Forwarded to the National Congress on January 22 by the President of the Brazil, Michel Temer, Bill No. 9,463/2018 should raise important debates during its review in the coming months. The text recommends the inclusion of Eletrobras (Centrais Elétricas Brasileiras S.A.) in the National Privatization Plan (PND) and establishes the rules and conditions for this procedure.


According to the explanatory memorandum of Bill 9,463/2018, the project aims to: (i) expand investment opportunities; (ii) expand the quality of public infrastructure; (iii) ensure the supply of electricity efficiently and at the lowest price for the Brazilian public; (iv) improve the governance of Eletrobras; (v) appreciate the assets of the Federal Government, which are currently devalued on the stock exchange; (vi) appreciate and develop the Brazilian capital market; and (vii) increase the direct participation of the Brazilian public in the capital of Eletrobras.


Eletrobras owns approximately 30.7% of Brazil's electricity generation capacity (47 GW installed in 239 plants) and 70.3 thousand kilometers of transmission lines (representing 51.7% of the entire Brazilian electrical grid). It is the largest holding company in the Latin American power sector and the 16th largest energy company in the world.


To denationalize a company of this size may represent significant challenges, especially considering the current political environment. For this reason, Bill 9,463/2018 proposes that the denationalization occur through an increase in share capital through public subscription of common shares, without the Federal Government’s participating in this subscription. The objective is to dilute state participation until it ceases to be a majority shareholder (article 1, paragraph 1). This capital increase may be accompanied by a secondary public offering of shares owned by the Federal Government to ensure dilution of the State’s participation (article 1, paragraph 2).


In addition, the promotion of denationalization will also have legislative authorization for the Federal Government to grant new concessions for the generation of electric energy to the private sector for a period of 30 years (article 2, head paragraph), covering the plants owned or controlled, directly or indirectly, by Eletrobras, such as those that (i) have been extended pursuant to Law No. 12,783/2013; (ii) are covered by item II of paragraph 2 of article 22 of Law No. 11,943/2009; or by (iii) paragraph 3 of article 10 of Law No. 13,182/2015 (article 2, paragraphs 1 to 3). These concessions will go from the quota framework to the independent energy production framework and will be able to freely trade energy in the regulated market (with electric power distributors, in auctions organized by Aneel) or in the free market, thereby reallocating hydrological risk from the public to the plants themselves.


The denationalization program is based, in sum, on the following actions: (i) conclusion of new electricity generation concession contracts (which will require payment for the granting of new concession agreements for Eletrobras to become a private company) (article 3, item I); (ii) execution of addenda to electric power transmission concession contracts, seeking to renegotiate amounts related to the payment of indemnity due for assets not amortized or not indemnified (article 3, item II); and (iii) amendment to its bylaws to: (a) create a preferred share of a special class (golden share) held by the Federal Government, which will have veto power in the event of liquidation, modification of corporate purpose, headquarters, and the corporate name of Eletrobras and its subsidiaries and amendments to the bylaws in the following matters; (b) prevent any shareholder or group of shareholders, Brazilian or foreign, from exercising votes at percentages greater than 10%; (c) prohibit the execution of shareholders' agreements for the exercise of voting rights, unless the block holds less than 10%; and (d) assure the Federal Government, holder of the golden share, the right to appoint an additional member to the board of directors, in addition to appointing members as a result of and in proportion to the ownership of the shares held by the Federal Government and other entities of the public administration (article 3, item III and paragraph 2).


The maximum level of 10% for the exercise of voting rights was proposed to prevent Eletrobras from being acquired by an agent already established in the electricity sector, thereby concentrating the market and inhibiting competition. The objective is to democratize the capital of the company, following the example of other successful Brazilian corporations.


In addition, the denationalization will be conditional on the inflow of capital at a minimum amount to be defined by the National Energy Policy Council (CNPE) (article 3, paragraph 4), still pending.


Other relevant provisions involve the authorization to create a government-controlled company dedicated to controlling Eletrobras Termonuclear S.A. (Eletronuclear) and managing the Itaipu Bi-national contract (article 3, item IV, and article 9), as well as: (i) the development of a program to revitalize the water resources of the São Francisco River basin directly by Eletrobras, or indirectly through the São Francisco Hydroelectric Company [“Companhia Hidrelétrica do São Francisco”] (article 3, item V), using the valorization resulting from the change from the quota framework to the independent energy production framework in actions that generate recharge of tributary flows and increase the operational flexibility of the reservoirs without prejudice to priority use and multiple use of water resources; (ii) maintenance of the Electric Energy Research Center (Cepel) for a period of four years (article 3, item VII); and (iii) maintenance of the rights and obligations related to (a) the first stage of the Program for Incentive to Alternative Sources of Electricity (Proinfa) until termination of contracts, which cannot be extended, (b) the use of resources from the Global Reversion Reserve (RGR) concluded until November 17, 2016, and (c) the National Program for Universal Access to and Use of Electric Energy - Light for All [“Luz para Todos”] until December 31, 2018, currently managed by Eletrobras, but incumbent on the electricity distributors.


Once Bill No. 9,463/2018 has been approved by the National Congress, with its subsequent enactment as law, Eletrobras' general meeting of shareholders will decide on whether or not to adhere to the terms and conditions of the privatization provided by law, and the Federal Government will not be able to participate in this resolution as a shareholder. This is because Bill No. 9,463/2018 provides that the Federal Government cannot exercise the right to vote on accepting the terms and conditions of the denationalization of the company. The objective is to avoid a situation of conflict of interest when it is deliberated on within the Eletrobras’ general shareholders' meeting.


The current position of the Federal Government differs from that adopted by the then-President Dilma Rousseff's government, when the Federal Government, as a shareholder of Eletrobras, approved the company's adhesion to the quota framework for the purpose of extending some of its concessions under Law No. 12,783/2013. This fact may bring in an interesting precedent for other state-owned companies.


The model adopted in the formulation of Bill No. 9,463/201 clearly reflects an attempt by the Brazilian government to conciliate pressures contrary to the privatization of the largest Brazilian state-owned company in the electricity sector. We understand that, until approved by the National Congress, the Bill will undergo changes, which should be closely monitored by professionals in the sector.