TECHNICAL NOTE
CRFEF/GRT
02/2015
Detailed calculation of the tariff adjustment
of Companhia de Saneamento de Minas
Gerais – COPASA MG in 2015
Tariff Regulation Management
Technical Coordination of Economic and Financial Regulation and
Inspection of ARSAE-MG
April 10, 2015
SUMMARY
This Technical Note details the 2015 Tariff Adjustment of Companhia de Saneamento de Minas
Gerais (COPASA) made by the Minas Gerais State Water and Sewage Services Regulatory Agency
(ARSAE-MG). ARSAE-MG Resolution 003/2011, of 3/18/2011, submitted to a Public Hearing,
establishes the method to calculate the Tariff Adjustment Index (IRT) applicable to water supply and
sewage service providers subject to ARSAE’s regulation and inspection.
The tariff adjustment consists in the recovery of the service provider’s actual revenue level based
on the variation of the inflation-related cost. The tariff adjustment methodology breaks costs into two
portions, under Law 18,309/2009: non-manageable portion (VPA) and manageable portion (VPB).
The non-manageable portion (VPA) comprises the expense items the service provider does not
fully control: electricity, treatment supplies, fuel and lubricants, telecommunication, taxes and fees.
Although efficiency in the use of inputs may be improved, the service provider is not able to avoid cost
variations caused by price changes. The methodology consists of verifying the price variation and fully
passing it on to the tariff.
The manageable portion (VPB) comprises the other expense items, such as personnel, third-party
services, other materials, maintenance, depreciation, amortization and general expenses. In the tariff
adjustment, this portion is adjusted by an average index calculated by ARSAE based on inflation indices
weighted by the percentage of each manageable cost item. If the service provider has a productivity
increase that leads to a reduction in these costs, profitability will increase, encouraging efficiency. If
productivity falls, profitability will also fall, forcing the service provider to control costs.
The non-manageable cost portion (VPA), which has a weight of 16.91% in the calculation of
COPASA’s tariff adjustment index, had an average increase of 34.23% between May 2014 and April
2015. The manageable cost portion (VPB) represents 83.09% and was adjusted by a 7.93% index.
The resulting Tariff Adjustment Index (IRT) is 12.38% and represents the impact of the price
variation felt by COPASA between May 2014 and April 2015. Due to the significant increase in
COPASA's expenses with electricity (62.22%), mainly caused by increase in the electricity tariffs in
February and April 2015 and estimated impact of the tariff flag implementation, the IRT was higher
than the main inflation indices for the same period, such as IPCA (8.10%), INPC (8.25%), IGP-M
(2.97%) and INCC (7.05%).
Each time ARSAE makes a tariff adjustment, amounts are offset with regard to the period to
which the tariff was applied. Without these adjustments, COPASA could be adversely affected or
benefited improperly. To determine the Average Tariff Effect (ETM), the effects of offsets calculated in
this adjustment are taken into account, and offsets of the previous adjustment are disregarded. This year,
the balance of these offsets is positive, equivalent to an increase of 2.66 percentage points in the
adjustment. Thus, the ETM, which represents the tariff impact that will be felt by users, was
15.04%. The tariff structure was maintained in its entirety.
As the number of users billed under the Social Tariff was below the target, ARSAE also
calculated the amounts to be refunded by COPASA, in order to ensure the neutrality of the tariff subsidy
in the service provider's revenue. The total amount to be returned by COPASA is R$ 64,325,694.
However, at the service provider's request, so as not to adversely affect the funds allocated for
construction works and emergency programs necessary in the current water crisis scenario, ARSAE will
split such amount into two installments to be paid in the next two tariff adjustments, duly adjusted for
the accrued Selic interest rate.
TABLE OF CONTENTS
1. PURPOSE ........................................................................................................................................ 4
2. COPASA'S TARIFF ADJUSTMENT REQUEST .......................................................................... 4
3. TARIFF ADJUSTMENT ................................................................................................................. 4
3.1. Tariff Adjustment Methodology ............................................................................................... 4
3.2. Definitions for COPASA’s 2015 Tariff Adjustment ................................................................. 4
3.2.1. Definition of moments 0 and 1 (M0 and M1) and Reference Period (PR) .......................... 4
3.2.2. Definition of the Benchmark Market (MR) and Authorized Revenue at moment 0 (RA0) 5
3.2.3. Definition of Portions A and B Values at moment 0 (VPA0 and VPB0) ............................ 5
3.3. Portion A Index (IA) ................................................................................................................. 5
3.3.1. Electricity ............................................................................................................................ 5
3.3.2. Treatment Supplies ............................................................................................................. 7
3.3.3. Fuel and Lubricants ............................................................................................................ 8
3.3.4. Telecommunication ............................................................................................................ 8
3.3.5. Taxes and Fees .................................................................................................................... 8
3.3.6. Portion A Index (IA) ........................................................................................................... 9
3.4. Portion B Index (IB) .................................................................................................................. 9
4. TARIFF ADJUSTMENT INDEX (IRT) ....................................................................................... 10
5. FINANCIAL COMPONENTS ...................................................................................................... 10
5.1. Portion A Variation Account (CVA)....................................................................................... 11
5.2. Offset through change in electricity peak hours ...................................................................... 11
5.3. Regulatory Costs ..................................................................................................................... 12
5.3.1. Call Center ........................................................................................................................ 12
5.3.2. Notice of tariff category change or beginning of service provision ................................. 15
5.3.3. Social Tariff Notice .......................................................................................................... 15
5.4. Social Tariff Offset .................................................................................................................. 15
5.5. Total Financial Components ................................................................................................... 17
6. AVERAGE TARIFF EFFECT (ETM) .......................................................................................... 17
7. TARIFFS ........................................................................................................................................ 17
7.1. Base Tariffs ............................................................................................................................. 18
7.2. Tariffs Applicable to Users ..................................................................................................... 19
7.3. Tariff Impacts .......................................................................................................................... 20
8. CONCLUSION .............................................................................................................................. 22
EXHIBIT ............................................................................................................................................ 24
1. PURPOSE
To present the detailed calculation of the average adjustment index and the tariffs to be applied
by Companhia de Saneamento de Minas Gerais (COPASA) from May 2015 to April 2016.
2. COPASA'S ADJUSTMENT REQUEST
On March 06, 2015, ARSAE received from COPASA External Notice no. 96/2015-PRE with
the request for adjustment of the tariffs in force and definition of the tariffs to take effect from May
2015 to April 2016. External Notice no. 102/2015-PRE, of March 10, sent the information of market,
trial balance sheets, managerial information, among other data to calculate the tariff adjustment.
