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E nergy Sxtor Management Assistance Programme

ColombiaPower Sector Restructuring Program

Report No. 169194

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JOINT UNDP / WORLD BANKENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)

PURPOSE

The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) waslaunched in 1983 to complement the Energy Assessment Programme, established three years earlier.ESMAP's original purpose was to implement key recommendations of the Energy Assessmentreports and ensure that proposed investments in the energy sector represented the most efficient useof scarce domestic and external resources. In 1990, an international Commission addressedESMAP's role for the 1990s and, noting the vital role of adequate and affordable energy ineconomic growth, concluded that the Programme should intensify its efforts to assist developingcountries to manage their energy sectors more effectively. The Commission also recommended thatESMAP concentrate on making long-term efforts in a smaller number of countries. TheCommission's report was endorsed at ESMAP's November 1990 Annual Meeting and prompted anextensive reorganization and reorientation of the Programme. Today, ESMAP is conducting EnergyAssessments, performing preinvestment and prefeasibility work, and providing institutional andpolicy advice in selected developing countries. Through these efforts, ESMAP aims to assistgovernments, donors, and potential investors in identifying, funding, and implementing economicallyand environmentally sound energy strategies.

GOVERVANCERAND OPER4TIONS

ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of theUNDP and World Bank, the govermnents and institutions providing financial support, andrepresentatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the WorldBank's Vice President, Finance and Private Sector Development, and advised by a TechnicalAdvisory Group (TAG) of independent energy experts that reviews the Programme's strategicagenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energyplanners and economists from the Industry and Energy Department of the World Bank. TheDirector of this Department is also the Manager of ESMAP, responsible for administering theProgramme.

FUNDING

ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nationsagencie^, the Furopean Community, Organization of American States (OAS), Latin AmericanEnergy organization (OLADE), and countries including Australia, Belgium, Canada, Denmark,Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,Portugal, Sweden, Switzerland, the United Kingdom, and the United States.

FURMER INFORMATION

For further information or copies of completed ESMAP reports, contact:

ESMAPc/o Industry and Energy Department

The World Bank1818 H Street N.W.

Washington, D.C. 20433U.S.A.

COLOMBIA

Power Sector Restructuring Program

November 1994

Power Development, Efficiency &Household Fuels DivisionIndustry and Energy DepartmentThe World Bank1818 H Street, N.W.Washington, D. C. 20433U.S.A.

This document has reSticted dibribufion and may be used by recipientsonly in the perfonnance of their official duties. Its contents may nototherwise be disclosed without UNDP or World Bank authorization.

CURRENCY EQUIVALENTS

Currency Unit Colombian Peso (COL$)

December 1991 US$1 = COL$ 701.09December 1992 US$1 = COL$ 807.64

Weights and Measures = Metric System

ACRONYMS

BOO Build-Own-OperateCENO Centro Nacional de OperacionesCHB Central Hidoelectrica de BetaniaCHEC Central Hidroelectrica de CaldasCNE Comisi6n Nacional de EnergiaCONFIS Conisejo Nacional de Politica FiscalCONPES Consejo Nacional de Politica Econ6mica y SocialCORELCA Corporaci6n Electrica de la Costa AtlanticaCSSE Consejo Superior del Sector EI6ctricoCVC Corporaci6n Regional del Valle del CaucaDNO Directorio Nacional de OperacionesDNP Departamento Nacional de Planeaci6nDPSL Domiciliary Public Services LawECLA Economic Commission for Latin AmericaEDF Electricite de FranceEEEB Empresa de Energia Elictrica de BogotaELDC Economic Load Dispatch CenterEMCALI Empresas Municipales de CaliEPM Empresas Pfiblicas de MedellinFEN Financiera Energetica NacionalFOGAFIN Fondo de Garantfas de Instituciones FinancierasGDP Gross Domestic ProductGOC Government of ColombiaICEL Instituto Colombiano de Energia ElectricaIDB Inter-american Development BankIFI Instituto de Fomento IndustrialISA Interconexi6n Electrica S.A.JNT Junta Nacional de TarifasLRMC Long-run Marginal CostMHCP Ministerio de Hacienda y Cr6dito PuiblicoMME Ministerio de Minas y EnergiaSCG Steering and Coordinating GroupSINSE Sistema de Informaci6n del Sector ElectricoSSP Superintendencia de Servicios PuiblicosTF Task Force

Colombian Fiscal Year January 1 to December 31

CONTENTS

PrefaceEXECUTIVE SUMMARY .......................... IThe Sector .......................... 1

Issues Facing the Sector ......... ................. 1Design of the Process .......................... 2

Phase I .......................... 3Phase 2 .......................... 6Phase3 .......................... 9Effectiveness ............................................ 9Lessons Lamied ......................................... 10

Organization of this Report ........................... 11

Chapter I. Main Sector Issues ........................... 12Study Objectives and Scope ........................... 12The Power Systemln ........................... 13Power Institutions ........................... 14Historical Background ......................................... 15Power Sector Issues ........................... 17

Management ........................... 17SupplyIssues ........................... 18Commercial and TariffIssues ............................ 19Financial Issues ........................... 21Distribution Issues ........................... 22

Conclusions ........................... 22

Chapter H. Design of The Process .......... ................. 24Achieving the Goals ........................... 24Nature of the Process ........................... 24

Country Specific Process ............ ............... 24Participation of Stakeholders and Colombian Leadership .25Organizaional Structure .25

Time Frame .27Phases of the Process .27

Chapter II: Results Of Phase .29Government Objectives and Policy .... . ........................... 29Economic and Power Sector Policy Objectives .29Restructring Objectives Adopted for Phase 1 Analysis .31Evaluation Criteria for Phae 1 Analysis .32Phse Structura Options and their Evaluation .34

Degree of Verticai negration. 35Degree of Horizonta Integration .35Trading Relationships 36Broad Options for the Powe .I.dstry. 36Evaluation of Broad ptions .38

Management and OwnershiP Options ....... 39

Company Ownership . .................................... 40Management .......................................... 40

Conclusions ......................................... 41Phase 1 Workshop Summary . .................................... 42Structural Decisions ......................................... 43

Relation between Transmission and Dispatch ....... ............... 43Relation between Generation and Distribution ...... ............... 44System Rents ......................................... 45

ecess to Networks ....................................... 45Syst, ;Iegulation ......................................... 45System Planning ...................................... ... 47Management Measures ......................................... 47Changes in Ownership ........................................ 47Conclusions ........................................... 48

Chapter Iv. Results of Phase 2 ....................................... 50Phase 2 Initation and Organization .............. ................... 50Task Force I Financial Strategy . .................................. 0Task Force 2 Tariffs ......................................... 52Task Force 3 Regulation ....................................... 54

Task Force 4 Pooling and Dispatch ......... ................... 54Task Force 5 Network Access and Charging ........ .................. 56Task Force 6 Management and Corporatization Issues .................... 57

Chapter V. Legal Framework ........................................ 61General Orientation ...................... 61Constitutional Mandates ...................... 62Development Plan Orientation ...................... 64Strategy Adopted ...................... 65Draft Principles of The Domiciliary Public Services Law ...... ............ 66

The CNE/MME Proposal ................................... 66The Draft Electricity Law ......... ............... ............ 70Transitional Measures ........................... 76Conclusions ........................... 77

Chapter VI. Remaining Agenda ............. .................. 79Project Conception ............................... 81Financial Studies ............................... 81Tariff Analysis ........... 82Dispatch and Transmission ................................ 82Legal and Corporate Studies ................................ 82

BIBLIOGRAPHY ............................... 84

ANNEX A. INSTITUTIONAL DESCRIPTION ............................ 86Non-operational Institutions ................................ 88Legal Constraints ............................... 89

ANNEX B. HISTORICAL BACKGROUND .............................. 90

&Eonomic Background: 1970-1990 ........... ...................... 90The Power Sector ........................................... 91

ANNEX C. INVESTMENT PLANNING ................................ 94

ANNEX D. OPERATIONS PLANNING AND SYSTEM DISPATCH .... ......... 95Seaso.-al Dispatch . ........................................... 95Daily Dispatch .............................................. 95Issues. ................................................ 96

ANNEX E. SPECIFIC INSTITUTIONAL ISSUES ......................... 97The Structure and Roles of ISA, ICEL and CORELCA .................... 97

Tables

111-1 Power Sector Policy Objectives ........... ........................ 31111-2 Phase 1 Restructuring Objectives .......... ........................ 33111-3 Power Sector Functions . ....................................... 35V-1 Draft of Colombia's Electricity Law: 1991 Outline .70

Figures

I-i Breakdown of Effective installed Generation in Colombia, 1990 .131-2 Breakdown of Electricity Sales by Users in Colombia, 1990 .141-3 Corporate Structure of the Power Sector .151-4 Electricity Demand and Real GDP Growth Rates ........................ 16I-S Technical and Non-Technical Losses by Subsystem in 1990 ................. 181-6 Total Transmission and Distribution Losses, 1975-1991 ................... 18U-1 Working Structure of Phase 2 . ................................... 26m-i Broad Models of the Power Sector ........... ...................... 371- A Colombian Power Sector-Corporate Sketch ........................... 86

Colombia: Power Sector Restructuring Program

Preface

Many developing countries and formerly centrally planned economies are considering efforts torestructure public enterprises as part of an overall policy program to achieve sustainable growth in theireconomies. The power sector usually comprises the single largest group of public entities operating asa vertically integrated public monopoly. In most of these countries, there are also pt' verftil political forcesand vested interests opposing the reform. Yet the record of experience on how successful reforms havebeen carried out is still relatively scarce. This document discusses ESMAP's participation in the 'rojectto restructure the power sector in Colombia from the late 1980s through 1991.

Several important changes have taken place since ESMAP initial work, among which the mostimportant are (a) the approval by congress of the Electricity Law (EL) and the Domiciliary Public ServiceLaw (DPSL), and (b) the debt-equity swaps that have placed (perhaps temiporarily) a greater proportionof the power sector under the ownership of the Ministry of Finance. The contents of the reform are welldocumented in a recent World Bank Report.' The reform process is entering now the critical stage ofimplementation of the regulatory framework, the competitive bulk supply market, developing privategeneration projects and privatizing existing assets. The Colombian sector has traveled a long road sincethe reform was being studied. This report nevertheless complements the World Bank Report by focussingon how the restructuring process was designed, organized, and carried out. It brings to light what was thethiinkg at the time the reform was being studied, and what were the prevailing conditions. T'hese aspectsare worthy of detailed attention, since they may be taken as (a) an instructive taxonomy of the problemsand nuances that many governments will confront in the ir own restructuring efforts, and (b) a valuable setof lessons for increasing the chance that the reform will be implemented by ensuring local ownership andleadership of the process from the start. The purpose of this report is thus to disseminate the lessonslearned during the process of studying the restructuring of the power sector in Colombia.

The restructuring project was initiated when studies by the World Bank's Operations EvaluationDepartment (OED) in 1988 and 1990 pinpointed the sector as a source of chronic administrative andfinancial problems for the goverrnent and an obstacle to development2. After completion of the OEDstudies and issuing of the report, the Bank postponed lending operations in the sector until the main issueshad been addressed. Urgent remedial actions were clearly called for, but they had to be timely, and in theproper direction. It was in this context that the Colombian government requested the World Bank andESMAP to undertake a full-scale study of alternatives for restructuring the sector. ESMAP mounted atechnical assistance program in close cooperation with the World Bank's country departnent (LA3IE) andwith Colombia's National Planning Department (DNP) and Nauonal Energy Commission (CNE). Thiscooperative undertaking was able to examine the issues and options facing the sector openly andconstructively. The study and discussion process was devised so that all the entities in the sector that hadanything to contribute could do so in a nonthreatening, transparent, and open-to-all environment, ensuringgreater common "ownership" and political support for the products of the study. The best way to describe

'Covarrubias, Alvaro J. and Suzanne B. Maia, 1994. Reforms and Pivate Participation in the Power Sectorof Selected Latin American and Caribbean and Industrialized Countries, LAT, Regional Studies Program Rep. 33,The World Bank, March.

2The World Bank 1990. Colombia-The Power Sector and the World Bank. 1970-1987, OperationsEvaluation Department, Report No. 8839, 28 June.

how the process was devised is that: "the restructuring of the sector was made in Colombia, by Colombiansandfor Colombians".

It is interesting to note that the participative and transparent manner in which the project wasundertaken ensured agreemenit in several areas of the reform, enabling implementation to start despite thefact that the electricity law had not yet been approved. Also, during the preparation of the secondarylegislation (statutes, licenses, etc.), new ideas served to improve the draft electricity law.

Luis E. Guirrez managed the study and prepared this report. It was kindly reviewed and editedby the following World Bank staff: Jos6 Maria Bakovic, Philippe Durand, Jorge F. Gorrio, Rafael A.Moscote, Jayme Porto-Carreiro, and Kurt F. Schenk. Their valuable comments and suggestions aregratefully acknowledged. The report also benefited considerably by the contributions, comments andsuggestions of the following consultants. Sebastidn Bernstein, Fernando Lecaros and Coopers & Lybrand.

ESMAP also wishes to express its appreciation to the Nationa; Planning Department, the NationalEnergy Commission and the many enterprises in the power sector in Colombia for the cooperation andassistance they rendered to ESMAP staff and consultants during the preparation of this study. The workwas made possible by the generous funding of the United Kingdom's Know-How Fund and by UNDPthrough bilateral contributions to ESMAP.

EXECUTIVE SUMMARY

The Sector

1. The restructu'ing program arose in response to the Colombian power sector's inadequateperformance over the 1970s and 1980s and, more immediately, its worsening finanicial crisis since 1984.At the time of the project (1990-91), virtually all electricity in Colombia was generated, transmitted, anddistributed through eight organizations, as listed below (the first three are municipal companies in the maincities and the remaining five government-owned companies):

Empresa de Enebir d.c n (aEB)Empresas Ptblicas de Medellfn (EPM)Empresas Municipales de Cali (EMCALI)

w Corporaci6n Aut6noma del Valle del Cauca (CVC)w Corporaci6n E16ctrica de la Costa Atlantica (CORELCA)w Instituto Colombiano de Energia El6ctrica (ICEL) in the rest of Colombia3

Interconexi6n Electrica S.A. (ISA, the major generation company in the sector)w Central Hidroelectrica de Betania (CHB).

2. The main government entities responsible for the sector and its regulation were, the Ministryof Mines and Energy (MME); the National Planning Department (DNP), particularly its National TariffDoard (JNT); the National Electricity Fund (FEN); and, since 1990, the National Energy Commission(CNE). The ultimate decisicnmaking authority in the country is the National Economic and Social PolicyCouncil (CONPES), chaired by the president and comprising several cabinet-level officials.

Issues Facing the Sector

3. A diagnosis of the power sector's problems, made after a World Bank (OED) evaluation in1988 and 1990, clarified the sector's underlying structural weaknesses. The most important were the lackof corporate autonomy and inefficiencies in management. Sectoral problems were evident in tariffs belowcost-recovery levels (at about 75 percent of long-run marginal cost [LRMCJ), subsidized prices forgenerating fuels, inadequate commercial practices (loss levels were up to 20 percent of generation),noneconomic selection of generating units, overbuilding of capacity during the 1970s, and frequent costoverruns (especially on the large Guavio hydro project).

4. Colombia's power tariffs were flawed in two basic ways. First, they did not provide the rightsignals to consumers, thus promoting a misallocation of resources. Second, they did not cover financialexpenditures, which deferred spending for necessary maintenance and expansion. The taiiff structure alsoallowed considerable cross-subsidies from industrial and commercial consumers to residential users, whoconsumed about 50 percent of total electricity demand. Tariffs for industrial consumers in Bogota wereon average about two to three times the LRMC. The pricing mechanism was not transparent and wasinsensitive both to changes in supply costs and to competition.

3CORELCA and ICEL are the major shareholders in 24 regional companies (the Electrificadoras) withpredominantly distribution functions.

Page 2 Colombia: Power Sector Restructuring

5. Political influence (interference or outright intervention) and lack of corporate autonomy werereflected in conflicts of ownership within the enterprises, leading in some instances to the sacrifice ofeconomically sound choices for political gains. In some cases, collusion between participants and othernoneconomic considerations prevented selection of the best projects. Optimal selection and timing ofprojects could not be ensured because of the degree and depth of centralized planning, the manner in whichprojects and plants werc selected for construction, the way in which plants were constructed, and theallocation of plant ownership.

6. The combination of all these problems made the sector less and less able to provide economicand reliable service, manage its debt, and funcidon without depending heavily on the government. Duringthe 1980s, investment in the sector represented about 24 percent of total public inivestment, and the sector'sdebt burden for this period was close to 30 percent of total public sector debt service.

7. Analysis revealed that 1nese problems-basic institutional and corporaee flaws and the lack ofwell-defined and feasible objectives (mainly attributable to contested ownership)-were compounded byweak regulatory mechanisms. In sum, the main issues confronting the power sector were as follows:

Weak management. This factor reflected the political aspirations of some managers, indistinctownership of the utilities, lack of corporate autonomy and accountability, nonexistence ofclear and transparent "rules of the game," and lack of a proper regulatory authority.

be A poorly dfined nstittional stnucture. Responsibilities between generation, transmission,and distribution were ill-defined.

Price and fnancial shortcomings. A long history of energy subsidies, tariff distortions, andpoor financial performance plagued the sector.

6e Fiscal dependency. The power sector was burdened by its massive reliance on the nationaltreasury and on debt financing for financias losses and sectoral development.

Desig of the Process

8. The process of sector reform is intensely political. Reshuffling responsibilities and poweramong sector entities necessarily diminishes one group's power and increases another's. In the case of areform that includes a large infusion of competition and private sector participation, "command andcontrol" functions are transferred to the marketplace. Because this involves a large transfer of economicpower from the public sector to the market, political opposition to restructuring is always a serious danger.The restructuring process in Colombia therefore had to be designed to harness the local talents, achievesynergy, and minimize the negative political consequences, if it was to have any chance to succeed. Localauthority "owneaW" ot the effort and outcome was therefore considered vital.

9. Given the pitfalls intrinsic in the restructuring, a highly participatory approach to the processwas judged essential if the results of the effort were likely to be embraced by the government andimplemented. From the start, the project involved the three main groups in the sector: the NationalPlanning Department (DNP), the energy sector authorit ies in the energy ministry through the NationalEnergy Commission (CNE), and the utilities' management.

Executive Summary Page 3

10. The restructuring program was organized in a flexible manner to account for the manyunknowns inherent in a new process and to tap the synergetic potential of the local talent The results ofthe work were dissemmnated and discussed as they became available through various seminars andwor':shops, and by publishing the results of the proceedings4. ES1MP thus performed more the role ofa facilitator of the process, by organizing local task forces and complementing its own staff with theexpertise from countries whiclh have successfully implemented power sector reforms. In other words, theeffort fully reflected a process-driven set of local concerns and judgements.

11. Because an open design would promote sound, quick, and timely solutions, the process wasplanned in three phases:

w Phase 1 would arrive at a diagnostic of the sector, identifying the main sector issues andoptions.

w Phase 2 would evaluate the options and propose the best institudonal setup.ow Phase 3 would carry out the fial implementation of the recommended options.

phase 1

12. Analyses of the sector's past performance highlighted its lack of well-defined and achievableobjectives. One of the more prominent weaknesses was the reiteration of vague, general objectives thatwere seldom attained. The nebulous character of these goals impeded assessments of progress towardthem.

