Eletrobras Privatization Law is Sanctioned with Vetoes

The President of Brazil enacted, with vetoes, Law No. 14,182, which was initially submitted from Provisional Measure No. 1,031. Law 14,182 provides for the privatization of Eletrobras (Centrais Elétricas Brasileiras S.A.) and establishes criteria and conditions for its implementation. Eletrobras is Brazil’s largest power generation and transmission company, but has been reducing its investment capacity and market share over the last years.

Privatization Model:

• The privatization will be carried out via a public offering of new (voting) shares. The Brazilian government (Eletrobras’ controlling shareholders) will waive its preemptive rights to subscribe such new shares, thus being diluted down to a minority stake.

• The Brazilian government or a company controlled by it can make a secondary offering to sell its own shares.

• Individual shareholders or shareholders bound by voting agreements may not hold more than 10% of Eletrobras’ total voting capital. The Brazilian federal government will hold a special class preferred share (“golden share”) granting it the power to veto resolutions that might change this limitation.

• The privatization will be conditional on the extension of the current terms of generation grants held by subsidiaries Eletronorte and Furnas for 30 more years, among other conditions set out in Law 14,182.

Eletrobras Termonuclear and Itaipu Binacional

• Eletrobras Termonuclear and Itaipu Binacional will remain under the Brazilian government’s control. Prior to being privatized, Eletrobras will undergo a corporate reorganization for this purpose.  A new state-owned company may be created to directly control these companies.

Thermoelectric power plants

• The Brazilian government must purchase 8 GW of natural gas-fired thermoelectric plants from 2026 to 2030 in the North, Northeast, Midwest and Southeast regions, in the form of public auctions for the acquisition of reserve capacity, with initial delivery dates varying by region and volume.

Small Hydroeletric Plants (PCHs)

• In the A-5 and A-6 auctions to be held until 2026, PHCs (with capacity of up to 50 MW) will be reserved the right to supply part of the demand of the power utilities (50% of the utilities’ demand up to an aggregated of 2 GW, and, thereafter, 40% of the utilities’ demand). The price cannot be higher than the ceiling for PCH generation established in the 2019 A-6 auction (adjusted for inflation). The projects awarded in these auctions will not be entitled to a discount in the transmission tariffs (as it is otherwise applicable to PCHs).

Proinfa

• The renewable energy purchase agreements signed by Eletrobras under the Alternative Sources Incentive Program (Proinfa) will be extended for 20 more years.

Tucuruí Power Transmission Line

• The Brazilian government will be able to start construction of the Tucuruí Power Transmission Line immediately after the conclusion of the Basic Environmental Plan-Native People Chapter.

Next steps

1. National Energy Policy Council (CNPE): Among other matters, CNPE will define the rules for modeling, sales, concession costs and the Brazilian government’s equity stake after the capitalization/ dilution.
2. National Economic and Social Development Bank (BNDES):BNDES will be responsible for conducting the privatization process.
3. Federal Court of Auditors (TCU): TCU will analyze the privatization rules to ensure compliance with applicable laws.
4. Eletrobras’ general shareholders’ meeting and the Brazilian Securities and Exchange Commission (CVM): After TCU’s approval, the process must be approved by Eletrobras’ special shareholders’ meeting, and then ratified by the CVM.
5. Public offering: This is the final stage of the process, expected by the first half of 2022.

Vetoes

Law No. 14,182 was enacted with 14 vetoes, which must be analyzed (i.e., maintained or overthrown), by the National Congress in the next 30 days. Here are main ones:

• Eletrobras employees: the President vetoed the mandatory absorption of Eletrobras employees laid off by other state-owned companies, as well as the possibility of acquiring up to 1% of the remaining shares of the Brazilian federal government by employees and eventual ex-employees of the company.

• Corporate changes in the subsidiaries: the President vetoed the prohibition against terminating, incorporating, merging or changing the domicile of the subsidiaries Chesf (PE), Furnas (RJ), Eletronorte (DF) and CGT Eletrosul (SC) for 10 years.

• National Grid Operator (ONS): the President vetoed the obligation to submit executives of appointed to the board of directors of ONS to the Senate’s prior approval..