by Philippe Ambrosio Castro e Silva

In recent weeks, amid the pandemic triggered by the spread of covid-19 (new coronavirus), the globalized world has been feeling concrete fears of a severe recession across various sectors of the economy.

Due to the uncertainty caused by the halt of economic activities in a wide range of areas, as a result of social distancing measures imposed by governments around the world, the economy has already begun to show the first signs of the sharp slowdown that could inevitably be expected from an event of this magnitude.

Among the sectors of the economy affected is the electricity sector which, specifically in Brazil, has suffered severely from successive crises over the current decade, whether due to hasty and poorly planned interventionist measures, the latest recession faced by the Brazilian economy, climatic factors that significantly affected hydroelectric generators years ago, or the intricate, complex and even outdated legislation regulating the sector, which has been encouraging growing litigation in the most varied legal relationships among sector participants.

In the specific case of the crisis now approaching, as noted, the first signs are already visible, given the sharp drop in energy consumption across Brazil, especially due to the total or partial interruption of industrial activity.

This circumstance has already prompted moves among sector participants, especially large free consumers who have found themselves unable to carry on their activities and therefore to consume the contracted volumes of energy, which will end up creating energy surpluses that will invariably be sold on the spot market at prices much lower than those in their contracts.

A similar situation is occurring with distribution concessionaires, which will inevitably have no one to supply with the contracted amounts of energy, leaving them also with significant surplus volumes.

All this has already started a race among sector participants to invoke force majeure clauses in their contracts with traders and generators in order to be released from their payment obligations to their energy sellers, which in turn could create a cascade of sector disputes in arbitration proceedings and another wave of litigation in the electricity sector, since traders and generators would also be harmed by energy surpluses or by their buyers’ failure to perform their contracts, thus affecting the economic and financial balance of their contractual relationships.

In this context, it should be noted that the National Electric Energy Agency (Aneel) recently and quickly issued Normative Resolution No. 878/2020, which provides for measures to preserve the provision of the public electricity distribution service in view of the public calamity relating to the new coronavirus pandemic.

The rule in question essentially deals with measures that seek to relieve the burden on, and guarantee the provision of distribution services to, captive consumers, many of whom will find it difficult to meet their obligations to their distributors.

However, because the outbreak of the pandemic and its effects are very recent, the regulatory agency has not yet been able to create regulatory mechanisms to resolve the disputes that will certainly arise in the near future, especially among generation, trading and distribution participants.

Thus, as the regulatory agency with the statutory power to mediate and resolve disputes among electricity sector participants, Aneel will need to ensure that the economic and financial balance of the contracts held by sector participants is preserved — especially those at the beginning of the consumption chain, that is, generators — by adopting measures capable of remedying the possible shortfall in their revenues due to the invocation of force majeure in their energy trading contracts, as well as mitigating possible negative sector impacts related to hydrological risk (GSF) — for hydroelectric generators — as a result of dispatch orders from the National System Operator (ONS) requiring generation to be reduced.

This will avoid worsening the economic difficulties faced during the latest sector crises, so as not to drive away further those who intend to invest in the sector.

Otherwise, a new wave of arbitration and court disputes will emerge, and it will fall to the Judiciary, due to Aneel’s omission, to safeguard the economic and financial balance of the contracts of the parties that turn to it, often, however, to the detriment of the interests of all the other sector participants — a circumstance known to have challenged the conduct of economic activity in the national electricity sector.

Article originally published in Estadão, in Fausto Macedo’s column (in Portuguese), on 03.30.2020.