IEEE Power & Energy Magazine - May/June 2020 - 44

and pay the network tariff. There are large consumers connected directly to the transmission network that do not pay
charges for distribution networks. Regulated consumers
account for approximately 70% of the energy consumption.
Brazil's regulation and tariff-structure framework was
defined in 1968 with the objective of establishing general rules
for distribution companies' charges. It was the responsibility
of the National Electric Energy Agency (ANEEL) to define
specific rules based on the legal framework's guidelines. In
general, the regulatory framework deals with fixing and revising electricity tariffs, the general classification of consumers
according to voltage levels, tariff structures, and special supply conditions (for example, rural areas and public lightning).
There are two tariff structures that can be applied to consumers connected to distribution networks:
1)	 binomial tariffs, which have two components, the first
representing charges for energy, losses, and other expenses (for instance, the costs of governmental policies) in $/MWh, and the second representing transmission and distribution charges in $/kW
2)	 monomial tariffs, in which all components are summarized in a single volumetric tariff in $/kWh.
To apply the tariffs, consumers are classified according to
their voltage levels: group A (high voltage level) and group B
(low voltage level), which are broken into subgroups. Group
A is divided by voltage levels: A1 (≥230 kV), A2 (≥88 kV
and <230 kV), A3 (>44 kV and <88 kV), A3a (≥30 kV and
≤44 kV), A4 (≥2.3 kV and <30 kV), and AS (<2.3 kV in the
underground network). Group B is divided by consumer
classes: B1 (residential), B2 (rural), B3 (other classes, such
as commercial, industrial, and public power), and B4 (public
lighting). Binomial tariffs are compulsory for high-voltage
consumers, and monomial tariffs are mandatory for lowvoltage users. The tariff menu offered to consumers is summarized in four modalities-conventional, blue, green, and
white-as illustrated in Table 4.
The conventional tariff modality is a constant, flat rate
used for almost all consumers connected to the low-voltage
network. Since 2018, users with an electricity demand higher
than 500 kWh have been able to opt for the white tariff, with
time granularity for peak, intermediate, and off-peak hours.
The peak period consists of the three consecutive workingday hours that have the highest demand. It is defined by the
regulator as 5:30-8:30 p.m., which is not in line with the
actual peak load. As many consumers increase their use of
air conditioners, the peak load has shifted to 2-3 p.m. in
many regions. However, the regulator has not updated the
definition, which incentivizes consumers who opted for the
white tariff to increase their consumption during the real
peak time. Changes to this modality might not reduce the
system's peak load, since many users will not necessarily (be
able to) change their consumption behavior. High-voltage
consumers can opt between the blue and green modalities.
The green one has a higher volumetric component for the
peak hour, which has motivated some consumers to build
44	

ieee power & energy magazine	

natural-gas cogeneration and diesel power plants to reduce
their peak load. For users who cannot shift their load, the
blue option may be more attractive.
The regulator periodically implements ratchets to revise
the tariffs. Readjustments are made annually on a percentage of the costs that network companies cannot control.
If the proportion of the uncontrollable costs increases or
decreases, companies' revenues will be scaled to avoid
rewarding or penalizing firms. Tariff reviews are carried out
at the end of each control period. The regulated revenue is
determined and decoupled from the evolution of the actual
costs. The idea is for the regulated revenue to cover efficient
costs. The relative efficiency of the distribution companies is
measured through data-envelopment analysis. Thus, if a network company can establish a more efficient cost structure,
incurring expenses that are lower than those included in the
tariffs, it can capture those savings within the control period.
During the periodic tariff review (which occurs, on average,
every four years), efficiencies are passed on to the consumer.
Distribution companies whose concession was renewed after
2015 have a revision every five years.
From the regulator's point of view, passing efficiency
gains to companies encourages efforts to reduce the cost
of providing the service. On the other hand, if uncontrollable costs are substantially altered, companies will
face expenses that do not have tariff coverage during the
period between revisions. In such cases, companies may
request an extraordinary tariff revision to reestablish
their financial balance. The regulator is responsible for
judging the merits of this request and deciding whether to
approve the application.
Brazil's price regulation incentivizes companies to save
investment costs during the first years of the control period,
toward the end of which the efficiency incentive becomes
weaker than other enticements in the policy framework.
Closer to the next ratchet, the incentive for companies to
increase their RAB during the long term becomes stronger. This is due to the Averch-Johnson effect, which grows
during the last part of the control period. It occurs because
investors' costs of capital (used by network owners to discount future cash flows) may be lower than the regulator estimated to determine the allowed revenue. Although this effect
is mostly associated with cost-of-service regulations, it may
occur under incentive-based rules. Because this is counterintuitive, we illustrate the fundamentals in an example.

The Averch-Johnson Effect
on Incentive-Based Regulation
Table 5 lists the profits (in net present value) from three
investment options for a hypothetical distribution company
whose revenues are regulated through an incentive-based
approach, where income remains fixed during the fouryear control period regardless of the firm's costs. In our
example, the network owner realizes (after the referential
network-expansion plan has been approved) that part of the
may/june 2020



IEEE Power & Energy Magazine - May/June 2020

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