3. TARIFF ADJUSTMENT
ARSAE-MG Normative Resolution 003/2011, submitted to a Public Hearing, establishes the
methodology to calculate the adjustment to the tariff of water supply and sewage services subject to
ARSAE’s regulation. Such calculation is explained in Technical Note 003/20111 and summarized
below.
3.1. Tariff Adjustment Methodology
The tariff adjustment restores the service provider’s actual revenue level based on the inflationrelated cost variation. Pursuant to Law 18,309/2009, the adjustment methodology breaks costs into two
portions: non-manageable portion (VPA) and manageable portion (VPB). Each of them is adjusted by a
more suitable index basket, instead of using a single inflation index, such as IPCA.
The non-manageable portion (VPA) comprises the expenses the service provider does not fully
control – electricity, treatment supplies, fuel and lubricants, telecommunication, and taxes and fees.
Although efficiency in the use of inputs may be improved, the service provider is not able to avoid cost
variations caused by price changes.
The manageable portion (VPB) comprises the other expenses, such as personnel, services, other
materials, maintenance, depreciation, amortization and general expenses. In this portion, the service
provider is encouraged to increase efficiency, reducing operating costs and raising profitability, and that
may lead to investments and performance bonus granted to employees.
3.2. Definitions for COPASA’s 2015 Tariff Adjustment
3.2.1. Definition of moments 0 and 1 (M0 and M1) and Reference Period (PR)
Moment 0 (M0) is defined as May 2014, when the tariffs in force were authorized under
ARSAE-MG Resolution 49/2014. Moment 1 (M1) is defined as May 2015, when the new tariffs, defined
in this Technical Note, will be authorized.
The Reference Period (PR) covers the twelve months of M0 until before M1, that is, from May
2014 to April 2015.
3.2.2. Definition of the Benchmark Market (MR) and Authorized Revenue at moment 0 (RA0)
The Benchmark Market (MR) is the volume billed and the number of units in the Reference
Period (PR). The MR was calculated by adding the data of the categories' consumption brackets from
May 2014 to February 2015 to the data estimated for March and April 2015.
1
The resolutions and technical notes published by this Regulatory Agency are available on its website www.arsae.mg.gov.br.
The Authorized Revenue at moment 0 (RA0) was obtained by applying the base Tariff Table
established in the 2014 Adjustment (Technical Note CRFEF/GRT 02/2014) to the Benchmark Market.
3.2.3. Definition of Portions A and B Values at moment 0 (VPA0 and VPB0)
The Portion A at moment 0 (VPA0) corresponds to the sum of the value of its components at
M0: electricity, treatment supplies, fuel and lubricants, telecommunication, and taxes and fees. The
percentages of each component in the RA0, defined in the 2014 Tariff Adjustment, are used to calculate
the value of each item of the VPA0.
The Portion B at moment 0 (VPB0) corresponds to the difference between the Authorized
Revenue and the Portion A Value at moment 0 (RA0 - VPA0).
3.3. Portion A Index (IA)
To calculate the IA, each component of Portion A is associated with a specific price index. The
criteria to choose each index or index basket are explained in the Exhibit to this Technical Note.
The difference between the realized indexes and the estimated indexes will be offset in the
Portion A Variation Account (CVA) of the following tariff adjustment, so as to ensure the neutrality of
inflation effects associated with these cost items for the service provider.
3.3.1. Electricity
Expenses with electricity represent 7.36% of COPASA’s revenue. The electricity index,
calculated by ARSAE based on the service provider's consumption profile, increased 62.22% for the 12month period. The index is composed of the variation of electricity tariffs calculated by the Brazilian
Electricity Regulatory Agency (Aneel) for Cemig, of the impact of tariff flags applied to the electric
power sector, and of the effect of the change in peak hours since May 2013.
Electricity tariffs
The electricity tariff index represents the impact of the ordinary tariff adjustment applied by
Cemig Distribuição S.A., service provider's main electricity supplier, published in Aneel's Ratifying
Resolution no. 1872, of April 07, 2015, with regard to the tariffs of Aneel's Ratifying Resolution no.
1700, April 07, 2014.
The electricity tariff index is calculated by dividing the amounts billed after tariffs were adjusted
by Aneel in April 2015 by the amounts billed with the tariffs established in April 2014. The two tariff
scenarios were applied to the demand values (kW) and active electricity (kWh) in on-peak and off-peak
periods, according to the tariff category and application of discount, in the period from May 2014 to
April 20152.
Thus, an average increase of 39.86% was verified in the electricity tariffs of Cemig Distribuição
S.A. applied to COPASA. Given the proportions of the impact, adopting energy efficiency practices is
of strategic nature for the service provider and may result in economic benefit that will be maintained by
COPASA. Thus, the incentive to effectiveness is preserved, and such effectiveness leads to tariff
reduction in the long term.
The table below shows a compilation of the information used and the calculations made by
ARSAE to obtain the index.
2
The electricity information was provided by the service provider from May 2014 to February 2015 and estimated for March and April
2015. The data were consistent with the respective accounting expenses.
Table 1 – Calculation of the Electricity Tariff Index
Source: Information supplied by the service provider, Aneel Ratifying Resolutions no. 1700/2014 and no. 1872/2015 and
ARSAE’s calculations.
Table translation:
Tariff / Sub-group / Demand/Energy / On-peak/Off-peak / M0 – Aneel Resolution 1700/2014 (R$/kW or R$/MWh) / M1 –
Aneel Resolution 1872/2015 (R$/kW or R$/MWh) / Adjustment: M1/M0 / Weight
Conventional / Time-Season Blue / Time-Season Green
Electricity Tariff Adjustment Index
Tariff flags
The tariff flag system was implemented on January 1, 2015. The values in force added to the
electricity tariffs were established by Aneel Ratifying Resolution no. 1858, of February 27, 2015. The
flags are disclosed monthly and may be:
i) Green: favorable conditions to generate electricity, no increase in the tariff;
ii) Yellow: less favorable conditions, R$ 0.025/kWh increase in the tariff;
iii) Red: critical conditions, R$ 0.055/kWh increase to the tariff.
The conditions that determine the tariff flags are mainly related to weather issues, as most of the
electricity in Brazil is generated by hydroelectric power plants. During long drought periods, in order to
save water in the plants' reservoirs, it is possible to resort to thermal powers plans, which generate
electricity at a higher cost.
According to simulations featured in the electricity bills throughout 2014, the red flag would be
applied from February to December 2014. Thus, considering that the weather conditions in 2015 will be
similar to those of last year, when establishing the estimated impact of the tariff flags ARSAE projected
that the red flag will be applied to all months of the next reference period. The flags' additional costs
incurred by COPASA from January to April 2015 will be offset through the electricity CVA3.
The estimated impact of the tariff flags is 14.37% on COPASA's electricity expenses.
3
According to Aneel, the red flag was applied from January to April 2015.