13. One of the first steps of the restructuring project was thus to define a set of three principalsector objectives:

v Enterprise management objectives. These centered on forming autonomous enterprise.,independent of political bodies, promoting management responsiveness to economic andfinancial incentives, adopting hard budget constraints to cap the extent of government supportpower sector companies could expect, and promoting normal commercial practices insupplier-consumer relations.

v Pricing and financial objectives. These involved a structure whereby consumers wereprotected from potential monopoly practices and tariffs reflected costs of service. Theconsequent financial strengthening of the sector was plamxed to attract new sources of debtand equity capital, particularly from the private sector.

v System operations and investments. These comprised a twofold objective: first, to seek aleast-cost operation as well as a least-cost expansion path based on economic signals, and,

4CNE and ESMAP, 1991. Evaluaci6n del sector elktrico colombiano 1970-1990, Preedings of the seminaron "Evaluaci6n del desempehfo del sector electrico colombiano 1970-1990" in Santa Marta, Colombia, 13-15 March;Modelos inuemacion4es de organizaci6n del sector electrico, Proceedings of the ser.iinar on "Organizaci6ninstitucional del sector electrico: La experiencia internacional" in Paipa, Boyaci, Colombia, 31 May to 1 June; andpWiyadzagi6n del sector electricp: La eweriencia internacionl. Proceedings of the seminar on -La participaci6nprivada en el sector el6ctrico colombiano" in Cartagena, Colombia, 28-30 August.


second, where possible, to base expansion on a competitive process, as opposed to the systemof compulsory planning.

14. The foregoing objectives were intended to form a consistent whole: to foster a managementwhose responsibilities and risks would entail rewards and penalties through the establishment of hardbudget constraints to promote the development of sound pricing policies, and to encourage operating andin.estment decisions that would minimize costs. These economic signals were intended to create a financialclimate conducive to attracting private capital.

1S. Finally, to judge alternative institutional structures, a number of evaluation criteria weredeveloped that were congruent with both the proposed objectives and the constraints faced by arestructuring program:

ow Feasibility of implementing hard budget disciplinesuw Ease of implementation of regulatory control and acceptability to the regionsor Attractiveness to external investors and lenders and potential to interest new entrantso Feasibility of implementing normal commercial practices to create an attractive business

climateor Incentives for preserving least-cost dispatch and maintaining service quality.

16. Structural Options and Case Studies. A number of alternative organizational proposalswere reviewed and evaluated according to the above criteria, ranging from an extreme of total integrationto a structure of competition at the generation level for supplying regulated distributors as well as largeconsumers. This evaluation highlighted the fact that structures promoting competition were preferable tothose based on vertically integrated industries. Furthermore, the fact that the existing Colombianorganization of relatively decentralized enterprises was amenable to restructuring based on competitiveprinciples pointed out the desirable direction for institutional change.

17. In order to obtain greater insight into the feasibility of embarking on the restructuring process,a number of precedents, based on the experience of the United States, France, Spain, Chile, andEngland/Wales were examined. This review led to the following conclusions:

s The pervasive presence of the state as an owner of assets in the electricity industry issometimes an obstacle to satisfactory performance in supply and distribution. A strongprivate capital presence is feasible and indeed representative of most of the case studies exceptFrance.

s The govermnent's presence in the sector is necessary to safeguard against market failureassociated with natural monopolies, but its role is that of a regulator of the industry ratherthan that of an investor.

s A radical restructuring of the electricity industry to create a competitive organization isfeasible, as shown by the examples of Chile and England/Wales.

b The restructuring of the industry is a necessary step before embarking on privatizationschemes; otherwise the effort could have the undesirable effect of replacing public monopolieswith private ones.

Execudve Summary Page S

18. Adopted Strategy. Results of the preceding analysis, together with the case studies, werediscussed at a seminar held on 1-2 June 19915. In a policy paper issued by CONPES', the Colombiangovernment adopted a strategy comprising the following main directives:

w Promote competition within the power sector and its linkage to the price system.w Strengthen the regulatory functions of the state.w Open the sector to alternative suppliers by assuring freedom of access to transmission.w Restructure existing enterprises owned by the central government--that is, ICEL and

CORELCA.

19. The promotion of competition was the central directive guiding the restructuring decisions.This implied the need for reorganizing the sector at the generation level where competition was feasible,creating new generation enterprises from the existing ones, breaking up vertically integrated companiesto foster the development of an active market, and organizing regulatory authorities to supervise itsoperation.

20. The CONPES directives, together with the considerations of the preceding analysis, pointedout three broad stages of the restructuring process:

Rehabilitagon. The rehabilitation stage would necessarily entail central government supportas well as its significant short-term presence within the industry in order to surmount thesector's present financial difficulties.

-p Reorganizaion. A reorganization stage would put in place the competitive structure and theregulatory authorities.

Privaion. A privatization stage would divest the state of its current holdings and attractprivate investors.

21. Phase 1 of the Restructuring Program culminated with a workshop held on 12 July 1991, atwhich representatives from the power sector and government endorsed the main decisions relating to theprocess:

w Developing competition between generators for supplying distribution companieseV Allowing competition for supplying large usersor Unbundling generation and transmission within ISAw Sepazating the generation and distribution businesses of vertically integrated municipal

companies (EEB and EPM)w Reorganizing ICEL and CORELCA and their subsidiaries in Ihie with the proposed directives

5CNE and ES"P, 1991. Modelos-intemacionaes de organizacion del sector elero, Proceedings of theseminar on 'Organizaci6n institucional del sector el6ctrico: La experiencia internacional" in Paipa, Boyaca,Colombia, 31 May to 1 June.

6CONPES, 1991. "Estrategia de reestructuraci6n del sector el&otrico", Document DNP-2534-UINF-DELEC,21 May.


Making subsidies explicit and make the government resnonsible for them through directtransfers to distribution companies

w Revising the existing rates to reflect costsFostering corporate responsibility, at least on a medium-term basis, through managementcontracts to be managed by FEN

w Creating the necessary regulatory bodies.

Phase 2

22. Following the July 1991 workshop, Phase 2 of the Restructuring Program was designed inorder to achieve the following target structure for the power sector:

v A competitive market at the bulk level whereby generators, distributors, and large consumersfreely established long-term supply contracts

v A minimum-cost dispatch organized through a control center whereby energy interchangewould be valued at short-run marginal cost

v Freedom of access to networks to facilitate the operation of the competitile market

v Regulation of stages in electricity transmission and distribution that constituted naturalmonopolies

v Establishment of a regulatory authority

v Reorganization of electricity enterprises into autonomous corporations responsible for theirinvestment and operative decisions

v A cost-reflective tariff system and the establishment of explicit state subsidies.

23. Phase 2 was developed as a natural coinuadtion of Phase 1, establishing in greater detail thestructural reforms to be tundertaken within the power sector. This effort was accomplished at a seeminglypropitious juncture: the new Constitution, enacted in July 1991, required the presentation of public servicelegislation to Congress for consideration during the legislature inaugurated in December 1991. The thrustof Phase 2 was therefore toward developing an -!ectricity law as its final product.

24. Phase 2 was organized by establishing six task forces in charge of providing a coherent frameof reference for designing the Electricity Law. They covered the following aspects of the legal frameworkof the sector:

Task Force 1: Financial StrategyTask Force 2: TariffsTask Force 3: Regulation

w Task Force 4: Pooling and Dispatchwt Task Force 5: Network Access and Chargingwe Task Force 6: Management and Corporatization

Execudve Summary Page 7

25. Given the time constraints for producing the Electricity Law, the task forces focused ondefining its essential elements so that Task Force 3, which was in charge of producing the draft legislation,could structure the proposed law. This necessarily foreclosed the possibility of fully developing many ofthe detailed aspects to be considered in the implementation of the proposed reforms; these were to havebeen developed later. The oatput of the different Phase 2 task forces should be viewed as constituting thebasic building blocks for achieving the desired restructuring of the sector.

26. From a legal standpoint, the challenge faced in drafting the Electricity Law consisted ofharmonizing the constitutional provisions that emphasize a number of aspects related to the supply of publicservices with the sector's target institutional structure and the government's general development policy.Problems arose because the Constitution's general orientation is toward establishing welfare-state conditionsfor the supply of public services, whereas the thrust of the government's policy and the power sectorrestructuring effort pointed toward allowing the price system to dictate the allocation of resources throughcompetitive markets whenever possible. Consequently, the general strategy followed in drafting legislationwas to assemble all the constitutional elements that enabled the establishment of the desired institutionalstructure while formulating the law so that provisos that were required but were likely to damage thedesired orientation of the law would have only a limited impact. The final result was draft legislation thatwas effective and hardened as far as possible against being disqualified as unconstitutional.

27. Domiciliary Public Services Principles. An important constraint in drafting the ElectricityLaw was the consdtutional requirement for the government to develop a Domiciliary Public Services Law(DPSL) encompassing electricity, water, sewage, natural gas, and possibly other services. Given the"umbrella" characteristic of the DPSL as essential background for the Electricity Law, and given that theDPSL draft was being prepared by DNP (who had the primary responsibility for this project), Task Force3 (Regulation and Legislation) outlined a set of preliminary principles for the DPSL to guide thepreparation of the Electricity Law. It is important to note that this report documents only the principlesprepared during Phase 2, which are different from the principles in the draft DPSL developed by DNP andpresented to Congress in March 1992.

28. The legal principles for the supply of residential public services postulate (a) the state's rolein the various public services, (b) the limits to the state's intervention, and (c) the entities responsible fortheir provision. The scope of these principles are limited to those services with natural monopoliesfeatures, or those that, because of their external effects, are necessarily a public sector responsibility. Theformer include those services that reach final consumers through networks-electricity, water supply,sewage, natural gas, and telephone services-whereas the latter category encompasses only garbagecollection.

29. In the context of the power sector's objectives, these principles facilitate achievement of thefollowing goals:

v Competitive bulk supply of power not encompassed by the DPSL, therefore allowing thecompetitive generation market to develop according to the Electricity Law.

v High-voltage networks exempt from regulation by the DPSL.

v Distribution enterprises that fall under the category of regulated services covered by theDPSL, but that can be organized as autonomous, possibly private, units with primarilyfinancial and economic incentives.

Page 8 Colombia: Power Sector Restlrcturing

30. With regard to tariffs, the draft DPSL called for setting cost-reflective tariffs with allowancefor explicit subsidies that may originate within the municipality, the departmnent, or the central government.This proviso sought to correct the gross distortions that afflicted commercial and industrial tariffs byexpressly disallowing cross-subsidies between consumer groups.

31. Concerning regulatory authorities, the constitution, together with the DPSL, established theSuperintendency of Domiciliary Public Services (SSP). Given the potential problem of overregulation,associated to the power to regulate all public services, the draft DPSL limits the range of ftinctions of theSSP to the control and supervision of die utilities, whereas the regulatory authority is explicitly assignedto bodies independent from the SSP. It endows the SSP' with the power to assume the direction of publicservice companies whose unsatisfactory financial or technical performance may endanger the continuityof supply.

32. The draft DPSL prepared by Task Force 3 was transmitted to DNP in early November 1991.DNP had developed its own version of the DPSL which was confronted w'ith the former in variousmeetings held during December 1991. The substantial differences between the two drafts lead to intensebut constructive debates, which eventually lead to a consensus. DNP developed the fnal draft of theDPSL, which was presented to Congress on the 28 February 1992 deadline.

33. Draft Electricity Law. Building on the foundations of the draft DPSL, the Electricity Lawwas drafted based on an open, unbundled and conmpetitive electricity supply industry. The draft lawaccepts competition in generation and third-party access in transmission. It assigns responsibility forsystem planning to CNE, the National Energy Commission. However, this planning is indicative only,serving as a guideline to orient investment decisions of existing and potential power producers. The latterare free to undertake investments other than those shown in the plan and are responsible for the commercialrisks inherent in such decisions.

34. The draft law sets basic parameters for the unregulated market at the generation level so thatgenerators, large consumers and distributors are free to negotiate their own long- term contracts (at leasttwo years). Large consumers are defined as those connected at voltages above 30 kilovolts. Theregulatory authority is empowered to extend this definition to lower voltages. Distributors are allowed tocompete for the supply of large users.

35. Operation of generation is to be coordinated by a National Operations Council representedby all major generators. This council supervises the National Dispatch Center which also acts asclearinghouse for transactions between generators.

36. Energy trading between generators resulting from system optimization decisions is valued atshort run marginal cost. The Energy Regulatory Commission is responsible for developing themethodology for cost calculation. The actual cost estimates are done by the National Dispatch Center.

37. The National Transmission System is defined to encompass all lines and substations at voltagesequal to or above 220 kilovolts. The corresponding service is entrusted to ISA and with the operation ofthe National Dispatch Center.

38. The transmission networks, both national and regional, are made freely accessible to allgenerators and distributors subject to payment of connection and service charges.

Execudve Summary Page 9

39. The draft law establishes the Energy Regulatory Commission at the ministry-level. Thecommission is charged with approving regulations concerning the conduction of commercial transactionswithin the sector as well as the regulated tariffs within the system.

40. Finally, the draft law reaffirms the general principles stated within the DPSL for distributioncompanies, restricting them to certain types of organization in order to assure their financial and managerialautonomy. The law also requires a separate accounting system for enterprises engaging in activities otherthan electricity distribution.

Phase 3

41. In March 1992 a continuation of the Restructuring Program, Phase 3, was conceived to designcomplementary legislation for the Electricity Law. Once the law was approved, it would be necessary toestablish specific and detailed conditions for its implementation. Colombian law allows for this throughthe enactment of executive decrees. Consequently, Phase 3 was created to support energy sectorauthorities in identifying those areas of the Electricity Law that needed complement and strengthening.Finally, because all elements of the Restructuring Program could not be implemented at once, given theircomplex repercussions on sector organization, Phase 3 would include a schedule for putting the reformsin place.

42. Phase 3 was designed with a preparatory stage in which a number of Colombian sectorexperts, along with international consultants, would identify and agree on the issues to be addressed,followed by a stage consisting of a number of specific studies. The fial outcome would be the secondarylegislation together with the detailed recommendations for the implementation of the proposed reforms.

Effectiveness

43. The reform process and "outcome" were viewed as Colombian. Given the profoundinstitutional changes, the major policy and political contents of the reforms contemplated, "Colomnbianownership" of the reform was essential. The open and highly participatory approach of the process enabledthe results to be accepted and promoted by the main sector players, specially the government. They werepart of the effort from the beginning, forming an integral part of the analytical and prescriptive process.

44. The effectiveness of the project may be judged based on the high degree of client participationand sense of ownership. The collaboration with the local Coordinating Group and Task Forces over thewhole project life gave the opportunity to the Colombians to voice their opinions at any stage and facilitatedbuilding consensus when lifficult issues emerged. The active role played by the Colombians in definingthe scope and structure of the project, analyzing the issues and recommending solutions ensured localownership of the process and the results. The Colombian Govermnent supported the project with humanand financial resources, as well as providing logistic support, indicating the Government's high priorityassigned to the project.

45. The project findings were widely discussed and disseminated, ensuring that the stakeholdersshared most of the basic premises and recomendations of the proposed reform. Dissemination relied more

Page 10 Colombki Power Secd, Resuructuring

46. The project had also a significant impact on the outcome of the reform. Although the twoprimary pieces of legislation -the Electricity Law and the DPSL- took more than two years in passingthrough congress, the project promoted a constructive and informative debate, leading to theimplementation of sustainable policy changes with their beneficial development impact. For instance,implementation of the reform started despite the fact that the electricity law had not yet been approved.The nature of the process ensured agreement in several areas that could be implemented. Also, during thepreparation of the statutes, licenses, etc., new ideas served to improve the draft Electricity Law.

47. The main final project outputs was the consensus around the need for reform, the industrymodel, the draft Electricity Law and the Action Plan outlined for the final phase of the process. Theimplementation of policy changes and sector reforms were initiated by the Government of Colombia withBank support as soon as the ESMAP project was concluded after phase 2.

Lessons Learned

48. Perhaps the most important single lesson of the project is that an effective reform processneeds strong political support and commitment. In the case of Colombia several factors contributed to thegovernment resolve to reform the sectcr: a) the inadequate performance of the 1970s and 1980s, especiallythe financial shortages due to inadequate tariff levels, high debt service and operational inefficiencies,b) the Bank's commitment lending policy applied after the OED report of 1990 pinpointed the sector asa source of chronic financial problems and an obstacle to development7, and c) the severe power shortagesexperienced in 1991-92.

49. Other key factors however reinforced this commitment and helped the project, among whichthe following should be emphasized:

ow The timely and highly publicized seminars, with abundant public media coverage and thepublication of seminar proceedings helped the process to continue on a fast-track and madeall concerned parties stakeholders in the project.

w The seminars were important in gathering the main sector players, widely disseminating thefindings, reaching consensus on policy concerns and technical issues, and learning from othercountries' experiences.

The Government and utilities commitment of resources (financial and human) ensuredownership of the project, facilitating consensus on outcomes, and action after therecommendations were made.

The formation of several thematic task forces under a coordinating group, provided alternativeforums in which interested sector players could focus their energies and discuss their maincorcerns without slowing the overall project.

7The World Bank 1990. Colombia-The Power Sector and the World Bank 19-1987, Operations EvaluationDeatment, Report No. 8839, 28 June.

Executive Summary Page 11

W These working groups also provided the opportunity to use and train local expertise, enablinga high quality forum to examine difficult issues with foreign expert assistance, and to reachconsensus.

e The Bank and ESMAP's role as facilitators ensured that all parties concerned were involved,enabling Colombians to benefit from the international expertise in a "constructive" and"pragmatic" manner.

SW The close on-going dialogue and collaboration of the Bank during the whole process ensureda better understanding of Colombia needs and strengthened the country dialogue. It helpedthe Bank defne its future operations and its role in promoting sector reform and private sectordevelopment.

Organization of this Report

50. The report contains the following chapters:

v Chapter 1 presents a background of the power sector and describes its main issues.

v Chapter 2 discusses the design of the restructuring process and its phases.

v Chapters 3 and 4 discuss the results of Phase 1 and Phase 2, spelling out the restructuringobjectives, structural options studied, evaluation criteria, adopted strategy, and conclusions.

v Chapter 5 deals with the legal framework for the reformed sector, summarizing the finalproducts of Phase 1 and Phase 2, the Electricity Law, and the draft Domiciliary PublicServices Law.

v Chapter 6 focuses in the "Agenda for Tomorrow", presenting the terms of reference forPhase 3, and what remains to be done.

Chapter I. Main Sector Issues

1.01 By the early 1990s, the Colombian power sector had become a chronic economic problemfor the government and an obstacle for development because of the magnitude of the resources itconsumed and the paucity of funds it generated. These problems were evidenced in the sector'sdecreasing ability to service its debt and its growing dependence on public capital.

1.02 Despite a number of adjustment programs, the sector was largely unable to rehabilitate itself,and its basic institutional flaws became increasingly evident. It was this situation that led the governmentinto a major reassessment of the power sector's structure and into a commitment to reform.

1.03 The government's overall reform agenda included opening the economy to foreigncompetition and liberalizing trade. It also encompassed, on the investment front, an intention to dedicateresources to sectors such as water supply or transportation, which were more dependent on public fundsor whose markets did not operate satisfactorily.

1.04 The power sector was seen as a particular target for reform not only because of its difficultiesin servicing its debt but also because of its uncommonly high energy losses and the marked lack ofcoordination between its institutions.

1.05 Toward the end of reforming the sector, the government appointed a National EnergyCommission, the "Comisi6n Nacional de Energia" (CNE), to supervise studies of institutional restructuring.In turn, the CNE requested technical assistance and advice from the joint World Bank/UNDP EnergySector Management Assistance Programme (ESMAP) in conducting the studies and planningimplementation.

1.06 An important forerunner of the restructuring program, it should be noted, was the review andanalysis of the power sector's performance from 1970 to 1987, which the World Bank's OperationsEvaluation Department (OED) conducted during the late 1980s. That effort provided substantial insightinto the sector's institutional problems.7

Study Objectives and Scope

1.07 The restructuring study sought to provide the government with an analysis and plan forundertaking a lengthy process of institutional reform. The project was organized in three phases to (a)allow for a timely response to the many unanticipated factors inherent in initiating an unprecedentedinstitutional reform, (b) to tap the synergetic potential of the local talent, and (c) to build consensus onthe direction of the reform. The process vwas also designed in an open fashion to promote sound, quick,and timely solutions. The project's three phases were as follows:

w Phase I aimed at identifying the main sector issues and available options.tw Phase 2 tried to appraise the main options and propose an institutional setup conducive to

sector efficiency.w Phase 3 would carry out the final implementation of the recommended options.

