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FOSSIL FUEL CONSUMPTION ACCOUNT OF

ISOLATED SYSTEMS (CCC-ISOL)

In 2004, the Brazilian Court of Audit (TCU) conducted an audit of the Fossil Fuel Consumption Account of Isolated

Systems (CCC-Isol). It is a tariff charge of the Brazilian energy sector which subsidizes the production of thermal

energy in isolated systems at the North Region and that, in the period of 1999 to 2009 exceeded R$ 25 billion.

The CCC-Isol enables the supply of electric power to the most remote regions of the country and promotes the

economic sustainability of locations served by the isolated systems, without which electric power prices would be

impractical. The cost of the CCC-Isol is funded by all Brazilian consumers, who apportion the costs of purchasing

fossil fuels.

Since the judgment of the CCC audit and the publication of Decision nº 556/2005-Plenary, TCU oversees the

measures adopted by the National Electric Energy Agency (Aneel), by the Brazilian Power Central (Eletrobras) and the

Ministry of Mines and Energy (MME) with a view to reducing the burden and improve the management of the account.

After the control performed by the TCU, there was a sharp drop in CCC collection, although several irregularities

pointed out in the first audit persisted. The monitoring of management of CCC was conducted according to Decisions

nº 923/2008-Plenary and nº 1906/2010-Plenary.

TCU authorized the continuation of monitoring because, besides the fact that the determinations were not met,

in December 2009 Law nº 12111 was enacted changing the criteria for using CCC subsidies. This new standard will

have an impact of at least 2% in the electric power tariff, which is equivalent to over R$ 2 billion a year built into the

energy tariffs. The materiality alone justifies the tariff burden remaining under the external control of the Court of Audit.

Main findings

During the audit, as well as during the monitoring carried out later, TCU noted that Eletrobrás does not conduct

public bids for the purchase of fuel, subsidized by the CCC, to supply the plants of the isolated systems, violating

item XXI of Article 37 of the Federal Constitution combined with article 19 of Law nº 11 943, of 2009. In addition,

the thermoelectric park of the Eletrobras’ holding companies is totally inefficient. The generation of one MWh costs

R$ 3,000, while the national average does not exceed R$ 350/MWh. There is also a high level of electrical losses

confronting the principle of efficiency.

The audit also found that the Digital Data Collection System provided for in Aneel Resolution nº 163/2005 is

not yet implemented. In 2010, of the 301 plants that compose the Isolated Systems only 16 had implemented the

Source: Eletronorte

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Brazilian Court of Audit • www.tcu.gov.br • 2nd Secretariat for Oversight of Privatization and Regulation • [email protected] • Phone: +55-61-33165945 • Fax:+55-61-3316-7545

For further information, visit www.tcu.gov.br/controleregulacao

system. This system is essential to assess with certainty if the production of electric power from thermal power

plants is consistent with the amount of fuel that is being subsidized with funds from the CCC, which can result in

significant financial damage to consumers of electricity in the country.

There is no study that demonstrates the effects of Law nº 12 111/2009 on the CCC and its impact on tariffs.

Previously, CCC only covered the purchase of fuel oil for power plants, but this law has built into the charge the

entire cost of the operation, plus the return on investment, depreciation, staff costs, costs of transport and storage

of oil and maintenance costs, the sector’s charges and, above all, compensation for loss of ICMS (tax on goods

and services) to the states of the North region. This law was regulated by Decree nº 7246/ 2010. Based on this

framework, Aneel issued Normative Resolution nº 427 of 2011, which establishes the procedures for planning,

training, processing and management of the CCC.

TCU Deliberations

Through Decision nº 1906/2010-Plenary it was determined to Aneel:

• the adoption of more effective measures to comply with Aneel Resolution nº 163 of 2005, including, if

necessary, the use of withdrawal of authorization pursuant to article 11, of Aneel Normative Resolution nº 63,

of 2004;

• the presentation of studies, sixty days after the implementation of Law nº 12 111, of 2009, showing the effect

of that law on the charges of the CCC. These studies should specify the manner of valuation of the average

cost of generation in the Regulated Contracting Environment (ACR), the valuation of self generation costs, the

impact of investments made by providers, the extent and form of transfer of any liability costs, for the period

covering from the publication of Provisional Measure nº 466/2009 until the date of its regulation, in addition

to the financial impact of the tariff burden on the CCC.

This decision determined that Eletrobras:

• carry out a bid for the purchase of subsidized fuel by the CCC, within ninety days, as well as guide the

companies controlled by the holding in the same direction. Eletrobras should also present an action plan

covering the actions for the modernization/revitalization of the thermal park of the power plants subsidized

by the CCC, which belong to the Eletrobras group, given the existence of high cost beneficiaries and the

measures adopted for the effective reduction of power losses in the Eletrobras’ companies, detailing the

rates of the losses, deadlines and values for this purpose and also listing the actions to be performed with

Eletrobras resources and resources obtained from the World Bank;

• the implementation of the Digital Data Collection System required by Aneel Resolution nº 163/2005 in all

the plants subsidized by the CCC, belonging to the holding company Eletrobras, in order to identify with

transparency the magnitude of electric power, notably the specific consumption of these plants.