Offset through change in peak hours
In Cemig's ordinary tariff revision of 20134, Aneel changed the electricity peak hours.
About two hundred and thirty facilities of COPASA had their peak hours changed to the period
from 5 PM to 7:59 PM5 which caused an increase in the service provider's expenses with
electricity as of May 2013.
As this is an external factor that would demand significant investments in storage in the
short term to avoid raising costs, ARSAE calculated a 1.41% offset for COPASA that represents
the future impact of the change in peak hours on the service provider's electricity expenses for the
period of 12 months.
Since the impact of each item on electricity expenses is calculated as percentage rates,
ARSAE uses the following formula to obtain the IA EE:
IA EE = {[1 + Cemig's tariff adjustment (%)] x [1 + tariff flags impact (%)] x [1 + peak
hours change impact (%)]} – 1 = (1.3986 x 1.1437 x 1.0141) - 1 = 1.6222 - 1 = 62.22%
The table below shows the electricity index calculated for COPASA referring to the period
from May 2014 to April 2015, based on the service provider's consumption profile.
Table 2 – Electricity Index Calculation
Source: Information supplied by the service provider, Aneel's resolutions and ARSAE’s calculations.
Table translation:
Non-manageable expenses (VPA) – Electricity
Item / VPA0 / Weight (%) – RA0 / Adopted Index / IA – (May/14 to Apr/15) / VPA1
3.3.2. Treatment Supplies
Expenses with treatment supplies represent 1.29% of COPASA’s revenue. These expenses
were adjusted for inflation by the IGP-M (General Price Index - Market) accrued in the period
from May 2014 to April 20156.
As shown below, the adjustment index for treatment supplies was 2.63% in such 12-month
period.
Table 3 – Calculation of the Treatment Supply Index
Source: Information supplied by the service provider, FGV/Ibre and ARSAE’s calculations.
Note: The inflation index was adjusted in relation to the index estimated in the last tariff adjustment to avoid
reproducing any estimation errors.
Table translation:
Non-manageable expenses (VPA) - Treatment Supplies
Item / VPA0 / Weight (%) – RA0 / Adopted Index / IA – (May/14 to Apr/15) / VPA1
4
Article 13 of Aneel Ratifying Resolution no. 1507, of April 05, 2013.
Before Aneel's change, peak hours were established in contract and consisted in three consecutive hours within the period from 5 PM
to 10 PM chosen by the client.
6
For April 2015, the IGP-M estimated by the Brazilian Central Bank's System for Generation of Time Series (SGS/Bacen) was used.
5
3.3.3. Fuel and Lubricants
Expenses with fuel and lubricants represent 0.53% of COPASA’s revenue. These expenses were
adjusted for inflation by the IPCA-BH (Broad Consumer Price Index of the metropolitan region of Belo
Horizonte) for components of gasoline and diesel fuel.
An analysis of the accrued indexes from May 2014 to April 2015 7 shows an increase of 13.70%
for gasoline and 12.57% for diesel fuel, considering the increase in taxes levied on fuel as of February
2015. As shown below, the resulting fuel and lubricant adjustment index, weighted by the ratio of 60%
gasoline and 40% diesel fuel, is 13.25% for a 12-month period.
Table 4 – Calculation of the Fuel and Lubricant Index
Source: Information supplied by the service provider, IBGE/Sidra and ARSAE’s calculations.
Table translation:
Non-manageable expenses (VPA) – Fuel and Lubricants
Item / VPA0 / Weight (%) – RA0 / Adopted Index / IA – (May/14 to Apr/15) / VPA1
3.3.4. Telecommunication
Expenses with telecommunication represent 0.19% of COPASA’s revenue. These expenses were
adjusted for inflation by the IPCA-BH of telecommunication services.
In order to select the components of this index basket that were best suited to the service
provider’s reality, only the following items were selected: fixed telephony, mobile telephony and
Internet access, with equal weights. Analyzing the accrued indexes from May 2014 to April 20158, the
resulting telecommunication adjustment index is -0.69% for the 12-month period.
Table 5 – Calculation of the Telecommunication Index
Source: Information supplied by the service provider, IBGE/Sidra and ARSAE’s calculations.
Note: The inflation indexes were adjusted in relation to the indexes estimated in the last tariff adjustment to avoid reproducing
any estimation errors.
Table translation:
Non-manageable expenses (VPA) – Telecommunication
Item / VPA0 / Weight (%) – RA0 / Adopted Index / IA – (May/14 to Apr/15) / VPA1
3.3.5. Taxes and Fees
Expenses with taxes and fees represent 7.53% of COPASA’s revenue. According to COPASA's
monthly trial balances, the main items of this portion are:



7
Cofins (Contribution to Social Security Financing), levied on total gross revenue;
Pasep (Government Employee Fund), levied on budget revenue;
TFAS (ARSAE’s Water Supply and Sanitation Services Inspection Fee).
For April 2015, the IPCA-BH Gasoline and IPCA-BH Diesel Fuel were estimated by ARSAE considering the Contribution of
Intervention in the Economy (Cide) as of this month.
8
For April 2015, the IPCA-BH Fixed Telephony, IPCA-BH Internet Access and IPCA-BH Mobile Telephony were estimated by
ARSAE.
ARSAE analyzes the variation of expenses for each one of the above-mentioned items and
defines the index to adjust taxes and fees according to the percentage of each tax in the revenue and their
respective adjustment percentages.
As they are levied on revenue, Pasep and Cofins are adjusted by the Average Tariff Effect
(ETM), as this corresponds to the adjustment percentage applied to COPASA's tariff revenue. The other
taxes, which accounted for less than 4% of the taxes and fees component, are adjusted by the ETM as
well.
The index applied to the TFAS percentage considers the variation between the revenue portion
reserved for payment of this fee and the value of this component in the next reference period. The index
that adjusts the TFAS was 10.58%.
As shown below, the index to adjust taxes and fees is 14.64% for the 12-month period.
Table 6 – Calculation of Tax and Fee Index
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Non-manageable expenses (VPA) - Taxes and fees
Item / Percentage / Variation (%)
Cofins / Pasep / TFAS / Other taxes and fees
3.3.6. Portion A Index (IA)
The table below shows non-manageable expense items, with their respective values at moment
0, adjustment indexes and values at moment 1. Non-manageable expenses represent 16.91% of
COPASA’s revenue. The resulting IA is 34.23% for the 12-month period between May 2014 and April
2015.
Table 7 - Portion A Index (IA) Calculation
Source: Aneel, IBGE/Sidra, FGV/Ibre, Bacen, service provider's information and ARSAE’s calculations.
Note: The inflation indexes were adjusted in relation to the indexes estimated in the last tariff adjustment to avoid reproducing any
estimation errors.
