An empirical analysis of the Brazilian Transmission Service Operators incentive regulation

Brazil started to reform its electricity market in the final years of the 1990s, and gradual changes in regulatory policy were implemented to strengthen the incentives. In the energy transmission segment, mild cost reductions were achieved. Major changes in this segment occurred after arbitrary interventions from the government in 2012. Such interventions raised the level of risk perceived by investors. The negative impacts of this event on the transmission market notwithstanding, the regulatory framework finally improved its incentive power. In this paper, we analyze the results of incentive regulation for Brazilian transmission companies regarding operational costs. We discuss the effectiveness of the regulatory signals and show that, despite the immediate losses that the arbitrary changes imposed upon the system, the long-term impact has tended to be positive. We point out the critical issues regarding the economic incentive framework. Lastly, we conclude that a gradual change of the regulatory practices, or even an agreement within the existing contract’s terms, could reduce the short-term damage experienced by companies.