Judgment TCU No 1.906/2010-Plenary session - 08/04/2010 Rapporteur: Minister José Jorge

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REVIEWS AND READJUSTMENTS OF

ELEcTRIc POWER DISTRIBUTION TARIFFS

The Brazilian Court of Audit (TCU) monitors the periodical tariff reviews of concession contracts for power

distribution. The main purpose of this oversight is to verify consistency in the methodological criteria used,

considering regulation principles such as moderate tariffs.

In Brazil, power distribution service is generally carried out by private companies under a concession contract

signed with the federal government. Currently, the country is subdivided into 64 concession areas. The concessionaire

is remunerated by charging residential, commercial and industrial tariffs. These tariffs should be moderate and

should cover all service costs (e.g., investments, depreciation, operation and maintenance, power purchases,

transmission costs, segmented charges), ensuring quality and constancy of service.

Concession contracts establish tariff changes under the following mechanisms:

Annual tariff adjustmentAn yearly simplified tariff amendment to reestablish the purchasing power of the concessionaire revenue

Extraordinary tariff reviewWhenever significant changes in the concessionaire expenditures occur, tariffs may be reviewed by its request in order to maintain economic and financial balance of the contract.

Periodic tariff review

A detailed tariff amendment which occurs in cycles, usually every four years, in order to maintain economic and financial balance of the contract and to incorporate gains of efficiency by the concessionaire, which shall be transferred to the consumer before the next review cycle.

How does it work?

TCU monitors the periodical tariff reviews of concession contracts for power distribution under Internal Rule

nº 43, of 2002.

It involves the evaluation of methodology, studies and procedures uniformly applied by the National Electric

Energy Agency (Aneel) to all concessionaires during a review cycle (four years). TCU also monitors, on a yearly

basis, the use of this methodology in some specific tariff review processes.

The oversight of tariff reviews during the first cycle, between 2003 and 2006, resulted in findings according to

which TCU issued recommendations and determinations to Aneel. Those were related to an early stage of the tariff

review process and the issues raised at the time were solved gradually with the introduction of new methodologies.

From the second cycle, between 2007 and 2010, TCU recommended Aneel to improve the criteria used in the

valuation of surplus power purged from the balance sheet in order to increase efficiency, boost low tariffs and

improve concessionaires’ management of power purchase contracts. TCU also recommended Aneel to establish

mechanisms for periodic monitoring of actual revenue reported by concessionaires and to improve ways on informing

population about average increase or decrease of tariffs.

In relation to the third cycle of reviews, conducted between 2011 and 2014, TCU began an audit to evaluate the

major enhancements of the methodology that will be used.

TCU does not perform systematic monitoring of annual tariff adjustment. However, this issue was the subject of a

specific audit, based on a request from the Committee of Mines and Energy of the Chamber of Deputies. As a result,

TCU found that the adjustment formula contained distortions which revealed undue gains by the concessionaires

since 2002. After the problem identification in 2008, Aneel discussed the issue with distribution concessionaires

and, in 2010, contractual amendments were signed in order to change the criteria for adjustment.



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These are TCU decisions in the oversight of second cycle tariff reviews, in accordance with Internal Rule nº. 43

of 2002:

Company Process Decision Rapporteur

Coelce TC 002.694/2007-6 TCU No 2.542/2008-Plenary session - 11/12/2008 Minister Benjamin Zymler

Eletropaulo TC 007.953/2007-2 TCU No 2.379/2008-Plenary session - 10/29/2008 Minister Benjamin Zymler

Elektro TC 014.601/2007-0 TCU No 547/2010-Plenary session - 03/24/2010 Minister Benjamin Zymler

Cemig-D TC 030.181/2007-2 TCU No 471/2010-Plenary session - 03/17/2010 Minister Benjamin Zymler

Light TC 023.172/2008-1 TCU No 1.945/2010-Plenary session - 08/11/2010 Minister Benjamin Zymler

Coelba TC 002.123/2008-5 TCU No 2.196/2009-Plenary session - 09/23/2009 Minister Benjamin Zymler

Ampla TC 031.852/2008-1 TCU No 324/2010-Plenary session - 03/03/2010 Minister Benjamin Zymler

Celg TC 009.421/2009-7 TCU No 49/2011-Plenary session - 01/19/2011 Minister Benjamin Zymler

Cepisa TC 018.715/2009-5 TCU No 776/2010-Plenary session - 04/14/2010 Minister Benjamin Zymler

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ELECTRIC POWER AND ENVIRONMENT

Given the energy generation matrix being

implemented and the difficulties in the environmental

licensing process, the Brazilian Court of Audit (TCU)

conducted a performance audit to assess the decreasing

number of hydroelectric plants and, consequently,

increasing number of thermal power plants, in the new

energy public auctions that occurred in 2005 and 2006.