Table translation:
Portion A Index Calculation
Item / VPA0 / Weight (%) – RA0 / Adopted Index / IA – (May/14 to Apr/15) / VPA1
Electricity / Treatment Supplies / Fuel and Lubricants / Telecommunication / Taxes and Fees
IPCA-BH – Fuel
3.4. Portion B Index (IB)
In order to calculate the IB, a hybrid index is calculated, weighted by the proportion of
manageable expense items, in which each Portion B component has a specific price index. The Exhibit
to this Technical Note presents details on the criterion adopted to select the associated price indexes.
The Portion B value at moment 1 is obtained by applying the Portion B Index (IB), minus the
Factor X9, to the VPB0. In COPASA's case, the Factor X is zero, as the service provider did not undergo
a tariff revision performed by ARSAE yet.
Manageable expenses represent 83.09% of COPASA’s revenue. The resulting IB is 7.93% for the
12-month period between May 2014 and April 2015.
The table below shows manageable expense items, and their respective percentages in the revenue
and Portion B Indexes (IB).
Table 8 - Portion B Index (IB) Calculation
Source: IBGE/Sidra, FGV/Ibre, Bacen, service provider's information and ARSAE’s calculations.
Note: The inflation indexes were adjusted in relation to the indexes estimated in the last tariff
adjustment to avoid reproducing any estimation errors.
Table translation:
Portion B Index Calculation
Portion B Items / Weight (%) – RA0 / Adopted Index / IB – (May/14 to Apr/15)
Personnel / Services / Materials / Miscellaneous / Maintenance / Depreciation/Amortization / Transfer to
municipalities
4. TARIFF ADJUSTMENT INDEX (IRT)
After defining the RA0, VPA1 and VPB1, the Tariff Adjustment Index (IRT) is obtained.
9
The X Factor corresponds to a percentage to be added to or deducted from the B Portion Index, depending on the service provider's
operating parameters throughout the reference period. The X Factor represents a tariff incentive mechanism to improve operating
efficiency and service quality.
1
=
= VPA1 + VPB1
0
RA0
See below the Values of Portions A and B (VPA and VPB) and the Authorized Revenue (RA) at
moments 0 and 1. The resulting IRT is 12.38% for the 12-month period between May 2014 and April
2015.
This index corresponds to the average adjustment to define the Base Tariff Table that will be
used in the next tariff adjustment, excluding financial components.
Table 9 – Calculation of the Tariff Adjustment Index (IRT)
Source: Information supplied by the service provider, inflation indexes and ARSAE’s calculations.
Table translation:
Tariff Adjustment Index Calculation
M0 / M1 / Variation (%)
The IRT was higher than the main general or consumer inflation indexes for the same period,
such as IPCA (8.10%), INPC (8.25%), IGP-M (2.97%) and INCC (7.05%). The significant 62.22%
increase in COPASA's electricity costs, mostly caused by Aneel's increase in the tariffs and application
of the tariff flags system in 2015, was crucial in the IRT value. If the electricity costs were adjusted by
the IPCA, the IRT would be 7.85%.
5. FINANCIAL COMPONENTS
The occurrence of financial components creates the need for temporary adjustments to the
service provider’s revenue. To that effect, the Application Tariff Table is established and will be in force
from May 2015 to April 2016. It will be able to settle the balance of these financial components without
changing the base tariff.
The following items were analyzed in this tariff adjustment:




Portion A Variation Account (CVA);
Offset through change in electricity peak hours;
Regulatory costs;
Social Tariff Offset.
5.1. Portion A Variation Account (CVA)
The CVA, which corresponds to the offset of differences between the estimated amounts of each
Portion A item and the amounts effectively incurred, month by month, is provided for in ARSAE-MG
Normative Resolution 003/2011 and explained in ARSAE Technical Note 003/2011.
The table below summarizes the CVA 10 results. The final amount with the Selic interest rate
10
ARSAE calculated the differences between unit costs or indexes-numbers projected in the 2014 tariff adjustment and those incurred
between May 2014 and April 2015, multiplied by monthly expenses defined in the last adjustment for each Portion A item. Then, the
revenue adjustment was applied, in order to consider market changes, month by month. Finally, the CVA calculated for each component
was adjusted by the Selic interest rate accrued in the corresponding period.
accrued in the period11, which corresponds to R$ 9,757,243, indicates that the non-manageable expenses
incurred by COPASA exceeded the estimates in the 2014 tariff adjustment. This offset, which results in
tariff increase, applies to this adjustment only and does not affect the next ones.
The Electricity CVA considers the application of tariff flags from January to April 2015 and the
provisions of Cemig's extraordinary tariff revision under Aneel Ratifying Resolution no. 185812, of
February 27, 2015. The Fuel and Lubricants CVA, in turn, includes the adjustment to the diesel fuel and
gasoline prices authorized by Petrobras in November 2014, the PIS/Cofins raise as of February 2015,
and the return of the Contribution of Intervention in the Economy (Cide) as of April 2015.
Table 10 – Portion A Variation Account (CVA)
Source: Information supplied by the service provider and Bacen, and calculations by ARSAE.
Table translation:
Month / Electricity / Treatment Supplies / Fuel an Lubricants / Telecommunication / Taxes and Fees / Total CVA / Monthly Selic /
Accrued Selic / CVA-Total including Selic
May/14, Jun/14, Jul/14, Aug/14, Sep/14, Oct/14, Nov/14, Dec/14, Jan/15, Feb/15, Mar/15, Apr/15
5.2. Offset through change in electricity peak hours
As mentioned in section 3.3.1, the electricity peak hours were changed, under Aneel Ratifying
Resolution no. 1,507 of 2013. As of May 2013, electricity expenses increased on account of such
external factor not controlled by COPASA. In addition to the future adjustment to the electricity index,
COPASA had to calculate the offset retroactively13.
11
For April 2015, the monthly variation of the Selic interest rate was estimated based on the Brazilian Central Bank's estimates.
This resolution raised Cemig's electricity tariffs and the value of tariff flags as of March 2015.
13
The electricity information required to calculate the offset through change in peak hours was provided by the service provider from
January 2013 to January 2015 and estimated for February through April 2015.
12
Table 11 - Offset through change in peak hours
Source: Information supplied by the service provider, Aneel and Bacen, and calculations by ARSAE.
Table translation:
Month / Offset – Change in peak hours / Monthly Selic / Accrued Selic / Offset with Selic
May/13, Jun/13, Jul/13, Aug/13, Sep/13, Oct/13, Nov/13, Dec/13, Jan/14, Feb/14, Mar/14, Apr/14, May/14, Jun/14, Jul/14,
Aug/14, Sep/14, Oct/14, Nov/14, Dec/14, Jan/15, Feb/15, Mar/15, Apr/15
The offset related to the change in COPASA's peak hours resulted in R$ 7,923,250, after
adjustment by the Selic interest rate14. This offset, which results in tariff increase, applies to this
adjustment only and does not affect the next ones.
