By Camillo Giamundo and Joaquim Melo de Queiroz
Members of the Electric Energy Trading Chamber recently approved the review of the arbitration convention, the document governing the rules for using arbitration as a mechanism to resolve certain disputes. The new rules update the CCEE Arbitration Convention in force since 2007 and bring positive changes and points that deserve assessment, especially in the current scenario of sector expansion.
There is undeniable euphoria in the electricity sector. Renewable energy generation projects are multiplying, many of them aimed at serving large consumers who are members of the Electric Energy Trading Chamber (CCEE). This phenomenon intensified from 2016 onwards, when a significant migration of large companies to the so-called Free Market (Free Contracting Environment) began. In this environment, companies can enter into electricity purchase and sale agreements directly with generators and traders, enjoying greater freedom to set volumes, prices, terms and other commercial conditions for their supply. This movement is likely to intensify. And the acceleration of the energy transition, with the shift from energy matrices based on fossil fuels to renewable sources, plays an important role in this change.
In this scenario of a growing number of market participants, a natural increase in the number of disputes between them, and consequently in the number of arbitration proceedings, is expected. The logic is Cartesian: the greater the number of participants and contractual relationships, the greater the number of potential disputes. In this context, the review of the CCEE Arbitration Convention comes at a good time.
On October 19, 2021, the 68th Extraordinary General Meeting of CCEE was held [1]. Among the matters resolved was the review of the Arbitration Convention.
A working group made up of CCEE and representatives of all the sector’s associations had been working since 2017 to assess the main points requiring the arbitration convention to be updated.
The working group’s diagnosis pointed to four main areas justifying the revision of the rule:
“(I) The lack of competition between Chambers, given the current exclusivity of the Fundação Getúlio Vargas Chamber (FGV);
(II) The possible impact on the market of arbitral awards issued in proceedings involving bilateral issues;
(III) The need to consolidate the rule already adopted setting out the cases in which the Arbitration Convention does not apply, arising from the Trading Convention itself (established by Aneel Normative Resolution No. 109/2004 and recently revoked by Aneel Normative Resolution No. 957/2021); and
(IV) Improvements arising from the evolution of the market itself and the experience gained since the current Arbitration Convention came into force.”
Based on this overview, the main changes proposed for the new text of the Arbitration Convention were identified:
“(I) Plurality of Chambers: a clause was drafted allowing participants to choose any Arbitration Chamber previously approved by CCEE, creating competition between Chambers and operational flexibility for participants. Thus, after approval, a procedure will be created for the approval and disqualification of Arbitration Chambers, with the collaboration of the same working group that took part in drafting the new proposal. The approval/disqualification procedure will be approved within CCEE and made public, without the need for a new Meeting;
(II) Arbitrable disputes: these are the ones defined in the Trading Convention. The current Arbitration Convention replicates the text of the Trading Convention. The proposed amendment suggests a mere cross-reference to the Trading Convention, so that any amendment does not have to be fully reproduced in the Arbitration Convention;
(III) Exception to arbitration for resolving bilateral disputes: the proposed amendment aims to improve the current text, since the current wording left participants uncertain about this exception. The text was improved to clarify that the Arbitration Convention does not apply to bilateral disputes that do not affect the rights of third parties and, consequently, have no impact on CCEE’s operations;
(IV) Exception to arbitration for CCEE’s collection of unpaid amounts, including penalties: the Arbitration Convention was amended to consolidate this rule already adopted by CCEE. The provisions added confirm that CCEE uses the courts to collect amounts unpaid by participants or non-participants, including penalties;
(V) Market Protection Mechanism: a mechanism is proposed to ensure that the Arbitral Tribunal requires guarantees from the parties regarding the financial effects of arbitral awards affecting third parties. The proposal allows CCEE to ask the Arbitral Tribunal to require suitable guarantees in cases where implementing the award would affect other participants not involved in the dispute;
(VI) Arbitrator conflicts and cooling-off period: the aim was to broaden the pool of potential arbitrators by changing the grounds for disqualification due to conflict. The proposed change allows the grounds for removing arbitrators to be assessed by the parties, who may refuse or consent to the appointment of the arbitrator in light of the disclosure made. For former service providers, former employees and former consultants of one of the parties, the cooling-off period will be reduced from two years to six months;
(VII) Publication of a case law database: to provide predictability regarding arbitral awards, the amendment proposes the creation of a public repository of summaries by the Arbitration Chambers, respecting the confidentiality of the parties involved; and
(VIII) Transition rules: the inclusion of specific clauses on the entry into force of the Arbitration Convention upon approval by Aneel. In addition, a specific clause reinforces that CCEE’s use of the courts to collect amounts unpaid by participants or non-participants, including penalties, has been the rule since the current Arbitration Convention came into force and is confirmed by the new Arbitration Convention”.