In this work, TCU examined the following aspects:

• Restriction in the supply of electric power from

hydroelectric plants in the new energy auctions

and implementation of the plan for the electric

energy sector.

• Negative environmental impacts and costs of the

energy matrix in deployment due to the restriction

in the supply of electric power from hydroelectric

plants in the new energy auctions.

• Environmental licensing process of generation

projects.

Main findings

During the audit, TCU identified that the Ten Year Plan

for Power Expansion (PDEE) 2006-2015 contemplated a

hydroelectric expansion of about 31 GW and a thermal

expansion of about 10 GW for the reference market

scenario. The installed capacity in the country at the

time exceeded 90 GW. It was expected that the installed

hydropower capacity would remain at 73% until the end

of the plan. The new energy auctions held in 2005 and

2006, however, resulted in negotiations of energy with a

baseline of about 50% to be supplied by each of these

types of sources.

At the time, it was stressed that the results of these

auctions would be inadequate if the final economic and/

or environmental costs of the resulting energy matrix

were higher than expected. If similar results occurred in

the next auctions this would certainly affect the energy

matrix being implemented.

With regard to the planning of the electric power

sector, the audit found that it began to be postponed

due to the crisis experienced in the sector in the 80s.

With the privatization process, planning effectively

ceased to be performed and was only resumed as of

the restructuring of the electric power sector model

and the creation of the Energy Research Company

(EPE) in 2004. Despite this resumption, the amount of

hydroelectric projects eligible for bidding in the 2005

and 2006 auctions, and the number of watersheds

inventoried remained below the desired levels. The

audit identified the need for proper monitoring of the

actual implementation of the planning.

The audit also identified that the Strategic

Environmental Assessments (SEA) were not being used

as a planning tool by the federal government. This

impaired the incorporation of environmental variables

at the level of strategic decision and prevented a

comprehensive multi-sectoral view on the sustainability

of natural resources.

Moreover, it was observed that the environmental

consequences arising from the emission of greenhouse

gases by energy generation enterprises were not

subjected to a prior review by the Brazilian Institute of

Environment and Natural Resources (Ibama), since there

were no regulations that required this analysis.

As for the process of environmental licensing

of electric power sector projects, it was observed

that there was a gap of regulation regarding articles

23 and 231 of the Federal Constitution, which deal

with the responsibility for licensing and the need for

congressional authorization, after hearing the affected

communities, for the use of use of water resources on

indigenous lands.

The audit found that the Government Council

provided for in the National Environment Policy, which

is responsible for formulating government policy

guidelines for the environment and natural resources

that interfere in other sectoral policies, was not properly

implemented and there were no representatives from

the social area of the government in the National Energy

Policy Council (CNPE). CNPE, similarly, is responsible

for formulating government policy guidelines for the

electric power sector.

TCU’s audit found that the deadline for closing the

socioeconomic registry was not regulated. This registry

is used to evaluate the social and economic impact of

an engineering work or of an activity that will change

the environment. In the registry, there is information

that reflects the population structure and characterizes

its social and economic constitution. It was also noted

that there was noncompliance with statutory time limits

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because of weaknesses in the management of the

licensing process; that the quality of studies submitted

to Ibama, as a prerequisite for licensing, was inadequate;

and that the results of public hearings held in licensing

processes were not publicized.

Law nº 9985/ 2000, Article 36, paragraph 1, determined

that the minimum amount allocated to environmental

compensation is 0.5% of the total costs of implementation

of an undertaking. The percentage is set by the

environmental licensing agency according to the degree of

the environmental impact caused by the project. However,

it was found that there was no ceiling-limit for establishing

the environmental compensation.

TCU Deliberations

The recommendations of this audit, contained in

Decision nº 2164/2008-Plenary, aimed to enhance the

actions required to implement the energy matrix, working

mainly to achieve the objectives of the PDEE and other

related public policies by the federal government,

including the National Environmental Policy and Brazil’s

commitment to reduce emissions of greenhouse gases.

TCU recommended that the Ministry of Mines and

Energy (MME), with the support of EPE, prepare a

strategic plan of action to monitor and facilitate the

expansion of electric power generation and establish

incentive mechanisms for sectoral agents to undertake

feasibility studies for hydroelectric improvements.

Particularly with regard to the SEAs, TCU

recommended a closer coordination between the

ministries of the Environment (MMA), Mines and Energy

and Planning, Budget and Management to establish

guidelines in order to carry out SEA’s of the large

projects in the electric power sector.

Regarding greenhouse gases associated with

electric power generation, TCU recommended that

the MMA evaluate the convenience and opportunity of

considering this in the context of environmental licensing

of projects in the electric power sector.