5.3. Regulatory Costs
The regulator’s performance may give rise to new costs to the service provider, referred to as
regulatory costs, the impact of which was not estimated in the previous tariff adjustment. Thus, in order
to maintain the economic and financial balance, the service provider must be exempted from these costs.
It is worth mentioning that only costs duly evidenced and deriving from practices not established in the
effective applicable regulation until ARSAE’s performance are accepted.
In COPASA’s 2015 Tariff Adjustment, the regulatory costs comprise the following expenses:
 Call center services provided to users in municipalities and regions where COPASA and
Copanor operate;
 Notices on changes in tariff category or on services COPASA starts to render (water supply,
sewage collection or treatment);
 Notices on Social Tariff and new criteria for classification of the beneficiaries.
14
Due to COPASA's consumption profile, the offset affected the values of demand (kW) and electricity (kWh) on peak hours of the
tariff groups A2, A3 and A4, billed under the blue and green flag tariffs. Demand and electricity offset indicators were calculated, and
they were compared before and after the change in peak hours. Thus, the demand and electricity increases were calculated, as well as the
absolute values of the monthly offsets. After the levy of PIS/Cofins and ICMS, the amounts were adjusted by the Selic interest rate.
5.3.1. Call Center
Pursuant to Article 39 of ARSAE-MG Normative Resolution 003/2010 (which was replaced by
art. 18 of ARSAE-MG Resolution 40/2013, that provides for free-of-charge call center service for
regional service providers), ARSAE established the water supply and sewage service provider’s
obligation to make available toll-free numbers for users 24 hours/day, including on Saturdays, Sundays
and holidays, in its entire area of operation. Since they were determined by the Regulatory Agency, the
costs related to implementation and provision of this service (call center, inbound calls and
telecommunication) characterize as regulatory cost.
Technical Note CRFEF/GREF 02/2013 establishes service quality parameters and the
methodology to calculate the regulatory costs to be recognized in tariffs. The study provides that the
efficiency and quality of COPASA's call center service be measured by indicators15 that are used to
calculate the Performance Factor (FD). This factor is an incentive mechanism that may reduce or
increase the call center's regulatory cost, depending on the performance of the call center service
provided to users.
Inspection Report CRFEF/GFE 01/2015 presents COPASA's and Copanor's indicators,
calculated based on data of the Performance Evaluation Reports of January through December 2014 sent
to ARSAE. The average of the performance factors in the 12-month period produced an FD of 4.31%
for COPASA and 9.47% for Copanor. Weighing them by the percentage of each company in the total
volume of inbound calls (99.5% for COPASA and 0.5% for Copanor), the FD to be applied to the call
center's regulatory costs in this tariff adjustment was 4.34%.
The table below shows the amounts month by month, before and after applying the FD, and the
amounts referring to COPASA’s Client Relationship Division (DVRC), which are deducted from the
calculation of the regulatory cost because they are already included in the tariff base16. The table also
shows the amounts estimated and anticipated in the 2014 tariff adjustment to fund the call center and
which were deducted from the regulatory cost.
Table 12 – Regulatory Cost – Call Center
Source : Service provider's information and ARSAE’s calculations.
Note (1): Amount anticipated in the 2014 tariff adjustment, that is, a R$ 111,188 reduction was estimated in the
costs of COPASA's Client Relationship Division between May 2014 and April 2016.
Table translation:
15
The performance indicators are the Service Level Index (INS), the Busy Call Index (ICO), the Give-Up Call Index (IAB) and the
Quality Index (IQ). For further details, see Technical Note CRFEF/GREF 02/2013.
16
Service Stations prices were adjusted by the IPCA and the amounts referring to DVRC were adjusted by the INPC, considering the
index accrued between May 2014 and April 2015.
Regulatory Cost – Call Center – in Reais / Month / Dimensioned / Dimensioned with FD / DVRC / Dimensioned
(-) DVRC / Estimate – 2014 Adjustment / Balance
May/14, Jun/14, Jul/14, Aug/14, Sep/14, Oct/14, Nov/14, Dec/14, Jan/15, Feb/15, Mar/15, Apr/15
Referring to inbound calls, the method to calculate the regulatory cost establishes a factor of
reduction in the monthly costs incurred if the call average duration 17 in the month exceeds the regulatory
call duration – 4 minutes and 50 seconds, that is, 290 seconds.
According to the monthly performance evaluation reports, the average call duration was below
290 seconds for all PR months; on average, the duration was 4 minutes and 5 seconds for COPASA and
2 minutes and 46 seconds for Copanor. Therefore, the total costs with inbound calls was recognized in
the regulatory cost, after deduction of the amounts anticipated in the 2014 tariff adjustment.
Expenses with telecommunication (links, licenses, etc.) were smaller than the amounts
anticipated in the 2014 tariff adjustment. The amount not spent is deducted from this adjustment.
Table 13 – Regulatory Cost – Inbound Calls and Telecommunication
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Regulatory Cost – in Reais
Inbound Calls / Telecommunication
Month / Costs incurred / Estimate –2014 Adjustment / Balance
May/14, Jun/14, Jul/14, Aug/14, Sep/14, Oct/14, Nov/14, Dec/14, Jan/15, Feb/15, Mar/15, Apr/15
The total balance to be recognized by tariffs to fund call center services for COPASA’s and
Copanor’s users referring to the PR is R$ 1,972,881, adjustment by the Selic interest rate, and this
amount should be refunded to COPASA.
17
Average call duration = Total Duration of Calls (TTD)/ no. of Calls Received by the IVR (CR IVR).
Table 14 – Regulatory Cost – Call Center Service – May/14 to Apr/2015
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Regulatory Cost – Call Center Service – in Reais
Month / Call Center / Inbound Calls / Telecommunication / Total/ Monthly Selic / Accrued Selic / Call Center – Total including
Selic
May/14, Jun/14, Jul/14, Aug/14, Sep/14, Oct/14, Nov/14, Dec/14, Jan/15, Feb/15, Mar/15, Apr/15
Just as it did in the 2014 tariff adjustment, ARSAE will anticipate the funds to pay for the call
center service in the next PR – May 2015 to April 2016. To that effect, the estimated amounts of call
center dimensioning, DVRC, inbound calls and telecommunications for April 2015 are used.
The total anticipated is R$ 2,610,872. In the next tariff adjustment, the realized amounts will be
calculated and the projections will be properly adjusted.
