From the bench’s standpoint: is the Supreme Court a threat to Eletrobras’s privatization?

From the bench’s standpoint: is the Supreme Court a threat to Eletrobras’s privatization?

For those familiar with Brazil, it comes as no surprise that the decision on whether Eletrobras may be privatized will come down to a ruling by the Supreme Court. The company plays a significant role in the generation, transmission and distribution of electricity in many Brazilian states. Consequently, its capital structure and governance can indirectly affect millions of consumers and thousands of workers. But how likely is the Judiciary to actually block or reverse the privatization process?

Context

The Executive Branch issued a provisional measure (an act issued on grounds of urgency and relevance) in February 2021 outlining the roadmap for Eletrobras’s privatization and allowing the immediate engagement of advisors and the taking of other preparatory steps.

Two left-wing political parties challenged the act, but no injunction was granted by the Supreme Court.

Those lawsuits are now moot. Constitutional rules required Congress to review the President’s act within a certain term; it did so, and approved the act’s conversion into statutory law in July 2021; at that time, lawmakers introduced new provisions relating to the energy sector but not specifically to Eletrobras or its privatization.

Three lawsuits are now pending before the Supreme Court against this new statute – one by left-wing parties, one by a right-wing party, and one by a labor union. Again, no injunction was granted. The Prosecutor-General was in favor of the dismissal of the suits filed by the political parties because, in his view, the statute is not unconstitutional; he is expected to take the same stance on the suit initiated by the labor union.

These three lawsuits will probably be jointly adjudicated by the Supreme Court, although it is hard to predict when.

The case at the Supreme Court

To begin with, the issues brought before the Supreme Court are different from those currently under administrative review by the Federal Audit Court (TCU – see Luiz Felipe Calabró’s article on the TCU front). Whatever the outcome of the TCU case, it should not change the course of the Supreme Court case.

Among numerous questions raised by plaintiffs against the July 2021 statute, three seem particularly sensitive as far as Eletrobras and its future are concerned.

First, plaintiffs claim that the law failed to lay out a public bidding process as mandated by the Constitution. The argument is twofold:

• Privatization was conditioned upon the extension or renewal of certain contracts between Eletrobras and the federal administration, and this provision breaches the duty to proceed with a public bid since Eletrobras will no longer be controlled by the federal administration and therefore private parties will ultimately benefit from the lack of competition for the assets.
• The proposed transaction is structured as a capital raise with issuance and subscription of new shares in the stock market (diluting the government’s stake) but this does not qualify as a public bid.

As to the former argument, there seems to be a clear economic rationale behind securing assets to Eletrobras as a condition for the transaction; otherwise, Eletrobras might lose relevant sources of revenue right before its capital increase and immediately become less attractive to investors. Also, the federal administration is legally authorized by law to extend those contracts without a public bid.

The latter argument is likewise not convincing. The proposed transaction is not a purchase and sale of shares, and capital increases are legally exempt from the requirement of an ordinary public bidding process. In this particular case, the public offering is per se a competitive process under market conditions, provided that Eletrobras prepares the offering and sets the share price in a professional and motivated manner, in accordance with capital markets rules.

Second, plaintiffs claim that it is unlawful to keep the federal administration as guarantor of Eletrobras’s obligations post-transaction, both because this would require Senate approval and because it would create an imbalance in competition between Eletrobras and other market players. Although the risk that the Supreme Court may take a more formalistic approach to the Constitution may not be ruled out, this argument also seems unconvincing: in passing the statute in July 2021, the Senate did consent to the survival of existing guarantees; also, this provision just preserves the status quo of existing guarantees as opposed to requiring or authorizing the government to post new ones.

Third, plaintiffs argue that the replacement of Eletrobras as a relevant shareholder of key subsidiaries Eletronuclear and Itaipu Binacional remains unclear, and that the Legislative Branch breached the Constitution by empowering the Executive Branch to determine how to handle such replacement. While this is a sensitive question, again contingent upon how formalistic the Supreme Court will be, in the past the Court found that a generic legal permission for the Executive Branch to incorporate a new company is valid; it is also undisputed that both Eletronuclear and Itaipu Binacional will remain under governmental control, and the only question is how the federal administration will keep doing what it has been doing so far through Eletrobras.