TCU recommended to the Civil House:

• to take measures with the National Congress to

accelerate the discussion of draft bills regulating

articles 23 and 231 of the Federal Constitution;

• to ensure their effective role in the formulation of

government policy guidelines for the environment

and natural resources that interfere in other

sectoral policies;

• to assess the appropriateness and timeliness of

the of Executive Branch agencies that deal with

social issues, for example the Ministry of Social

Development and Hunger Alleviation, to be

represented in the National Power Policy Council.

TCU considered it essential that Ibama acknowledge

the need for presenting a rationale for its administrative

acts and that the reasons for acceptance or rejection of

the claims made by participants in public hearings held

during the environmental licensing processes should be

published. Moreover, aiming at improving the objectivity

of the licensing process, TCU determined that Ibama

explain the criteria for defining the percentage of the

environmental compensation, the maximum limit

allowed and establish the percentages equivalent to

the environmental damage as stipulated in article 36,

paragraph 1 of Law nº 9985/2000.

In view of the difficulties encountered in the process

of environmental licensing of projects to generate

electric power, it was recommended to Ibama to:

• create a mechanism to punish those responsible

for preparing inadequate environmental impact

studies;

• regulate, in partnership with the MMA, a date for

closing the socioeconomic registry as well as

the conditions under which such registry can or

should be reopened.

Judgment TCU No 2.164/2008-Plenary session - 10/01/2008 Rapporteur: Benjamin Zymler

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ELECTRIC POWER GENERATION CONCESSIONS

The Brazilian hydrothermal system operates mostly with hydroelectric plants that have large reservoirs, which

allows controlling the flow of water for electric power generation. The decision on whether or not to store water is

based on an economic and social impact analysis which assesses the potential risk of an energy deficit, i.e., the

theoretical risk of a power outage. This decision has direct reflexes on the cost of energy generated in the National

Interconnected System (SIN), because, in case of reduced hydropower generation, there will be the use of thermal

electric plants, whose electric power is more expensive.

Currently, the trend is the installation of run-of-the-river hydroelectric plants, where there are practically no water

reservoirs, which requires more constant use of thermal electric plants.

According to data from the National Electric Energy Agency (Aneel), the generation matrix exceeds 122 installed

GW, including imports. Hydroelectric energy plants account for 66% of such capacity.

Chart Nº 1: ENErgy matrix, partiCipatioN by sourCE of gENEratioN (updatEd oN 6.9.2011).

Source: Aneel (http://www.aneel.gov.br/aplicacoes/capacidadebrasil/operacaocapacidadebrasil.asp)

features of the granting process

The commercialization model established by Law nº 10.848/2004 provides free and regulated environments for

contracting electric power:



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Most consumers served by energy distributors belong to the captive market. Exceptionally, in some specific

cases, distributors may purchase energy outside of the ACR.

The energy auctions are conducted five, three and one year in advance counting from the initial date of supply.

They are called A-5, A-3 and A-1. The granting of concessions for use of the hydroelectric potential is included in

the A-5 auction.

the role of tCu

The Brazilian Court of Audit (TCU) oversees all the departments and agencies responsible for managing the

electric power sector, such as the MME, Aneel, the Power Research Company (EPE), the National Power System

Operator (ONS), public and private companies that hold concessions of public utilities, among others. Thus, TCU

oversees and evaluates both the spheres of policy formulation and execution, as those of regulation and provision

of public services.

TCU is responsible for monitoring the acts that grant the use of the hydroelectric potential, as provided for in

Internal Rule nº 27/1998. This monitoring includes analysis of studies of technical-economic and financial feasibility

(EVTE) regarding the project and of the environmental implications inherent to the undertaking.

In addition to these aspects, the legality of the public notice and its conformity with the EVTE, the stages of

qualification of interested parties and judgment of proposals, and finally, the signing of contracts are also analyzed.

These analyses are carried out simultaneously to the granting procedures, in stages provided for in the rule, so that

any irregularities detected can be corrected prior to signing the contract.

Among the major advances in regulation of the processes regarding the granting of concession to generate

electric power, spurred by TCU monitoring, the following are noteworthy:

Improvement and consolidation of the methodology used to define its own capital costs as well as those of

third parties;

• mprovement of the methodology for defining the values of investment of generation projects;

• Adoption of action for the appropriation of business efficiency gains in favor of low tariffs;

• Improvement the assessment of environmental costs associated with hydroelectric plants;

• Greater transparency in setting maximum electric power tariff allowed.

Below are some examples of TCU deliberations on the issue:

HEP Santo AntônioJudgment No 2.138/2007-Plenary session - 10/10/2007

Judgment No 373/2011-Plenary session - 02/16/2011

Rapporteur: Minister Benjamin Zymler

Rapporteur: Minister Ubiratan Aguiar

HEP JirauJudgment No 602/2008-Plenary session - 04/09/2008

Judgment No 1.635/2009-Plenary session - 07/22/2009Rapporteur: Minister Benjamin Zymler

HEP Belo Monte



Judgment No 3.155/2010-Plenary session - 11/24/2010

Rapporteur: Minister José Múcio

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REGULATION OF ELECTRIC POWER LOSS

The Brazilian Court of Audit (TCU) carried out an audit to evaluate regulation regarding electric power losses. In

the audit, TCU sought to identify the impact of technical and commercial losses on the tariffs of the entire electric

power system, as well as the measures taken by the National Electric Energy Agency (Aneel) to reduce and combat

such losses.

