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    Covid-19 and the impact on free energy market contracts

    Thiago Carvalho Fonseca, lawyer in the energy field at Tortoro, Madureira & Ragazzi Advogados

    Covid-19 will bring significant changes to the Brazilian society, affecting the way we deal with personal, commercial and industrial relationships. And with the regulated activities, it could not be different. Facing the potential consequences of the pandemic in the energy sector, the National Electric Energy Agency (ANEEL) has already submitted a number of proposals, to be evaluated in the short and medium term, aimed at mitigating possible impact on the segments of distribution, transmission and generation of electric energy.

    However, aside from these possible regulatory measures, we do highlight some discussions related to the commercialization in the Free Contracting Environment, considering the significant reduction in energy consumption of customers with high demand (free and special), with the adoption of social isolation by state governments, in addition to the retraction in prices of long-term contracts.

    In a brief way, for clarification purposes, the Free Contracting Environment (ACL) is the segment of electric energy market where purchase and sale transactions are conducted, by means of freely negotiated contracts.

    In other words, the parties to the ACL have autonomy to decide their contracts, managing the future and financial risks of a possible price variation, through an agreement of values, energy volumes and supply period. Thus, with the necessary adaptations, it is a type of financial contract (“hedge”), with prediction of the logic consume the minimum amount or pay (“take or pay”).

    In this context, where there is an assumption of rights and obligations between the parties involved (buyer and seller), there is the question: would the pandemic resulting from Covid-19 be characterized as a fortuitous event or force majeure, justifying the amendment or even the termination of the contracts then formalized in the free energy market?

    In fact, following the interpretation of article 393 of the Civil Code, the specialized doctrine states that, for the characterization of such an event as mentioned above, the fact has to be unpredictable, beyond

    the will of the parties and inevitable, which renders impossible the execution of the agreement, not being sufficient to create difficulty or burdens for the debtor.

    In view of this, the unpredictability and inevitability of the pandemic that we are experiencing is undeniable. Nevertheless, it must be kept in mind that the risk of the activity is intrinsic to the businesses executed in the energy Free Contracting Environment.

    That because the buyer who previously acquires a specific contractual position (right and determined price) shall be “protected” against the setbacks and future fluctuations of the Differences Settlement Price (PLD), which is the market and reference value for the energy. On the other hand, the seller assumes these charges (appreciation or devaluation of the PLD, against the contract value).

    Therefore, on first sight, in view of the probability of simultaneous profit and loss and the business’ own risks, there is no way to privilege the loss of one party at the expense of the other, since both are affected by the current scenario.

    For these reasons, it may be concluded that the eventual flexibilization of the contracts then formalized in the Free Contracting Environment shall be weighed against its own contractual clauses, with the history of the negotiations and the commercial and financial reality of the parties. Indeed, even in the face of the pandemic, to justify a request for amendment or termination of the contract, there shall be a blatant inferior position of one of those involved and evidence of extraordinary and unavoidable damage, which makes it impossible to fulfil the obligation.

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