Federal Government publishes Decree to regulate the extension of energy distribution concessions and the sharing of infrastructures between distribution concessionaires and telecom companies

        I.            Eligibility for Extension

The Decree maintained the extension mechanism provided for in the concession contracts and Law No. 12,783/2013, that is, the concessionaires must submit a request for an extension at least 36 months before the contract’s end date. The request must be accompanied by documents substantiating the concessionaires’ good standing with the tax, labor, and sectoral authorities, in addition to proof of their legal, technical, economic, and financial qualifications.

However, according to the new requirements, only distributors with service levels in line with the energy supply continuity, and sound economic and financial management indexes will be eligible for extensions.

Failure to comply with any of the following indexes within a 5-year period will cause the concessionaires to be in breach of the requirement:

1. energy supply continuity index for 3 consecutive years. Alternatively, the concessionaire may propose an action and investment plan to the MME to meet the requirement during the remaining term period up to the 18-month milestone prior to the contract’s end date; or

2. economic and financial management indexes for 2 consecutive years. Alternatively, the concessionaire may contribute the funds necessary to maintain the concession, in the form and the amount determined by the Brazilian Electricity Regulatory Agency (ANEEL).

After analyzing the requirements above, ANEEL will send an opinion about the extension of the concession to the MME at least 21 months before the end of the contractual term. The MME, in turn, will have to decide on the extension up to 18 months prior to the expiration of the contract.

Concession contracts not extended according to the above will be subject to a new tender, without reversal of the assets. Compensation for reversible assets not yet amortized or depreciated will be paid by the new concessionaire to the old one, with any surplus to be paid by the Global Reversal Reserve (RGR), a fee paid monthly by energy generation, transmissions, and distribution companies managed by the Chamber of Electric Energy Commercialization (CCEE). Notwithstanding the above, amounts and requirements applicable to collaterals and disposal of assets will be defined by ANEEL.

      II.            New Requirements for Concessions

Decree No. 12,068/2024 innovated in comparison with Decree No. 8,461 of June 2, 2015, which governed previous extensions, by including the following as requirements for new amendments to the contracts:

1. user satisfaction indexes based on time of service and public opinion surveys;

2. market service indexes by the concessionaires in line with universalization goals;

3. efficiency targets for service recovery, in case of extreme weather events;

4. provision for cautious investments and efficient management of total operating and capital costs;

5. measures against power losses and payment defaults;

6. protection of personal data held by the concessionaire;

7. standardization of technical qualification requirements between the concessionaire and outsourced companies;

8. measures fostering gradual use of digital networks and services, and modernization of techniques, equipment, and facilities;

9. allocation of risks between the Government and the concessionaires; and

10. criteria to assess governance.

Other important aspects mentioned by the MME in the Decree involve the new economic conditions applicable to the concessions, to wit:

1. annual adjustment of electricity rates for inflation according to the variation of the Broad Consumer Price Index (IPCA);

2. regulatory flexibility to define the best economic regime for the development of the distribution sector, allowing ANEEL to recognize capital and operating costs between reviews of electricity rates to foster the modernization of services;

3. authorization for the concessionaire to carry out other business activities or offer new services to users, on its own behalf, favoring the affordability of electricity rates, subject to ANEEL’s prior approval;

4. contractual flexibility to allow competitive services offerings by other players, provided these services comply with economy principles;

5. accounting segregation of the services to be initially provided by the concessionaire and that may be later provided in a competitive environment by other players in the sector. This segregation is for regulatory purposes;

6. possible differentiation of electricity rates approved by ANEEL for highly complex areas in terms of measures against non-technical energy losses and high payment default; and

7. possible definition of different types of electricity rates by ANEEL based on technical, location, and quality criteria.

The Decree maintained the possibility of forfeiture of the concession in the event of failure to meet energy supply continuity, or economic and financial management indexes for 2 consecutive years. Nevertheless, the Decree innovated by allowing ANEEL to define additional and more restrictive criteria to start the forfeiture proceeding.

    III.            INFRASTRUCTURE SHARING

The Decree establishes new rules for infrastructure sharing between electricity distribution concessionaires and telecommunications companies. According to the new rules, concessionaires must assign the space for distribution infrastructure sharing, including occupation bands and fixing points in poles for overhead networks, to a separate legal entity, in a paid and cost-oriented manner. Therefore, a new and totally independent agent was added to the sharing relationship to make negotiations with the telecommunication companies more dynamic.

Also, according to the Decree, infrastructure sharing must be carried out according to regular business practices and may include places with different economic profiles, subject to the regulation to be jointly agreed by ANEEL and ANATEL. The assignee is also bound by this future joint regulation and must comply with the applicable technical requirements and rules to rectify occupancy bands.