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    Increase in default in the free electricity market

    Increase in default in the free electricity market

    Carlos Augusto Tortoro Jr., partner of Tortoro, Madureira & Ragazzi Advogados and attorney in charge of the energy and litigation area.

    Published by Canal Energia, on January 31, 2019

    The electricity market in Brazil is characterized by the existence of two contracting environments, namely, the regulated environment and the free environment, the latter being where sellers and buyers can freely negotiate commercial conditions.

    The creation of these two contracting environments resulted from the alteration of the electricity regulatory framework in 2004, aimed at allowing competition between the generation agents, so that the price of electricity would fall under the aegis of the supply and demand rule and freedom of contracting.

    To this end, the generation agents and buyers must be associated with the Electric Energy Commercialization Chamber – CCEE, which is responsible for managing the electricity market in Brazil, under the supervision of the National Electric Energy Agency – ANEEL.

    CCEE is organized as a non-profit civil association under private law and its members are generators, distributors, traders and large electricity consumers that may participate in the free market.

    By becoming members of the CCEE, the agents agree with the association’s convention, which, in turn, complies with the guidelines established by ANEEL in normative resolutions and federal law.

    In this regard, it is important to mention that, even though it is inspected by ANEEL, CCEE is an association governed by private law and, therefore, has internal rules created and ratified by its members, in clear compliance with the freedom of association constitutional principle.

    Thus, in order to migrate from the captive market and become a free energy market agent, for example, a large consumer must comply with the stipulations contained in the association’s adhesion procedure, accept the terms of its articles of incorporation and ratify the operating rules, as all other associates. This is the essence of the constitutional principle of freedom of association.

    However, some decisions of the judiciary have altered this dynamics and created a sensitive situation in an environment that should be guided by freedom of negotiation and contracting between the parties involved.

    Not infrequently, court rulings allow large consumers to remain in the free energy market that no longer meet the initial participation requirements, nor are they entitled to remain as members of the association that manages the market.

    It should be noted that there is a misconceived intervention in the context of a private civil association, as well as in a market that is not in the least related with the provision of an essential public electricity distribution service.

    In these terms, three fearful situations immediately arise: i) affront to the constitutional right of freedom of association; ii) risk of increased delinquency in the free energy market; and iii) consequences to free competition.

    First, as it is a civil association, any legal decision that allows an agent to remain a member of the CCEE, even though the agent no longer has the characteristics and conditions of association member, is clearly contrary to the principle constitution of freedom of association, undermining the rights of other members.

    As a logical consequence of the maintenance of an agent as member of the CCEE, without the minimum conditions provided for in the association’s convention, there is risk of increased delinquency in the free electricity market, affecting the other associated creditors, who apportion the debts in default by agents in debt that should no longer be operating in the market.

    Finally, a legal decision allowing a defaulting member to stay directly affects the constitutional principle of freedom of competition as well, as it gives the specific agent the right to use free market electricity free of charge, causing a competitive imbalance in relation to the other agents of the same economic segment that pay for the manufactured supply.

    Thus, if a particular delinquent agent who observed and followed all the rules provided for in the association’s convention is dismissed, there is no argument capable of substantiating a judicial decision that precludes this act, characterizing a harmful intervention in a business environment established under the aegis of freedom of association and contracting.

    This situation deserves attention, because with the increase of agents in the free electricity market and the regulator’s willingness to encourage this migration, the impact of delinquency could be greater, adding one more dangerous ingredient to be solved by the sector in the coming years.

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