through in association with: Allen & Overy LLP Andreas Lionis & Associates Anzola Robles & Associates Araújo e Policastro Advogados Arthur Cox Barger Prekop sro Berkemeyer Attorneys & Counselors Boden Law Office CVCLAW Villaraza Cruz Marcelo & Angangco Dundas & Wilson LLP Erdinast, Ben Nathan & Co Advocates Gilbert + Tobin Gowling Lafleur Henderson LLP Khaitan & Co Kocián Šolc Balaštík Larraín, Rencoret, Lackington & Urzúa Abogados Lener Lo´pez Velarde, Heftye y Soria Mac´ es ˇic´ & Partners s Nestor Nestor Diculescu Kingston Petersen Osborne Clarke Schönherr Rechtsanwälte GmbH Siegler Law Office / Weil, Gotshal & Manges LLP SimmonsCooper Partners Staiger, Schwald & Partner Ltd Vietbid White & Case LLP

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Contributing editor: Earle H O’Donnell

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in 28 jurisdictions worldwide


contents ®

Electricity Regulation 2012 Contributing editor: Earle H O’Donnell White & Case LLP Business development managers Allan Lee George Ingledew Robyn Hetherington Dan White

Australia Catherine Dermody, Catherine Earles and Morelle Bull Gilbert + Tobin

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Austria Christian Schmelz and Bernd Rajal Schönherr Rechtsanwälte GmbH

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Brazil Maria Aparecida Seabra Fagundes, Rafaella Ferraz and Bernardo de Medeiros Araújo e Policastro Advogados

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Canada Paul Harricks and Neeta Sahadev Gowling Lafleur Henderson LLP

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Chile José Manuel Larraín Larraín Rencoret Lackington & Urzúa Abogados

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Marketing managers Ellie Notley Sarah Walsh Alice Hazard

Croatia Miroljub Mac´es ˇic´, Ivana Manovelo and Miran Mac´es ˇic´ Mac´es ˇsic´ & Partners

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Czech Republic Václav Rovenský and Ján Béreš Kocián Šolc Balaštík

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Marketing assistants William Bentley Sarah Savage

France Florence Ninane, Alexandre Ancel, Liliana Eskenazi and Charlotte Beauchataud Allen & Overy LLP 55 Germany Thomas Funke Osborne Clarke

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Greece Basil C Scouteris Andreas Lionis & Associates

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Hungary Eszter Zádori and Dániel Arányi Siegler Law Office / Weil, Gotshal & Manges LLP

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India Amitabh Sharma, Mukund Puranik and Rahul Arora Khaitan & Co

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Ireland Alex McLean, Patrick McGovern and Jennifer Burke Arthur Cox

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

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Mexico Rogelio Lo´pez-Velarde and Amanda Valdez Lo´pez Velarde, Heftye y Soria

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Nigeria Babatunde Irukera and Ikem Isiekwena SimmonsCooper Partners

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Panama Erika Villarreal and Nadia de Halman Anzola Robles & Associates

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Paraguay Luis A Breuer and Magali Rodríguez-Alcala Berkemeyer Attorneys & Counselors

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Philippines Patricia A O Bunye CVCLAW Villaraza Cruz Marcelo & Angangco

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Poland Jerzy Baehr and Jakub Pokrzywniak Wiercin´ski, Kwiecin´ski, Baehr Spk

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Romania Gabriela Cacerea and Bianca Pop Nestor Nestor Diculescu Kingston Petersen

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Slovakia Roman Prekop, Monika Šimorová and Peter Ikrényi Barger Prekop sro

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Spain Luis Castro Prieto, Aldara Martín Seara and Silvia San Felipe Menéndez Lener

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Publisher Richard Davey

Switzerland Marc Bernheim and Gaudenz Geiger Staiger, Schwald & Partner Ltd

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Turkey Deg ˘er Boden Akalın and Seda Gümüs¸ Boden Law Office

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Electricity Regulation 2012 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 2011 No photocopying: copyright licences do not apply. ISSN 1479-2310

United Kingdom Peter Willis, David McGowan and Louise Macleod Dundas & Wilson LLP

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United States Earle H O’Donnell and Caileen N Gamache White & Case LLP

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Vietnam Nguyen Van Anh and Nguyen Thanh Ha Vietbid

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Marketing manager – subscriptions Rachel Nurse subscriptions@ gettingthedealthrough.com Assistant editor Adam Myers Editorial assistant Lydia Gerges Senior production editor Jonathan Cowie Production editor Martin Forrest Chief subeditor Jonathan Allen Subeditors Caroline Rawson Sarah Morgan Davet Hyland Editor-in-chief Callum Campbell

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 2011, be advised that this is a developing area.

