Brazil's power sector has begun discussions on the terms for renewing distribution concessions, as more than 20 contracts are nearing their end.
This issue has been a key concern for bank analysts following both the contracts and Brazilian power companies in recent months, and are also a concern among the distributors' executives. Distributors expect the renewals to follow the same molds as those of renewed distribution contracts in 2015.
In distributors' view, the 2015 renewals brought on important changes, with more governance and compliance clauses, more financial responsibility terms, clearer principles for tariff review and changes to inflationary rates that were used but not charged for concession renewals.
Another matter in question is whether the government will ask for granting bonus allowances, a sum companies must pay the government to receive a concession. Those who oppose the idea argue that the government did not charge for these allowances in 2015 and the current renewals are in the contracts' terms. The sector is apprehensive that President Luiz Inacio Lula da Silva's administration would opt for the charge, which can amount to millions of reais per company. Mines and energy minister Alexandre Silveira has signaled to distributors that there will not be a charge, but this decision involves other ministers, as it can result in less future revenue for public coffers.
The same changes applied to the new contracts for the privatization of Eletrobras' distribution companies in 2016, strengthening the argument for that to be the standard for subsequent renewals. Power regulator Aneel should unify concession contracts, with all companies following the same rules, a distribution market source said.
The topic is complicated because this is the first time the first companies privatized in the 1990's will renew concessions. Portuguese utility EDP's concession in Espirito Santo state will be the first to expire, in July 2025. The company signed the 30-year contract in 1995 and its terms allow the government to renew it with 18 months' notice, if the company is interested. EDP has expressed interest in renewing the concession for another 30 years and Aneel is expected to issue the renewal terms by the first half of 2023.
There are two other power distribution contracts to expire in 2026, eight in 2027, six in 2028, three in 2030 and one in 2031, according to Aneel.
Some sectors have more prescriptive concession contracts, but the power sector tends to prefer more general contracts and rely on Aneel's subsequent regulation as the concessions continue for many decades, thus giving contracts more longevity.
There is some concern among market participants that the concession renewals will be used to advance other topics, such as the modernization of the power sector. These changes need to be addressed through regulation, not contracts, according to a market participant.