Other challenges seem less likely to affect privatization, such as the ones in the items that follow:

• Privatization is not an urgent matter, therefore a provisional measure, issued by the President, is not the appropriate legal instrument to regulate it. However, the act was converted into and superseded by a statute, i.e., an act by Congress; lawmakers could have barred privatization by rejecting the act or simply by not reviewing it within the applicable term; instead, they positively allowed Eletrobras to be privatized.
• The act regulates the rendering of a public utility service, which is not admissible under the Constitution. However, the Executive Branch did not purport to regulate the generation, transmission or distribution of electricity, but rather to forfeit its own corporate control over Eletrobras, which is only one among many players in that market; the original act did not contain provisions regarding the electricity market as a whole and these were only introduced in the final statute by Congress.
• Eletrobras’s workers will be left unprotected because the President vetoed certain rules that would have allowed employees to keep their jobs and buy Eletrobras’s shares. If anything, this objection regards the lack of a legal provision and not a breach of the Constitution by an existing provision. While the Judiciary may order Eletrobras to implement some mechanism to protect workers, which may consequently increase privatization costs, it would be unreasonable and disproportionate to block or reverse the whole process for this reason.

Finally, plaintiffs have asked the Supreme Court to review provisions that regard other aspects of the market and not the privatization process itself. The Court would be making a mistake if it were to interfere with Eletrobras’s future on the grounds that those other provisions are unconstitutional. There are essentially two sets of issues:

• Transmission line – plaintiffs argue that the rules on the construction of a large transmission line called “Linhão de Tucuruí” breach the constitutional protection of the environment and native indigenous peoples; however, the federal administration (not Eletrobras) will be responsible for the construction; therefore, even if plaintiffs’ arguments have merit they should only taint that specific project.
• Acquisition of energy – rules requiring the acquisition of a certain amount of energy from thermoelectric and smaller hydroelectric plants in certain locations have drawn a lot of criticism for being inefficient, not being environmental-friendly, creating market distortions and potentially driving up consumer prices; however, this discussion is unrelated to the scope, structure or purpose of Eletrobras’s privatization, which in principle should remain unaffected if the Supreme Court finds in favor of plaintiffs.

For that matter, these two sets of issues show the complexities of the Brazilian political landscape. As previously mentioned, they result from amendments made by lawmakers to the original February 2021 act. In other words: the Executive Branch exercised its agenda-setting power by issuing the act and pushing Congress to discuss the privatization of Eletrobras; in turn, the Legislative Branch exercised its own agenda-setting power by hijacking the act and adding unrelated content so as to reduce the President’s leeway to veto those new provisions.

This peculiar process is now exploited by plaintiffs, who rely on those lateral discussions to annul the July 2021 statute entirely, including Eletrobras’s privatization – against the common interests of the Executive and Legislative Branches.

Stakeholders interested in preserving the privatization process regardless of the questions surrounding the “Linhão de Tucuruí” and the commissioning of power plants may consider seeking admission as amici curiae; this could prove helpful to ensure that the Judiciary will not throw the baby out with the bathwater.

Conclusion

Evidently, it is never wise to guess what the Supreme Court’s findings may be, but perhaps Eletrobras’s fate hangs on a non-legal factor time.

The few facts at hand are that (a) the Supreme Court usually takes years to adjudicate suits challenging the constitutionality of laws, (b) no injunction was granted to stay either the February 2021 act issued by the Executive Branch or the subsequent July 2021 statute passed by the Legislative Branch, and (c) the reporting Justice was appointed by the incumbent President in late 2020 and has so far issued opinions favorable to the Executive Branch in unrelated matters, and (d) realistically there are no legal tools to force the reporting Justice to release his opinion within a certain term (not to mention the opinions by each of the other ten Justices).

Simply put, by the time the Supreme Court is in a position to effectively adjudicate the case, Eletrobras’s privatization may have been fully accomplished already, with a new capital structure and governance in place.

The Supreme Court of course has the power to void the whole process several years from now, but that would be troublesome in multiple ways: first, by not granting the injunction requested by plaintiffs, the Court signaled that their arguments are not sufficiently strong prima facie and that the privatization process may move forward as planned; second, Eletrobras and the federal administration would have to refund investors stripped of their shares (an obviously very large disbursement); third, the perceived lack of legal certainty would spook investors, hurt large infrastructure projects and have a ripple effect across the Brazilian economy.

Those who remember the decades-old discussion about what to do with Eletrobras will not let the irony go unnoticed if time ends up favoring privatization.