by Giuseppe Giamundo Neto and Joaquim de Queiroz

The TCU’s leading role on extremely important issues for the electricity sector is harmful and goes beyond its institutional sphere of action

The first four months of 2024 ended with heated decisions by the Federal Court of Auditors (TCU), all of them with a major impact on the Brazilian electricity sector.

On January 24, the TCU approved a proposal by Justice Antonio Anastasia on monitoring the Granting Authority’s actions regarding electricity distribution concessions about to expire. This process began with a TCU resolution requiring the Ministry of Mines and Energy (MME) to take steps to define, at least three years in advance, the guidelines for the procedure for granting electricity distribution concessions nearing expiry that had not been renewed in 2013.

There are currently 20 distribution concession contracts expiring between 2025 and 2031. The first to expire is EDP Espírito Santo’s, ending in July 2025. And, under the applicable legislation, the MME should already have stated its position on the possibility of extending this concession. There is therefore an urgent need to define the rules.

The renewal of power distribution concessions has become the stage for a fierce clash between the Executive and Legislative Branches. The discussion centers on renewing the concession contracts versus holding new tenders. The atmosphere is hostile and tense, and the outcome of this dispute is unknown.

On the one hand, the MME has already stated its position that renewing the concession contracts would be the most practical and appropriate solution. On the other, part of the Legislative Branch argues that new tenders are needed, on the grounds that the Legislative Branch would be competent to approve the new law regulating the re-tendering of concessions.

In the middle of this tug-of-war, the TCU sought to smooth things over. At the end of January, it determined that, if the Granting Authority chooses to extend the concessions, the TCU will monitor them individually, through specific audits of the processes that will lead to the signing of the contract amendments. The signal was clear: although the TCU endorsed the Granting Authority analyzing whether it is advisable to extend the concessions, it indicated that there will be close oversight.

After the decision, the TCU suspended the case to wait for the MME to present the guidelines and rules for renewing the contracts or re-tendering the concessions. In the middle of this imbroglio is the case of Enel SP, whose contract expires in June 2028. And the Minister of Mines and Energy’s recent statements about opening forfeiture proceedings against the distributor add even more fuel to the discussions about the need for re-tendering.

The TCU’s second high-profile decision concerned an investigation into possible irregularities in the granting of subsidies by the National Electric Energy Agency (ANEEL). The case involves a reduction of up to 50% in the Transmission System Use Tariff (TUST) and the Distribution System Use Tariff (TUSD) for renewable generation sources.

Under the existing rule, renewable generation projects could benefit from a 50% discount on the grid use tariff, provided they did not exceed a certain size (a limit of 300 MW of injected power). In practice, many developers, with the legitimate aim of rationalizing fundraising and the construction of their plants, chose to group individual projects of up to 300 MW, using valid corporate arrangements to do so. Each of these separate plants obtained a specific ANEEL authorization for its implementation, thus obtaining the discount on grid use.

At the end of 2023, the TCU held that ANEEL was mistakenly granting authorization for these projects with the discount. According to the court, some developers were irregularly splitting plants to fit within the legal limit for the discount. The TCU therefore ordered ANEEL to refrain from granting new discounts and to adopt, within 180 days, an action plan to improve the rules.

The action plan was also to cover projects already authorized and enjoying the subsidy, in order to assess the impacts of any regularization or of maintaining the discount. This decision caused widespread commotion in the electricity sector and prompted ANEEL to request clarification.

In January, the TCU granted ANEEL’s request to establish that developers could, at their own risk, proceed with the implementation of projects still in the authorization process. However, it indicated that the plant’s eligibility for the discount would depend on subsequent regulation by the agency. Once again, the TCU’s action had a very negative impact among investors. Indeed, it brought undesirable legal uncertainty for renewable generation developers, triggering intense activity by sector associations. There is undeniable apprehension in the air today.

As can be seen, the TCU has been taking a leading role on issues of extreme relevance to the electricity sector. Although the court has jurisdiction to carry out oversight and control activities, it has clearly been going beyond its institutional sphere of action. There is consensus that this conduct is harmful to the electricity sector.

Last Tuesday, the National Electric Energy Agency began deliberating on compliance with the Federal Court of Auditors’ decision ordering the suspension of discounts for renewable generators and a review of the rules for granting them, in order to prevent the splitting of plants.

The market is eagerly awaiting ANEEL’s decision on this issue, especially regarding the possibility of applying the new rules retroactively. There are fears of a setback with the revocation of the discount granted to hundreds of wind and solar generators whose plants are in operation. The impact would be in the billions and catastrophic. It would distort the financial modeling of these projects, with the risk of a cascading effect, drying up future financing for the sector.

It would also seriously undermine legal certainty, as well as damage the country’s credibility in attracting new investment in renewable energy. The case is expected to return soon to the agenda of ANEEL’s board meetings. Perhaps by then other TCU decisions will bring the sector to an even greater boil.

Article originally published by Valor Econômico on 05.10.2024 (in Portuguese).