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Overview

Since the beginning of electrification in Brazil, the private sector has played an important role. Hundreds of generation projects and local grids were first developed to supply local businesses, and were later consolidated when São Paulo Railway, Light and Power Company and American & Foreign Power Company entered the market in 1889 and 1927, respectively.

The 1950s represented a shift from the private paradigm, with new expansions propelled by public investments. Noticeably, federal-controlled Centrais Elétricas Brasileiras SA (Eletrobrás) and several state-controlled companies such as Companhia Energética de Minas Gerais (Cemig) and Companhia Paranaense de Energia (Copel) were established.

The electricity market underwent a major restructuring process and was fully reopened for private investments in the 1990s. Complementary reforms were passed in 2004 to increase the security of supply, regulatory stability and competitiveness among agents. Many assets have been already privatised, including most state electricity companies and some subsidiaries of entities controlled by the federal government. Despite this, enterprises such as Eletrobrás, Cemig and Copel, with approximately US$33 billion, US$4.7 billion and US$3 billion of assets, respectively, continue to be within the government's control, but are expected to enter into divestiture programmes in the near future.

Under the existing framework, the federal government maintains the power to grant power transmission, power distribution and large hydropower plant concessions, subject to a competitive process, and to grant authorisations to other power generation projects, under the applicable rules. Through different bodies and entities, the federal government also:

1. plans expansions (mainly through the Ministry of Mining and Energy (MME));
2. regulates, inspects and enforces regulations (mainly through the National Electricity Agency (ANEEL));
3. performs settlements in the electricity trade (mainly through the Electricity Trade Chamber); and
4. centrally operates the national electricity grid (mainly through ONS, the national grid operator).

Perhaps particular to Brazil is the fact that the federal government assumes a protagonist role, being responsible for conducting all of the electricity auctions needed to match the demand of privatised power distribution companies with the energy produced by independent power producers. It has successfully encouraged the expansion of the power generation matrix while maintaining a reasonable predictability regarding investments and the bankability of projects. Electricity auctions offer excellent opportunities for mergers and acquisitions (M&A) in greenfield generation, both before and after tenders.

What makes electricity auctions effective in Brazil is the fact that power distribution companies are obliged to acquire the energy required to supply their consumers in these auctions. This is because the power distribution model is not completely unbundled, in the sense that the large majority of electricity consumers, representing around 70 per cent of the demand, are still not free to select their power supplier, and are bound to their local distribution concessionaire. For this reason, they are called 'captive consumers', as opposed to 'free consumers' who can freely choose their suppliers. However, the proportion of free consumers is increasing so substantially that they will become the majority or even the totality of the market in the next decade or so, which in turn will require changes to the government's role in planning the expansion of the power generation matrix.

Legal and regulatory framework

M&A in the power sector is subject to the general regime applicable to corporate law, in particular to the Corporations Act, and to some extent to the Civil Code. In the case of divestiture of government-controlled assets, additional statutes may apply, including the Public Procurement Act, the State-Owned Companies Act and the State-Owned Divestiture Regime. Furthermore, when it comes to power concessions held by the government, specific provisions allow for the extension of the validity of concession agreements when in connection with a privatisation process, such as the one that occurred, for instance, during the privatisation of CESP.

Other acts are applicable in particular to the power sector, such as Law No. 9,074/1995, among others. It is worth highlighting Law No. 13,306/2016, which implemented important changes in the power sector legislation, and created a new mechanism whereby ANEEL may approve a change of control of assets undergoing punitive proceedings as a means to avoid the revocation of the applicable power sector authorisations or concessions. This legal mechanism has already fostered several M&A negotiations relating to hydropower, thermoelectric and wind power plants, as well as to transmission concessions, although because of some excesses it can be expected that ANEEL will take a slightly less permissive approach in the future.

For transactions resulting in a change of control, it should be considered whether ANEEL Normative Resolution No. 484/2012 requires the agency's prior approval, or only a notification after the closing of a transaction. Prior approval will be needed, for instance, when a target involves a concessionaire of a public utility such as power transmission and distribution, or when it relates to hydropower plants or nuclear power plants. There is another hypothesis, not yet applicable, referring to power plants owning a 'relevant level' of supply in regulated electricity auctions, under which the definition of the relevant level by ANEEL is still pending.

The regime applicable to changes of control may be also subject to specific language included in the auction rules of a given concession or in the authorisations and concessions of the relevant power assets, to be assessed on a case-by-case basis. For instance, recent transmission auctions have included in their auction rules the new controller's obligation to evidence compliance with the public tender requirements in the case of a change of control occurring before the commercial operation of the facilities.