The proposed changes converge on pressing, current issues debated by the arbitration community: publicity of awards, confidentiality and the arbitrator’s duty of disclosure.
Specifically regarding disputes in the electricity trading sector, two points call for reflection: the clear definition of arbitrable disputes and the exceptions to arbitration.
The scope of arbitrable disputes is set out in clause 1 of the draft of the new Arbitration Convention:
“CLAUSE 1. Pursuant to current legislation and regulations, disputes (‘DISPUTES’) that may be resolved through Arbitration are those defined in the Trading Convention in force.”
The proposed solution is elegant, as it avoids the need to continuously update the arbitration convention, but it may give rise to divergent interpretations as to its actual scope. Currently, the disputes that must be resolved through arbitration are listed in article 44 of Aneel Normative Resolution No. 957/2021:
“Article 44. CCEE Members and CCEE shall resolve, through the Arbitration Chamber, all disputes involving disposable rights, under Law 9,307 of September 23, 1996, in the following cases:
I – a dispute between two or more CCEE Members that does not involve matters under Aneel’s direct jurisdiction or, if it does, has already exhausted all administrative instances regarding the subject matter in question;
II – a dispute between one or more CCEE Members and CCEE that does not involve matters under Aneel’s direct jurisdiction or, if it does, has already exhausted all administrative instances regarding the subject matter in question; and
III – without prejudice to the provisions of a specific clause in the CCEARs, a dispute between CCEE Members arising from Bilateral Contracts, provided that the event giving rise to the disagreement stems from the respective contracts or from Trading Rules and Procedures and affects the obligations of the contracting members within CCEE”.
Given the development of the market and the greater complexity of its control structures, the objective definition of arbitrable matters may give rise to challenges. A practical and current example: would preventive measures to mitigate default risks, as recently proposed by CCEE [2], be subject to discussion through arbitration? This is a question to be considered, including because of the Financial Safeguards Structure with mechanisms to mitigate losses resulting from default in the Short-Term Market, also proposed in the aforementioned CCEE Technical Note. The configuration of these proposed structures could raise questions about what should actually be subject to scrutiny through arbitration.
On the other hand, the precise definition of the triggering event for classifying the disputes provided for in item III of article 44 of REN 957/2021 could give rise to conflicting interpretations, especially in situations where it suits the respondent to postpone the decision on the dispute.
In any event, and despite any questions that may arise, it will always be for the arbitral tribunal to make this assessment, in line with the kompetenz-kompetenz principle, which was even endorsed in a recent precedent of the Superior Court of Justice [3]. As for the exception to arbitration in claims brought by CCEE seeking payment of amounts owed by participants, it should be assessed whether this would in fact be the most appropriate solution:
“Paragraph 3. This CONVENTION does not apply to claims in which CCEE seeks unpaid amounts from participants or non-participants, including penalties, which are brought exclusively before the Judiciary”.
The justification for this exception is set out in paragraph 4 of clause 1:
“Paragraph 4. Based on article 113, §2, and article 421-A, I, of the Civil Code, the parties declare that CCEE, when seeking unpaid amounts, acts as procedural substitute for the collective, based on article 18 of the Code of Civil Procedure, article 4 of Law 10,848/2004, article 2, VII, of Decree 5,177/2004, article 3 of Decree 5,163/2004, and article 2, §2, of ANEEL Normative Resolution 545/2013; as a result, the respective actions will be brought before the Judiciary”.