TCU’s work is necessary and timely because the level of losses in the electric power system is a determining

factor for setting the tariffs for consumers. The losses also influence the decision on investment in new generation

projects, because for a given demand, the greater the loss, the more energy should be generated and injected into

the system.

A certain level of loss is inevitable, but this factor should be managed and subject to regulation. Appropriate

incentives should be offered to all agents in the system in order to have the best electric power efficiency possible.

Main findings

During the audit, TCU identified that the level of electric power losses in the systems was very high, reaching

about 5% of the amount of tariffs paid by final consumers. In nominal terms, in 2007 this increase amounted to R$

4.7 billion. The energy that was not invoiced and the respective taxes not collected amounted to 11% of annual total

sales of the sector, i.e., more than R$ 10 billion.

In addition, commercial losses in the period 2003 to 2007 had a very different behavior from that observed in the

captive market, a segment served exclusively by the local distributor. While the market declined in the period (due to



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the migration of consumers to the free market, which grew from 18 TWh in 2003 to 71 TWh in 2007) the commercial

losses increased.

Among the free consumers - those who can choose the electric power distributor - the commercial losses are

practically null. Given this situation, it was possible to conclude that there was an increase of 29% of this type of

loss over the period, indicating that concessionaires were not looking for efficiency.

2003 2007Year

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20

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Captive market falls

Com

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Commercial loss grows

2003 2007Year

As for the admissible downward trend of energy losses per concessionaire, at the beginning of the second cycle

of tariff reviews the TCU noted that this trend had not been defined by Aneel. At the time, the regulator adopted only

one specific goal.

TCU Deliberations

Although Aneel has a series of mechanisms that could contribute to the reduction of energy losses, the agency did

not use them at the beginning of the second cycle of the concessionaires’ tariff reviews. Based on this background,

TCU, in its Decision nº 2211/2008-Plenary, recommended to the regulator that they effectively implement the

measures that they themselves established.

CharT 2 – CoMMerCial losses in TWh, 2003-2007CharT 1 - CapTive MarkeT in TWh, 2003-2007

Judgment TCU No 2.211/2008-Plenary session - 10/08/2008 Rapporteur: Minister Benjamin Zymler

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ENERGY SECURITY POLICIES

The Brazilian Court of Audit (TCU) conducted a performance audit in order to assess the adequacy of the policies

and actions of the electric power sector agents aimed at ensuring safety, efficiency and sustainability of electric

power supply to the domestic market.

This audit is the result of TCU’s concern with a possible imbalance between supply and demand for electric

power over the years from 2009 to 2016, exceeding the levels deemed acceptable by the National Energy Policy

Council (CNPE), a fact that would threaten the country’s energy security, the low-tariff principle and the sustainability

of the sector.

Main findings

The work conducted by TCU concluded that the electric power sector’s planning is well structured, with a balance

between prospects of expanding demand and supply. This reflects directly on the reduction of the possibility of

deficit by 2016.

If the current growth trends persist (5% per year), the audit conclusion is that the deficit hypothesis is remote,

given the improvement of short and medium term planning, timely completion of new energy bids, better monitoring

and management of the national electric power system by the various bodies and agencies, and the integration of

different generation subsystems through by expanding transmission lines.

The implementation of government guidelines and priorities for the energy sector are directly associated with prior

planning, the cornerstone for a systemic and integrated view of demand and supply expansion of various energy

sources, with goals and strategies for implementation that should be followed by solid regulation and monitoring.

Thus, planning and its interface with public policies were prominent, as well as the implementation of this plan

through bids and other contracting models, sector regulation and monitoring.

Despite the macro coherence of the plan to expand electric power generation and transmission, and despite the

assumptions and factors that affect the prediction of the expansion, the audit identified some flaws in this process

that indicate improvement opportunities, such as:

• Inadequacy in the calculation of the deficit costs;

• Inaccuracy of the database on total installed electric power capacity of the hydroelectric power stations;

• Failure to incorporate the peculiarities of the free market into planning;

• Untimely publication of the ten-year electric power expansion plans;

• Lack of integrated planning and public policies to guide gas industry development, regulation and expansion.

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Other risks that stood out and are as worrisome as the risk of energy deficit relate to failure to obtain low tariffs,

thus affecting efficiency; and unreasonable use of electric power resources, which, over time, may negatively impact

the sustainability of the national electric power system.