7The World Bank 1990. Colombia-The Power Sector and the World Bank, 1970-1987, OperationsEvaluation Department, Report No. 8839, 28 June.

12

Main Sector Issues Page' 13

1.0S Phase 1 began in March 1991 and culminated in a workshop on 12 July 1991, where twoproposals concerning the preferred structure for the power sector were presented. Consensus was reachedon the broad outline of the preferred model for the industry, which included separating generation anddispatch within the main interconnection company (ISA), developing competition between generators,fostering corporate responsibility and accountability, and creating the necessary regulatory bodies. Theresults of the workshop paved the way for the subsequent phases.

1.09 Phase 2 began immediately after Phase 1 in July 1991; its goal was to present to Congressa draft National Electricity Law. This stage was designed to develop a legal framework supporting thestructural reforms ident,fied in Phase l. Six task forces were formed from the representatives of the sectorentities to provide a coherent framework for designing the Electricity Law. Each task force was entrustedwith one of the six areas of concern identified in the previous phase: (a) Financial strategy; (b) tariffs; (c)regulation; (d) pooling and dispatch: (e) network access and charging; and (f) management andcorporatization. The output of these six working groups or task forces were the basic building blocks forrestructuring the sector. The law was presented to Congress in February 1992.

1.10 The Electricity Law, the central product of Phases I and 2, outlined the proposed structureof the power sector and its guiding operational, economic, and commercial principles. However, carefuland clear regulation of the Electricity Law was deemed essential to ensure the efficient and equitableoperation of the proposed institutional structures. Inadequate regulation of the law would result in costlymistakes in system operation and in resource allocation.

1.11 Phase 3, the final stage of the program, was to implement the policies and principlesembodied in the Electricity Law. This phase included follow-up studies on issues and implementation thatcould not be properly addressed in Phase 2, partly because of time limitations, and partly because allproblems had not been identified. The major areas to be covered were financial studies, tariffs, dispatch,use-of-network issues, regulation, and legal and corporatization work.

The Power System

1.12 In 1990, the Colombian powersystem had an effective installed power generationcapacity of about 6,500 MW (78 percent) inhydroelectric plants and 1,800 MW (22 percent) inthermal units (see Figure 1.1). In 1990, peak Hydro 78.3%

demand reached 5,915 MW; energy production inthe system was 34 TWh (a load factor of 66percent); sales amounted to 26 TWh; and lossesaccounted for 22 percent of production, of whichabout 12 percent were tcchnical losses and the 21.7%

remainder nontechnical losses.

1.13 Demand concentration was greatestaround the principal cities of Bogota (1,500 MW),Medellfn (1,000 MW), Cali (500 MW), and Figure 1-1: Breakdown of Effective InstalledBa-ranquilla (350 MW). The country's two Generation Capacity in Colombia, 1990distinct electrical regions-the Central region,

PaRe-14 Colombia: Power SectorRestructuriaf

which encompasses Bogota, Medellfn, and Cali, and the Atlantic Coast region-were interconnected viaa 500kV link. Within the regions, interconnections between load centers were through 230kV lines.

1.14 Volume sales (measured in kilowatthours) show predominantly residentialconsumption (48 percent), followed by industrial(30 percent) and commercial (10 percent) uses. RuMesft4a.1%The balance was accounted for by government, -

public lighting, and other services (see Figure1.2).

1.15 Further information on the power Gov me.%system, including data on demand, supply, and l301 W8w-dl8|5market structure is provided in Annex 1.

Power Istitutions

1.16 The operating institutions in the Figure 1-2: Breakdown of Electricity Sales bysector in 1990 consisted of several municipal Users in Colombia, 1990companies and some national institutions thatgrouped sev_ral regional and smaller local companies, along with an interconnection company. Theseinstitutions are described below.

1.17 The principal municipal companies were EEB (Empresa de Energfa de Bogota); EPM(Empresas P6blicas de Medellin); and EMCALI (Empresas Mianicipales de Cali), serving their respectivecities. EEB and EPM owned generating plants and distributed electricity; EMCALI operated as adistribution enterprise only.

1.18 ICEL (Instituto Colombiano de Energfa El6ctrica), a government institution, owned themajority of shares in 24 local distribution companies (the "electrificadoras"). ICEL owned generatingstations and transmission lines, but their operation was subcontracted with its subsidiaries, which owndistribution networks.

1.19 CORELCA (Corporaci6n Electrica de la Costa Atlantica), also a government institution,owned the majority of shares in nine subsidiaries; CORELCA also owned and operated generation stationsand transmission lines.

1.20 CVC (Corporaci6n Aut6noma Regional del Valle del Cauca), a national institution, servedthe Cauca Valley region, generating and distributing electricity and selling it in bulk to EMCALI.

1.21 ISA (Interconexi6n Electrica S.A.), the national interconnection company, owned and operatedpower stations as well as the national interconnection grid. It was also responsible for system dispatchand investment planning. ISA was owned by EEB, EPM, CVC, ICEL, and CORELCA.

1.22 CHB (Central Hidroel6ctrica de Betania) owned and operated a 500 MW hydro plant. Thecompany's shareholders are ICEL, ISA, and some ICEL subsidiaries.

Main Sector Issues Page is

1.23 The ICEL and COREL.CA subsidiaries, regional companies serving relatively small markets,acted primarily as distributionenterprises, although they may havehad some generation capacity. Figpre 1-3: Corporate Structure of the Power SectorTheir service area typicallycomprised a "department," | sbxetrvy of M)ine | a1ona1 Planni.ng

following the political subdivision L , , ,of the country. mmicipalities

1.24 The most significant Nationea

nonoperational entities in the sector Co 1X1iX1

in 1990-91 were the Ministry ofMines and Energy (MME); theNational Planning Department("Departamento Nacional de ! _|__ _ I

Planeaci6n"; DNP); the "Financiera 15I 9 Local

Energ6tica Nacional" (FEN); the Distribution Distribution

National Tariff Commission ("Junta Ces Coes

Nacional de Tarifas"; JNI); and theNational Energy Commission(CNE). At the municipal level, thecity councils of Bogota, Medellfn,and Cali also played a role in the sector by appointing representatives to the boards of directors of EEB,EPM, and EMCALI.

1.25 A corporate sketch of the sector is shown in Figure 1.3; additional information about thedifferent organizations appears in Annex 2. The relationship between MME and ISA has been formal inthe sense that the minister has acted as ISA's chairman of the board. In addition, in 1990, after a longperiod of refinancing the sector's debt, the government swapped debt for equity in ISA and other sectorenterprises.

Historical Background

1.26 The Colombian economy went through three growth periods between 1965 and 1991: (a)a stage of relatively high growth to 1980; (b) a period of decline and recession to 1985; and (c) a phaseof resumed growth, albeit at lower rates than those of the late 1960s and the 1970s.

1.27 1.28 In general terns, the economy evolved from a situation of high demographic growthand s.ong migration to the cities in the 1960s to a state of more modest population increases and lesspressure on urban resources in the !ate 1970s and the 1980s. The economy also went from a permanentscarcity of foreign exchange to more balanced foreign trade because of the increase in coffee prices in thelate 1970s and the resumption of oil exports in the late 1980s.

1.28 Within the energy sector, Colombia was a modest oil exporter until the first oil crisis of 1973-74; in the middle of this crisis, the country began importing in small quantities. Despite a rising andsignificant oil bill in the late 1970s, the extraordinary growth in coffee exports more than compensatedfor the macro effects of increased oil expenditures.


1.29 In the early 1980s, the effects of the second oil crisis were felt, and the economy wentthrough recession and economic stagnation that lasted until 1985. In 1986, the country again was ableto export oil as a result of a successful exploration effort.

1.30 The late 1960s were years of major institutional change in the power sector. The heretofore-isolated subsystems of EEB, EPM, ICEL, its CHEC subsidiary, and CVC-prodded in part by the WorldBank-created ISA to build and operate the interconnection network. They endowed ISA with a monopolyon the construction and ownership of new power plants, the first being the 500 MW Chivor plant. Thisprerogative has been the principal point of dispute within the sector since ISA's creation in 1967. Itspower was successfully challenged in the mid- and late 1970s, when a significant construction programwas developed in which both ISA and its shareholders were assigned new plant construction.

1.31 Demand for electricity roughly 1,%

followed the economy's growth pattern. Until the --- t D s

late 1970s, overall energy consumption was 12% -- le--- icD-- d--- ---- --mostly in excess of 10 percent per year. During j lthe 1980s, demand growth however swung from -------one year to the next. Growth in electricity 8% -- l,---consumrption has tended to normalize at about 5 / \percent per year (see Figure 1.4). 6% - -- '- -r- _--

1.32 The ability of the power system to 4% l -----

track electricity demand has not been particularly 2z4 -- ----------impressive because of construction delays; alumpy, inflexible investment plan; and financial 0% , , ,,,n ;,,,crises caused primarily by inadequate tariff levels. 1976 198 190 19'2 194 1986 1988 10

Energy shortages occurred in 1976, 1977, 1980- Figure I4: Electricity Demand & Real GDP81, and again in 1991-92. In trying to correct for Growth Ratesthe expected shortages of the 1980s, the sectorembarked on an ambitious plant-building programin the late 1970s but belatedly (around 1984) realized that the expected demand would not materialize.

1.33 Thus began a period of permanent financial crisis in which the sector was unable to generateenough internal funds to service its debt. The situation was aggravated in 1985 by a devaluation of thepeso, done to compensate for its overvaluation since the coffee-boom years. The sector's debt, mostly inforeign currency, had to depend on financing from the government. This, in turn, thwarted thegovernment's efforts to assign resources to other sectors of the economy.

1.34 In 1990, the power sector's debts to the government reached such a state that a radicalmeasure was adopted-the government would swap its debt for equity in the companies, particularly in ISA.Thus the government acquired leverage for adopting radical measures, in particular for strengthening thesector through the institutional restructuring that is the subject of this study.

1.35 Further detailed information on the background of both the economic situation and the powersector is included in Annex 3.

Main Sector Issues Page 17

Power Sector Issues

1.36 Three general proc'ems were identified in the Phase I analysis. First, the sectors objectiveswere set out in vague terms, without a well-defined set of achievable subobjectives. Second, the sectorlacked a regulatory mechanism with the mandate to monitor and enforce corrective measures for achievingspecific objectives. Third, the sector suffered from indistinct "areas of autonomy" for regional enterprisesand an inbalance in centralized and decentralized functijns (this issue will be discussed in rel.tion toplanning, investments, and operations).

1.37 The analysis also highlighted a number of specific issues confronting the power sector,singling out those that could be addressed through institutional restructuring. They are grouped in thefollowing five categories anc discussed in the subsections below:

ow Management issues and the incentives perceived by the management of the utilitiesow Demand and supply issues covering losses, planning, and developing of power plantsow Commercial and tariff issues concerned with power trading between utilitiesor Financial issues and t,heir relation with the sector's institutional setupcw iElectricity distribution issues related to investment, management and regulation.

Management

1.38 Absence of clear objectives, coupled with the lack of a well-defined regulatory structure,created managerial difficulties in most electricity companies. The problem was in the composition of theboards of directors, the incentives they perceived, and the scope of their mandate.

1.39 A conspicuous case was the composition of ISA's board of directors. Except for threerepresentatives from the national government, ISA's board comprised representatives from the differentshareholding companies, whose primary allegiance was to their regional enterprises. ISA's shareholderswere thus both investors and customers of the company, and the board members' orientation changeddepending on which of these two roles predominated. Under such circumstances, periodic crises causedby arrears in capital contributions or by accumulation of energy bills should not have been surprising.

1.40 The situation was similar for other companies, the study found. For example, a typical boardof directors of an ICEL or CORELCA subsidiary consisted of a representative of ICEL or MME, one ortwo representatives from the local government (i.e., the governor of the departnent), and representativesfrom the local industrial and commercial organizations. With the possible exception of the ICEL andMME representatives, the majority of the board members were accountable either to their constituents orto the organizations that sponsored them (as in the case of the representatives from the local chambers ofindustry or commerce). Given the absence of hard budget constraints and the certainty that thegovernment, acting either through ICEL or CORELCA, would provide financial relief, the board wouldoppose unpopular tariff increases. It tended to favor measures with short-term benefits as opposed to moredesirable decisions with long-term benefits.

Page 18 Colombia: Power SectorRestructuring

1.41 The scope of authority of the boardsof directors was also an issue. By taking part Systtm(formally or informally) in the day-to-day ISA

management of the company, many of them acted EPM mas administrative rather than directive boards.This situation created a conflict in the sense that EMCALI -

the management of the company was no longer ICEL

held accountable to the board for its performance, CORBLC A

leading to its administrative deterioration. cvcBEB - _

1.42 A dramatic example of negligent 5 1 _, _ 2

management was in the losses for all subsystems, ° 5 10 is 20 25

which exceeded 18 percent in 1990 (see Figure N cd1.5). Total system losses for Colombia, as awhole, exceeded 20% during the 1980s (see Figure 1.5: Technical and Non-Technical LossesFigure 1.6). This scenario is typically an by Subsystem in 1990administrative problem that requires prompt actionand constant monitoring. Once losses are out ofcontrol, particularly when fraud is a factor, reducing them becomes increasingly difficult. Closely relatedto the management issue is the institutional problem: reducing nontechnical losses is an unpopular measurethat requires, for example, installing meters with the consequent increase in electricity bills to users or,in cases of meter tampering or fraud, police intervention. Facing the problem would require, along withthe decision to enforce, technical and political support. In the Colombian power sector given the absenceof motivation regarding profits and the eventual political cost of such actions, loss control ranked low onmost companies' agendas.

1.43 In light of the conditions outlined 2_ _ _ _above, creating an industry driven by financial and coI economic incentives rather than regional or 1political considerations would require at least four 22.M/measures: (a) a change in the ownership structure,(b) a separation of ownership and management, (c) Ieffective regulation, and (d) the introduction of 20.0%-

competitive forces into the system. Thesemeasures could not be mutually exclusive; ajudicious combination would be necessary to MM %

provide the incentives for reaching desiredobjectives.

16.0%s , , , , , , , 1975 1977 1979 11 1983 1985 197 199 1991

Supply Issues Figure 1-6: Total Transmission and DistributionLosses, 1975-1991

1.44 The power supply planning functionassigned to ISA was practically unchallenged. The results of this centralized planning could be criticizedin hindsight, particularly given the swings in over- or undersupply that have characterized the last decade.The question the study confronted was whether thrse planning errors should be ascribed to (a) chance andunforeseeable events, (b) vast differences in exttution times relative to the planning assumptions, (c) aninherent weakness in centralized planning, and/or id) poor quality of management and planning staff.

Main Sector Issues Pae 19

Although centralized planning and decisionmaking resulted from the interconnection, the question raisedwas the degree and depth of investment planning needed and desired.

1.45 In contrast to the planring of power plants, construction and ownership were subject tocontroversy since the creation of ISA. The seeds of contention were in ISA's original bylaws, which gavethe shareholders the right to build particular power plants. Plant assignmer,s in 1977 and 1979 hencewere made principally to appease the ambitions of ISA's sponsors. The main issues that were identifiedin the construction and ownership of new plants:

Sw Allocation criteria for distributing plants among utilitiesor Least-cost criteria for the construction and ownership of new plantsow Provision of incentives to ensure that a company allocated the construction of new plant will

do so at least costor The means to ensure economies of scaleow The means to ensure that the rents of inframarginal hydroelectric resources could be allocated

in a manner perceived as "fair" by consumers and taxpayers, as well as the power companiesSw Redefinition of ISA's role regarding ownership and construction of new plants.

Commercial and Tariff Issues

1.46 Along with the issue of plant ownership, the commercial problem figured prominently withinthe institutional organization of the sector. Utilities were required to purchase energy pnncipally from ISAbased on a scheme of "basic" and "optimizing" energy. These concepts correspond roughly to energyneeded by a system to supply its demand and energy bought or sold to reach a minimum-cost dispatch.

1.47 The tariff for basic energy was based on the calculation of the system's long-run marginalcost (LRMC), with an investment cost component and a variable cost component. However, the tariff levelactually applied was a fraction of the LRMC, although JNT (the tariff commission) had an adjustmentschedule to reach the LRMC level by 1994. There was no explicit tariff for "optimidzing" energy-the pricefor a given transaction was based on avoided short-run variable costs; its level was such that the savingsassociated with the energy interchange were split between the buyer and the seller.

1.48 A chronic complaint voiced by some of ISA's shareholders stemmed from a superficialperception of the way the system functioned. During the construction period of a gizen power plant, thecompanies were required to capitalize ISA proportionally to their participation in the project and, once theplant started operating, to pay for the energy they used. This apparent "double payment" was raisedperiodically as an argument against the system used in ISA for building and operating its power plants.The argument obviously ignored the returns on investments in ISA and the fact that the equitycontributions corresponded only to the unfinanced portion of the investment.

1.49 The former problem vividly illustrates the contradictions experienced by the shareholders intheir dual role of investors and users. As investors in ISA, the shareholders should have been interestedin the company's profits. However, as buyers of ISA's energy, they had an incentive to maintain lowtariffs for basic energy, thus preventing ISA from being profitable. Depending on which rolepredominated, shareholders have an inducement to behave either as investors or as buyers.


1.50 The commereial issue at the forefront of sector discussions concerned the allocation ofresponsibility for the cost of excess supply. Until the early 1980s, ISA's shareholders purchased energyaccording to the amount needed to supply their market; at the time, the issue involved deciding how muchpower to cut off within each subsystem. A quota-rationing system was adopted, and the argumentsrevolved around the monitoring of each subsystem's power cuts. When facing a situation of excess supply,shareholders sout,it to limit their purchases strictly to the energy and capacity they needed. Consequently,ISA was unable to find a market for the production of its hydro plants, which were spilling water and nots!upported by long-term contracts for either capacity or energy. Therefore, ISA would be financially worseoff under the new circumstances. In order to provide financial relief for ISA, MME sought to compeleach shareholder to purchase at least 75 percent of its participation in a given power plant, whether theshareholder used the energy or not. This obligation was challenged by the sponsors, and foremost byEPM, the principal casualty of the policy. In any case, the issue still to be addressed was seekingcommercial mechanisms for dealing with the situations of either excess demand or excess supply.

1.51 The low level of tariffs extended from the bulk level (as noted before) to the retail level.Both the bulk tariff and the markup for distribution companies were below marginal cost. Also, tariffswere not uniform, depending on the market composition. Distribution companies with predominantlydomestic, heavily subsidized customers were better off than others. Considerable cross-subsidies existedwhereby industrial and commercial users were charged prices that compensated for the low rates ofresidential consumers.

1.52 One of the main causes of inappropriate tariffs lay in the absence of any institutional interestin their adjustment. This can be explained by the following factors:

v The power companies, at the level of their boards of directors, responded more to short-termpressures from the constituencies of their directors, who avoided being associated with tariffincreases.

v The Finance Ministry, although interested in reducing the sector's dependence on the centralgovernment, was also under pressure to reduce inflation; it therefore avoided exerting itsinfluence for significant tariff adjustments.

v The international lending agencies such as the World Bank and the IDB, despite theiradvocacy for reform, were protected by government guarantees for their loans and, with theexception of informal action taken in 1974, did not suspend disbursements because ofnoncompliance with tariff covenants.

v The sole institutional agency to advocate strong price measures up to 1991 was the TariffBoard (JNT). Its determinations were however oriented toward adjusting prices to changesin the price index with little gains in real terms. Indeed, its adjustment goals usually extendedover several years, whereas strong short-term increases were needed to extricate the sectorfrom its financial crisis.

