The electricity market needs to mature
Carlos Augusto Tortoro Jr., partner of Tortoro, Madureira & Ragazzi Advogados and attorney in charge of the energy and litigation area.
As it occurred to the financial market in Brazil, over decades there has been an almost negligible supply of products and sources of funding, which certainly created obstacles to the sector’s development and the country’s own economy.
However, the scarcity of investment categories provided to the market and credit lines was not exclusively justified by the high inflation rates or the limited reach of Brazilian economy to the global market.
Much of the financial sector’s persistence in expanding business was based on the insecurity of debt recovery, due to the absence of legislation and effective instruments to support creditors in the event of default.
Decades of stagnation, however, were not enough to discourage the financial sector, which, by means of its regulator, created several rules designed to protect creditors and develop the economic activity.
It can be said today that the Brazilian financial market has matured and is considered one of the safest in the world. Obviously, such a statement may be questioned from several points of view, but there is no denying that the development of credit protection legislation was key to establishing a healthier and safer business environment.
Today, the electricity market is in a similar condition the financial market was submitted to years ago, facing important dilemmas, the solution of which is the key to maturing and developing a relevant and strategic economic sector for the country.
Over the past three decades, the Brazilian electricity market has become more sophisticated and developed through the regulator’s action and, of course, the increasingly dense engagement of private agents.
However, some events have undermined security for the continued development and sophistication of the electricity market in Brazil.
Events such as the rise in delinquency in the short-term market, legal interventions that change the regulatory system, especially in regard to injunctions, and the breach of contracts for the purchase and sale of energy in the free environment have raised doubts among investors.
The most important matter to note is that the regulator has not been insensitive to such events and has shown concern compatible with the magnitude of the issues, as we can see in Public Inquiry No. 33 of the Ministry of Mines and Energy, which highlights engagement for creating an electricity exchange, and such proposal must be submitted by ANEEL by 2020. However, this matter should be addressed in another text.
It is important to note that small legislative changes can ensure more security to the electricity business environment.
By way of example, legal and financial instruments such as chattel mortgage and foreign exchange contracts are classified as first priority claims and this has enabled economic activities to increase, due to the security offered to agents involved in business.
It should also be noted that chattel mortgage law provides for an out-of-court procedure for repossession of the property under chattel mortgage, removing the need to resorting to court to terminate the contract.
It would be a major progress to the electricity market, if the free environment purchase and sale contracts and the energy reserve contracts were also not subject to bankruptcy, including short-term market liquidations.
More security to creditors in complying with contracts would be beneficial to new business development and risk mitigation, especially when it comes to a multilateral market such as short-term liquidation.
This would imply less risk to selling agents, generators and traders, and would facilitate new consumers’ access to the free electricity market, expanding the business environment and financial volumes involved.
Taking advantage of discussions on Bill 10.220/2018, which addresses a new procedure for reorganization and bankruptcies, to cause electricity contracts not to be subject to bankruptcy is an urgent and sensible measure, from a business and strategy standpoint to allow the development of the electricity market in the country.
Ultimately, the existence of legal instruments that mitigate risks and hinder the socialization of delinquency with short-term market creditors may mean a considerable adjustment in sliding-scale rates to the benefit of the market and consumers in general.