Joisa Dutra, director of FGV CERI, wrote the article Broadcast of Estadão, entitled "Keeping the lights on in the COVID-19 pandemic".

The article deals with the possible impacts of the pandemic on the electricity sector and the change in the payment capacity of electricity users, among other aspects.

Read the full article below and follow FGV CERI's intellectual contribution on normative production related to COVID-19 through the FGV CERI COVID-19 Regulatory Monitor.

Joisa Dutra: Keeping the lights on in the COVID-19 pandemic

At the risk of boring the reader, nothing is more important at the moment than the economic consequences of the Covid-19 pandemic. The globalization and complexity that characterize the world economy make this an unprecedented crisis. And medicines need to consider "out of the box" solutions to mitigate their impacts on the health, income and employment of the population. This is how the public and private sectors in different countries are thinking. It will be necessary to create adequate and realistic conditions to anchor the expectations that will be fundamental in the resumption of economic activity.

The Covid-19 crisis is the result of an exogenous shock, with dimensions of supply and demand. In this scenario, monetary policy instruments have limited effectiveness. To complement them, countries on several continents are already announcing fiscal policy measures. Although the initial focus is on health, it is necessary to create space to address the economic consequences. And these are magnified by the difficulties we even have to assess what they are.

As an infrastructure segment, the electricity sector is considered essential. In terms of investments, it was one of the most successful in this century. It underwent a modernization process, with privatizations and network expansion. It succeeded in connecting more than 99.8% of the population. But a challenge remains. When considering the United Nations' sustainable development goals (SDG), we do not score well on the social dimension of affordability.

Electricity users' ability to pay faces limits. Low-income consumers already have the Social Electricity Tariff (TSEE). In 2019, the program benefited almost nine million families, and for 2020, the National Electric Energy Agency (Aneel) established a budget of R $ 2.618 billion. The expectation for this year was already for an increase in the number of users served.

To help this segment of the population, the Ministry of Mines and Energy and Senator Marcos Rogério (DEM-RO) are working on a proposal to alleviate the problems of low-income families for a period of three months. Although welcome, these measures are insufficient.

The events in other countries allow us to foresee that the unfolding of the crisis must go through a set of phases. In the early stages, interruptions are restricted, but as confinements and quarantines are adopted, the impact on economic activity increases. In Brazil, structural characteristics amplify this process: the high informality in the job market (40%), more vulnerable to exogenous shocks; and the large participation of the service sector - more than 70% of GDP -, which shows a slower recovery.

But this picture does not provide the correct dimension of the affordability problems that electricity users will face in the Covid-19 crisis. There are also workers with a formal contract who have a large part of their income from commissions. An expressive portion of these three groups will be severely penalized in their income generation. And this effect is persistent. Consider, for example, unserved meals, which will not allow waiters to recover tips even when activities return.

These examples are important for measuring the impacts that electricity companies will suffer in terms of defaults. In a study by FGV CERI in 2015, we estimated the impact of the then tariff realism policy on Light's losses. At first, the "tariff" produced a significant increase in defaults. And from the sixth month, the company experienced an increase in non-technical losses - thefts and fraud. It is worth mentioning, however, that the analysis of the company's data reveals an asymmetric behavior: if losses increase in periods of crisis, the recovery is less proportional in the boom.

In the set of measures being designed to face the crisis, it is important to consider how to address the real picture of the ability to pay citizens who use electricity. The wrong policy is one that does not consider the unique dimension of the affordability problem facing the electricity sector in Brazil - and that is aggravated in an unprecedented way by the pandemic.

Responses around the world include suspending delinquency cuts for a specified period. The Pandemic Planning Document, produced by the Edison Electric Institute, advocates suspending cuts for non-compliance. This proposal has found broad support in the National Association of Regulatory Utility Commisioners, which represents state regulators in the United States, entities responsible for regulating electricity distribution in the country. It makes sense to establish a similar measure in Brazil for a period compatible with the expectations of the duration of emergency measures by the other management bodies. Revisions are always possible. But that is not enough. In view of the notorious low saving capacity in the economy, a very significant portion of the population will have serious difficulties in meeting their electricity bills during confinement and quarantine. Even more with increased consumption for staying longer at home, sometimes even working. Possible concerns about problems of moral hazard - which are not justified in the face of an exogenous shock of this nature - can be mitigated through focused actions.

Even after the resumption, it is necessary to find solutions for the extension of the payment terms of the debts contracted during the most severe phase of the shock. And the time required to amortize these debts needs to be compatible with the recovery of the income generation capacity of the affected population. Otherwise, there will be scope for isolated and uncoordinated local responses.

Failure to respect the needs of the population and the impact of the crisis on their ability to pay compromises the generation of cash and value for the industry as a whole. It is therefore difficult to resume the pace of operation and expansion of a segment so important to sustain future economic growth.

Joisa Dutra is director of the Infrastructure Regulation Center at Fundação Getulio Vargas (FGV CERI) and a member of the Global Economic Future Council of the World Economic Forum. She was director of the National Electric Energy Agency (Aneel) between 2005 and 2009. This article represents the author's vision exclusively.

Follow FGV CERI's intellectual contribution on normative production related to COVID-19 through the FGV CERI Regulatory Monitor for COVID-19.