As part of its effort to revitalize the Brazilian electricity market, the Government of Brazil (GoB) implemented a set of measures described in two documents, Relatórios de Progresso no. 2 and 3. Duke Energy International and Tractebel Energia commissioned NERA to prepare a report that analyzed four of these measures: deverticalization, tariff realignment, bilateral contracting, and promotion of free customers.

The NERA team found that while these measures form a consistent approach in the Relatório de Progresso no. 2, they were no longer internally consistent in the most recent Relatório. Of particular concern is the continuation of cross-subsidies implied in the tariff realignment measure. The NERA team argues that the GoB should implement sustainable and economic alternatives to encourage efficient entry into the generation sector and stimulate market development and provide three possible solutions to phasing out cross-subsidies.

Eliminating cross subsidies is one way to push customers towards market-oriented outcomes as intended in the reform of the Brazilian electricity sector. The other two alternatives consist of phasing down cross subsidies while initial contracts are stepped down.