This article was featured in our 2023 Energy Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the energy industry, encompassing information on electricity & renewables, based on data available on Jus Mundi and Jus Connect as of September 2023. Discover updated insights into energy arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on energy projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Rafael Villar Gagliardi, Partner at XGIVS
Julia Schulz Rotenberg, Senior Associate at XGIVS
Guilherme Eduardo Pahl, Senior Associate at XGIVS
The Brazilian National Electric Energy Agency (“ANEEL”) recently approved a new Arbitration Convention (“New CCEE Convention”) for all the agents that trade energy in the Electricity Trading Chamber (CCEE). This is a relevant development for the energy market, especially given both the intense use of arbitration in such segment of the economy and the expected increase in the number of consumers expected to migrate to the free market, thus entering the CCEE trading environment. This paper addresses the main changes of the New Convention and offers points of comparison with other countries in Latin America.
Brief Notes on the Brazilian Electricity Market and the Use of Arbitration
Brazil has the world’s 6th largest installed capacity of generation, with 191,257MW, mostly (83.79%) from renewable sources (56.14% hydro, 5.31% solar, 13.80% wind and 8.55% biomass). According to the Energy Research Company (EPE), there are more than 90.5 million consumers, with an annual consumption of 58.95 GW, out of which 23.38 GW are dedicated to the 31,071 consumer units in the free energy market.
Despite its size, Brazil currently occupies the 47th position out of 56 countries in the Electric Energy Freedom ranking released by the Brazilian Association of Energy Traders (“ABRACEEL”), based on annual data from the International Energy Agency (IEA).
While it gained 8 positions since 2019 due to recent regulatory advances, Brazil is still outranked by countries such as Colombia (41), Peru (44), Uruguay (45) and Argentina (46), that underwent similar processes of privatization and deverticalization in the early 90s.
Currently, only units connected at medium or high voltage (above 2.3kV) that meet the contracted demand requirement of at least 500 kW are eligible for accessing the free trade market (Ambiente de Comercialização Livre or “ACL”). This demand can also be met by the sum of units from the same company or by companies in neighboring properties. However, in such cases, consumers can only purchase energy from incentivized sources. The remaining consumers are part of the regulated market (Ambiente de Contratação Regulada or “ACR”) and must purchase energy from the local utility.
The number of free consumers is expected to grow threefold in the near future, following the loosening of access restrictions approved by the Ministry of Mines and Energy (“MME”). At least 72,000 new units are expected to migrate to the free trade market and further favoring access to the ACL is widely considered to be an irreversible trend. Regulation under discussion by the MME provides for banning all restrictions by January 2028.
On the other hand, the Brazilian electricity market is known for adopting arbitration as the preferred dispute resolution mechanism. It is, in fact, mandatory for applicants to enter the CCEE trading system to accept and execute the CCEE Arbitration Convention. As per Federal Act 10,848/2004, disputes between agents taking part of the CCEE (“CCEE Agents”) and between CCEE Agents and CCEE itself must be resolved through arbitration.
In parallel, over the years, several pieces of legislation were enacted to provide for the use of arbitration, even by State entities. In 2015, the Brazilian Arbitration Law (“BAL”) was adjusted to expressly encompass such a possibility, thus reducing the opposition faced in some sectors of the Government.
Despite the legal provisions, arbitration was not used specifically by ANEEL until a recent decision by its Board of Directors, in September 2021. At that juncture, ANEEL decided to agree to arbitrate a claim for financial rebalance of a concession contract to arbitration. Besides, the General Attorney’s Office recently enacted Regulation 15/2022, establishing the Specialized National Team for Arbitration.
With an eye on the market opening and modernization of the sector, ANEEL approved the New CCEE Convention on February 14, 2023. The New Convention had already been approved by the CCEE Agents on October 19, 2021.
The New CCEE Convention
The first relevant change brought by the New CCEE Convention was allowing other arbitral institutions to administer cases to which it applies (“Convention Cases”). In doing so, it ended a monopoly held by the FGV Mediation and Arbitration Center (“FGV”). CCEE Agents are now free to choose among arbitral institutions approved by CCEE. The goal is to foster competition, flexibility, and efficiency.
Institutions applying to be registered by the CCEE are required to undertake the obligation to conduct mediation prior to the arbitration procedure. They must also agree to maintain a public database of Convention Cases awards on their websites, to create a reliable source of research and to foster consistency in the outcome of similar cases. Clearly, a consolidated database would be much more efficient and reliable for practitioners.