1.53 The tariff problems faced by the sector can be summarized as follows:

SW Management's unresponsiveness to economic and financial incentivesow Lack of proper incentives to generators, which could be provided, for example, through the

bulk tariff


SW A structural situation in which ISA's sponsors were subject to contradictory incentivesSW Inappropriate indirect subsidization of residential consumption, for example, by penalizing

the bulk tariff level or by cross-subsidizing from industrial and commercial consumers.

Financial Issues

1.54 The financial dimension was strongly linked to the tariff issue and ultimately reflected thecompounded problems facing the sector. From a historical perspective, the power sector was always inprecarious condition. Problems consistently were "solved" by incurring additional debt, despite financialindicators that rarely reached the level of acceptability for operations.

1.55 The absence of objectives was evident at the financial level. Despite covenants with theWorld Bank and IDB, short- and medium-term quantitative commitments were not kept and no concretesteps were taken toward controlling the sector's progress in achieving them.

1.56 Management of accounts receivable was found to be a persistently deficient aspect of thesector, particularly at the ISA level. Defaults in paying energy purchases and in making equitycontributions were common, perhaps because no service cuts for nonpayment at the interconnection levelwere ever made. This situation fostered abuse by creating an automatic, low-cost line of credit for energybuyers.

1.57 Study of the institutional aspect of the sector's financial issues in 1990-91 revealed thefollowing specific problems:

v No identifiable institution could be held accountable for results, as in the case of electricitytariffs, whose low levels were largely responsible for the financial distress of the system.

v Financial terms were inappropriate to electricity supply projects, where generatinginvestments are lumpy, front-loaded and with long operative lifes, such as hydro plants withservice periods of 50 years or more.

v An insurance mechanism was lacking for reducing the exchange rate risk of the sector, giventhat most of its debt was in foreign currency, yet it generated none.

1.58 The study found that the hydroelectric rents in the system were of concern because of theirconsiderable impact. Power plants built in the past took advantage of favorable natural conditions thatgradually grew more scarce with a consequent increase in costs. Although the plants had been almosttotally depreciated by 1990-91, they continued to operate adequately. Consequently, a tariff adjustmentto the level of marginal costs would lead to windfall profits, which represent the economic rents fromthese inframarginal resources. These rents are now being enjoyed by consumers through lower prices asin the case of EPM and, possibly, EEB. No official policy decision was made on the destination of profitsoriginating in natural rents, although the power companies, and EPM in particular, were conscious thatallocating them outside the region w'-Yuld not be acceptable.


Distribution Issues

1.59 The study noted that problems experienced at the distribution level related to an imbalancein the overall investment program, with only a fraction being dedicated to distribution, and to themanagement and control of the smaller distribution companies.

1.60 Distribution investments normally take second place to more glamorous generation andtransmission projects. The lack of resources for distribution, documented in the OED study, was evidentlycaused by an emphasis on the development of the new power plants. Three problems devolved from this:(a) load growth became stunted when network extensions and reinforcements were limited by financialconstraints, (b) technical losses grew because of equipment overloads, and (c) nontechnical losses grewfor lack of metering equipment and meter control.

1.61 These distribution issues characterized ICEL's role in supervising and controlling itssubsidiaries. This institution provided weak technical backup, did not determine any policy with respectto connection rates or targets, and limited itself to following the budgetary process with little or noplanning support. Under these circumstances, the study questioned the financial viability of distributioncompanies with low-density markets and high costs.

1.62 A final problem the study identified was that coordination for distribution planning wascentralized in ISA regardless of whether this is practical or a function ISA can fulfill competently.

Conclusions

1.63 A common thread that ran through the issues concerned ownership within the power sector.Unclear ownership led to unclear sector objectives. Indeed, the electricity industry often operated moreas a political mechanism than as an industrial or commercial enterprise.

1.64 The ownership issue was aggravated by the weakness of the sector's regulatory mechanisms.The ministry suffered from a dearth of funds and human resources that led to ineffectiveness in dialogueswith the sector's operative institutions. The National Energy Commission had the resources to fill thisvoid, but the study questioned whether the day-to-day regulation of the sector should be one of thecommissions's functions, given its primary task of formulating long-term policy and indicative planningof expansion requirements.

1.65 The study determined that a number of separate issues converged on the role and structureof ISA, ICEL, and, to a lesser degree, CORELCA. At the generation level, ISA's most controversialfunction was that of plant developer, whereas its planning and information-gathering roles were widelyaccepted as successful. However, the political manipulation of investment decisions was seen as stilllatent; in this sense, the strength and effectiveness of CNE were unproved. At the distribution level, theissue of ICEL's effectiveness and organization in supporting, managing, and controlling its subsidiarieswas seen as suspect and a subject for attention in the early stages of restructuring.

1.66 Even though the reasons for the sector's plight were several, the most important were the lackof corporate autonomy and management inefficiencies. The sector problems were manifested in tariffsbelow cost-recovery levels (tariffs reached about 75 percent of LRMC); subsidized prices of generatingfuels; inadequate commercial practices (with high loss levels of up to 20 percent of generation);


uneconomic selection of generating units; overbuilding of capacity during the 1970s; and frequent costoverruns (especially on the large Guavio hydro project).

1.67 Tariffs had two basic flaws: they were not providing the right signals to consumers, whichpromoted a misallocation of resources, and they did not cover financial expenditures, which deferredspending for necessary maintenance and expansion. There were considerable cross-subsidies fromindustrial and commercial consumers to residential users, who consumed about 50 percent of totalelectricity demand. Tariffs for industrial consumers in Bogota were on average about 2 to 3 times theLRMC. The pricing mechanism was not transparent and was insensitive to changes in supply costs andcompetition.

1.68 Political influence (interference and outright intervention) and lack of corporate autonomywere reflected in ownership conflicts within the enterprises; this led in some instances to a disregard ofeconomic choices in the utilities for political gain. In some instances, collusion between participants andnoneconomic considerations prevented the selection of the best projects. Optimal selection and timing ofprojects could not be ensured because of the degree and depth of centralized planning, the manner inwhich projects and plants were selected for construction, the way in which plants were constructed, andthe allocation of plant ownership.

1.69 The combination of all these problems led to an increasing inability of the sector to providean economic and reliable service and service its debt; it also led to a growing dependence on thegovernment. During the past 10 years, investment in the sector represented about 24 percent of totalpublic investment and a debt burden close to 30 percent.

1.70 An analysis of the sector revealed that at the root of these problems were basic institutionaland corporate flaws and the lack of well-defined and feasible objectives. This situation derived mainlyfrom contested ownership and was compounded by weak regulatory mechanisms. In sum, the principalissues confronting the power sector were as follows:

6e Management problems, related to management's political aspirations, indistinct ownership ofthe utilities, lack of corporate autonomy and accountability, the nonexistence of clear andtransparent "rules of the game," and lack of a proper regulatory authority

6e An institutional structure with ill-defined responsibilities between generation, transmission,and distribution

V A long history of energy subsidies, tariff distortions, and poor financial performance

Ve The power sector's massive reliance on the national treasury and on debt financing forfinancial losses and sector development.

Chapter IIl Design of The Process

2.01 Given the background and issues identified in chapter 1, the main policy question the projectconfronted was how to design ways to overcome the main impediments for an economic and reliablesupply of electricity, a fundamental condition for the sector to contribute to a robust and self-sustainingpiocess of economic growth in Colombia. The dual objectives for restructuring the power sector, thus,were to establish a decentralized and independent mechanism to promote sector efficiency and to designa self-sustaining restructuring process, one that increased the probability of political commitment.

Achieving the Goals

2.02 The study team determined that the first goal, to establish a decentralized and independentmechanism to promote sector efficiency, could be achieved by devising means to introduce competitionand sustain it over time by opening the industry to private sector participation. This would need theintroduction of commercial criteria for tariff setting, thus enabling the formation of stable, autonomous,and efficient enterprises. These features would require a transparent legal and regulatory framework, rulesfor trading between the different entities, and procedures for a sound pricing system.

2.03 Achievement of the second goal, design a self-sustaining restructuring process, wasconsidered challenging. An open and transparent process was needed whereby all the Colombian entitiesinvolved in the sector would have a chance to participate in designing its new structure. The participationof the sector's main players in devising the institutional solutions to its problems was intended to givethem ownership and leadership of the process, while at the same time fostering their commitment for thereform.

Nature of the Process

2.04 Coun*y Specdf1c Process. Every restructuring process by its very nature is political andtherefore country specific. Reshuffling responsibilities and power among sector entities inevitablydiminishes one entity's power and increases another's. In a reform that introduces competition and privatesector participation, several "control and command" decisions are transferred from the public sector to themarketplace. Because a large shift in institutional power thus takes place, political opposition torestructuring is an omnipresent danger. Therefore, if the reform was to have a chance of success, theprocess needed to harness the local talents, achieve synergy, minimize the negative political consequences,and build a constituency supporting the reform.

2.05 In some countries local abilities exist and the process can tap their talents. In others, foreigntalent might be requied to a larger extent. In every case a balance has to be stricken between (a) the needto arrive to sound restructuring proposals in a timely fashion against (b) the need to pave the way foracceptance by sharing ownership during creation of the restructuring proposals. So the question theESMAP study team asked was how to tap Colombian talents and "know how."

24

Page 25 Colombia:- Power SeoRestructuri

2.06 December 7, 1994 Particpation of Stakeholders and Colombian Leadership. Localauthority "ownership" of the effort and outcome was therefore considered vital. Given the major policyand political content of the reform, a participatoly approach was judged essential to increase the likelihoodthe results of the process would be embraced by the government and implemented. ESMAP thusencouraged the active collaboration in the design of the reform by domestic stakeholders.

2.07 The design of the process involved the main groups in the sector: the National PlanningDepartment (DNP), the energy sector authorities in the Energy Ministry through the National EnergyCommission (CNE), and the management of the utilities. The process was thus structured so that thestakeholders that had anything to contribute could do so in a constructive and open manner, in anonthreatening, transparent, and open-to-all environment. This scenario ensured shared ownership andsupport for the products of the study. From the start, the stakeholders became an integral part of theanalytical and prescriptive process, meting regularly to discuss the progress and results of the studies. Infact, apart from the end product, the consultations and cooperation were particularly useful in facilitatingcommunication and cross-fertilization of ideas and approaches among the participants. The local playerseventually viewed the work process and "outcome" as their own as distinct from solely Bank driven.

2.08 Recognizing potential rivalries, different agendas, and keeping in mind the potential confusionthat could result from involving "outside" agencies, the study team took particular care in designing areform process where leadership-from beginning to end-remained in Colombian hands. Design of theprocess thus was done so that the role of ESMAP, the World Bank, and foreign consultants was limitedstrictly to ancillary support. That is, their job was to screen the ideas and proposals of the working groupsand to describe and explain what had been tried elsewhere, what had worked, what had not, and why. Thebest way to describe how the process was devised is that: 'the restructuring of the sector was made inColombia, by Colombians and for Colombians".

2,09 Organizational Stucture. Early on, the Bank, ESMAP and the Colombian authoritiesagreed that the process should be conducted in a transparent and open manner, by forming representativeworking groups staffed by the most qualified local people. The working arrangement consisted of asteering body coordinating the various working groups focused in specific topics with specific expertshired to advice them. A Colombian consultant familiar with the sector was hired to coordinate theprocess. This design was perhaps more time consuming and expensive than hiring one external fim toproduce a comprehensive study of how the sector should reform, but it ensured the nectssary consensusfor the need for reform and the type of sector wanted.

2.10 A Steering and Coordinating Group (SCG) and six task forces were thus established, reportingto the Power Sector Superior Council (CSSE), formed by the Ministries of Mines and Energy (MME) andFinance (MHCP), and the National Planning Department (DNP; see Figure II-1).

Page 26 Colombia: Power SectorR

Power SectorSuperior Council

Stosrlng andCoora!nadnq Group

Task Forme I Task Force 2 Task Fore 3 Task Force 4 Task Force 5 Task Force 6Fhnandal Tarifs Regulation Poong & Neork Managment &Statbgy Dlspac Aocess & Corpoo

== _ _ ~~~~~~ ~~~~~~~~Prbino Isulon

Figure II-1: Working Structure of Phase 2

2.11 The Steering and coordinating group (SCG) had the day-to-day task of coordinafing the workof the six task forces. It also arbitrated on disputes within them, and reported to the CSSE on their work.The SCG was chaired by the Minister of Mines and Energy; it included the Director of Electric Powerof the Ministry of Mines and Energy and the coordinators of the six task forces; representatives from FEN,JNT, CNE, DNP; and the ESMAP consultant.

2.12 The responsibilities of the SCG were as follows:

or Defining outstanding structural issues:8 Separation of transmission from ISAi Ownership of a new ISA transmission company9 Contestability of transmissionM Split of ISA's generating assetsM Responsibility for dispatchI Ponnation of ICEL and CORELCA generating companiesM Split of generation from distribution in municipal companiesM Extent of competition for endMuser customersM Pricing policy for end users subject to regulationI Definition of privatization optionsM Treatment of embedded generation and isolated systemsM Participation of distributors in the poolI Form of, and responsibility for, system planning.

Determining the requirements for an enabling legislation, that is, the scope of the legislationneeded to support the proposed structural changes

Endorsing policy regarding corporatization and privatization.

2.13 On the basis of these decisions, the SCG, together with the six task forces, specified the termsof reference. These included listing of the issues to be addressed, reporting requirements, and

Page 27 Colombia: Power Sectorg

2.13 On the basis of these decisions, the SCG, together with the six task forces, specified the termsof reference. These included listing of the issues to be addressed, reporting requirements, andmembership. They also included the timetable and critical path additions made to ensure that issuesrequiring resolution within each task force for inclusion in the proposed legislation were given priority.

Time Frame

2.14 The project was developed over a period of twelve months, from preparing the ActivityInitiation Brief to presentation to Congress of the Electricity Law. During this period, four seminars wereorganized:

or A kick-off seminar, held in Santa Marta in March 1991 and attended by the main Colomnbianstakeholders and domestic and foreign experts, examined the OED reporte, the main issuesand challenges facing the sector.

o A follow-up seminar, held in Paipa in early June 1991 and attended by power sector staff,government officials (represented by the National Planning Department [DNP] and theMinistries of Finance and Mines and Energy), foreign observers, and spokesmen of theinternational electricity industry, discussed the main sector reform options and theinterational experience.

e A privatization seminar, held in Cartagena in late August and attended by the mainstakeholders, international independent power producers and sector experts, examined thepotential for private sector participation in the Colombian electricity supply industry.

o A tariff seminar, held in Medellifn in October 1991 and attended by the participants of theworking groups, ESMAP staff and consultants, examined the main pricing options for bulk,retail, free and captive markets.

Phases of the Process

2.15 The restructuring program was thus organized in a flexible manner to account for the largeunknowns-that is, the fact that it was a new process with few domestic precedents-and to tap the localtalent as it became available and as new issues arise. The process was also designed in an open fashionto promote sound, quick, and timely solutions. Hence, it was designed in three phases:

SW Phase 1 was to produce a diagnosis of the sector and identify both the main obstacles facingthe power sector and the available options.

or Phase 2 was to arrive at the main options and propose a new institutional setup conduciveto sector efficiency.

or Phase 3 was to carry out the implementation of the recommended options.

'The World Bank 1990. Colombia-The Power Sector and the World Bank 1970-1987 OperationsEvaluadon Department, Report No. 8839, 28 June.

Design of the Process Page 28

2.9 The ESMAP project encompassed the first two phases. The first phase was developedbetween March and July 1991. It consisted of an analysis of the power sector from an institutional pointof view; this study revealed fundamental administrative and management flaws at the root of seriousoperational and financial problems. In late May 1991, the government set out a policy that coincided withthe corrective proposals developed as part of Phase 1. The results of the Phase I analysis were presentedat the Paipa seminar in June 1991. The seminar served as a debate of the Colombian sector's problemsas well as a review of its organization composed with that of other countries (Chile, France, Spain, theUnited Kingdom, and the United States) where alternative institutional setups have been successful inproviding reliable and low-cost electricity service to conswners. One of the main products of the Paipaseminar was a consensus on private sector participation in the electricity industry. Consensus was alsoreached on the broad outline of the preferred structural model for the industry, which included separatinggeneration and dispatch within the main interconnection company (ISA), developing competition betweengenerators, fostering corporate responsibility and accountability, and creating the necessary regulatorybodies. These agreements were to pave the way for the subsequent phases.

2.16 The second phase began immediately after Phase 1, in July 1991, and concluded with thepresentation to Congress of the National Electricity Law in February 1992. The thrust at this stage wasto develop a legal framework supporting the structural reforms identified in Phase 1. Six task forces wereformed from the representatives of the sector entities to provide a coherent framework for designing theElectricity Law. A Steering and Coordination Group (SCG) was formed and charged with a number ofstructural issues. Each task force was entrusted with an area of concern identified in the previous phase:(a) financial strategy; (b) tariffs; (c) regulation; (d) pooling and dispatch; (e) network access and charging;and (f) management and corporatization. The results of these six working groups or task forces were thebasic building blocks for achieving the desired direction of the sector's restructuring.

2.17 The Electricity Law was the essential product of Phases I and 2. The Law outlined theproposed structure of the power sector and its guiding operational, economic, and commercial principles.The study was conscious that careful and clear regulation of the Electricity Law would be necessary toensure the efficient and equitable operation of the institutional structures proposed. Failure to address thismatter would slow down the implementation of the restructuring process.

2.18 The third phase, the final one of the Power Sector Restructuring Project, was designed as theimplementation phase-to put the policies and principles embodied in the Electricity Law into practice.Approval of the Law by Congress took a long time, until the second half of 1994, with intense politicaldebates. During this time however overall consensus was reached about the direction of the reform, andthe type of institutional structures and regulatory regime needed. The major areas to be covered duringthis phase were financial studies, tariffs, use-of-network issues, dispatch, regulation, and legal andcorporatization work. This phase was also to include follow-up studies that could not be properlyaddressed in Phase 2, partly because of time limitations, and partly because all the issues andimplementation problems had not been identified.

Chapter HlI: Results Of Phase 1

Government Objectives and Policy

3.01 The restructuring of the Colombian electricity industry in the early 1990s was principally aresponse to a financial crisis in which the power sector became a major burden on public resources. Italso coincided with a historic process of institutional change whereby a Constituent Assembly was in theprocess of modifying the country's Constitution. Although clear directives for the provision of servicesdid not then emerge from the Assembly, the public sector appeared to accept the fact that structuralchanges were required in the supply of electricity to correct for the accumulated problems of the past andto reduce the probability that they would recur.

Economic and Power Sector Policy Objectives

3.02 After taking office in August 1990, the government centered its economic policy on thefollowing goals:

ow Opening the economy to foreign competition and creating conditions for enhancing efficiencyEr Controlling inflation in excess of an alarming 30 percent per year in 1990aw Mobilizing internal and external capital by providing an enabling investment environment.

3.03 In 1991, the government, through CNE, produced a policy paper that included the following15 considerations with respect to the power sector:9

V^i The government would initiate a restructuring program to solve the more pressing problemsof the sector within a relatively short term; it also would establish the foundations for aninstitutionally more simple and transparent structure with solid and stable enterprises.

v Tariffs would reach values reasonably near economic costs within a span of five years orless.

v The interconnected system would be organized to respond strictly to price signals;specifically, power companies would enter into long-term contracts that would limit the riskto generation enterprises.

V The government would review all the sector's regulatory mechanisms to establish thefinancial and operational quality of service goals. It would also define areas of autonomyfor the regional enterprises.

v Private investors would be encouraged to participate in the power sector and to formcompanies that could compete with the existing enterprises on a commercial basis.

v The government expected to become the major shareholder of ISA and to reorganize thiscompany by redefining its role and structure. It viewed its investments in ISA as temporary,

9Comisi6n Nacional de Energfa, 1991. "Bases de la Politica Disefiada por la Administraci6n Gaviria para elSector Eldctrico".

