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Federal Government publishes Decree regulating the “Covid Account”

Cescon Barrieu Informa — May 21, 2020

The Brazilian Federal Government published on May 18, 2020 Decree no. 10,350/2020 (“Decree”), which regulates Provisional Measure no. 950/2020 (“MP 950”) and establishes the terms of the “Covid Account”. The Covid Account draws on the experience of the Regulated Market Account “ACR Account” created to support electric energy distribution companies (“Discos”) during the crisis of 2014 and 2015.

The Covid Account will provide loans to Discos to help them face temporary revenue loss due to the pandemic as a result of the decrease in energy consumption as well as measures enacted by the government to prevent power cuts against certain clients in default. In this context, the measure aims at (i) ensuring the solvency of Discos and, indirectly, of other players in the power sector, since Discos are the first tariff collectors in the power sector chain, feeding all the other players in the electric sector; and (ii) avoiding an increase in energy costs during an economic crisis.

According to the Ministry of Mines and Energy – MME, the Covid Account will be funded through syndicated loan secured by funds in the Energy Development Account (“CDE”). It is expected that costs associated to such loan will be significantly lower than those practiced in the financial market.

Goals

The Electric Energy Trading Chamber (“CCEE”) will manage the Covid Account, raising bank loans hired by the CCEE itself which will be destined to cover deficits or anticipate revenues to Discos and related to:

i. financial effects due to the surplus of energy purchased by Discos;
ii. balance to be constituted in the A Portion¹ Variation Compensation Account (“CVA”);
iii. neutrality of sector charges;
iv. postponement to June 30, 2020, of the increase in tariffs already approved;
v. balance of the CVA and deferrals acknowledged or reverted in the last tariff proceeding, that were not fully amortized; and
vi. early consideration of the regulatory asset related to the “B Portion”², according to ANEEL’s regulation.

The bank loans shall be concluded in accordance with the following schedule:

a. between April and December 2020, funds for items i and iii above;
b. between the date of approval of the tariff readjustment of each of the Discos and December 2020, for item ii; and
c. for the entire duration of the postponement of the increase in tariffs, for item iv.

Repayment of Loans

CCEE shall transfer of the costs related to the loans to CDE. The loans will be repaid with funds from the energy tariffs paid by captive consumers and consumers that migrated to the Open Trading Environment after April 08, 2020.

Consumers of the A Group (high tension) will have their costs related to deferral of payment obligations covered by the loans. This was one of the reasons ANEEL why denied requests by these consumers to be charged by the amount effectively used and not the amount contracted.

ANEEL will also be responsible for establishing the funds to be transferred from CDE to the Covid Account, to be used by CCEE for repayment of the debt and establishment of the collateral for the loan.

Waiver of Rights

The Decree establishes that in order to receive the funds from the Covid Account, Discos will have to expressly and irrevocably accept the terms and conditions of the Decree, including:

I. the waiver of requests the suspension or decrease of amounts contracted under power purchase agreements until December 2020, except if provided for by law;
II. in case the company is in default of sector obligations, limitation on the payment of dividends to the minimum legal percentage of 25% of the net profits; and
III. waiver to the right to question, judicially or through an arbitral proceeding, any terms of the Decree – except for the right to request the economic-financial rebalance of the concession before ANEEL which is preserved.

Points of Attention

Amount to be Made Available: The amount that will be necessary for the loans is still pending governmental definition.

Surplus Energy Duration: Discos may still have surplus energy after December 2020 in view of the possible decrease in the GDP. It is unclear how this matter will be dealt with in the future.

Pending Regulation: Several points of the Decree depend on ANEEL regulation. The Agency stated that it will carry out a public consultation on the matter, which should have faster procedures to speed up the disbursement of funds.

Waiver to the Suspension or Reduction of Amounts under PPAs: it is unclear if Discos that have already notified generators and electric energy trading companies will be allowed to interrupt these proceedings to receive the funds, but it would be reasonable that this option should be available to these Discos.

Migration to the Open Trading Environment (Mercado Livre): it is unclear the specific moment that ANEEL will consider as deadline to exercise the option to migrate to the Open Trading Environment – certain consumers have already started the relevant proceedings but migration will only occur in 2021.

Next Steps: According to news published on the MME’s website, the Ministry understands that the decree concludes the first round of discussions on the impacts of the pandemic on the power sector. The next stage of discussions will continue to demand active involvement of all players of the electricity sector.

Click here to access the full version of the Decree (in Portuguese).

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Notes:
¹The A Portion of the energy tariff is composed of the items that are not manageable by the Disco, such as the cost of purchasing energy and sector charges.
²The B Portion of the energy tariff is composed by items that the Disco can manage, such as operation costs and return on capital.