With regard to bids and other contracting models, the audit identified that, while the amounts of energy negotiated

in bids are consistent with the trend of increase in demand, there is a difference between the amount planned and

what was actually purchased in such bids. This is due to the fact that there are divergences between the planned

sources and the ones under implementation - with a low level of participation of hydroelectric ventures in the new

energy bid from 2005 to 2008, and increasing participation of thermoelectric enterprises.

In the post-privatization scenario, sectoral regulation, associated with oversight, has been an essential activity to

ensure a stable and economically attractive environment, defending the public interest. In such context, monitoring

the performance of the regulators is seen as a priority by the TCU.

TCU also noted that:

• Improvements in legislation and regulation of the sector are needed in order to overcome difficulties in the

financial and commercial acknowledgement of energy re-potentiation and modernization gains;

• There is a risk that the renegotiation of “old energy” contracts, signed in 2005 and 2006, and the end of

the concessions of generators, distributors and transmitting stations will impact significantly the low tariffs

charged, and even supply security;

• Cancellation of contracts that took place between 2003 and 2006 allowed “old energy” to migrate into the

free market, forcing the captive market to accept the price of the new energy;

• In 2007-2008, thermoelectric plants were disregarded , with no technical justification nor legal support;

• The apportionment of the sectoral charges concerning Energy Research and Development (R & D) is uneven

among consumers of low and high voltage.

• There is a lack of legislation and government interference in the gas industry is weak.

• While financial arrangements in hydroelectric power export and import do not cause damage to Brazil, the

agreements signed with neighboring countries to exchange power have flaws and one of the consequences

is that Uruguay fails to return the electric power within agreed deadline.

TCU Deliberations

The findings of this audit are directly related to the Country’s energy security regarding electric power. Thus,

the determinations and recommendations were generally aimed at improving the management of public resources,

more specifically:

• Increased reliability of the databases and studies on sectoral planning;

• Adequacy of the parameters used in the planning process of the electric power sector;

• Advances in the gas industry, with active participation by the Government in setting guidelines for the industry;

• Establishment of policies to foster re-potentiation and modernization of hydroelectric stations;

• Reassessment of the criteria used in the new energy bids for thermoelectric plants;

• Incentive to optimize the exploitation of hydroelectric plants;

• Incitement to keep tariffs low in the process of concession renewal;

• Strengthening of fundamental legal instruments for the exchange of electric power with neighbor countries.

Judgment TCU No 1.196/2010-Plenary session - 05/26/2010 Rapporteur: Substitute-minister Augusto Sherman

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ELECTRIC SECTOR

The Brazilian Court of Audit (TCU) oversees the management and performance of the National Electric Energy

Agency (Aneel) to verify legality, efficiency, effectiveness and economy. .

TCU oversees by:

• monitoring concessions and contract compliance on power generation and transmission;

• assessing regulation regarding power distribution contracts, especially on tariff review and adjustment

mechanisms and

• auditing governmental activities of planning, implementation, evaluation and regulation of public policies in

areas that, directly and indirectly, affect tariffs, quality, continuity and access to energy.

Structure of the electric sector

The electric power sector provides electricity to more than 95% of the population and is structured into four

segments: generation, transmission, distribution and commercialization of electricity.

image 1 – electric POWer SectOr SegmeNtS

Source: Aneel

The Brazilian system of power production and transmission is basically hydrothermal, with an installed electricity

generation capacity which exceeds 112 GW, according to the Ten-Year Energy Plan, and with a physical warranty

average of 72 GW. The participation of water source is approximately 66%. It is a system with multiple owners.

In planning the expansion of the sector, the Energy Research Company (EPE) estimates, for this decade, an

average consumption growth rate of 5% per year. The fulfillment of these growth rate depends both on investments

in large hydropower plants (HPPs) and on diversification of the matrix in order to minimize reliance on this energy

source due to hydrological adversities.

These adversities have been compensated by thermal generation from fossil fuels, which increases the emission

of greenhouse gases. Recently, the sharing of other sources in the Brazilian energy matrix has grown, such as

natural gas-fired power plants, biomass, wind power and, solar to some degree.

Regarding the transmission of electricity, Brazil is covered by the so-called National Interconnected System (SIN)

and by isolated systems, mainly in the Amazon region. The SIN provides 97% of national consumption and covers

55% of the Brazilian territory.



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The integrated use of generation and transmission resources of the Interconnected System makes possible

the reduction of operating costs, reduction of heat production and lower fuel consumption, whenever there are

hydroelectric surpluses in some parts of the system.

Service to the end user is delivered by power distributors, which buy power from generators. Transportation to

the concession area of distributors is done through the transmission lines.

legal framework and institutions

The basic legislation in the electricity sector was consolidated in the last 70 years. It is a set of constitutional

provisions, supplementary and ordinary laws, decrees, rules issued by more than one ministry and rules from the

Ministry of Mines and Energy (MME), among others.

