The backpack charge: regulatory strategies for stranded cost recovery in Brazil's retail power market

B. Goulart, J.P. Chaves, C. Batlle

Summary:

In the current context of accelerated decarbonization, liberalization, and decentralization of electric power systems, concerns about stranded or legacy costs are once again high on the political and regulatory agenda. A particularly relevant case arises when regulated or incumbent suppliers enter into long-term procurement commitments for a defined group of customers, while some of those customers are subsequently allowed to leave regulated supply. If the corresponding contractual obligations remain in place after part of the load migrates, an inappropriate allocation rule may shift legacy costs to the consumers who remain under regulated supply.
This paper discusses the challenges and methodologies for stranded-cost recovery in the Brazilian electricity market. Recent Brazilian legislation addresses migration-induced overcontracting by allocating the corresponding financial effects across consumers in both the regulated and liberalized contracting environments. The paper develops an alternative methodology, informally referred to here as the “Backpack Charge:” Consumers leaving regulated supply continue to bear their share of eligible procurement commitments entered into while they formed part of the regulated customer base, while being exempt from commitments entered into thereafter. The methodology aims to estimate the above-market cost associated with the relevant pre-existing regulated procurement commitments and to allocate it according to this temporal responsibility principle. An illustrative case study is developed to show how the mechanism could operate in practice and to assess its potential order of magnitude. Although developed for the Brazilian context, the proposed framework may also be relevant to other jurisdictions in which long-term procurement obligations are incurred for a customer group that may subsequently migrate to alternative suppliers.

Spanish layman's summary:

A medida que Brasil abre los mercados minoristas de electricidad, los antiguos contratos a largo plazo pueden dejar costos pendientes cuando los clientes cambian de proveedor. La «mochila» es un cargo que permite que los clientes que abandonan la tarifa regulada asuman su parte de los compromisos adquiridos anteriormente, para evitar un arbitraje ineficiente.

English layman's summary:

As Brazil opens electricity retail markets, old long-term contracts can leave costs behind when customers switch supplier. The “Backpack Charge” proposes that departing customers carry their share of past commitments, to avoid inefficient arbitrage.

Keywords: Stranded Costs; Retail Market Liberalisation; Regulatory Intervention; Electricity Retailing; Brazilian Power Market.

Registration date: 22-sep-2025