29

Page 30 Colombia: PowerSector Resru ftaring

for the purpose of managing the company's restructuring, and expected to make a profit onthem.

v Investments by the government in the power sector would not imply its willingness tocontinue in the role of financial savior. Indeed, the government's intention was to let thepower sector enterprises become responsible for their management and to submit them tohard budget constraints.

v The number of power sector enterprises was to be reduced to a smaller number of strongercompanies. The new markets formed by merging companies were expected to serve areaschosen with criteria based on electrical integration characteristics rather than municipal ordepartment limits.

v The government would restructure ICEL and revise its role in relation to the new regionalcompanies.

v Rural electrification was to develop based exclusively on economic grounds.

v' The management of regional companies was to sign performance contracts with thegovernment. Access to credit from FEN would be conditioned on satisfactory fulfillment ofthe contracts.

v Investments in distribution were to reach a level of development comparable to that ofgeneration and transmission. The development of new power plants would continue to beplanned on the basis of least-cost criteria, as well as according to the precepts of risk analysisand flexibility. Furthermore, they would take into account financial constraints. Projectconstruction would not begin unless its fmancing was assured.

v Enterprises undertaking the construction of new projects were expected to take the risksintrinsic to their execution.

v New power plants would be evaluated according to their impact on the environmen. and onthe populations in the vicinity of the project. In the case of thermal power plants, emissioncontrols would be mandatory. Cinder disposal facilities would be required for coal plants.

a" Private sector participation was to be encouraged both at the generation and distributionlevels.

3.04 A task force appointed by the government in February 1991-with representatives from MME,CNE, and DNP-defmed the eight demand, supply and tariff objectives for the sector outlined in Table m-1.10

10 ESMAP, Task Force 2, 1991. "Reestructuraci6n Sector Electrico-Avance sobre el AnalisisInstitucional y Financiero", Documento de Trabajo, 15 February.

Results of Phase I Page 31

Table III-1: Power Sector Policy Objectives

Demand System Expansion and TariffsOperation

Electricity should be used where it Expansion and operation of the Both bulk and retail tariffs shouldis most convenient from a power system should guarantee be compatible with economic coststechnical and economic point of that demand Is met at least social and cost recovery.view. cost.

Coverage should reach strictly The interconnection should allow Subsidies should be made expliciteconomical limits when compared generating enterprises to and should be exclusively orientedwith local generation options or participate ii: the least-cost toward low-income u.wers.with the use of new or expansion plan and to compete fornonconventional energy sources. long-term market supply.

The levels of reliability and The commercial rules and theservice quality should be based on tariffs for energy interchange musteconomic criteria, foster efficiency and should

configure a commerciallyacce_table

Restructuring Objectives Adopted for Phase 1 Analysis

3.05 Based on the government's enunciated goals listed above and the issues identified in chapter1, objectives for the first phase of the study were proposed. They were classified into (a) enterprisemanagement objectives, (b) pricing and financial objectives, and (c) investment and system operationobjectives. Table III-2 outlines these objectives.

3.06 In the view of the study, an essential requirement for achieving the enterprise managementobjectives would be the establishment of hard budget constraints for all enterprises. However, as long asfinancial losses were ultimately absorbed by the government, no inducement would exist to reach thestated goals. Consequently, the study cot cluded, a restructuring proposal based on hard budget premisesmust also spell out the consequences to be faced by enterprises that do not achieve them.

3.07 Implementation of hard budget constraints, together with a reorganized managementresponsive to businesslike considerations in electricity supply, would provide clear incentives for bulk andretail tariffs to reflect the costs of service, thus achieving the third broad objective set out by thegovernment.

3.08 For management to becr me responsive to economic signals and hard budget constraints inparticular, the practice of not honoring purchase contracts should be terminated, the study argued. Thiscould be done by allowing a normal commercial environment to develop wherein supplies could be cutoff after a reasonable default period. An alternate method could involve setting up a collection systemwhereby consumer bills are broken down into distribution and non distribution components and the latterchannelled directly to the generation/interconnection compar,y.


3.09 Mobilizing private sector resources is one means of changing the management outlook andchanneling it toward economic results. However, this change could be effected only with commercialdiscipline and clear profit incentives for private investors to participate. Consequently, reaching afinancially acceptable situation would be a precondition for achieving this objective.

3.10 Achieving the objectives set out by the government would not address the issue of economicrents for existing power plants. Because it is unlikely that a market mechanism could be devised toallocate these rents, further clarification of the problem would be necessary. It would appear from talksheld with sector representatives that allocating these rents outside the region in which they originate wouldbe unacceptable.

Evaluation Criteria for Phase 1 Analysis

3.11 The criteria adopted to assess the relative merits of alternative strucural options reflected boththe objectives identified for the sector and the particular issues raised by the examination of the currentsituation.

3.12 The evaluation criteria consisted of the following:

3w Effectiveness of hard budget disciplines as a spur to efficiencyMr Attractiveness of enterprises to external investors and lendersor Ability to attract new entrants

S Ease of implementation"M Acceptability to the regions8 Feasibility of implementing mechanisms for enforcing the settlement of energy bills- Potential for service interruptions from labor conflictsM Ease of implementation and control of regulatory measures3 Ease of ensuring the minimization of system expansion costs- Extent of preservation of least-cost dispatchM Ability to maintain adequate reserve margin.

3.13 As noted above, the study contended that the major improvements in efficiency were likelyto materialize with effective "hard budget" financial disciplines. In 1991, however few direct incentivesexisted for enterprises to ensure that costs were minimized; hence, the penalties for failure and rewardsfor success were unclear.

3.14 The study observed that given the investment needs of the subsector, an important measureof sound industry structures would be the capability of enterprises to raise capital from external sourceson their own behalf. This observation pointed to the need for sound cash flows and balance sheets andfor keeping the size of an enterprise relative to the investments it is required to undertake; undulyfragmented structures would be unattractive to investors.

"For example, how much does the new structure deviate from the existing one; what human resourcechanges are needed.


Table III12: Phase 1 Restructuring Objectives

Types Objectves

w Forming autonomous companies independent of extraneous political bodies

e Promoting management responsive to economic and financial incentives

e Adopting "hard budget" policies and setting explicit limits to the extent of governmentsupport expected by enterprises

Enterprisemanagement e Minimizing the vulnerability of the power system to crippling strikes or sabotage from

labor organizations

ew Eliminating inappropriate incentives (e.g., those within ISA's board)

e Promoting normal commercial practices, such as allowing companies to disconnectservice to inhibit non-payment and payment delays.

W Protecting consumers from monopoly practices

a Achieving tariff levels and structures that reflect economic costs

Adjusting the bulk tariff to promote competition between companies

Pricing and Adjusting consumer tariffs, eliminatng excessive cross-subsidies, and retaining, if

flnawial necessary, only explicit and selective subsidies

a' Establishing achievable quantitative and readily monitorablefinancial performancegoals

or Attracting new sources of debt and equity capital, particularly from the private sector.

a Limiting the connection of new loads to those that can be economically justified

gr Adopting reliability criteria for expansion planning that are based upon economicconsiderations ana consistent with tariff levels

Investment and a Promoting a least-cost construction program using multiattribute criteria (e.g., takingsystem into account costs associated with risk, financing, and environmental constraints) andoperfction an adequate pornfolio of candidate projects

sr Allocating the construction and ownership of new plants through commercialprocedures and competition

or Promoting the least-cost operation of the system.

3.15 Ideally, the new structures would also need to provide an attractive environment for newentrants to the market. "Franchises" would be limited to areas in which there are clear strategic oreconomic benefits to monopolies.

Page 34 Colombia: PowerSectorRestructurig

3.16 Given that structural change was intended to commence quickly, initial solutions needed tobe capable of rapid and effective implementation. However, because these initial structures were unlikelyto meet longer term objectives fully, they also had to be capable of further evolution.

3.17 The experience of the last two decades has shown the tenacity of resistance to "centrally"imposed regulations; the study concluded, thus, that inasmuch as an alternative meets with less regionalopposition, it should be favored.

3.18 Another observation was that management responsibility for complying with the commercialrules of the system should be fostered by explicitly allowing, at least as a last resort, the possibility ofservice cutoffs for commercial reasons.

3.19 One of the major reasons for not integrating the industry into a single large enterprise,particularly at the level of generation, has always been the threat of being at the mercy of a single labororganization with a stranglehold on the supply of electricity and, hence, with the power for reaching itsobjectives through the use of intimidation. Hence, the study indicated that structures that maintain afactured labor organization are to be preferred to those that would encourage labor integration.

3 '0 Sector-specific criteria consist of maintaining the ability of the sector to perform least-costdispatch, minimize system investment costs, and maintain adequate reserve margins.

3.21 The project envisioned regulation as necessary, but concluded that different structures requireddifferent types and degrees of regulation. The study team noted the importance of selecting a structurefor wnich the regulatory implications were manageable and capable of being implemented effectively.

3.22 Also noted by the group were the need for implementation of an adequate information systemas well as a uniform accounting procedure.

Phase 1 Structural Options and their Evaluation

3.23 Defining a new industry structure requires making choices about a range of issues; theseissues were categorized by the study group as follows:

w The organization of different activities within the sector, in particular the degree of verticalintegration that should exist

w The organization of the same activities with regard to horizontal integrationw The trading relationships between business entities within the sector and between the

organizations external to the sector (suppliers, customers, regulatory agencies).

3.24 The activities undertaken by the power sector can be loosely typed as "generation,""transmission," and "distribution." Each conventional grouping includes a longer subset of functions suchas presented in Table E11-3.

Resams of Phase I Pae 35

Table M-1.3: Power Sector Functions

Generation capacity planningGeneration

Generation operations

Transmission capacity planningTransmission

Transmission operations

System Operations Load dispatch

Distribution capacity planningDi'stribution

Distribution operations and control

Marketing Customer suppI (Lsates, load management, metern and billing)

Degree of Vertical Integration

3.25 The functions listed above can be vertically integrated to different degrees, so that a singleenterprise can undertake the range of functions identified. This is the case for ISA (generation andtransmission), EEB, and EPM (generation, transmission, and distribution). At the other extreme lie thedistribution subsidiaries of ICEL, with no generation or transmission functions. Some countries have evenmore vertical integration (e.g. France, Italy), whereas others integrate only two of the five activities withinthe same enterprise (New Zealand, Sweden, United States). Mo.-eover, in some countries, generation,transmission, and distribution may be fully separate in corporate structure although owned by the sameholding company.

Degree of Horizontal Integration

3.26 The extent of horizontal integration can be assessed from two viewpoints: (a) the number-andhence the relative size-of separate enterprises and (b) the closeness of the relationships between theseseparate production units. Other countries show considerable variation in the extent of horizontalintegration, paaicularly at the generation and distribution levels (transmission is generally more integrated).In Western Europe, industries may range from the completely integrated systems of Italy, France, orIreland to the largely disaggregated structure of Germany or Denmark.

3.27 The extent of horizontal integration will be reflected in the relationships between businessunits engaged in similar activities. At one extrerme is the single company with strong central managementand, at the other, characterized by a greater number of enterprises, are competing companies. Intermediatearrangements can occur when enterprises are owned by the same holding company; in this case the tradingrelationships may be administered to allow for some degree of competition.

Page 36 Colombia: Powtr Sector Restructuring

Trading Relationships

3.28 The relationship between business entities is crucial in determining institutional structures.The most effective incentives are provided by relationships that result in a sharing of business risks andrewards between the buyers and sellers of goods and services.

3.29 In the Colombian power sector, pricing was regulated without much thought to costs. Becauseloss-making enterprises were not allowed to go out of business, most of the business risk was borne by thesupply companies and, ultimately, by the government.

3.30 Competition can exist around bilateral contracts negotiated between buyers and sellers. Incapital-intensive activities with relatively low variable production costs, such as hydroelectric power plants,these contracts are typicaliy long-term. This type of contract may transfer to the buyer much of thebusiness risk of changes during the life of the contract (e.g., "take or pay" contracts leave buyers with therisk that demand for the final product changes during the contract's life). Other intermediate types ofcompetition can be found in countries such as Denmark, Spain, and the Netherlands, where generators arereimbursed for the cost of generation on the basis of standard costs. Consequently, they cannot pass onall costs to the consumers and thus have an incentive to operate efficiently.

3.31 In electricity, not all trading relationships can reflect competitive activity. Natural monopolies(such as those associated with electricity networks) typically lead to administered price levels; efficiencyis sought by way of a regulatory regime. It is worth noting that administered relationships of this naturesometimes lead to greater overall efficiency than attempts to engender competitive trading when either thebuyer or the seller is in a position to dominate the negotiations.

Broad Options for the Power Industry

3.32 In order to assist in the choice of an appropriate structure, six broad structural models wereidentified and evaluated according to the proposed criteria. Figure rn-I presents the six models.

3.33 Model 1 illustates an extreme aggregation, both horizontally and vertically. The relationshipsbetween functions within the single company are generally conducted through a centralized managementand internal transfer prices. However, a recent trend has been to introduce decentralization and financialaccountability within these potentially monolithic atructures.

3.34 Model 2 illustrates vertical integration but less ltorizontal integration through regionally basedcompanies. This model is characteristic of Germany and the United States, which have a tradition offederal administrative and political systems. In these geographically large countries, distinct butinterconnected regionally based grids are viable. In Germany, load and generating capacity are relativelyevenly spread; of the eight large, vertically integrated generating companies that dominate their regionalgrids, all but one have an installed capacity of more than 4,000 MW. Trading between such regionalsystems does take place, but economic opportunities for power exchange are not always exploited.


1 P1: Ntol lodel P2s Regional Model P3: National Generation Iutegrated Monopoly Integrated Monopoliea Transission with Regiona

Distribution Monopolies

I I IT I It I1

D D D D

Cstomrs(C)l CS CL CSS

Model P4. Cmpeting Generation, Xodel PS Coup. Generation, Model P6: Cow. Genration,National Transmission with Ge- National Trea., Regionl National Tran., Regioalneration, Regional Distribution Distribution Monopolie Distribution MonopoliesMonopolies cometng with Generators

via coon carriage

F] Fa a aG- ao- r -

I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

L J |41 |Cometitive r Pool|

Figure HI-: Broad Models of the Power Sector

3.35 Model 3 illustrates horizontal and vertical integration of generation and transmission activities,but with separate regionally based distribution entities. This structure is close to that effectively inoperation in England and Wales before the restructuring of the industry. It is that used in smaller countriessuch as Austria where regional disaggregation would probably lose significant economies of scale ingeneration and transmission. In England and Wales, the logic behind integration was that coal-firedgeneration was located away from the main load centers in the south of the country, thereby increasing -neimportance of an integrated national grid.

3.36 Model 4 shows a more disaggregated structure similar to that found in Sweden and Norway.The model horizontally disaggregated generation and distribution but has a single transmission companythat also has significant geinerating capacity in its own right (50 percent for Vatenfall in Sweden, 30 percentfor NVE in Norway). This is a possible solution where the geographic match of load and generation is nota good enough to justify vertically integrated regional utilities and where competition within a particularsegment of generation (from large stations, nuclear power) is difficult to engender.

3.37 Model 5 illustrates separate generation companies that sell power to a single nationaltransmission company (which coordinates dispatch and investments); the company then sells power toseparate regionally based distribution companies. This model has been proposed for Poland within therestructuring of the power industry in that country; variants of the model can be found in Spain and theNetherlands that involve the transmission company selling power back to vertically integratedgeneration/distribution companies on the basis of pooled costs.

Page 38 Colomnbia: Power Sector Restructuring

3.38 Model 6 is the radical endpoint of a spectrum of increasing competition within the in,dustry,as has been adopted for England and Wales. Horizontally disaggregated generators bid to supply electricityto a common pool, and the price of the pool is set to clear the market. Suppliers (which include bothgenerating and distribution companies) purchase their electricity directly from the pool, and can, inaddition, enter contracts with generators to provide financial protection against the variable pool price.Suppliers then compete to sell the electricity to final customers. Hence, the regionally based distributioncompanies do not have a monopoly of supply and must make their grids available to any licensed supplierat published common carriage tariffs. For a transitional period, however, the distribution companies haveretained a monopoly over supply to smaller consumers. This structure has required an extremely complexlegal and regulatory framework, and the administration of the system has demanded a heavy investmentin information systems and customer metering.

Evaluation of Broad Options

3.39 The six generic models were evaluated using the Phase 1 criteria developed above.Assessment was essentially subjective given that the purpose was to provide a first screening as to theirsuitability for the Colombian power sector.

3.40 Model 1, the integrated structure, was seen to offer the advantage of central control, such asleast-cost dispatch and, to a certain extent, ease of regulation. However, it scored badly in relation to theother criteria; it left great potential for inefficiencies, as these national enterprises become independentempires. If enterprises were profitable, as in the case of the national oil company, they would fosterfeatherbedding; if they incurred losses, as in the case of the national railroad system, they would becomefinancial cripples and provide progressively deteriorating services. They would also become niches forprivileged workers because labor demands would have to be met if crippling strikes were to be avoided.

3.41 Model 2, with regional vertically integrated structures, would correspond to the pre-interconnection model. It would have fundamental economic drawbacks in that generation resources andloads would not share the same distribution throughout the country, and it would not be possible to captureeconomies of scale. The regional monopolies would also share many of the disadvantages of Model 1,albeit on a smaller and more localized scale.

3.42 Model 3 would correspond to the long-term structure visualized when ISA was created; thatis, a progressive concentration of generation and transmission within a single company. In comparisonwith Model 1, this alternative only provides a decentralization of distribution, which would take placeanyway under Model 1, if only for the sake of administrative efficiency under a single utility. Given ISA'sexperience since its creation, this model would not be acceptable to the regions, and it would also bevulnerable to labor disruptions.

3.43 Model 4 corresponded approximately to the prevailing scenario in 1991, in which ISA wasin the role of the generation and transmission company, together with other generators and regionaldistribution monopolies. The principal difference was that there vas no competition at the generation leveland that hard budget disciplines were not enforced. However, compared with the three previous models,the existing structure appeared to hold promise.


3.44 Model 5 would correspond to the situation that existed during 1971-76, when ISA's sole rolewas that of a transmission company and it had not yet acquired generation facilities. When compared withModel 4, Model 5 had the following advantages:

v No conflict of interest existed between the transmission company and the generatingcompanies.

v Functions such as system planning could be delegated to the transmission company as anobjective and impartial institution.

v The ownership issue would no longer emerge in relation to the transmission company becauseboth the generators and the distributors would be interested in its services.

v The transmission enterprise would wield the same monopoly power as in Model 4 and wouldrequire similar regulation.

3.45 Model 6 would have generators compete to supply distributors and customers under contract,as opposed to Model 5 in which generators would compete for contracts with a single buyer-thetransmission company. This model, as noted, has the problem of requiring extensive legal foundations aswell as a very detailed regulatory framework. It could perhaps be visualized as a long-term goal, evolvingfrom either Model 4 or Model 5.

3.46 Regarding short-term choices, the more reasonable alternatives were seen to correspond toeither Model 4 or Model 5, which offered the added advantage of being very similar to the existingstructure. The choices therefore narrowed down to the following:

e Deciding whether ISA's role should be limited to that of a transmission companyE Deciding the degree of separation between generation and distribution for EEB and EPM as

well as the grouping of generation within ICEL's subsidiariesor Reassessing the trading methods and the pricing structure within the interconnected systemor Designing the regulatory mechanisms.

Management and Ownership Options

3.47 As noted in chapter 1, the problem of management responsiveness was found to be one of thecauses of many of the sector's ills. The boards of directors did not identify with the interests of thecompany; and the management received no reward for competence and was not held accountable fornegligent administration.

