As a result of the Public Hearing No. 102/2012, the Brazilian Electric Energy Agency (“ANEEL”) published Normative Resolution No. 531, dated December 21st, 2012 (“Resolution 531/2012”), in order to change the calculation methodology for financial guarantees associated with the spot market of the Electric Energy Commercialization Chamber (“CCEE”).

In accordance with the new methodology, which has been in force since January of this year, the sellers’ default risk is shared with buyers, to make buyers more responsible in choosing their electric energy suppliers. The risk sharing will take place through a process of contract registration confirmation, in which CCEE will adjust registered and validated electric energy amounts in the event of the seller not submitting the financial guarantee in the amount established by CCEE, so as to balance the negative financial exposure of seller.

Resolution 531/2012 sets forth that the amount of the financial guarantee will be equivalent to the agent’s negative financial exposures for the reference month, plus five percent (5%). On the other hand, agents whose financial exposures are positive will not have the obligation of providing a financial guarantee for the reference month.

In the event of failure to provide the financial guarantee, the agent will be subject to a penalty equivalent to two percent (2%) of the amount of the guarantee, and in case of delay in the payment of such penalty, one percent (1%) interest will be applied per month, calculated pro rata die, after monetary adjustment based on the General Market Price Index – IGP-M, published by the Getúlio Vargas Foundation – FGV, from the maturity date to the actual payment date.

In the calculation of the financial exposure for the purpose of setting the amount of the financial guarantee, (i) any accounting adjustments due to arbitration awards, administrative and/or court decisions; and (ii) amounts related to fines and penalties will not be taken into account. However, any adjustments due to arbitration awards, administrative and/or court decisions shall be considered in the calculation of the financial exposure for the purpose of adjustments in the contracted electric energy amounts.

Considering the autonomy and diligence level in the selection of suppliers, Resolution 531/2012 established criteria that give priority to adjustments in the amounts of contracts negotiated in the Free Contracting Market (“ACL”), beginning with the most recent registry. Subsequently, if necessary, the adjustments shall be applied to contracts executed within the Regulated Contracting Market (“ACR”), in the following order (i) adjustment auction contracts; (ii) Electric Energy Contracts in the Regulated Market (“CCEARs”) related to auctions of existing generation facilities; and (iii) all other CCEARs, in proportion to the contracted amounts.

The buyer – free costumer, special costumer or self-producer – affected by the decrease of the contracted amounts by reason of financial exposure of the seller may avoid the penalty enforcement for insufficient coverage if it, cumulatively, (i) fully pays its debts related to the settlement of the spot market for the reference month, (ii) buys additional electric energy amounts in the subsequent month equivalent to the verified insufficiency; and (iii) has no registry of sale contracts in case of self-producer.

Resolution 531/2012 allows CCEE to disclose to all of its agents the list of sellers in default of their obligation to provide financial guarantees, as well as those that had their contracts adjusted due to their negative financial exposure, including information of the settled amounts with no guarantees.

Finally, Resolution 531/2012 sets forth that CCEE’s Board of Directors must initiate its own administrative procedure to banish sellers whose contracts have not been fully confirmed (i.e., whose contracts have been adjusted through the process of contract registration confirmation).

In accordance with ANEEL, the new methodology intends to promote a market cleaning of block sellers with no financial conditions to operate. The goal is that the buyer market systematically avoids contracting with sellers that operate without physical or contractual coverage and do not provide sufficient financial guaranties to cover their negative financial exposures. The new rules will result in profound changes in the negotiation practices in the ACL, to balance this new risk allocation to the buyers.