Furthermore, while it still provides for additional circumstances regarding the impartiality and independence of arbitrators, the New Convention states that all such cases are no longer of impediment (non-waivable), but merely of suspicion (waivable). Also, it narrowed down such additional cases and reduced the quarantine time for former contractors, service providers or consultants. The aim is to increase the number of eligible arbitrators with experience in the market. That said, an opportunity was missed to simply remove the additional cases of waivable cases of partiality/lack of independence, given that there is no real gain in comparison to the content of the Brazilian Arbitration Act.
The New CCEE Convention also clarifies to which conflicts it does not apply (and, conversely, those to which it applies). It states that it does not apply to bilateral conflicts that do not affect third parties’ rights and, consequently, do not have repercussions on CCEE’s operations. This is relevant to give more security to the parties in case they decide to submit a bilateral conflict to a different mechanism of dispute resolution that does not necessarily observe the parameters provided for in the New Arbitration Convention.
Further to that, the New CCEE Convention clarifies that it does not apply to disputes between ANEEL and signatories and ratifies that collection of amounts owed by CCEE Agents must be carried out before Brazilian Courts.
Aiming to protect the market and ensure that the financial effects of decisions arising from bilateral conflicts are restricted to the parties involved, the New CCEE Convention affords the CCEE discretion to liaise with the Arbitral Tribunal and request it to require suitable guarantees from the interested party in cases in which the operationalization of a decision may impact third parties. While the idea is laudable, certain cases were not dealt with, such as what the consequences of the Tribunal not granting the request for guarantee or if the CCEE is a party to the arbitration.
The New CCEE Convention maintained the preexisting rules regarding the applicable law (Brazilian Law) or the language of the procedure (Portuguese). Moreover, it still provides for the requirement that arbitrators appointed shall reside in Brazil, which may prove an unnecessary restriction to the appointment of good arbitrators residing abroad, either Brazilian or foreigner.
As for the seat of the arbitration, the New CCEE Convention provides that it shall be indicated by the parties and, failing such agreement, determined by the Tribunal within the Brazilian territory. In cases in which the CCEE is a party, the seat will be in São Paulo.
All awards of Convention Cases will thus be domestic awards, regardless of other elements of internationality, given that Brazil is a monistic country and it abides by the territorial criterion to define whether the award is domestic or foreign (Arbitration Act, article 34, sole paragraph).
Looking Beyond the Brazilian Borders: the Experience of Neighboring Countries
Several countries in Latin America have gradually developed a more friendly environment for arbitration. Solid arbitral institutions have emerged, and national legal frameworks have been enhanced to support arbitration in the region.
Specifically with regards to energy projects, some experiences can be pointed out in connection with the dispute resolution mechanism applied by some of our neighbors.
In Colombia, the State does not enter energy projects and private agents can undertake these contracts within the open market and parties are free to agree to arbitrate their disputes as they see fit for the specific project.
National and international arbitration are regulated by the same arbitration act. Despite the legal possibility, choice of forum and choice of law rules are usually introduced in international arbitration proceedings (articles 93 and 101 of Law No. 1563 of July 12, 2012) and not in contracts that are to be adjudicated by national courts, due to a discussion on whether parties can modify domestic rules of conflict by means of introducing a choice of law clause.
For the purposes of promoting projects for nonconventional sources, the Colombian State has organized public tenders for the sale of energy contracts. Under these contracts, arbitration is provided as the final mechanism for dispute resolution, after a direct arrangement between the parties and an attempt of an amicable settlement. As to the arbitration, the contracts provide for specific provisions concerning the seat of arbitration (Bogota), applicable chamber (Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce), and language (Spanish), among others.
In Peru, private investors are mainly responsible for developing electricity projects and this is done through concession contracts with the State (represented by the Ministry of Energy and Mines). The regulation in force promotes settling disputes by domestic or international arbitration, depending on the amount of the dispute. Similarly to Colombia, the Peruvian Arbitration Law (D.L 1071/08) also regulates both national and international arbitration.
PPAs, construction contracts, interconnection contracts, and easement contracts executed by power generators customarily contain arbitration clauses. Finally, as per Law 28832, of 2006, and the bylaws of the COES (that roughly performs the role of the Brazilian CCEE), decisions issued by the Board of Directors and the Assembly may be challenged through ad hoc arbitration.
As to Chile, much like in Brazil, the applicable framework is twofold, comprising the free and the regulated markets. In relation to the free market, there is no State intervention. Parties are free to agree on the dispute resolution mechanism and customarily chose arbitration for the relevant contracts. The Arbitration and Mediation Centre of the Santiago Chamber of Commerce (CAM Santiago) is extensively used. Med-Arb clauses are also popular and promoted by the arbitral institution itself.