3.48 This lack of responsiveness in power sector companies is common to many public enterprises,it might be noted. The problem lies in the lack of ownership identification and manifests itself in theundefined roles for management and for the boards of directors. In general, the function of the boardsshould be to represent the interests of the owners of the enterprise and to set strategic directives;management's role should be to implement policies. The difficulties originate in the absence of identifiedshareholders ("govermnent," "municipalities"); as a consequence, the interests represented at the boardlevel are a mixture of complex elements and not just-or not at all-the financial welfare of the company.


The resulting lack of functional definition leads to Board involvement in the day-to-day running of thecompany and deficient management performance.

Company Ownership

3.49 Finding an owner for the companies is not a straightforward process, the study team agreed.An alternative could be privatization in whole or in part through a legal reorganization and the sale ofshares. A legal reorganization would be necessary to change the companies' status from that of stateenterprises to that of corporations.

3.50 Privatization through divestiture of the companies, a more radical approach, was seen by thestudy as the most effective choice for creating profit incentives and inducing the enterprises to minimizecosts, exclude inappropriate political recommendations regarding staffing, and award contracts accordingto economic merit (the latter are the three areas in which most of the administrative failures, andparticularly those related to corruption, originate). With this alternative, the boards of directors would ofnecessity change; management might also exhibit substantial change. The political opposition that thisdecision would generate would be the most difficult hurdle to overcome and would require earnest andunwavering government support.

3.51 The actual privatization process would require additional study because of the nature of thecompanies. Both the magnitude and the nature of the transaction vary dramatically between a company thesize of ISA and one the size of a small "electrificadora" (local distribution company). Another questionwould be whether the private sector could mobilize internally the bulk of resources necessary to acquiresome of the companies.

3.52 Although a massive privatization of the industry did not appear feasible to the study group,at least in the short term, privatizing one enterprise, or fostering the creation of a private generator thatwould operate within the present public sector environment, was discussed as an alternative. This wouldhave the positive effect of establishing a yardstick of performance for the rest of the industry. Anotheralternative discussed was that of partially incorporating of private capital into some companies, withsufficient board representation to control key decisions. That alternative has been successful in other areas,such as those associated with natural resource extraction (oil, coal, nickel) where partnerships with privatecompanies have installed independent management substantially free of the problems found in totally publicsector enterprises.

Management

3.53 If transfer of ownership to the private sector would take place, management would becomemore responsive. However, if the privatization alternatives could not be implemented, another worthwhileoption would be to introduce a mechanism whereby ownership was separated from management. Therelevant issues here would be determining who should appoint the management and designing incentivesfor management so that their objectives were solely linked to the financial performance of the company.

3.54 Two alternatives for management strengthening arose following the previous outline:privatization of the management of the companies through performance contracts and profit incentives andperformance contracts with the existing management structure.


3.55 Under the first alternative, the present ownership would not change (and there would thereforebe similar boards of directors), but sector regulations would require that the board contract the managementof the company with an external, private organization. In this way, the issue of determining who shouldappoint the management could be solved by making it contingent on a bidding process. The contract withthe chosen management enterprise would address the incentive problem by incorporating a payment forits services based on its performance and its profits. The attributions of the board of directors would beclearly defined within the contract to avoid interference with the daily running of the company. Thismeasure could be particularly effective in reorganizing companies that have suffered serious deteriorationin their management.

3.56 The type of company that could be contracted to manage the enterprise could be, for example,a management consulting firm with the backing of (or in consortium with) a financial institution or anotherpower sector enterprise. The latter case could be particularly attractive for smaller distribution companies,where management would be contracted with one of the larger enterprises; moreover, foreign participationwould not be excluded.

3.57 Under the second alternative, performance contracts would be established between thegovernment and the sector companies. This approach is common in a number of countries, particularlyones organized with the advisory services of Electricite de France (EDF) and are known as "contract plan."The advantage of this option would be its ease of implementation; its drawback, in a system where thereis no accountability and where ownership is undefined, would be that the contracts could be ignored unlessthey were complemented by measures such as "hard budget" constraints.

3.58 In addition, given the problems at both board and management levels, performance contractsbetween the government and the enterprises would consist of a contract with the board that set limits to itsintervention in the company, along with specific corporate goals; and a contract with management thatspecified performance objectives.

Conclusions

3.59 The essential elements of the restructuring strategy, in summary, were as follows (the listingdoes not imply precedence):

v The financial discipline that would be introduced by hard budget constraints would be thenecessary condition for introducing efficiency incentives. Without these constraints it wouldbe futile to embark on a complicated series of maneuvers involving divestiture of assets,transfers of ownership, and regrouping of enterprises.

v The management and ownership reforms would be the next basic measures. The essentialfeatures at this stage would comprise clearly defmed responsibilities and objectives for theboards of directors and for management through actions ranging from total or partial transfersof ownership to performance contracts between the government (through a regulatoryauthority or other agency) and the companies.

The structural reforms-formation of new companies, new ownership, new regulatorystructures, etc.-would appear in the process and should be viewed as a means foraccomplishing objectives that became feasible once the first essential elements were in place.

Page 42 Colombia Power Setor Resactureg

Phase 1 Workshop Summary

3.60 The power sector objectives, options, and evaluations discussed in the previous sections werepresented at a seminar held on 31 May and 1 June 1991. With regard to restmcturing of the power sector,a number of decisions were taken by the National Social and Economic Policy Council (CONPES) duringthe last week of May 1991.13 The measures called for by CONPES directives were as follows:

w Economic diversification of energy supply through the substitution of electricity by othersources of energy

w Promotion of competition within the power sector and its linkage with the price systemw Strengthening of the regulatory functionsw Third-party access to ISA's interconnection gridw Accounting separation of the generation and network functions within ISA and the municipal

companieser iFreedom for ICEL and CORELCA subsidiaries to contract for thewr supplies with enterprises

other than their holding companies;w Restructuring of ICEL's generation assets by regrouping in regional companies.

3.61 The principal conclusions from the seminar related to the government's goals are discussedin the following paragraphs.

3.62 The creation of an industy based on competitve conditons requires a diversified demand andsupply. Such diversity is also required to justify a separation of functions between generation anddistribution (or between generation and transmission), as well as the organization of generation enterprisesby grouping some of ICEL's power plants.

3.63 In addition to the structural alternatives, it is also necessary to study, within the perspectiveof a competitive market, (a) the procedures for setting in place a price system, (b) the rules for tradingenergy between the different entities, and (c) the organization of a regulatory agency.

3.64 If a competitive system is to be established, depending on the commercial structure chosen,prices and trading rules are two areas that would require fundamental changes. During the seminar, threebasic alternatives for a competitive market were presented:

v Model 5, in which the generation enterprises bid for supplying the transmission company,which acts as the sole purchaser and the only seller to the distribution enterprises or otherbulkc suppliers. Retail competition among those companies for sales to final customers.

V Model 6 (the England/Wales model), in which the generation companies bid to supply thePower Pool on a daily basis, and where there is also competition among suppliers for salesto final customers.

"CONPES, 1991. "Etategia de Reestructuraci6n del Sector ElEctrico", Document DNP-2534-UINF-DELEC,21 May.


eV The "Chilean Model," in which the generation companies establish contracts directly eitherwith some major final clients or with the distribution enterprises; in this model, the EconomicLoad Dispatch Center (ELDC), operated by the generators under legal regulatory constraintsacts only as the price setter for entrgy interchange between generators; it does not interactwith the distribution companies.

3.65 The CONPES document establishes the freedom of access to ISA's grid as well as the freedomof negotiation between generation and distribution companies. This implicitly leads to choosing the"Chilean Model," with the advantage that the transmission company performs a totally transparent functionand therefore requires less regulatory control.

3.66 Whatever the decision, a basic revision of the models and procedures used in system dispatchwould be necessary. Because this area is precisely one that has created little controversy, the trading rulesshould be adapted so that the existing models, dispatch procedures, and system control rules werepreserved as much as possible.

3.67 The decision to adopt this model does not carry with it limits to the competitive activity. Forexample, in the Chilean case, generators can enter directly into contracts with consumers that have morethan 2 MW loads (with compensation to third parties for the use of their networks) who are not compelledto purchase from the local distribution company. In the case of Colombia, such an extension of competitiveactivity to fnal consumers could lead to traumatic consequences for some distribution enterprises becauseof the existing tariff schedules. Yet such an opening in the market could be beneficial both for thegenerators and the consumers. As an alternative, the freedom to access generation companies could bemade available gradually, starting with new clients having loads in excess of a given magnitude. Objectorsto the latter scenario, however, cite its impracticality.

3.68 Along with setting the limits to competitive activity, specifying the duties of the distributionenterprises should be done regarding the supply to smaller consumers, particularly to marginal demandsuch as that of rural electrification projects.

3.69 The decision to adopt a competitive trading model leads to defining the topics that will bediscussed in the following sections:

w Structure of the power companiesw Access to the networksw Regulation of the systemw System planning.

Structural Decisions

Relation between Transmission and Dispatch

3.70 ISA's policy as of 1991 consisted of implementing an accounting separation between thegeneration functions, on one hand, and the transmission and dispatch functions, on the other. A mereaccountng separation inevitably creates a conflict of interest at the operations level, particularly within acompetitive envirownent. Even with a "managed" market, ISA and EPM had conflicts regarding theoperation of plants located in the Guatap6-San Carlos-Jaguas hydroelectric complex. Consequently,


although the accounting separation of funcdons may have been adequate as a short-term measure, a long-term decision was clearly needed. The relevant issues to address, as defined by the study team, were (a)the "conflict of interest" issue associated with the question whether to separate generation fromtransmission, and (b) the issue of "market power dominance" associated with the question of diversifyinggeneration. This could involve either of the following resolutions:

oe Establishing a holding company to encompass one or several generation enterprises and atransmission affiliate

v Establishing totally separate generation and transmission enterprises, with consequently fewerpossibilities for conflicts of interest but perhaps at the cost of less coordination betweengeneration and transmission.

A final argument advanced for promoting the formation of several generation enterprises from ISA'spresetit assets was the desirability of having an industry structure in which no single company couldmanipulate the market.

3.71 As envisioned by the study team, the transmission company resulting from the division ofISA's functions would be charged with the dispatch and trading management responsibilities in the system.The company could be formed according to different alternatives: (a) as an enterprise held by thegeneration companies in the system (such as in the cases of New Zealand, or ISA in its initial years ofoperation); (b) as an enterprise held by the distribution companies (as in England/Wales); (c) as a state-owned company (similar, for example, to REE, the Spanish transmission enterprise). The sector's currentstructure was seen to favor alternative (a), coinciding, as noted, with ISA's initial structure as aninterconnection company. On the other hand, it would have to be regulated to ensure that new entrantsin the generation business could compete under equal conditions with generators that owned an interest inthe transmission compan;.

Relation between Generation and Distbution

3.72 The other aspect to be examined consisted of the separation between generation anddistribution, which would affect EEB, EPM, ICEL, and CORELCA. In ICEL's case a proposal forcreating four generation companies had already been made. In CORELCA's, the study observed, thefeasibility of a similar arrangement should be analyzed, although it is probable that the configuration ofthis subsystem would favor maintaining generation within a single company.

3.73 One of the more complicated issues addressed was the separation of generation anddistribution functions in the municipal companies. The separation was again intended to assist in forminga competitive market. EEB and EPM had exclusive rights to supply the two largest markets in the country,not only in terms of sales or number of consumers but also in terms of the number of large industriessupplied; these then were seen as potential candidates for supply by compmies other than the localdistributor. In order to generate a competitive market where prices might guide the industry, wholesaledemand could not be limited to EMCALI and the ICEL/CORELCA affiliates; it also would have toincorporate (possibly through a gradual process, as noted above) the Bogota and Medellin markets.

3.74 The study determined that at least two other important considerations would have to be takeninto account in the restructuring process. First, it may not be desirable to create generation companies that


are too small and would have little or no negotiating power; this type of problem could be avoided byattaching small plants to some of the distribution enterprises and treating them as "embedded generation".Second, releasing the market overnight could lead to a situation of confusion that eventually could imperilits long-term chances of survival; to avoid this risk, it may be beneficial to proceed gradually.

System Rents

3.75 A problem in restructuring the sector at the level of the municipal companies involves theallocation of rents from generation assets. The main concern of the municipal companies regarding to theseparation of the generation and distribution functions is that the central govermment might tax away theprofits of the generation companies. These r%rofits constitute rents that are being enjoyed by consumersthrough lower tariffs. Accordingly, the following three recommendations were proposed:

v In order to reach the economic benefits of an efficient market, tariffs should be kept in linewith costs; indeed, transferring renits to the consumers via lower prices vis-a-vis marginalcosts provides inappropriate economic signals and should be avoided.

<v A decision must reflect political reality by assigning rents either to specific cities, regions, orto the central govermnent to provide an explicit destination for the rents.

6e Once a decision is made with respect to the destination for the rents, a mechanism can bedesigned to make the required transfers-probably one that combines local, regional, andnational taxes.

Access to Networks

3.76 Competition at the supply level requires freedom of access to the transmission grid. TheCONPES document established this freedom in relation to the interconnection network operated by ISA.However, an extension of this ruling would be necessary so that transmission lines owned by certaincompanies (notably those in the ICEL and CORELCA systems) could become accessible (with adequatecompensation for their use) to all generators.

3.77 If competition for supplying final clients were allowed, it would be necessary to guarantee theuse of lines and substations owned by distribution companies for supplying consumers who have entereddirectly into supDly contracts with generators. This freedom of access would have to be complemented bya system of whveling charges for use of these facilities.

System Regulation

3.78 Establishment of a competitive market implies interaction between a considerable number ofeconomic agents. Given the physical characteristics of power systems, this interaction could give rise toabuses detrimental to consumers and to the community. In Colombia's electricity industry, the studyconcluded, a greater degree of competition between profit-motivated companies would require a greater

Page 46 Colombia: Power Sector Restr. ctring

degree of regulation thar. what existed in 1991; the state-owned structure, although inefficient, at least didnot abuse its monopoly position.

3.79 The CONPES document proposed that "regulation and sector planning are functions exclusivetG the Ministry of Mines and Energy." The study's response was that if the objectives of restructuringwere promoting competition and attracting private capital, that proposition should be carefully scrutinized,as it would confer considerable power on an entity that would be subject to short-term changes accordingto the political situation. This could lead eventually to an undesirable interference in the mechanisms ofcompetition-that is, in the pricing system-that could frighten private investors and disrupt operations.

3.80 The alternative, the study team noted, would be to establish an autonomous entity forperforming this plaming function or a regulatory commission with characteristics of independence similarto those enjoyed by CNE, the National Energy Commission. In addition to the regulatory commission,which would set the rules, the question of who would control the enforcement of the rules would have tobe addressed. The Constitution mandates the creation of a Public Services Directorate that could performthe function of overseeing utility performance.

3.81 To mobilize resources and attract private capital, the possibility of extending guarantees tothese investors could be examined. These guaramtees would protect private investors against the damagingeffects of any unilateral actions taken by the authorities. One scenario might include obliging thegovernment to compensate enterprises (both public and private) if unilateral decisions (such as a tarifffreeze) led to economic losses.

3.82 If energy prices were to be determined within a competitive system, a rapid adjustment of bulktariffs would be required with, possibly, a slower adjustment at the retail level. There may be a need toregulate bulk sales prices directly, at least for a short interim period. The price difference, constitutingan implicit subsidy, would be assigned and managed by the regulatory authority in coordination with theMinistry of Finance.

3.83 One of the price-setting functions of the regulator would be determiniing the acceptable marginfor distnbution enterprises, which would continue to operate as local natural monopolies. In this respect,the most adequate system appears to comprise, as in the cases of Chile and Spain, by setfing standard costsfor distribution companies (possibly classified according to certain types of enterprises), allowing them toreach higher rates of return insofar as their real costs are lower than the standards.

3.84 Tre regulator should oversee the service obligations of the distribution companies throughconcession contracts, the team concluded. Concerning this aspect, one of the major functions of theregulating entity-at least during the initial period of operation-would be to manage and establish policiesfor the allocation of subsidies, particularly regarding the supply of marginal consumers, if the latter becamea responsibility of the distribution companies.

3.85 Controlling the power sector would require having an extensive information system withrespect to finances (including a uniform accounting system), operations, and market structure. To acquirethis information, the regulator must have a way to interact with the power system information project,Sistema de Informaci6n del Sector Electrico (SINSE) that was being developed by ISA. One possibilitycould be simply to transfer this project to the regulatory entity.

Resalts of Phase I Page 47

System Planning

3.86 The CONPES document proposed that CNE take on system planning with the technicalsupport of ISA. It should be pointed out that within a competitive system the planning function takes onan indicative character with respect to the execution of future projects, given that their development isexpected to be undertaken by companies, or groups of companies, that do so on a voluntary basis.

3.87 It would be desirable to have an execution capability within ISA for the purpose of maintainingand enlarging the catalog of future projects; these would be developed through the contracting ofprefeasibility and feasibility studies. In order to finance these acav.us, one alternative might be toestablish a fund that would be supported through contributions from the generation companies.

3.88 The government would no longer be obliged to develop specific projects, even if theybelonged to the minimum-cost path, but it could foster desirable ones by extending (or refusing) its loanguarantees for the execution of future power plants.

3.89 A final issue to be addressed concerns the actions to be taken in v..ase no new voluntaryinvestments were forthcoming for the construction of new plants. One possibility would be to maintain aproject development faculty within ISA. However, in the context of a competitive market the absence ofwilling investors should be interpreted as the absence of the right kind of economic stimuli for Llvestment.Accordingly, a preferable solution to the problem would involve (a) changing the incentives on potential(public and private) investors, and (b) allowing the market to develop the appropriate signals-demandpressures upon capacity and quality of supply leading to higher prices and new investmentopportunities-rather than enforcing the implementation of specific projects.

Management Measures

3.90 As of mid-1991, the policy was oriented toward management contracts with the differententerprises. This should be viewed as a temporary measure that would be effective during the restructuringphase. Once the major structural changes were achieved, management contracts would probably no longerbe necessary for some companies and would have to be modified for others.

3.91 The problem of enterprise insolvency and the remedial measures needed, together with therole of FEN in this respect, should be addressed in a first phase of the Restructuring Program. This issuewould be strongly connected to the hard budget constraints, so that in cases of insolvency it would bepossible to take the usual steps for this kind of situation-namely, transfer of ownership, restructuring ofmanagement, and sale of assets.

Changes in Ownership

3.92 Some of the main obstacles to ownership changes were of a legal nature. Accordingly,considerable advances were gained during the "Seminar on the Participation of the Private Sector in theColombian Power Sector," held in Cartagena in 28-10 August 1991. A legal workshop organized byESMAP and CNE immediately ensued focusing on the legal aspects of ownership transfer. The


groundwork for mobilization of private sector resources was thus laid down on the basis of the seminar andworkshop's results.

3.93 The need for complementary studies were also examined during the workshop so as todetermine the procedures and possibie obstacles for transferring existing debt of the enterprises to theprincipal lenders to the sector, in particular the development banks, to private sector agents. Anothersubject debated during the workshop was the feasibility of a pilot privatization plan on the basis of theChilean and/or English experience.

Conclusions

3.94 After the major operational, financial, and planning elements have been further defined, theform of an Electricity Law should be a matter for detailed analysis. Subjects needing examination includethe following:

SW Content of legislation for implementing the structural measuresw The specific role of government institutions (MME, CNE, JNT, DNP)wt Type of price regulation and standards for quality of servicew Shape of regulatory bodyw Characteristics of distribution concessionslw Nature of pool operation and dispatch arrangementsw Rules for supply competidonw Definition of the transmission/interconnection gridow Rules for the participation of generators in the power pool

Tariffs: price estimations, distribution margins, subsidies, and wheeling chargeswt Privatization alternatives.