First, there is a possible inconsistency in this system, given that a participant’s default would precisely have effects on CCEE’s operations, which would trigger the rule in paragraph 1 of clause 1, reaffirming arbitral jurisdiction to resolve the dispute:
“Paragraph 1. This CONVENTION does not apply to disputes between CCEE Members arising from bilateral contracts that do not affect the rights of third parties outside the legal transaction in dispute and, consequently, have no impact on CCEE’s operations”.
Second, due to the inherent attributes of arbitration, resolving disputes of this nature through arbitration could allow faster subsequent recovery of any credit owed to the affected participants, if confirmed by the arbitral tribunal (even if its satisfaction depends on subsequent enforcement of the arbitral award).
Finally, the fact that CCEE acts as procedural substitute for the other creditor participants (if its role is so regarded [4]), or even as procedural representative, would not, a priori, prevent it from filing a request for arbitration in its own name, provided it is expressly authorized by them.
This is a delicate issue that is, to some extent, related to the need to improve the negative option system usually used by CCEE. Under this procedure, CCEE sends the affected participants a notice asking them to state whether they are not interested in being represented by the Chamber in a future collection claim. If the participant does not respond, authorization for CCEE to represent it is presumed.
There are objections to this format on the grounds that CCEE could only represent participants where its member has expressly and affirmatively granted it powers to do so.
On the other hand, it is argued that CCEE’s standing would be supported by the provisions listed in paragraph 4 of clause 1 of the draft Arbitration Convention.
In any event, it is worth considering whether the Arbitration Convention could be amended so that CCEE may pursue collection, on behalf of its members, through arbitration, especially given the speed of this dispute resolution mechanism.
In short, the proposals to update the CCEE Arbitration Convention are positive and should be welcomed. Among them, the possibility of using other Chambers stands out, which will increase participants’ autonomy with a greater number of options. The proposal to establish a repository of precedents should also be welcomed, as it will give participants greater legal certainty in their decision-making, since they will be able to better map the Chambers’ approach to certain disputes in the sector.
Finally, it should be noted that the proposed update to the Arbitration Convention is currently under review by Aneel. Its approval is expected to be swift, especially given the race to implement new renewable generation plants triggered by the regulatory window opened by Law 14,120/2021. These projects are largely financed by electricity trading contracts (Power Purchase Agreements — PPAs). There is therefore the possibility of a significant number of disputes soon, linked to these contracts. It would be advisable for the new Arbitration Convention to already be in force to govern these disputes.
NOTES
[1] https://www.ccee.org.br/documents/80415/919507/ATA%2068%C2%AA%20AGE_19_10_2021.pdf/995a9de2-5757-1afa-e32e-d8cf6a8b0e2d
[2] As per Technical Note NT CCEE 06735/2021, of December 16, 2021:
https://www.ccee.org.br/documents/80415/919440/Nota%20T%C3%A9cnica%20CCEE%20-%20CCEE06735-2021_site.pdf/79bd0de3-916b-c75b-e545-0b8ecc709144
[3] https://processo.stj.jus.br/processo/julgamento/eletronico/documento/mediado/?documento_tipo=integra&documento_sequencial=140974127®istro_numero=201800037380&peticao_numero=201900612834&publicacao_data=20211210&formato=PDF
[4] There is disagreement as to CCEE acting as procedural substitute for its members, according to the decisions issued in Special Appeal No. 1,511,140/PR: https://processo.stj.jus.br/processo/julgamento/eletronico/documento/mediado/?documento_tipo=integra&documento_sequencial=123096605®istro_numero=201500083740&peticao_numero=202000345744&publicacao_data=20210318&formato=PDF
Consultor Jurídico magazine, April 13, 2022
Originally published in Consultor Jurídico magazine (in Portuguese)