Table 15 – Regulatory Cost – Call Center Service – Estimate for the next PR
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Regulatory Cost – Call Center Service – May/15 to Apr/16 - in Reais
Call Center / Inbound Calls / Telecommunication
Total estimated
5.3.2. Notice of tariff category change or beginning of service provision
ARSAE-MG Resolution 38, of March 14, 2013, provides that users must be notified of any tariff
changes or introduction of water supply or sewer system public utilities:
“Art. 1 Users must be notified of any tariff changes or introduction of water supply or sewer system public
utilities provided by Companhia de Saneamento de Minas Gerais – COPASA MG and by COPASA Serviços
de Saneamento Integrado do Norte e Nordeste de Minas Gerais S/A – COPANOR.”
To be consistent with the previous adjustments and consider only expenses already realized and
duly evidenced, ARSAE analyzed the regulatory costs with communication during the period from
February 2014 to January 2015. Therefore, in order to comply with such resolution, COPASA had a cost
of R$ 138,725 (adjusted by the Selic interest rate) in the 12-month period. This amount was recognized
as regulatory cost.
5.3.3. Social Tariff Notice
ARSAE-MG Resolution 20, of April 11, 2012, sets forth in Article 2:
Paragraph 6 - COPASA will broadly disclose the change in the Social Tariff classification criteria, by means of
message included in water and sewer bills, via direct mail to residential users, and mass media. ARSAE-MG
will establish the parameters for such disclosure.
ARSAE-MG Resolution 22, of April 25, 2012, which sets the criteria for COPASA to disclose
the Social Tariff, provided that:
Article 4 The amounts spent to disclose the Social Tariff will be recorded in a specific account for them to be
considered a regulatory cost. The expenses referring to notices and educational messages will be considered as
regulatory cost, provided that they do not contain COPASA advertising, pursuant to item III, paragraph 8,
article 8, of Law 18309/2009.
Thus, COPASA had a cost of R$ 454,928 (adjusted by the Selic interest rate) with notice of the
Social Tariff implementation between February 2014 and January 2015. This amount was recognized as
regulatory cost.
5.4. Social Tariff Offset
In the 2012 adjustment, ARSAE changed the criteria for users to be benefited by COPASA's
Social Tariff. The Social Tariff is a tariff subsidy as established in Federal Law 11445 of 2007, and must
have a neutral effect on the service provider’s revenue.
In order to avoid that the change in the Social Tariff's criteria affected the service provider's
revenue, in 2012 the adjustment of tariffs of the other categories was 2.29% higher than the IRT and a
target was set for registration of the beneficiaries. To that effect, a regulatory ratio was defined between
the Social category and the Residential category. If the service provider benefited more or less users
than what had been established, revenue would be offset in the subsequent tariff adjustments.
As established in Technical Note CRFEF/GRT 02/2014, ARSAE changed the target for
registration of users in the Social category to a minimum of 80% of the families registered in CadÚnico
with per capita income lower than 1/2 minimum salary. This percentage corresponds to 23.9% of the
amounts billed and the units with consumption levels of up to 20 m³ billed under the Social Tariff.
The change was necessary given the difficulties in reaching all the families that could potentially
benefit from the Social Tariff, despite COPASA's proven efforts of communication and registration.
Nevertheless, if COPASA does not reach the new target with the billing of the Social Tariff
beneficiaries, there will be a billing surplus, and it must be deducted in the next tariff adjustments in
order to ensure neutrality of the Social Tariff for the service provider.
ARSAE found that the number of families benefited by the Social Tariff reached 629,000 in
February 2015. As COPASA billed a number Social Tariff beneficiaries smaller than what ARSAE had
established in the 2014 adjustment, its revenue was higher than the revenue established by ARSAE. The
amount in excess was assessed by ARSAE and will be offset by the service provider by reducing tariffs
applied to users.
The offset calculation required the comparison of the ratio of billed volume/number of units
between the Social and Residential categories estimated in the 2014 adjustment, effective between May
2014 and April 2015. The balance referring to this period is R$ 49 million (adjusted by the Selic interest
rate) to be returned by COPASA, as shown in the table below.
In addition to the offset referring to the period from May 2014 to April 2015, PR-related
amounts of the previous adjustment (May 2013 to April 2014) will have to be offset as well. These
amounts result from divergences found by ARSAE in the market information of that period provided by
COPASA. Thus, after the due adjustments, in addition to the amount already offset in the 2014
adjustment, there is an additional balance to be returned of about R$ 13 million, which adjusted by the
accrued Selic rate amount to R$ 15 million.
The total amount to be returned by COPASA is R$ 64,325,694, which would lead to a reduction
in the tariffs applied in the period from May 2015 to April 2016. However, according to External
Communication no. 158/2015-PRE, received by ARSAE on April 09, 2015, the service provider
requested that such amount be returned gradually in the following fiscal years "due to the current
scenario and the unpredictability of the water crisis' impact on the company's revenue". Thus, so as not
to adversely affect the funds allocated for necessary construction works and emergency programs and
COPASA's economic and financial balance, ARSAE will split such amount into two installments to be
paid in the next tariff adjustments, duly adjusted for the accrued Selic interest rate.
Table 16 – Social Tariff Offset
Source: market information provided by COPASA, application tariffs under ARSAE-MG Resolution 49/2014 and market structure
between categories set in the 2014 adjustment (Technical Note CRFEF/GRT 02/2014).
Table translation:
Adjustment 2014 / Adjustment 2015
Month / Offset Social Tariff / Selic accrued in 2014 / Offset including Selic / Month / Offset Social Tariff / Selic accrued in 2015 /
Offset including Selic / Total Offset
May/13, Jun/13, Jul/13, Aug/13, Sep/13, Oct/13, Nov/13, Dec/13, Jan/14, Feb/14, Mar/14, Apr/14
May/14, Jun/14, Jul/14, Aug/14, Sep/14, Oct/14, Nov/14, Dec/14, Jan/15, Feb/15, Mar/15, Apr/15
5.5. Total Financial Components
The table below summarizes the results of financial components to be offset in the next 12
months, referring to the period authorized for application of tariffs: May 2014 to April 2015. In this
adjustment, these offset amounts total R$ 22,857,899.
Table 17 – Total Financial Components
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Financial components / in R$
CVA / HP Offset /Regulatory Costs – Communication / Call Center – May/14 to Apr/15 Call Center –
May/15 – Apr/16
6. AVERAGE TARIFF EFFECT (ETM)
The Average Tariff Effect (ETM) is the ratio between Application Revenue at moment 1 (RA1Application, equivalent to the sum of RA1-Base and the financial components) and the Application
Revenue at moment 0 (RA0-Application, application tariffs defined in the 2014 adjustment multiplied
by the benchmark market). As shown below, the ETM corresponds to 15.04%, 2.66 percentage points
above the IRT on account of the effect of financial components.