3.95 Phase 1 of the ESMAP project on the restructuring of the Colombian electricity sectorculminated in a workshop on 12 July 1991, at which, apart from an overview of the key issues addressedby the Phase 1 Report, two precise proposals concerning the preferred structure for the power sector werepresented. Both doeuinents sought to provide more definition to the sector's structure, based broadly uponthe CONPES directives of May 1991.

3.96 The 12 July 1991 workshop was designed for the purpose of debating structural alternativesdesigned according to the CONPES directives of May 1991; and endorsing the development of specificoptions with the purpose of drafting legislation by 1 December 1991.

3.97 The themes presented and debated within the workshop covered the following areas:

r Introduction of competition in the power sectorov The mode of competition between generatorsw The market structure at the generation levelow The extent of competition at the demand levelw The nature of the transmission enterprisew The organization of the dispatch functionw Commercial and trading arrangements at the generation level

The 9,cute financial crisis within the sector and the need for short-term solutions


w Pricing policy to end users subject to regulationw Rights and obligations for distributing companiesw Subsidies and their managementw The planning function in a competitive environmentw The regulatory role of MME, CNE, JNTw The future (constitutionally mandated) Public Services Commissionw The mandates for provision of public services established in the new Constitution.

3.98 The 12 July workshop did not result in formal decisionmaking or endorsement of specificpolicies but rather in an informal agreement on the need for examining specific areas, together with animplicit support for the principal features of the models that were presented. The main conclusions wereas follows:

v The development of competition between generators for supplying the market of distributioncompanies through bilateral contracts was approved and accepted by the participants.

-w The extent of competition for final clients was a subject of considerable debate. Thepossibility of having generating enterprises access large clients in other companies wasopposed by the (sole) representative of the distribution companies.

=' There was consensus concerning the need to separate ISA's generation and transmissionbusinesses- first through an accounting process, in the future through an administativeseparation. The question of whether the separation of generation should also involve breaklngup ISA's plants and forming several companies was not debated.

v Concerning the municipal companies, there was also an agreement on the need for separating(at least on an accounting basis) the generation and distribution aspects of the business.

V EMCALI expressed considerable skepticism about the proposal to have the government awardsubsidies directly to the power companies; administration of subsidies was seen as one of themajor issues to be addressed within the restructuning program.

b From an overall economic viewpoint, DNP diagnosed the power sector's problems basedupon the sector's poor rate of savings in relation to investment needs; the general conclusionwas that, unless this situation could be reversed, the sector would not achieve a satisfactoryrecuperation.

Chapter IV. Results of Phase 2

Phase 2 Initiation and Organization

4.01 Within the area of responsibility of each task force, the cone Mrns of the main sector playerswere openly debated. Workshops were organized. Foreign experts were invited to examine the proposalswith the intent of bringing everything out into the open, evaluate the options and arrive at the bestsolutions. This chapter summarizes the work of the six task forces.

Task Force 1 Financial Strategy

4.02 The terms of reference prepared for TF1 indicated that the principal obj.ective was toformulate strategies and solutions for assuring the fmancial viability of the sector. This task force wouldalso examine financial simulations that would serve as a basis for the evaluation of restructuring proposalsissued by other TFs. TF1 was organized with representatives from FEN (task leader), EEB, EPM, MHCP,and ISA. The full TF results are contained in several Spanish-language documents.'4

4.03 In brief, this task force report analyzed the financial results of the base scenario for the 1991-2000 period. Using these results, the analysts then examined the more relevant indicators for the sectoras a whole and for individual companies. The report was based on work by FEN and was reviewed indetail by an ESMAP local consultant, who was a major contributor to the document.

4.04 The base scenario forecast for the sector between the years 1991 and 2000 showed anincreasingly favorable evolution of the sector with respect to most financial indicators. In a comparisonof the years 1991 and 2000, the following elements came to light:

v Gross income was expected to grow at an average rate of about 4 percent in real terms,doubling by the end of the decade.

v Operating costs were expected to decrease, as a percentage of gross income, from 24 percentto 14 percent; similarly, administrative expenses were expected to decrease from 20 percentto 13 percent of gross income.

v Gross internal generation of funds would increase by a factor of 2.7.

v Net internal generation of funds was expected to rise from a negative amount of US$820million in 1991 to a positive value of about US$1 billion in 2000, which would enable thesector to finance all its investment in that year.

v In cash-flow terms, net savings were expected to varj from US$100 million to US$1,200million, equivalent to 50 percent of sector income.

14ESMAP, Task Force 1, 1991. 'Sector el6ctrico colombiano: Problemas y perspectivas financieras 1991-2000-Anexo: Sfntesis de informaci6n del sector electrico colombiano- Proyecciones financieras per{odo 1991-2000",November 29. FEN, 1991. -Cifras proyecciones financieras del sector el6ctrico colombiano -perfodo 1991-2000",Vicepresidencia de Planeacion, Divisi6n de Anfilisis Sectorial, November 27; The World Bank, Colombian PowerSector: Probleu and Perspectives 1991-200O-Anax: 1rfornniion Summwy of 1991-2000, Financial Forecasts.

50

Results of Phase 2 Page 51

Long-term debt was expected to decrease by 15 percent; as a fraction of net assets, long-termdebt would fall from 53 percent to 34 percent.

V Debt service, as a fraction of gross internal fund generation, was expected to fall from 215percent to 50 percent.

v }Operating income would allow the sector to earn a rate of return of 12.5 percent on capitalcosts, as compared with 6.5 percent at present.

4.05 The base case scenario involved two clear-cut periods: the years 1991-94, which could betermed a period of recovery, and the years 1995-2000, which could be termed years of consolidadon.Underlying the achievement of these results was a crucial element of tariff adjustment: during 1991-2000,tariff increases would generate addidonal fimds of about US$5 billion, of which about US$1 billion wouldbe generated in the initial four years of the forecast. The overall tariff increases corresponded toadjustments in dollar terms of about 7 to 8 percent per aMum during 1991-94 and about 2 percent for therest of the period. It should be noted that the forecasts also envisaged a penetration of natual gas in theurban markets, which would substitute 850 MW and 652 GWh in 1994 and 5,863 MW and 4,516 GWhin 2000.

4.06 Together with the assumed policy of tariff adjustments, the financial solutions posited by thedocument consisted of the following:

v An exchange of debt owed by electricity companies to the government for ISA shares ownedby those companies, for a total US$343 million

v An exchange of ISA debt with the government for ISA's accounts receivable from electricitycompanies, finally paid through further ISA shares owned by the companies, for a totalUS$314 million

V The government's capitalization of CHB through national budget contributions in 1991 ofUS$174 million

V Additional national budget allocations for 1991 and 1992

v A credit plan for 1991-94 divided between investment credits of US$426 million and debtservice credits of US$1.69 billion; credit sources would consist of the complementary IDBloan (US$300 million) and FEN/CADEX loans

V A "transitory" PEN loan intended to mop up the remaining deficits.

4.07 The overall sector picture, however, disguised a munber of differences among individualcompanies, as follows:

V Two insttutions, ICEL and CHB, exhibited critical and permanent financial difficulties, whichwere manifested by a contiual and increasing use of the "transitory" loan.


ve EMCALI began the scenario period in stable shape but deteriorated in time because of aninsufficient distribution margin.

v ISA exhibited large shortages during the initial years of the scenario but recovered in thesecond part of the decade.

v EPM and CVC were in stable and satisfactory financial condition throughout the pericd.

v EEB and CORELCA had a brief period of shortfall followed by a longer term of satisfactoryresults.

v ICEL's companies (the electrificadoras), taken as a whole, showed an acceptable generationof funds, whereas CORELCA's companies would be unable to fulfill their commitments.

These conclusions pointed toward the need for a case-by-case analysis of solutions for each company,because the positive sectorwide results would concentrate on EPM, CVC, EEB, and, in smaller measure,ISA.

4.08 The analysis concluded by pointing out that the financial solutions envisaged in the base caseforecast were not adequate for all institutions. It indicated that structural solutions would have to be soughtif the government were to avoid taking charge of the financial commitments of enterprises that did notimprove financially.

Task Force 2 Tariffs

4.09 The purpose of the terms of reference for TF2 was to design a tariff policy for the reformedpower sector according to the program guidelines involving competition, efficiency, and transparency ofcommercial relationships. The scope of activities for TF2 comprised the following elements:

w Definition of free and regulated marketsw Criteria for tariff settingw Cost calculation methodologiesMr Definition of tariff policy elementsw Definition of subsidy policiesw Transition scheme.

4.10 TF2 was headed by JNT and included representatives from CNE, ISA, CVC, EMCALI, andEPM. It benefited from local consulting support throughout the project and from subject-specific supportfrom ESMAP's international consultants. Its preliminary results were discussed in a workshop conductedin Medellfn on 1 October 1991, attended by ESMAP and World Bank staff, as well as ESM4P local andinternational consultants.

4.11 The results of TF2 are contained in a document entitled 'Tariff Proposal." Regarding thedifferentiation between regulated and unregulated markets, this report concluded that the unregulatedmarket would involve generators, distributors, and large consumers. The latter were initially defined asconnected at 62 kV voltages or higher, together with a load in excess of 2 MW; this category would beexpanded to encompass loads in excess of 2 MW connected at 30 kV or higher. Legal considerations led


to dropping the 2 MW categorization as possibly being unconstitutional on discriminatory grounds. Thefinal criterion included in the draft Electricity Law defined large consumers as those connected at 30 kvor higher (the draft law empowers the regulatory body to extend this category to lower voltages). Inaddition, the report concluded that the bulk market of energy destined to lower-than-30 kV-users wouldbe regulated.

4.12 In the unregulated market, the task force identified transactions between generators, betweengenerators and distribution companies, between generators and large consumers, between distributors andlarge consumers, and among distribution companies regarding marketing of surplus energy or rationingsharing. In all these transactions, the unregulated element referred to the generation component of theprice; all network charges were regulated.

4.13 TF2 proposed that sales to regulated consumers should be set at prices determined by theregulatory authority. Concerning tariff structuring, TF2 proposed three options for calculating finalconsumer costs: average accounting costs, long-run incremental costs, and short-run marginal costs. Itrecommended the adoption of the third option.

4.14 Concerning the calculation of generation costs, the recommended approach consisted of basingtariffs on short-run marginal energy costs resulting from an operational simulation of a reference year.Concerning capacity costs, the task force recommended adopting the marginal cost during the criticalperiod and left open the possibility of using the 'gas turbine reference cost" approach, as a proxy ofcapacity costs. The task force however agreed that this needed further study. For instance, such anapproach would not be adequate under excess supply conditions, which explains the task force'srecommendation of using marginal capacity cost, which can be adjusted for particular conditions. It shouldbe noted that the task force recommended basing the generation component of the tariff on costs rather thanon the prices of the unregulated market.

4.15 The recommended distribution cost calculations consisted of analyzing reference distributionenterprises using either the Electricite de France method of physical quantities or the asset renewalapproach. These studies would be contracted with external support. Distribution enterprises would beallowed to offer a variety of tariff structures to their customers, depending on voltage level and load,including seasonal energy charges, time-of-day charges for both energy and capacity, and fixed charges.Distribution charges applicable to large customers contracting their deliveries in the unregulated marketwould cover only distribution network costs and access charges.

4.16 Regarding the tariff structure, TF2 recommended establishing four components: (a) kWhcharges; (b) kVA charges for consume.s with installed loads in excess of 50 kW or with a transformationcapacity in excess of 45 kVA; (c) kW charges; and (d) fixed monthly charges. Each of these componentswould have an associated reference cost for price-setting purposes.

4.17 The tariff proposals included a basic option that involved seasonal tariffs with peak/off-peakenergy charges and peak/off-peak capacity charges; and other options that comprised any other system ofcharges derived from the basic option, as long as each charge had a well-defined reference cost, such asa simple energy charge throughout the year, with peak/off-peak capacity charges. The implementation ofan option would depend on the availability of measuring equipment.


4.18 The basic provisos concerning subsidies consisted that these should be explicit, and all implicitones should be eliminated. Tariffs would be set according to cost recovery criteria, and whatever subsidiesdeemed relevant from a policy perspective, should be funded by the government from the national budget.

4.19 The recommended subsidy policy included the following elements:

Mr Explicit subsidies should be targeted exclusively to low-income users.w Low-income residential users could be favored with lower fixed charges.w Subsistence consumption of low-income users could be subsidized; this level defined as the

0-200 kWh/month block in regions with no energy substitutes and the 0-100 kWh/monthblock in regions with substitutes.

w Subsidies should come from the state budgets in accordance with DPSL guidelines.

4.20 Task Force 2 achieved the original goals. The remaining work was numerical in nature,particularly in relation to detail calculation of distribution costs and how to incorporate them into theregulated tariffs.

Task Force 3 Regulation

4.21 TF3 drafted the proposed Electricity Law and the principles of the Domiciliary Public ServicesLaw, discussed in chapter 5 of this report.

Task Force 4 Pooling and Dispatch

4.22 The terms of reference for TF4 set as the objective to establish the principles and proceduresfor dispatching and commercialization of electricity in the interconnected system. Specific activitiesincluded the following:

w Defining basic principles for operations and dispatchw Defining procedures and rules for operating the systemor Defining conflict resolution procedures and information requirementse Establishing principles for facing the risks of excess energy and rationingor Defining a transition scheme to the new system.

4.23 TF4 was headed by a CNE advisor and included representatives from all major generationcompanies (ISA, EPM, EEB, CORELCA, and ICEL). It benefited from discussions with ESMAP staff andinternational consultus in the Medelifn workshop of 1 October 1991.

4.24 The basic principles that framed TF4's recommendations were as follows:

or Establishing a least-cost integrated operation coordinated through a central organizationw Promoting a competitive market for bulk energy supplyor Opening the generation activity to private entrepreneursw Designing a system whereby participants would assume the commercial risk of their decisions

Regulating the generation market on matters such as the obligation for all major generatorsto participate in economic dispatch and the distribution of energy surpluses.


4.25 The insti4utional recommendations made by TF4 can be summarized as separating theregulatory and entrepreneurial roles of the government within the system by incorporating an OperadonsCouncil into the law and treating publicly owned assets on the same footing as privately owned assets.Within the actual operations-related area of the system, the TF recommended reorganizing ISA so thatthere will be an "ISA Interconnection" company that will operate the existng network (without necessarilyhaving a monopoly on future expansion). ISA Interconnection would manage the National DispatchCenter, which would coordinate system operations on behalf of the an Operations Directorate formed bythe larger generation enterprises. The TF recommends that ISA Interconnection be government-owned,at least initially.

4.26 The commercial recommendations consisted of the following:

v Encouraging a competitive r.rket between generators, distribution companies, and largeclients for long-term supply contracts

.V Supporting long-term commercial decisions by a system of indicative planning centered withinCNE

V- Assigning the responsibility for distributing the commercial risk of "excess contract energy"(when customers/distributors contract to buy more energy than they actually take) to theOperations Council, where major generators would be represented

b Freeing the determination of supply conditions in the bulk market

V Valuing short-term transactions for system optmnization at short-run marginal cost.

4.27 TF4's detailed recommendations concerning commercial procedures governing long-termcontracts and short-term energy interchange included the following:

V Constraining distrbutors and large companies to enter into long-term contracts for coveringtheir demand

v Constaining generators to limit their long-term contactual supplies to firm energy availability

V Assigning the responsibility for short-rnm marginal cost calculations that clear the short-termmarket to the interconnection company

v Assigning clearinghouse functions to the system dispatch center

v Allowing generators and distributors to specify a commercial remedy within the long-termcontracts in case of shortfalls from critical hydro conditions

v Suggesting provisos for shortfalls in delivery attributable to generation or transmissionbreakdowns

V0 Setting the rules for entering into long-term contracts


v Establishing payments for specialized services such as frequency and voltage regulation (withdetailed specifications to be worked out in a future phase).

4.28 Concerning so-called autonomous marginal generation, which encompasses cogeneration aswell as independent power production (e.g., for industrial complexes), TF4 recommended that suchproducers be able to inject electricity into the grid, either at the interconnection level or throughsubtransmiission or even distribution networks. In any case, such injections were to be priced at short-runmarginal cost. Regarding firm power availability, these autonomous power producers could enter into theunregulated market; enterprises owning network assets would have to provide access to these producers,with adequate compensation for their use.

4.29 TF4's recommended treatment for operating risks associated with excess supply was to assignthem to the generating enterprises, except when responsibility lay with the transmission enterprise. TF4reconmmended analyzing such events within the contracts between generators and distributors or largeconsumers.

4.30 TF4 accomplished its objectives. It benefited from ISA's the accumulated experience inmanaging its network both from an operational and a commercial viewpoint during the last 20 years, andin its extensive knowledge of the procedures used at present to optimize costs. Further detailed workwould be required, particularly for the purpose of integrating dispatch rules with the network rules studiedby TF5.

Task Force 5 Network Access and Charging

4.31 The terms of reference for TFS encompassed the general objective of establishing a frame ofreference for conducting the 'transmission business." This included aspects relating to regulation,procedures, and methodologies given the particular natural monopoly conditions governing networks ingeneral. Specific objectives included the following:

w Defining general principles for guiding the establishment of rules and procedures definingnetwork access conditions

w Defining rights and obligations of both network operators and network usersw Defining criteria for use of international interconnections

Establishing principles for cosdng services provided by the network and the methodology fortranslating them to a system of charges

w Defining the modes of private sector participationw Defining quality and reliability standards

Defining transition conditions.

4.32 The task leader for TF5 was an ESMAP consultant, the group was integrated withrepresentatives from all major companies (ISA, EPM, CVC, ICEL, CORELCA, and EMCALI). Itspreliminary results were discussed at the Medellfn workshop with the international consultants for theproject.

4.33 TF5 defined the National Transmission Network as comprising lines and substations energizedat voltages equal to or above 220 kV. The general principles governing the use of this network consistedof freedom of access to all users complying with regulations to be determined by the regulatory agency;


nondiscriminatory charging and operating conditions for users of the network; charges proportional to theuse of the network; assignment of network losses to network users; and noninterference of network chargeswith optimal dispatch procedures.

4.34 With respect to network charges, one of the major conclusions of the task force was that thesechanges not be transaction-specific; that is, network charges would not be included in the unregulated bulkenergy market. The recommendation regarding the structure of transmission charges consisted ofconnection charges associated with specific investments required for connecting a given customer; fixedcharges that would reflect the costs incurred for a basic interconnection between the different nodes; andvariable charges associated with the physical use of the network by different enterprises.

4.35 TF5 spent considerable time seeking to establish specific methodologies for cost allocation;however, the complexity of the problem only allowed for a first approximation and evaluation of differentalternatives and no consensus favoring a specific methodology. In general, the options researched by theTF consisted of seeking a cost allocation scheme based on the idea of "MW-kin," in which the possibledelivery routes between nodes are analyzed and costs assigned following different schemes. One of thesuggested schemes was the so-called Shapley value, derived from game theory. This value allocated theaverage marginal cost contributed by transactions associated with any one node in the network. Variationsof the Shapley value were analy, ed, but no firm conclusion regarding any given methodology was reached.

4.36 Concerning the allocation of losses, two possibilities were raised by the workshop: the'Chilean" methodology, based on short-run marginal costs; and the 'UK" methodology, based on averagelosses with peak/off-peak discriminon. In the Chilean methodology, marginal costs were calculated forevery node of the network, the differences in cost between one node and another reflecting the value oflosses. When transactions were valued at marginal cost in this fashion, there was an excess of receiptsfrom users over payments to generators which is allocated to covering transmission costs; however, thiscomponent was insufficient to cover all costs, and an extra contribution had to be levied from networkusers using a relatively arbitrary methodology. In the case of the current England/Wales system, alltransactions were valued according to the average losses throughout the system at any given moment, withpeak/off-peak differentiation. The task force favored the latter, simpler approach.

