The George Washington University IBI - The Institute of Brazilian Business and Management Issues THE CHANGES IN THE SOCIAL TARIFF OF ELECTRICITY IN BRAZIL Juliana Nascimento Lago Minerva Program, Spring 2010 Washington D.C.2 TABLE OF CONTENTS 1. INTRODUCTION 2. THE LOW INCOME SOCIAL TARIFF FOR ELETRICITY IN BRAZIL FROM 2002 TO 2009 – LAW 10.438/2002 2.1.The 2002-2009 model 2.2.Current numbers of the program 2.3.The problems of this model 3. THE NEW LOW INCOME SOCIAL TARIFF – LAW 12.212/2010 3.1.The extinction of the automatic entitlement 3.2.Inclusion of indigenous and maroon 3.3.Rise in the income roof and level of discounts 4. CALCULUS OF THE CHANGES IN INCOME CRITERIA AND THE DISCOUNT LEVELS 4.1.Assumptions 4.2.Data 4.3.Consumption Simulations Middle West region Northeast region North region Southeast region South region 4.4.Final results - Brazil 5. FINAL CONSOLIDATION 6. CONCLUSIONS3 1. Introduction Access to electricity is an essential requisite for rising quality of life and social welfare. This is the main argument for favoring social policies when there is insufficient access to this service. In Brazil, the current government program with this purpose is the social tariff for low-income people, which gives discounts on energy prices in accordance with the level of consumption. This subside exists since 2002 and, in order to improve this program, in January 2010, the Brazilian government passed a law imposing several changes in the social tariff model which will be implemented within a maximum term of 24 months. Basically, the law changed criteria of income, level of consumption and the size of the discounts. These changes will modify significantly the number of families benefited, their consumption and the costs of the program. Thus, the objective of this study is to analyze how these changes will affect the benefited families and all other energy consumers. First, we want to estimate how many families will be benefited of the new target criteria and how many will no longer receive the benefit. After that, we will estimate the consumption level of the low income families applying the old and the new table of discounts. This comparison is important to measure the changes in welfare of the consumers. Finally, we will concentrate on the costs of the program before and after the new law.4 2. THE LOW INCOME SOCIAL TARIFF FOR ELETRICITY IN BRAZIL FROM 2002 TO 2009 – LAW 10.438/2002 2.1.The 2002-2009 model The Brazilian current benefit system to the electric energy consumer with low level income is called Low Income Social Tariff and was created in April 2002, by the law 10.438. This law established the requirements of eligibility, the discount table and the source of funds to finance the program. In according to that legislation, all single-phase1 consumer units with monthly consumption between zero and 80 kWh (mean of the last twelve months) are automatically considered low income and are able to receive the benefit. No prove of poor condition is required. The program is based on the idea that electric energy consumption is a proportion of the level of consumer income. If we consider this assumption as a true, the idea of including automatically every household with mean electric energy consumption until 80 kWh per month in the program is quite appropriated. The units in which consumption level overcomes 80 kWh must follow some rules: - The consumer unit must have a monthly consumption between 80 and 220 kWh, (mean of the last twelve months). - Responsible by consumer unit must be enrolled in the Unified Registry to Assistance Programs of the Federal Government (CADUNICO2) created by Decree 3.877 of July 24, 2001 and managed by the Ministry of Social Development and Combat Hunger - MDS. Additionally, the mean income per capita of the household members must be less than R$ 120.00 per month. - A person of the family must go at the concessionaire with the documents mentioned above in order to be enrolled by it, and then, receive the benefit. Once enrolled, the consumer unit will receive discounts on the electricity tariff according to their consumption level. More discounts are given to less levels of consumption.5 Table 1 Table of discounts – Law 14.438/2002 Total consumption Level (kWh) Discount (%) 0-30 65 31-100 40 100-220 10 An important aspect must be noticed: the discounts aren‟t in cascade, which means that they aren‟t cumulative. A family that has a consumption of 200 kWh in a month will receive a discount of 10% in its tariff value. The law 10.438 also created a national fund, the Energy Development Account - CDE, which has two goals: to stimulate the use of innovative sources of energy and to finance universal access to electricity, what includes the low income tariff program. Each year, the Ministry of Mines and Energy predict the total costs of the programs financed by the CDE for the next year. This cost will be shared by all consumers of electricity in the country and charged through their electric bills. The source of the next graph is the „The hornbook of electricity taxes‟ by ABRACE3. It shows the application of the sources of CDE since 2004. As it is shown, the costs of the social tariff program use almost 50% of all CDE revenues. Graph 1 Historical Application of CDE6 2.2.Current numbers of the program According to ANEEL4, in May 2009, about 19 million units are receiving the benefits of the social tariff of electricity. The table bellow summarizes the current numbers of the program: Table 2 Around 35.7% of all Brazilian residential units receive the benefit. As we can see, 73.4% of the units that receives the benefit were elected automatically and only 26.2% were previously enrolled units. Still analyzing ANEEL numbers, the costs of the program in 2008 summed R$1,534,999,076.15. Sharing this number by 19.3 million consumers, the cost will be R$ 79.49 per year, or R$ 6.62 per month in average. It is important to remember that this cost is paid by all the consumers of electricity by the CDE account. 2.3.The problems of this model In 2004, the Brazilian Court of Audit – TCU5 - promoted a research that tried to respond if the legal parameters to include the low income consumers were correct.