Table 18 – Average Tariff Effect (ETM)
Source: Information supplied by the service provider, inflation indexes and ARSAE’s calculations.
Table translation:
RA0 – Application Tariff / RA1 – Application Tariff / Average Tariff Effect
7. TARIFFS
Two tables are presented below: i) Tariff Table I, with the tariffs that will be the basis for the
tariff adjustment of the next period and ii) Tariff Table II, with tariffs to be applied to users, which
features the financial components.
ARSAE-MG Resolution 64/2015 features Tariff Table I only, with tariffs applicable to users, to
avoid any misunderstandings. The tariff structure was not changed.
7.1. Base Tariffs
It corresponds to the linear application of the Tariff Adjustment Index (IRT) of 12.38% to the
base tariffs of the previous adjustment, resulting in the Tariff Table I (Base Tariffs).
Tariff Table I – Base tariffs (not applicable to users)
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Only consider the columns corresponding to services rendered:
- Water: water supply
- EDC: dynamic sewage including collection
- EDT: dynamic sewage including collection and treatment
Consumption Class / Tariff Code / Consumption Interval (m3) / Base Tariffs / May/15 to Apr/16 / Water / EDC / EDT
Residential Social Tariff up to 10 m³ / ResTS up to 10 m³
Residential Social Tariff exceeding 10 m³ / ResTS > 10m³
Residential up to 10 m³ / Res up to 10 m³
Residential exceeding 10 m³ / Res > 10m³
Commercial / Com
Industrial / Ind
Public / Pub
7.2. Tariffs Applicable to Users
It corresponds to the linear application of the Average Tariff Effect (ETM) of 15.04% to the
application tariffs of the previous adjustment, resulting in the Tariff Table II (Tariffs Applicable to
Users). These tariffs are the ones authorized to be billed as of May 13, 2015.
Source: Service provider's information and ARSAE’s calculations.
Table translation:
Only consider the columns corresponding to services rendered:
- Water: water supply
- EDC: dynamic sewage including collection
- EDT: dynamic sewage including collection and treatment
Consumption Class / Tariff Code / Consumption Interval (m3) / Application Tariffs / May/15 to Apr/16 / Water / EDC /
EDT
Residential Social Tariff up to 10 m³ / ResTS up to 10 m³
Residential Social Tariff exceeding 10 m³ / ResTS > 10m³
Residential up to 10 m³ / Res up to 10 m³
Residential exceeding 10 m³ / Res > 10m³
Commercial / Com
Industrial / Ind
Public / Pub
7.3. Tariff Impacts
Since the tariff structure was not changed in this adjustment, all users will receive a 15.04%
increase18 in COPASA’s bills, provided that the same consumption profile is maintained. The table
below shows the bills for consumption of up to 20 m³ of residential users, and the tariff impacts that will
be felt in cases of water supply only (table on the left), and water supply and treated sewage (table on
the right).
Residential users consuming up to 6 m³/month, for instance, will no longer pay R$ 26.36 bills, in
case of water and treated sewage; now they will pay R$ 30.32, a R$ 3.96 increase in the monthly bill.
Table 19 – Tariff Impacts by Consumption Level of Residential Users
Source: Service provider’s information, application tariffs of ARSAE-MG Resolution 49/2014, application tariffs defined in this
Technical Note and ARSAE’s calculations.
Table translation:
1st Table: Residential Bills – Water
Volume m3 / Bill in R$ / Difference
Current / New / R$ / %
18
Except for tariff rounding issues.
2nd Table: Residential Bills – Water and EDT
Volume m3 / Bill in R$ / Difference
Current / New / R$ / %
The next table shows a comparison of the bills of residential users and of those eligible to the
Social Tariff. Residential users with consumption of 6 m³ registered for the Social Tariff will pay a
R$ 18.19 bill, which is 40% lower that what is paid by users under the Regular Residential tariff in the
same consumption level, for water and treated sewage.
Table 20 - Comparison between bills of Residential and Social Tariff users
Source: Application tariffs defined in this Technical Note (2015 Tariff Adjustment) and ARSAE’s
calculations.
Table translation:
1st Table: Water
Volume m3 / Bill in R$ / Difference
Residential / Social Tariff / R$ / %
2nd Table: Water and EDT
Volume m3 / Bill in R$ / Difference
Residential / Social Tariff / R$ / %
The tables below show examples of bills for non-residential categories (commercial, industrial
and public) and the tariff impacts for users of water supply and treated sewer services.
Table 21 – Tariff impact by consumption level and category (water and treated sewage)
Source: Service provider’s information, application tariffs of ARSAE-MG Resolution 49/2014, application tariffs defined in this
Technical Note and ARSAE’s calculations.
Table translation:
1st Table: Commercial Category
Volume m3 / Bills (R$) / Difference
Current / New / R$ / %
2nd Table: Industrial Category
3rd Table: Public Category
Finally, the table below provides information about the market, revenue, average billed volumes,
tariffs and average bills by category and type of service rendered by COPASA, on a monthly basis.
Histograms between May 2014 and February 2015, estimates for March and April 2015 and the
application tariffs defined in this Technical Note were used.
For the water supply service, COPASA's new average tariff is R$ 3.85/m³. For the treated
sewage service, COPASA's new average tariff is R$ 3.59/m³.
Table 22 – Market and Average Tariffs by Service and Category
Source: Service provider’s information, application tariffs of this Technical Note and ARSAE’s calculations.
Table translation:
1st Table: Water Supply Service
Categories / Billed volume (m3) / Units / Average volume billed per unit (m3) / Revenue (R$) / Average Tariff (R$/m3)
/ Average tariff per unit
Residential Social Tariff / Residential / Commercial / Industrial / Public
2nd Table: Dynamic Sewage Service including Collection, without Treatment (EDC)
3rd Table: Dynamic Sewage Service including Collection and Treatment (EDT)
8. CONCLUSION
The resulting Tariff Adjustment Index (IRT), which measures the impact felt by COPASA on
account of inflation in the 12-month period between May 2014 and April 2015, is 12.38%. Due to the
significant increase in COPASA's electricity expenses (62.22%), mainly caused by the increase in the
tariffs authorized by Aneel and application of the tariff flags in 2015, the IRT was higher than the main
general inflation indexes for the same period, such as IPCA (8.10%), INPC (8.25%), IGP- M (2.97%)
and INCC (7.05%).
To define the application tariffs for users, the financial components must be considered, as they
create the need for temporary adjustments to the service provider's revenue that will be settled during
the period the adjusted tariffs are applied. The offset amounts considered in this adjustment amount to
R$ 22,857,899.