The landmarks of modernization of this sector are general laws and specific laws. Examples of general laws are

Law nº 8987, of 1995, which deals with the system of public service concessions, and Law nº 9074, of 1995, which

sets standards for granting and extension of concessions and permits of public services. Examples of specific

laws are Law nº 9427, of 1996, which creates the National Electric Energy Agency (Aneel), Law nº 10 848, of 2004,

which establishes conditions to electricity commercialization, and Law nº 12 111, of 2009, which provides rules for

electricity services in isolated systems.

The sector is organized with several institutions and agents that perform different duties, as presented in Chart 1.

chart 1 - iNStitutiONal OutliNe Of the electric POWer SectOr

institution Duties

Ministry of Mines and Energy (MME)To develop policies on this segment and establish guidelines.

National Electric Energy Agency (Aneel)To regulate the established policies, provide guidelines and inspect the services.

Energy Research Company (EPE) To perform necessary studies for electric system expansion.

Operador Nacional do Sistema Elétrico (ONS)Coordenar e supervisionar a operação do sistema interligado

Power Commercialization Chamber (CCEE) To make feasible power commercialization.

National Power Policy Council(linked to the

Presidency of the Republic)To propose specific actions for the sector.

Agents from the sector (generators, transmitters, distributors, traders)

To offer power services to end users.

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electric POWer trANSMiSSiON cONceSSiONS

Brazil has complex electric power production and transmission systems. Brazilian regions are served by the

National Interconnected System (SIN) and by the Isolated Systems (SIsol).

SIN comprises generation and transmission concessions in the South, Southeast, Midwest, Northeast and part

of the North region. With the completion of major projects underway in the North, the Energy Research Company

(EPE) foresees the interconnection and expansion of the SIN in a few years, which will limit isolated systems to a

few areas.

In territorial terms, the SIsol are inserted in an area corresponding to approximately 50% of the country, where about

3% of the electric power used in the country is consumed. Some of these systems have been recently interconnected,

or interconnection process is underway, as is the case in the cities of Manaus, Porto Velho and Rio Branco.

Electricity interconnection between regions allows the optimization of watersheds, making it possible to take

advantage of hydrological diversities, thus increasing energy security.

Image 1: NatIoNal INtercoNNected SyStem, coNfIguratIoN expected by 2012

Source: ONS



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characteristics of transmission line granting processes

The National Electric Energy Agency (Aneel) is in charge of organizing bids for transmission expansion.

To select the winner responsible for building, operating and maintaining the transmission lines, the Agency

adopts reverse auction bidding. The value of the bids shall be the Allowed Annual Revenue (RAP) that the companies

participating in the auction intend to establish. The lowest bid wins. The RAP is passed on to the electric power tariff

and is a component of the total tariff charged the end-user.

The RAP shall not be so low as to render the auction unfeasible due to a lack of interested bidders, which

would endanger electric power supply; it shall not be too high, since this would put at risk the low tariffs, with

consequences to both the population’s cost of living and the competitiveness of domestic goods. The RAP is mainly

a function of capital costs, of the values of investments required for the ventures to be offered in bids of depreciation

and of operation and maintenance costs.

the role of tcu

The Brazilian Court of Audit (TCU), according to Internal Rule nº 27 of 1998, monitors the electric power

transmission lines concessions processes. TCU oversight in this segment is conducted in stages and focuses

on the parameters used to establish the tariff ceiling for the bid, examination of the bidding procedures and its

conformity with all rules and regulations, including examination of the bidding notices and granting contracts.

In recent years, monitoring and decisions by the Court led to the improvement of the bidding contests, thus

contributing to improve and strengthen the methods employed by the Regulatory Agency.

Major advances concerning regulation of electric power transmission granting processes have been achieved as

a result of TCU monitoring:

• Improvement and consolidation of the methods to determine costs of own/third party capital.

• Creation of the regulatory agency Prices Bank of used to define investment amounts for transmission lines.

• Adoption of measures to obtain gains from business efficiency earnings in order to favor low tariffs.

• More transparency in the definition of the Maximum Allowable Annual Revenue.

Here are some examples of major deliberations made by the TCU on this matter:

Linhão do MadeiraJudgement TCU No 1.945/2008-Plenary session - 09/10/2008

Judgement TCU No 1.637/2009-Plenary session - 07/22/2009Rapporteur: Minister Benjamin Zymler

Transmission lines to

interconnect biomass plants

Judgement TCU No 2.386/2008-Plenary session - 10/29/2008

Judgement TCU No 857/2010-Plenary session - 04/28/2010Rapporteur: Minister Benjamin Zymler

Linhão Tucuruí-

Macapá-Manaus


Judgement TCU No 1.569/2009-Plenary session - 07/15/2009Rapporteur: Minister Benjamin Zymler

Transmission lines to

interconnect wind plants

Judgement TCU No 188/2011-Plenary session - 02/02/2011

Judgement TCU No 964/2011-Plenary session - 04/13/2011Rapporteur: Minister José Múcio

Prices Bank Judgement TCU No 1.032/2008-Plenary session - 06/04/2008


Rapporteur: Minister Benjamin Zymler


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LIGHT FOR ALL PROGRAM AND SOCIAL TARIFFS

In response to a request from the Committee of Mines and Energy of the Chamber of Deputies, the Brazilian

Court of Audit (TCU) conducted audits of the “Light for All “program (LPT) and of the “Social Tariff”, which are a part

of the public policies aimed at universalizing electric power distribution service.

