On May 18, the Federal government published Decree No. 10,350, which regulates Provisional Measure No. 950/20 and provides for the creation of an account for the energy sector to face the state of public calamity recognized by Legislative Decree No. 6/2020, called the Covid-Account.

The new decree seeks to mitigate the cash impacts suffered by distribution concessionaires as a result of the fall in energy consumption and increase in defaults caused by the covid-19 pandemic. According to article 1 of the decree, the Covid-Account will receive funds from the contracting of credit transactions with financial institutions. The objective is to cover deficits or accelerate revenues for energy distribution concessionaires.

The Covid-Account should alleviate the effects caused by the distributors’ over-contracting of energy and ensure neutrality of sectorial charges for distributors, among other repercussions. According to the first paragraph of article 1, the Electric Energy Trading Chamber (CCEE) is charged with contracting credit transactions intended to cover the Covid-Account, taking advantage of a lower cost of operation, since the Selic rate is now close to 3%, compared to 11% at the time of the creation of the ACR account, due to the crisis in the electric sector in 2014.

In order to receive the funds from the Covid-Account, distributors will have to expressly accept, on an irrevocable and irreversible basis, certain conditions, such as:

  • prohibition until December of 2020 on requirements to suspend or reduce the volumes of energy acquired through power purchase agreements;
  • limitation, in case of intra-sectorial default, on the distribution of dividends and interest on equity payments to the legal minimum percentage of 25% of net profit;
  • the possibility of reimbursement by distributors of administrative and financial costs incurred in credit transactions and borne by consumers, subject to certain requirements; and
  • waiver of the right to litigate, in a judicial or arbitral context, these conditions of acceptance.

It is not known whether all distributors will accept these conditions to receive the funds from the account, mainly because some of them generate discussions in the energy sector, such as limiting the distribution of dividends and interest on equity payments to the legal minimum percentage of 25% of net profit.

The costs of the financial transactions contracted will be passed on in full to the Energy Development Account (CDE, in Portuguese) and paid by consumers. Those who migrate to the free market during the financing period will not be exempt from paying the loan.

The decree also provides for the possibility of bilateral negotiation between distributors and Group A consumers, upon mentioning, in article 3, paragraph 3, subsection IV, that the amounts to be paid by the Covid-Account to the distributors will be approved by Aneel and will consider, among other factors, any deferred payment installments, by the distributors, of outstanding obligations related to the invoice of the demand contracted for Group A consumer units.

This possibility is in line with Order No. 1,406, of May 19, 2020, which, under Administrative Proceeding No. 48500.001841/2020-81, filed by Group A consumers, allows distributors to freely negotiate deferred payment installments of amounts related to invoices based on contracted demands instead of measured demands, under the terms of applicable regulations.

Although still subject to regulation by Aneel, the decree has been facing opposition, such as that of Legislative Decree Bill No. 231/20, filed by Federal Representative José Guimarães (PT-CE). The parliamentarian intends to halt the effects of the decree on the argument that there is no stipulation of a maximum amount for loans, which would mean a blank check to Aneel.

Although some of its points are controversial, Decree No. 10,350/20 constitutes an important emergency measure for the energy sector, since, as far as possible, it preserves the payment flow of the entire chain of the sector. It is not, therefore, a definitive solution to the problem, which is why it mentions that Aneel will be able to evaluate the need to restore the economic and financial balance of concession contracts, upon a justified request of the interested party.