The occurrence of financial components led to an application index – or Average Tariff Effect
(ETM) to be felt by users – of 15.04%, 2.66 percentage points above the IRT. The tariff structure was
maintained in its entirety.
As the number of users billed under the Social Tariff was below the target, ARSAE also
calculated the amounts to be refunded by COPASA, in order to ensure the neutrality of the tariff subsidy
in the service provider's revenue. In this adjustment, the result was R$ 15 million, related to correction
of inconsistent market information of the period from May 2013 to April 2014, and R$ 49 million
referring to the period from May 2014 to April 2015 due to registration of number of users in the Social
Tariff below the target.
The total amount to be paid by COPASA is R$ 64,325,694, which would lead to a reduction in
the tariffs applied between May 2015 and April 2016. However, at the service provider's request, so as
not to adversely affect the funds allocated for construction works and emergency programs necessary in
the current water crisis scenario, ARSAE will split such amount into two installments to be paid in the
next two tariff adjustments, duly adjusted for the accrued Selic interest rate.
Laura Mendes Serrano Tariff
Regulation Manager
Economist – CORECON-MG no. 7825
Paula Monteiro de Almeida
Tariff Regulation Analyst
Economist – CORECON-MG no. 8119
Gustavo Vasconcelos Ribeiro
Tariff Regulation Analyst
Economist – CORECON-MG no. 8136
Vinícius Sales Fraga Tariff
Regulation Analyst
Administrator – CRA-MG no. 01-052203/D
I agree:
Bruno Aguiar Carrara de Melo
Technical Coordinator of Economic and Financial Regulation and Inspection
Economist - CORECON-MG no. 5564
The study that grounded this technical note was also supported by the Economic Information
Management (Technical Reports GIE 05 and 06 of 2015) and by the Economic Inspection Management
(Inspection Report CRFEF/GFE 01/2015).
EXHIBIT
Justification for choosing inflation indexes
The State Law no. 18,309/2009 sets forth:
“Article 8 The adjustment and revision of tariffs charged by service providers subject to regulation and
inspection of ARSAE-MG will be authorized by means of ARSAE-MG Resolution and will aim at ensuring the
economic and financial balance of the adjustment, reasonability and social control of tariffs, in all cases with
due regard for the disclosure of new amounts.
(...)
Par. 7 The recovery of costs deriving from the provision of water supply and sewer services will be based on
measured inflation, first and foremost by the General Price Index - IGP-M, and ARSAE-MG will disclose the
reasons that justify choosing the IGP-M or another index.” (underlined by us)
The IGP-M, a hybrid index prepared by FGV (Fundação Getúlio Vargas), is composed of 60%
of IPA (Extended Producer Price Index), 30% of IPC (Consumer Price Index) and 10% of INCC
(National Construction Cost Index). As a hybrid index captures fluctuations in the price level of goods
not related to all items that are part of Portions A and B, such index was adopted for each one of the
portions, and each component is in line with a more suitable index or index basket, as provided in State
Law no. 18309/2009.
The indexes used were obtained from the database of the Brazilian Central Bank (Bacen), the
Brazilian Institute of Geography and Statistics (IBGE) and the Brazilian Economic Institute of Fundação
Getúlio Vargas (Ibre/FGV) for the period available. For months where the indexes had not been
disclosed yet, the estimates provided by the Brazilian Central Bank's System for Generation of Time
Series (SGS/Bacen) were used. In the cases where the estimates were not available in SGS, ARSAE
made the estimate.
PORTION A:
Electricity – Tariff revision and adjustment indexes calculated by Aneel for Cemig are usually
considered, applied to the service provider’s consumption profile, which is obtained through of its
electricity bills. In this adjustment, given the considerable uncertainty that makes it difficult to estimate
Cemig's adjustment index in 2015, ARSAE adopted an estimate of electricity index. The calculation of
the projected index is explained in section 3.3.1 of this technical note.
Treatment Supplies – Chemicals for water and sewage treatment are considered tradables;
therefore, they are subject to foreign exchange volatility. In addition, agreements for purchase of
treatment supplies are generally adjusted by the IGP-M. Therefore, IGP-M is defined as the price index
for this item.
Fuel and Lubricants – Expenses with lubricants, ethanol and CNG are not considerable;
therefore, weighting of the Broad Consumer Price Index (IPCA-BH) is applied only to the components
of gasoline and diesel fuel, with weights of 60% and 40%, respectively.
Telecommunications – The components of fixed telephony, mobile telephony and Internet
access of the IPCA-BG are considered as proxies more appropriate for telecommunication expenses.
These three components receive equal weights in the telecommunication index.
Taxes and Fees – Includes expenses with Cofins, Pasep, TFAS, Charge for Use of Water
Resources, and other taxes. As they are levied on revenue, Pasep, Cofins and other less significant taxes
are adjusted by the ETM. For TFAS and Charge for Use of Water Resources, the variation between the
value estimated in the last adjustment and the value that will be incurred in the next period is
considered. The indexes are weighted by the percentage of each tax in the total expenses with taxes and
fees.
PORTION B:
Personnel – It includes personnel expenses related to salaries, benefits and social charges. Since
collective bargaining agreements apply the INPC (Consumer Price Index), this index was elected as the
most appropriate to evaluate the fluctuation of personnel expenses.
Services – It refer to expenses with third parties, such as cleaning, security, postal services,
advisory services, among others. As these services have a higher level of diversity compared to
personnel expenses and no collective agreement is applied to them, the IPCA was adopted, which is
more comprehensive than INPC.
Materials – Conceived as a comprehensive measure of the variation of prices in the Brazilian
economy, the IGP-M was selected for adjustment of this item because materials cover a great diversity
of components, including consumption and administrative items.
Miscellaneous – It includes several expenses, such as meals for visitors, membership fees of
associations, pocket expenses, among others. The diverse nature of these goods, usually acquired in
retail, led to the adoption of the IPCA, as it better suits the consumption of retail goods.
Maintenance – It includes costs with materials and third parties' services to maintain the water
supply and sewage systems. Therefore, the INCC-DI-MS, component related to materials and services
of FGV's National Construction Cost Index (INCC) was considered as the most appropriate proxy for
the adjustment of this item.
Depreciation/Amortization – These expenditures are mainly related to sanitation infrastructure.
Thus, the incorporation of new construction works in the asset base to be depreciated/amortized results
in the variation of this component proportionally to the variation of the value of construction works.
Thus, FGV's INCC was adopted for the adjustment of this item, as it assesses the construction cost
inflation.
Transfer to municipalities - Corresponds to mandatory transfers which are proportional to
COPASA's water and sewage revenue, established in the concession agreements of the municipalities of
Andradas, Belo Horizonte and Divinópolis. Since they are related to the tariff services revenue, the
Average Tariff Effect (ETM) is the appropriate index to adjust this item.