The following risks have been identified in the “Light for All” program:

• Undue impact on electric power tariffs due to flaws in audits conducted by the National Electric Energy

Agency (Aneel).

• Target-public will not be fully served by the deadline set for conclusion of the program, scheduled for

December 31, 2011.

As for Social Tariffs, the audit tried to assess the efficiency and effectiveness of this policy, based on the analysis

of the criteria to grant discounts to low income consumers.

Light for All

With regard to the Light for All program, the TCU found that between January 2004 and October 2010 more than

2.5 million households were served, which corresponds to 86% of the target public. This accomplishment required

contracting works in the approximate amount of R$ 15 billion. The chart below shows the development of the

program in each state over the above-mentioned period.

ChArt 1: ImpLementAtIon of the Lpt progrAm In eACh stAte CompAred

to the respeCtIve goAL (%) from 2004 to oCt/2010

0%SC PE RN SE ES RS AL MG SP MA BA RJ PR MS CE PB MT PA RO AC GO AM PI TO RR AP

20%

40%

60%

80%

100%

120%

Source: MME (Elaborated by Sefid)

Despite the success of this public policy, the TCU found that an important share of the population still lacks

access to electric power: at least 830 thousand families mainly located in more isolated regions of the country.

Based on this scenario, one can conclude that the great challenge of universalization is still to be met: catering

to the population living in remote areas. This requires a great volume of investment and electric power generation

technologies still barely used in Brazil, such as solar energy.

The audit also identified flaws and improvement opportunities related to the auditing methods directly or indirectly

used by Aneel to oversee the program, through Eletrobras. This may unduly impact electric power tariffs. These

failures are mainly related to the statistical models used in the audits.

social tariffs

The audit of the “Social Tariffs”, regulated by Law nº 10 438/ 2002, revealed that the legal criteria for tariff

discounts could benefit higher-income consumers and exclude low-income consumers who should be the ones

favoured. The law automatically fit into the program all users who had a level of consumption up to 80 kWh.

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The following scatter charts illustrate the inadequacy of using only household electric power consumption (up to

80 kWh) as a criterion for discounts.

Source: Sefid.

In charts 2 and 3, the entire vertical range covering regions “A” and “a” is the one to be selected, i.e. households

with per capita income up to half minimum wage. However, only those households located in this range but below

region “a” got full discounts on tariffs. Households in the “a” range had progressively smaller discounts and

households in “A” had no discount. On the other hand, households located in range “B” were benefited even with a

per capita income of more than half minimum wage.

The exclusion of low-income consumers as a result of the criteria proposed (in the graph, “A” – excluded, and

“a” – smaller discounts) shows the lack of efficacy and effectiveness of Law nº 10 438/2002, in terms of fostering

equity. The fact that middle and high income consumers benefited from the program according to the same criteria

(“B”) displays the inefficiency of the law in terms of resource allocation (cross-subsidies intended to allow discounts

in power tariffs). Both effects combined demonstrate the regressive nature of the law, as low-income consumers

subsidized middle and high income consumers.

The scenario described above resulted in losses that reached R$ 2.7 billion, in the period from 2002 to 2008 only.

tCU deliberations

In the audit of the “Light for All” program, which culminated in Decision nº 371/2011-Plenary, TCU determined

that agencies and institutions involved (Ministry of Mines and Energy - MME, ANEEL, and Eletrobras) should carry

out studies to improve planning of their actions, so as to enable effective and universal provision to the most

vulnerable consumers, without undue impacts on tariffs.

With regard to the audit of “Social Tariffs”, that resulted in Decisions nº 344/2003, nº 59/2005 and nº

1103/2008-Plenary, the Court recommended that MME and ANEEL should evaluate and use different criteria or

mechanisms to grant low tariffs to the low income population, in order to actually benefit the target public. In 2010,

the criteria were modified through Law nº 12 212. Since then, the discount is now granted only to consumers

enrolled in the Unified Registry System for Social Programs of the Federal Government (CadUnico).

ChArt 2: grAphIC IdentIfICAtIon of

exCLUsIon of Low-InCome hoUsehoLds

ChArt 3: grAphIC IdentIfICAtIon of InCLUsIon

of hIgh And mIddLe-InCome hoUsehoLds

Programa Luz para Todos Judgement TCU No 371/2011-Plenary session - 02/16/2011 Rapporteur: Minister Ubiratan Aguiar

Tarifa Social





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