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Law Business Research


Araújo e Policastro Advogados

brazil

Brazil Maria Aparecida Seabra Fagundes, Rafaella Ferraz and Bernardo de Medeiros Araújo e Policastro Advogados

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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 the other 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 public services related to electricity. 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 major power consumers from the commercial monopoly of distribution concessionaires, leaving the choice of a supplier at their discretion; 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 selfproducers’ 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 operate 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; www.gettingthedealthrough.com

• t he 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 for Electricity (MAE), to be created by a Market Agreement. In force since 24 July 2000, Law No. 9,991 addresses the realisation of investment in research and development and energy efficiency regarding concessionaires, permit holders and authorised companies in the electricity sector. ANEEL establishes the guidelines that regulate and elaborate research and development projects. Law No. 9,991/2000 instituted the mandatory application of at least 1 per cent of the annual net operational revenue of companies in the Brazilian electricity sector to research and development and energyefficiency projects. The second reform redefined the institutional model for the sector, mainly focusing on the energy trade. It set out key guidelines, namely, the need for expansion and low-cost tariffs, while ensuring competition between power generation companies. Another notable development is the resumption of planning in the sector. 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 mediation, regulation and overview of the sector, but assigned the attributions of granting power to the Ministry of Mining and Energy. The ONS continued to be the entity in charge of control and coordination of the operation of 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 into 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 energy produced by the new power generation undertaking; • the coexistence of two environments for energy agreements: one regulated, for the protection of dependent customers 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 on distributors not to perform the activities of power generation and transmission; • the extinguishing of self-dealing among affiliates; and • the obligation to contract 100 per cent of the consumer market.

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brazil Araújo e Policastro Advogados The same law created the Chamber of Electric Energy Trading (CCEE), replacing 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). This law further authorised the institution of the Committee on the Monitoring of the Electricity Sector (CMSE), with the power to follow up the supply conditions of the electricity market and advise on preventive actions for guaranteeing this supply. Pursuant to Law No. 10,847, the Energy Research Company (EPE) was created, which is a public company linked to the Ministry of Mining and Energy and responsible for 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 licence 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, on 16 January 2008, Decree No. 6,353, published by the government, regulated 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 abovementioned 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, which later became Law No. 12,111 of 2009, regulated by Decree No. 7,246 of 2010. This aims to encourage the competitiveness of power suppliers in the ‘isolated systems’, establish the provisions for the inter-connection 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 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 powergenerating companies controlled by Centrais Elétricas Brasileiras SA (Eletrobras), a company controlled by the federal government, 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.

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A self-producer, on the other hand, generates power for its own consumption; however, it may trade its surplus power. A 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 services, which are considered competitive activities, are undertaken 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. Law No. 12,111, regulated by Decree No. 7,246 of 2010, created a specific type of transmission system, apart from the SIN, dedicated to international interconnections. Such transmission services shall be also granted under the system of concession of public utility. The activities of electricity distribution are performed by concessionaires of electricity and holders of the distribution works 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 trading may be regulated or free. In the first case, distributors buy, in the regulated environment (ACR), the required power to guarantee supply for its market of captive consumers and they execute the Agreement for Energy Trade in the Regulated Environment (CCEAR) with each electric generator company. Free trade is conducted by energy purchase and sale transactions between power generators, traders, importers and free consumers. With regard to the sale of other electric products, they are the object 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 run parallel to the conducting 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. 343 of 2008, or thermoelectric power plants, as defined in ANEEL Resolution No. 390 of 15 December 2009. Pursuant to Law No. 9,074 of 1995, Decree No. 2003 of 1996 and ANEEL Resolution No. 390 of 2009, a company or a consortium that is interested in producing and trading electric energy Getting the Deal Through – Electricity Regulation 2012


Araújo e Policastro Advogados originating from sources other than water – such as wind, coal and gas, but not from nuclear – have to request an authorisation to be an independent power producer (IPP) from ANEEL. The interested company must comply with certain requirements, such as evidence of tax compliance with regard to social security, FGTS and local, state and federal treasuries. Upon completion of the requirements, ANEEL first issues an order that allows the interested company to have access to consult the concessionaries and distributors of energy and the ONS, obtain the environmental licence and authorisations from other federal, state or local public authorities and initiate all measures regarding the construction or expansion of the power plant, at its own risk. It is important to highlight the two main differences between this process for thermoelectric power plants and the process for hydroelectric power plants as the National Water Agency has no participation in this process because the source of energy is no longer water and the entrepreneur is in charge of obtaining the environmental licences instead of the Energy Research Company. Following the issuance of the corresponding order and upon the accomplishment of other requirements ANEEL examines the availability of the fuel, when applicable, installed capacity to be granted by the plant and access to the transmission and distribution grids. ANEEL also verifies the history of the company and its economic group and the existence of any precedent on penalty application. Once the prerequisites are accomplished, ANEEL grants an authorisation and the corresponding IPP is then allowed to trade the energy produced at its own risk. 4

