Brazil's states risk becoming a bottleneck for the country's natural gas market opening, expected in January, following the enactment in April of a new federal gas law.
Out of the country's 27 states, 14 do not have any definition of what a "free consumer" is in a natural gas market in which consumers have traditionally been captive to state-controlled utilities. None has a standard delivery contract, and nine states do not determine the separation of distribution and trading activities. Only the southeastern state of Minas Gerais allows gas consumers to sell surplus gas.
All of this must change for the new gas law to work fully as contemplated.
The government hopes to unleash midstream gas investment with the new law, which converts a concession contract model for new pipelines into a more streamlined authorization model, and also facilitates third-party access to pipelines, gas treatment facilities and regasification terminals.
Under the new legislation, the hydrocarbons regulator (ANP) will determine the maximum pipeline tariff, but the agency will no longer manage open seasons for pipeline access. The law does not alter states' control over gas distribution, which is guaranteed by the constitution. As a result, states interested in developing their local gas markets need to pass their own legislation.
Federal regulators have been working on the regulatory framework since 2019 and are expected to unveil it in January.
But gas distribution is defined by state law, and rules allowing consumers to freely buy gas depend on state lawmakers. State regulators will determine contracts standards, tariff calculations and floor volumes for free consumers.
Lawmakers in some states have been preparing for the gas market reform, such as drafting the definition of a free consumer, who will be able to choose among more than one supplier. Most states, however, have lagged behind.
Six states define the minimum volume for free consumers at 10,000m³/d: Bahia, Minas Gerais, Rio de Janeiro, Sao Paulo and Sergipe. That limit is defended by a group of energy producers and consumer associations belonging to the Gas Forum and coordinated by the Brazilian association oflarge energy consumers ABRACE. Five other states define a higher minimum volume, between 35,000m³/d to 1 mn m³/d.
"The bureaucracy for the qualification and exercise of the commercialization activity in the states are obstacles that can end up hindering the negotiations and even increasing the activity and, consequently, the price of gas for consumers," Comerc Gas Trading director Pedro Franklin said in an interview.
Distribution tariffs for free consumers and standard contracts between free consumers and the distributor are key at this moment. Only four states have a distribution tariff preview and none of them have defined a standard contract for consumers and distributors.
Regulator ANP and the Brazilian government released a handbook earlier this month to help states draft their regulatory frameworks. Among the topics in the handbook, the government suggests that states create or maintain independent regulatory entities, with transparent decision-making processes. That may be a tall order in a country where gas market regulation is conducted by states' finance departments or by general regulatory agencies, which are also in charge of public transportation, water sanitation and electricity in most cases.
Public servants at the regulatory organs complain about a lack of staff and training to handle the evolving situation. In a survey conducted by Argus with state regulators in all 27 states, only six states responded. Some said they were not aware of the best practices handbook and some questioned the independence of the state agencies, as some state tariffs are defined by state finance secretaries.
