The announcement that the government of Minas Gerais has taken the first step toward studying the possible federalization of Companhia Energética de Minas Gerais (Cemig) and Companhia de Saneamento de Minas Gerais (Copasa) has surprised the electricity and sanitation markets.
On the eve of the day the new president was to take office, it was announced that the State had authorized the Brazilian Development Bank (BNDES) to seek investors for the two companies — in practice, a kind of preparation for a possible transfer of the assets to the Federal Government, as a way of easing the cost of Minas Gerais’s debt under the Fiscal Recovery Regime.
In the experts’ view, federalization emerges as an alternative to privatizing the two companies, which would face political resistance in the State. However, there is a lack of clarity about how a possible transition would work, with fiscal and political questions still open.
“There are no details. It is a discussion at an early stage,” said Giuliano Guimarães (GPH), a consultant specializing in energy. Cemig is coordinated with the State controlling 17.73% of the company. “The companies show efficiency indicators, since investing in the assets and markets is an attractive business.”
From a fiscal standpoint, he believes that negotiating with the Federal Government would give the States more resources to ease the effects of the fiscal crisis, with the potential to obtain more favorable conditions for debt reduction, as has already happened with other states.
Lawyers specializing in regulation point to a number of questions about how the transaction would work, as it still lacks clear regulatory frameworks.
According to a source close to the companies’ situation, who spoke on condition of anonymity, there are questions about the private sector as an investment alternative. “There is still no law validating this transaction, which is different from previous processes that required specific funds,” the source stresses.
Rodrigo Bertoccelli also sees regulatory risks. “In the energy markets, Brazilian companies have already faced difficulties because of regulatory changes. Time is needed for market players to adapt, but there are significant regulatory risks.”
The lawyer does not rule out risks regarding the companies’ new governance arrangements after the transaction, since Copasa is listed on the stock exchange. “This situation is unprecedented. We expect clarification on how the companies will be managed, which may create divisions among minority shareholders.”
The federalization by the Minas Gerais government of two of the state’s largest state-owned companies emerges as an alternative to the Fiscal Recovery Regime (RRF), which was examined by the National Congress and is still awaiting approval — a measure that would set the conditions for the state’s fiscal recovery.
For public finance experts, the measure was announced at a time when the state already allocates significant resources to interest payments on its debt, compromising investments in essential areas. The budget deficit is worsened by spending under the Federative Equalization Fund (FEF).
This move represents a way for the State to pay off its debts by transferring control of the state-owned companies to the federal sphere. Even with the description of the transaction, there is little information about how the studies will be carried out.
“In the case of Copasa, the sanitation sector has growing prospects in the country,” said a source.
According to sources, there is also a political component to federalization. The energy market went through liberalization under PSDB governments in the state. A possible federalization would mean changes for the companies.
In the electricity sector, Cemig is one of the largest in the country. The Minas Gerais government holds 31% of the company, and the rest is freely traded; it serves 3.4 million consumers.
The company reported revenue of BRL 31 billion, according to its 2022 financial statements.
The company operates in more than 3,000 municipalities in Minas Gerais through power distribution, and holds a 30.7% stake in Transmissão de Energia Elétrica (Taesa), in partnership with ISA Energia. Taesa has 84 high-voltage transmission lines serving 174 cities.
In generation, total installed capacity is 447 megawatts (MW), with investments of BRL 7.4 billion. Cemig Geração e Transmissão (Cemig GT) serves almost 104,000 customers, 96% of whom are residential consumers.
When contacted, Cemig said it “will comment exclusively through its official channels”. Copasa did not comment. The Government of Minas Gerais and the Ministry of Cities have also not yet commented on the proposal.