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

Pursuant to the laws, transmission facilities are divided into four types: those from the basic grid of the interconnected system, those within the distribution concessionaire’s own scope, those having exclusive interest to the power generation plants and those dedicated to international interconnections. Upon payment of a toll, 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 brought about several strategies, such as the reduction of tariffs for the use of the transmission and distribution system, 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 Eletrobras undertakes to purchase energy from undertakings based on wind, small hydroelectric power plants and biomass in the interconnected system and its value is then divided among the end-users 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. www.gettingthedealthrough.com

brazil For isolated systems, on the other hand, Law No. 9,648 of 1998 established incentives to use renewable alternative energy sources as a substitute for 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, with this percentage to be achieved within eight years of the publication of the mentioned Law. 6

Climate change What impact will government policy on climate change have on the types 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 effects, so there is considerable pressure to postpone or prevent such construction. 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. In December 2009, the Brazilian law on climate change was approved (Law No. 12,187) in accordance with the obligations assumed by the country in COP15. This law sets forth the National Policy for Climate Change, among other matters. Its article 11 sets forth that the Brazilian government shall establish sectoral plans for mitigation and adaption to climate change, aiming to consolidate low-carbon consumption in various fields of the economy, including electric power generation and distribution. 7

Government policy Does government policy encourage or discourage development of new nuclear power plants? How?

Brazil has two operating nuclear reactors (Angra 1 and Angra 2), providing about 4 per cent of all electricity consumption. There is a third reactor under construction (Angra 3), which will not be finished until 2015, according to plans of the Ministry of Mines and Energy. Although Brazil has the sixth largest uranium reserves in the world, the country has a very small nuclear power sector. This is about to change. In 2007, after several debates involving Brazil’s high dependence on hydro plants, the National Energy Plan 2030 (PNE 2030), issued by the Brazilian government, foresees the need for at least four more nuclear plants, besides Angra 3, but this number could reach up to eight additional power plants by 2030. According to the PNE 2030, nuclear power’s participation in the Brazilian energy matrix could represent up to 5.6 per cent. Regulation of electricity utilities – transmission 8

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 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.

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brazil Araújo e Policastro Advogados 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 rejection 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. 9

Eligibility to obtain transmission services 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, namely, 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 between the ONS, the transmission concessionaires represented by the ONS and the users of the basic grid, and the latter may be: • agents holding a concession or permission for providing the 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 sharing facilities (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. 10 Government incentives Are there any government incentives to encourage expansion of the transmission grid?

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 Regime for the Development of Infrastructure (REIDI), which is a general tax incentive for 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. 11,943, which authorises the federal government to participate in the Guarantee Fund for Electric Energy Enterprises (FGEE). The fund aims to provide a financial guarantee proportionate to the participation, direct or indirect, of federal state-owned companies participating in the electricity sector in companies created for the development of electricity-related projects that are part of the Growth Acceleration Programme (PAC). 11 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 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.

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Importers and exporters are subject to a specific tariff when using transmission networks dedicated to international interconnections, in addition to the TUST. 12 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 coordination and operational control of 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. Regulation of electricity utilities – distribution 13 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. 14 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 tariff for the use of the distribution system (TUSD). The users of this grid execute agreements for the use of the distribution system with distribution concessionaires (CUSD). 15 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 16 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, holders of permits and authorised companies, traders, importers and exporters of electricity, which are agents that have been granted a 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 Resolution No. 109 of 2004. These agreements are registered with the CCEE.

Getting the Deal Through – Electricity Regulation 2012


Araújo e Policastro Advogados 17 Power sales tariffs Is there any tariff or other regulation regarding power sales?

As stated in questions 15 and 16, in sales to dependent consumers, the power distribution company sets regulated tariffs, while in power purchase and sale in the free environment, the prices are fixed by 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. 5,163/04 and provisions in the above-mentioned Trading Convention. 18 Rates for wholesale of power Who determines the rates for sales of wholesale power and what standard does that entity apply?

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 by taking into account the variable costs of operational thermoelectric power plants in the SIN and the minimum rate is calculated by taking into account the operational and maintenance costs of hydroelectric power plants. 19 Public service obligations To what extent are electricity utilities that sell power subject to public service obligations?

The electricity utilities subject to public service obligations regarding power sales are the power generators that comply with the conditions for public concessionaires of electricity (see question 2) and the power distributors, as well as public service concessionaires (see question 16). Regulatory authorities 20 Policy setting Which authorities determine regulatory policy with respect to the electricity sector?