Within the regulated market, there is intense State regulation. Chilean law provides that utilities must have supply contracts resulting from public tender processes, designed, coordinated, and managed by the National Energy Commission, the Chilean electricity regulator.
These contracts set forth a similar dispute resolution mechanism as to one found in Colombia, i.e., Med-Arb clauses. However, in practice, arbitration cases are few and far between, given the intense presence of the State and the exclusion of the Governmental Authority from the scope of the arbitration agreement.
On a separate note, it is worth noting that in recent years, there has been an increase in the number of ICSID cases involving Latin American countries. Colombia, Peru, and Chile are signatories of the ICSID Convention, alongside several other Latin American countries. Notably, Argentina has withdrawn from the 1965 Washington Convention, but was involved in several high-profile cases against foreign investors. Brazil, on the other hand, is not a party to the ICSID Convention. It is therefore not part of the ICSID system.
Although each energy market has particularities, it is possible to identify a general trend as dispute resolution methods in connection with energy contracts.
With regards to the free market, parties generally have more freedom to customize the dispute resolution mechanism, although they should pay attention to possible obstacles that might face upon the enforcement of an award depending on each legal system. It is even possible to note an attempt to implement a framework that actually embraces international arbitration.
As to the contracts with States, State-owned companies or public entities, the use of arbitration is also being continuously disseminated. There are still additional particularities to be considered depending on each system, but several Latin American countries seem to be endeavoring efforts to attract investment by institutionalizing a more friendly environment and predictable mechanism for dispute resolution related to capital-intensive projects, even by means of investment arbitration.
Concluding Remarks
The Brazilian electricity-free market is growing exponentially, and this is a trend expected to continue, as access barriers are gradually being removed. One of the implications of this trend is the increasing number of CCEE Agents and the growth of commercial relations that will contain arbitration agreements (or the disputes of which shall be resolved by arbitration under the New CCEE Convention).
That alone is reason enough to justify the review of the previous CCEE Arbitration Convention, enacted in 2007 to reflect the evolution of the market. While the makeover was not as complete as one should expect, it addressed relevant points that concerned market players, thus representing a step forward.
This is even more important considering the expected changes resulting from the ongoing worldwide efforts to carry out a complete energy transition aimed at achieving climate and sustainable development goals. This transition tends to present opportunities and challenges and, as such, room for growth of energy-related disputes in a market already quite litigious.
Legal frameworks friendly to arbitration are crucial to attracting foreign investors, especially in the energy sector, considering the relevance of technical decisions and efficient procedures in disputes arising from the significant and long-term contracts executed.
While it felt short of embracing all the possible tools and mechanisms to benefit efficiency, the New CCEE Convention represents an important step to strengthen energy-related arbitration. Still, there is room for improvement and Brazil may learn greatly from the positive experiences of its neighbors.
ABOUT THE AUTHORS
Rafael Villar Gagliardi is a partner at Xavier Gagliardi Inglez Verona Schaffer – XGIVS. He focuses his practice on disputes involving major domestic and international companies, mainly in the areas of private law, energy, infrastructure, and construction. Rafael holds Ph.D., Master’s, and Bachelor’s Degrees from Pontifical Catholic University of São Paulo (PUC-SP) and was a visiting researcher at the London School of Economics and Political Science (LSE). In addition to teaching at the graduate programs of PUC-SP, the Brazilian Institute of Energy Law (IBDE), and other institutions, he is a Fellow of the Chartered Institute of Arbitrators (CIARB). Rafael is also on the roster of arbitrators at several Brazilian institutions.
Julia Schulz Rotenberg is a senior associate at Xavier Gagliardi Inglez Verona Schaffer – XGIVS. She has experience in complex disputes involving public law, life sciences, commercial, competition and environmental matters, as well as in contractual and corporate disputes. Julia has a master’s degree from the University of São Paulo (USP), she is specialized in public bidding and contracts at Fundação Getúlio Vargas (FGV -SP) and has a bachelor’s degree from Pontifical Catholic University of São Paulo (PUC-SP).
Guilherme Eduardo Pahl is a senior associate at Xavier Gagliardi Inglez Verona Schaffer – XGIVS. His practice is focused on the energy industry in all its segments, assisting domestic and foreign companies in administrative, judicial, arbitration proceedings and developing projects and advisory services. He has extensive experience in the electricity industry, having served as regulatory legal manager at the Chamber of Electric Energy Commercialization. Guilherme holds an MBA with an emphasis on electricity from Poli-USP, an MBA with an emphasis on business management from FGV, a graduate degree in civil procedure law, and a Bachelor of Laws from Pontifical Catholic University of São Paulo (PUC-SP).
Find more data-backed insights in our 2023 Energy Arbitration Report