The regulatory policy for the sector is established by the ANEEL. With regard to competition matters, it should act jointly with the secretary of economic law (SDE) of the Ministry of Justice. 21 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 federal government policies and guidelines. These policies are submitted 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 compliance with Law No. 8,884 of 1994 by monitoring and investigating market practices to prevent and curb infractions against the economic order. 22 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.

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brazil The financial autonomy would be assured by the collection of a supervisor’s fee. The management autonomy would come in the form of appointment and removal of its head managers, the former being 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 part of the government. 23 Challenge and appeal of decisions 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 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 structure, 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 24 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, which always acts jointly with SDE, according to item VIII and article 3 of Law No. 9,427 of 1996. 25 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?

Since ANEEL and CADE share the authority in dealing with anticompetitive 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 rejecting the transaction, but ANEEL Resolution No. 273/07 establishes that, once the proceeding has been documented, the agency as a rule shall have 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 concerning competition, provided that the proceeding has been duly documented. 26 Prevention and prosecution of anti-competitive practices Which authorities have the power to prevent or prosecute anticompetitive or manipulative practices in the electricity sector?

The SDE is vested with this power by Law No. 8,884/94.

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brazil Araújo e Policastro Advogados 27 Determination of anti-competitive conduct What substantive standards are applied to determine whether conduct is anti-competitive or manipulative?

Article 20 of Law No. 8,884/94 describes in detail the practices that are considered violations of the economic order, namely any act that may: • restrain, prevent or otherwise harm free competition and free enterprise; • control the relevant market of goods and services; • arbitrarily increase revenues; or • abusively exert a ruling position. Some of these practices are explained in article 21 of the said law, for example: • in a settlement with the competitor, setting arbitrary prices and conditions for products and services; • obtaining or engaging in the approval of standard commercial practices among competitors; • dividing up the markets of services and goods, or the raw materials’ and middle products’ supply sources; or • boycotting the entrance of new companies into the market. 28 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 order 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 a summary of the judgment in a newspaper at the offender’s expense, the prohibition to make agreements with government financial institutions as well as with the public administration and entry into the National Record for Consumer Defence. There is a further possibility of the imposition of preventive measures by the SDE for the cessation of the practice at any stage of the proceeding in order to avoid the bringing about of 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.

Maria Aparecida Seabra Fagundes Rafaella Ferraz Bernardo de Medeiros

International 29 Acquisitions by foreign companies Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?

For the granting of a concession of public services or the use of public property, it is required that a company be organised under Brazilian statutes and have its principal place of business and management in the country. The invitations to bid for concessions allow foreign companies to participate severally in auctions, provided that if they win the bid they shall organise a corporation (a special-purpose company) and shall have a legal representative in Brazil. To be eligible to take part in an 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 certified translator. 30 Cross-border electricity supply What rules apply to cross-border electricity supply, especially interconnection issues?

Under article 26, item III, of Law No. 9,427/96 the Ministry of Mining and Energy shall grant authorisation to import and export electricity. Recently, Law No. 12,111/2009, regulated by Decree No. 7,246/2010, by changing existing Law No. 9,074/95, subjected to specific international treaty the approval for the construction of transmissions network dedicated to international interconnections and connected to the SIN. Also, such networks are no longer attached to the import or export of electricity enterprise, but it rather shall be granted by means of a concession of public service, as much as any other transmission service in the SIN. The ONS is in charge of the coordination and operation control of such transmission networks. Finally, Law No. 10,847/2004 included among EPE’s duties, support and participation in discussions aiming at energy integration.

afagundes@araujopolicastro.com.br rferraz@araujopolicastro.com.br bmedeiros@araujopolicastro.com.br

Av. Brigadeiro Faria Lima, 3729, 2nd floor Tel: +55 11 3049 5700 Itaim Bibi Fax: +55 11 3078 6120 / 6195 04538-905 www.araujopolicastro.com.br São Paulo Brazil

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Getting the Deal Through – Electricity Regulation 2012


AraĂşjo e Policastro Advogados Transactions between affiliates 31 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. 334 of 2008 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 of 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 to or a parent company of those performing distribution activities.

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brazil 32 Enforcement and sanctions Who enforces the restrictions on utilities dealing with affiliates and what are the sanctions for non-compliance?

Within the scope of corporate law, the enforcement agency for publicly held companies is the Brazilian Securities and Exchange Commission (CVM). Within 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 between parent company, controlled company and affiliates. These penalties range from fines calculated corresponding to the income or the estimated amount of the yielded energy, to the intervention or the declaration of forfeiture and the right to full defence that is guaranteed at all times.

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Getting the Deal Through - Electricity Regulation 2012