4.37 TF5 was relatively handicapped because of the novelty of the problem it faced. It fulfilledits objectives in general terms, having reached agreement on major principles; however, substantial workremained on establishing and evaluating specific methodologies.

Task Force 6 Management and Corporatization Insues

4.38 The terms of reference for TF6 spanned two major areas. The first, essentially short-run,measures comprised actions to halt and possibly reverse the deterioration of most electricity enterprises byenhancing administrative and operational efficiency. The other measures were essentially long-term actionsdirected toward modifying the management strucure of the companies through competiton and privatesector participation.

4.39 The following specific objecdves were set out by the task force:

w Short-term ObjectivesI Estblishing a "control panel" for monitoring enterprise performance

Page 58 Colombia: Power Sector RestruPluring

4 Identifying and quantifying public sector debt with electricity companiesa Defining FEN's role during the transition and recommending measures for its

strengtheningI Supporting FEN in the definition of performance contracts.

w Long-term Objectives8 Defining functions for electricity enterprises with emphasis on the feasibility of

contracting services with the private sectorU Establishing procedures for converting the existing enterprises into "mixed" capital

corporationsU Establishing procedures for transferring government-owned assets to the new

corporationsI Designing a privatization plan.

4.40 TF6 was headed by DNP and comprised representatives from FEN, MHCP, MME, EEB, andDNP. However, most of the work was delegated to an ESMAP local task force consultant.

4.41 A control panel for enterprise monitoring was developed that included both operative andmanagement variables. This product was intended for users such as FEN (for controlling compliance withperformance contracts) and the future Superintendency of Domiciliary Publ,; Services (SSP for thepurpose of early detecdon of service deterioration and possible intervention of enterprises. The panelcombined a number of technical, administrative, and financial indicators in order to evaluate theperformance of an enterprise.

4.42 The indicators suggested by TF6 included the following:

w Generation indicatorsU Capacity factor by unit and for the enterprise as a wholeU Efficiency of thermal units8 Efficiency of hydro units8 Unit maintenance costs8 Unit production costs1 Rationing indicator.

w Transmission and distribution indicators8 Forced disconnection rateU Unsupplied energy indicatorU Average losses by voltage levelU Overload indicator8 Transformer loss indicator8 Unit transmission and distribution costs.

Commercial area indicators8 Coverage indicatorU Demand response indicatorU Indicator of effective measurement capacity8 Average consumption indicatorU Relative reading costs


I Reading efficiency indicatorI Billing efficiency indicator8 Billing complaints indicatorI General complaints indicator8 Accounts receivable rotation indicatora Accounts receivable indicator8 Global commercial efficiency indicatorI Loss indicators

or Management indicators:8 Global labor productivity indicators (users per employee, cost per user)I Labor availability indicatoisI Administrative load indicatorM Investment-level indicatorI Global efficiency indicatorX Deterioration lossesM Warehouse productivity indicatorM Overtime indicatorI Absenteeism indicatorI Personnel rotation indicatorI Industrial security indicator8 Labor union incidence indicator8 Contracting efficiency indicatorI Maintenance cost indicator-rolling stockI Training indicator

Financial indicators. These were the usual financial analysis ratios -not listed here for thesake of brevity.

4.43 The problems associated with public sector debt (e.g., ministries, hospitals and police stations)were quantified, and the following conclusions were reached:

be On a sector bas;s, the problem was not serious, but at the enterprise level, many of thesmaller distributors (electrificadoras) were seriously affected.

V The evolution of the problem was a concern-the debt doubled between December 1989 andJune 1991.

V Introduction of special budgetary legislation might be advisable to gurantee the recuperationof receivables by the electricity companies.

4.44 Concerning the role of FEN and the responsibilities assigned to it in Law 25 of 1990, aninternal reorganization was designed to allow it to comply with its new obligations. The proposedreorganization included the creation of four vice-presidencies (credit, plamiing, financial resources, andmanagement control). The credit vice-presidency would fulfill an operative role with specialized creditofficers and would encompass investment banking, credit, and monitoring. The financial resources vice-presidency would provide specialized analytical support to the credit vice-presidency. Finally, the

Page 60 Colombia. Power Sector Restructuring

management control vice-presidency would be in charge of evaluating the achievement of specific goalsfor the different power sector enterprises.

4.45 Regarding the conditions under which enterprises could access FEN resources, the followingstipulations were proposed:

i Establishment of cost accounting methods

v Institutional conditions, inicluding the dismantling of peripheral activities that could becontracted outside the company, for which it should present a precise implementation plan

V Financial performance stipulations.

4.46 In the area of performance contracts, the task force examined those being designed at present,namely FEN-EEB, FEN-CORELCA, and MME-Electrificadoras. The group did not recommend anymajor changes.

4.47 The task force report presented an extensive overview of the possibilities for embarking ona privatization process within the electricity sector. Apart from the necessary institutional changes, whichwere to be created by the Electricity Law, the group analyzed the feasibility of the following alternatives:

or Outright sale of public enterprisesor Private investment within state corporationse Sales of assets to private agentsw Leasing of assets to private agentso Management contracts- Subcontracting of services.

The report included a number of basic actions necessary before embarking on a privatization process,which essentially consisted of a rehabilitation of the enterprises through such elements as rationalizing andrenegotiating union contracts or eventually liquidating the enterprises.

4.48 For undertaking the privatization process, the task force suggested centralizing it withii anexisting organization, the "Financial Instituion Guamntee Fund" (Fondo de Garantfas de InstitucionesFinancieras FOGAFIN) affiliated to MHCP, which has successfully undertaken the privatization ofgovernment-controlled financial institutions.

4.49 Task Force 6 reached its goals within Phase 2. Additional activities were earmarked asnecessary for implementation purposes, partcularly regarding legal groundwork and establishing detailedcorporatzaion and privatizaton plans for the different companies.

Chapter V. Legal Framework

5.01 The final output of Phase 2 was the Draft Electricity Law and the associated principles of theDomiciliary Public Services Law. An understanding of these laws requires grasping the basic constraintsset by the Constitution, on one hand, and government policy as embodied in the October 1991Development Plan on the other."5 This chapter first provides an overview of the general orientation of theConstitution's contents, an analysis of the articles p, tinent to the laws, a summary of the guidelinescontained in the development plan, and the strategy adopted regarding the framing of the two legislativeproposals. The principles of the Domiciliary Public Service and Draft Electricity Laws are then presented.

General Orientation

5.02 Prior to the Draft Electricity Law, explicit electricity legislation did not exist. Most legalnorms that affected this service were limited to a few acts related to the water usage and a statute in whichthe state was entrusted with the responsibility for building power plants.

5.03 The 1991 Constitution could be characterized as outlining a welfare state. The first articleof the Constution defines Colombia as a "social state" based, among other things, on the solidarity of thepeople and on the "general interest."

5.04 This general orientation of the Constitution was given specific expression in the definitionof "public services." These were the common services associated with the provision of water, sewage,and electricity and other less typical "public" services such as health, education, social security, andenvironmental protection. As article 365 put it, "Public services are inherent in the social objective of theState." The Constitution thus decisively placed these services under government responsibility.

5.05 The general theme of the state as the provider of various goods and services was a leitmotifwithin the Constitution, as elaborated in 1991. The document either explicitly assigned the state theseresponsibilities or listed a number of rights to goods and services presumably to be dispensed by the state.For example, the Constitution included a list of "children's rights" (including love), the protection ofsingle-parent households headed by women, assistance to the elderly, the right to housing, the right torecreation (and to the practice of sports), and the ri-ht to strike.

5.06 From the point of view of assigning responsibilities within the state, the Constitutionestablished the notioii of "competence" for allocating functions to different territorial entities. In this sense,the municipality was clearly identified as the "fundamental entity of the political and administrative divisionof the State." The role assigned to the departments was framed more vaguely, in terms of planning andpromoting development.

5.07 With respect to "domiciliary public services," the responsibility for their supply was squarelyput on the municipalities. The Constitution indicated that the municipalities should supply these servicesdirectly whenever the technical and economic characteristics of the service permit.

'5Presidencia de la Rep6blica, 1991. La Revoluci6n Pacffica, Plan de Desarrollo Econ6nuco y Social 1990-1994,Departamnto Nacional de Planeacion, Bogoti, Octeber.

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Page 62 ColobIa-: Power Sector Restructuring

5.08 Concerning economic rights and the freedom of entrepreneurial activity, the Constitution wasambiguous. As could be expected from the welfare state context, the state was given a stronginterventionist role in the economy. The state was thus seen as responsible for the general direction of theeconomy and as having the purview and faculties for intervening within any economic activity.

5.09 As a counterbalance to the latter powers, the Constitution also established freedom ofeconomic competition, as well as freedom for undertaking economic activities within the limits of thecommon good. It should be noted that this role does not contradict the previous intervention-orientedfaculties, because for freedom of economic activity to exist, the state must have the power to correctelements that impede this freedom. However, the general tone of the 1991 Constitution was clearlyweighted toward the institution of state controls, and it stated that individual interests are subordinated tocollective ones.

Constitutional Mandates

5.10 This section summarizes a number of articles contained in the Constitution that provided asan explicit frame of reference for public services in general, and hence applied to the Electricity Law asit was considered during the restructuing acdvity. The topics are organized into the following categories:

General criteria.wm3 Legal regime

Competence and responsibilityProtection, rights, and duties of users

-- Financial and pricing provisionsMr General management policies and efficiency controlsw Participation of users and municipal representatives in public service enterprises.

5.11 The following four general criteria were contained in the Constitudon:

V That public services are inherent to the social objectives of the state and its obligation toensure their supply throughout the country (Art. 365)

ve That public services should comply with the law and be provided by the state, directly orindirectly; by organized communities; or by the private sector (Art. 365)

ve That the law establishes criteria for competence and responsibility regarding the supply ofdomiciliary public services, including their coverage, quality, and financing, and their tariffregime-the latter to take into account, in addition to cost-related standards, solidarity andincome redistribution criteria (Art. 367)

eV That the president should be responsible for developing the efficiency, management, andcontrol criteria of public service providers; that domiciliary public services should be underthe control of the SSP (Superintendency of Public Services) the notion of efficiency was notdeveloped in the Constitution, but its interpretation would most likely correspond to the 'leastcost for satisfying a given demand" criterion (Art. 370).

Legal Framework Page 63

5.12 The three legal regib provisions require the state to ensure the efficient supply ofdomiciliary public services (Art. 365); be directly or indirectly responsible for their provision (Art. 365);and exercise the regulation, control, and inspection functions (Art. 365).

5.13 Regarding competence and responsibility for providing public services, the Constitution statedthat the law determines the competence and responsibility relative to the supply of public services (Art.367); that the municipalities supply services directly under certain circumstances (Art. 367); and thatsupport and coordination functions be assigned to the departments (Arts. 367, 298).

5.14 The protection, rights, and duties of the users of public services were addressed as follows:

w That the states are to ensure their efficient provision (Art. 365)or That the law determines the rights and responsibilites of users as well as mechanisms for their

protection (Art. 369)e That the role of municipal councils and department assemblies be determined (Arts. 300, 313)or That government present to Congress, within three months of the latter's inauguration, the

legislative proposals relative to the legal regime of domiciliary public services. Thecorresponding draft legislation was presented on 28 February 1992; if within two legislativeperiods the corresponding laws were not promulgated, the president was authorized toinsdtute them by decree (Transitory Art. 48).

5.15 Financial and tariff-related provisions comprised the following:

ow That the nation, departments, districts, municipalites, and state institutions concede subsidieswithin their budgets to cover the basic public service needs of lower-income individuals (Art.368)

o That the law determine the tariff regime of public services by taking into account cost,solidarity, and income redistrbution criteria (Art. 367)

or That the law establish the competent entities for framing tariffs (Art. 338).

5.16 Regarding management and efficiency, the Constitution stated that the state maintain thecontrol and supervision of domiciliary public services (Art. 365) and that the control and inspection ofenterprises that provide domiciliary public services be performed by the president through thesuperintendency of public services (Arts. 189, 370).

5.17 For participation of users and municipality representatives, the following provisions pertain:

o That the law determine the modes for participation of users in the management andsupervision of enterprises that supply domiciliary public services (Art. 369)

o That the law define the participation of municipalities or their representatives in theseenterprises (Art. 369)

w That congressmen, deputies, and city councilors be barred from participating in the boardsof directors of decentralized institutions (Arts. 180, 292)

o That supervision and control of municipal services assigned to local administrative boards(Art. 318).

Page 64 Colombia: Power Secor Restructuring

Development Plan Orientation

5.18 The 1990-94 development plan was published and disseminated in October 1991. It containedthe general and specific policies that the government sought to implement during this period.

5.19 The following extracts from the president's foreword to the plan illustrate its generalorientation:

v "Previous plans suffered from basic defects;- they were based upon a peculiar vision ofgovernment that would, with its financial capacity and its network of officials, act in anyeconomic area with positive results."

v '[In this plan] government will concentrate its action in selected areas with greatest effect ofpublic spending on growth and equity."

v "Effective public spending mechanisms will be combined, such as demand subsidies, insteadof an indiscriminate promotion of supply."

v "The performance of ministries, which had become executing agencies, has been modifiedin order to enhance the regulatory functions that had hitherto been neglected."

v "The private sector is provided with a healthy atmosplhere in order to develop its projects,with clear commercial rules."

"The reforms in market structure are oriented toward fostering efficiency and competitivenessby eliminating structural obstacles."

5.20 The introduction by the head of the National Planning Department contained the followingexcerpts:

v "These years will witness the demise of an inefficient, protectionist economic model."

v "The broad problems of the Colombian economy have become embedded within itsproduction structure with worrisome tenacity."

v "The plan includes profound institutional transformations; it fosters individual autonomy,private sector participation, and adopts the new economic tendencies."

v "The plan seeks to modify the role of the central, regional, and local governments, delegatingexecution responsibilities to the regional and local level, leaving the central government totake care of truly national problems."

v "The plan seeks to promote an institutional atmosphere so that the private sector becomes thecentral actor within the process of change and growth."

>"The state can be more effective by concentrating on its basic social obligations and gettingrid of functions that it cannot fulfill by abstaining from intervening in numerous aspects ofeconomic activity."

Legal Franmework Page 65

v "Ideas that conferred excessive value to the capacity of intervention of the state andprotectionist policies have been rejected due to their lack of efficacy. The role of markets, theeffect of human capital, and the treatment of externalities are the themes that dominate today'sideas on development."

5.21 The orientation provided by the development plan appears in stark contrast to the general veinof the Constitution; it promotes markets anid private sector participation as vital elements of the economy,coinciding with the objectives that were set out for the Power Sector Restructuring Program.

5.22 The challenge faced mn drafting the Electricity Law was to interpret the constitutionalprovisions and harmonize them with the orientation of the development plan.

Strategy Adopted

5.23 A constraint in drafting the Electricity Law was the constitutional requirement for thegovernment to develop a Domiciliary Public Services Law (DPSL) encompassing electricity, water,sewage, natural gas, and possibly other services. Given the "umbrella" characteristic of the DPSL asessential background for the Electricity Law, and given that the DPSL draft was being prepared by DNP(who had the primary responsibility for this project), Task Force 3 (Regulation and Legislation) outlineda set of preliminary principles for the DPSL to serve as a guide for the preparation of the Electricity Law.It is important to note that this report documents only the preliminary principles outlined during Phase 2,which are different from the principles in the draft DPSL developed by DNP and presented to Congressin March 1992.

5.24 In order to make the constitutional provisions compatible with the ESMAP and governmentobjectives, six principal hurdles had to be cleared:

v Defining the notion of domiciliary public services in order to narrow as much as possible therange of products to be regulated

v Identifying, from a legal standpoint, those products within the electricity supply subsector thatdid not fall into the category of domiciliary services

v Defining the question of competence for public service supply

b Defining the desirable modes of enterprise organization for public service suppliers with theobjective of minimizing the cases where the state took on this responsibility

b Inerpreting the Constitution in order to define those prices that were subject to regulation bylaw and that could be set by the market

V Defining the role of the superintendency of public services in order to limit its interventionwithin markets.


Draft Principles of The Domiciliary Public Services Law

5.25 This section conains an overview of the draft proposal developed within the RestructuringProgram (and referred to as the CNE/MME Proposal). It should be noted that this draft was intendedprimarily to provide a frame of reference for drafting the electricity law, although it also serve to stimulatea constructive debate vis-a-vis the initial drafts developed by DNP. The reader should therefore bear inmind that Sections A and B that follow reflect the thinling as matters stood when Phase 2 was completed,that is, as of December 1991. Section C provides an epilogue concerning developments during Januaryand February 1992.

The CNE/MME Proposal

5.26 Section A outlines the basic definitions and orientation given to this proposal and a discussionof its contents and organization.

DeflJdtons and Sbteg

5.27 The first item to be defined was which services were to be considered "public" and which"domiciliary." Regarding the first definition, the oniy reference was to those that could be customarilysupplied by public sector enterprises. This allowed the inclusion, at least conceptually, of a large categoryof services; in the case of electricity and water, defining them as essential public services was convenient,because the law explicitly prohibited strikes in enterprises that supply them. Regarding the "domiciliary"feature, this was interpreted to limit such public services to those that reached the household address vianetworks, that is, electricity, piped gas, water, sewage, telephone services, and, exceptionally, those thatinvolved significant externalities, namely, garbage collection.

5.28 An interesting property of the latter definition was that it coincided with the regulation ofservices with natural monopolies features because of the inefficiency of building parallel lines, be they ofelectricity, water, sewage, or telephone services. The definition also coincided with services that requiredthe use of public property (aerial or underground street crossings). It therefore provided a firm basis forjustifying the regulation of these services and the creation of the superintendency of public services.

5.29 The Constitution mandated the regulaton of the direct supply of public services. This termwas interpreted to mean the supply to those final users of the product, without further transformation. Inpractical terms, this released the market for bulk energy at the generation level from being regulated byconstitutional mandates. It also allowed the existence of a bulk supply market for large users, with theunderstanding that the product was being further transformed.

5.30 The general approach to structuring the project consisted of the following elements:

v Providing incentives for the assignment of operating functions to entities other than themunicipality, that is, by encouraging the establishment of concession contracts that havehitherto never been developed as a means of providing services in Colombia;


l Discouraging both the vertical and horizontal integration of organizations that provide publicservices (i.e., encouraging the managerial separation of supply functions)

v Encouraging the corporatization of public municipal companies (in the absence of concessioncontracts) by endowing them with administrative autonomy and independence from othermunicipal bodies

v Linking tariffs and costs and separating subsidies from the former, which would henceforthbecome explicit in consumers' bills.

5.31 The following sections provide an overview of the draft guidelines and principles proposed.The project was organized in seven titles, as detailed below.

Ne 1 General Crteria

5.32 The project defrmed a number of constitutional notions and set out the general rules thatshould govern the provision of services. The proposed principles that would guide the provision of theseservices were:

v The efficiency principle, governing the economically appropriate assignment and use ofresources

v The quality principle, whereby services be supplied with predetermined technical qualitystandards

v The continuity principle, whereby services be permanently supplied, independently of theadopted mode of organization, except for interruptions originating in technical or majorcauses

v The "adaptability" principle, whereby suppliers were expected to adopt technologicaladvances

v The neutrality principle, whereby users with similar characteristics were to be treated insimilar conditions

v The solidarity and income redistribution principle, whereby measures be taken for the supplyof services to low-income residential users.

5.33 Although the competence for the provision of services was assigned to the municipalities, theactual supply could be performed by the nmunicipalities, by other state agencies, by private entities or byorganized communities. In order for municipalities to undertake the direct provision of services, they weredirected to establish separate corporations with the possible participation of private sector agents.Municipalites with a population of 50,000 or less were excepted from this constraint. Private secwor agentscould supply public services by organizing enterprises with this sole objective. Municipalities were furtherconstrained to the direct supply of services by having to comply with a nmber of conditions regarding thefinancial health of the enterprise they established.


Tide 2 Entites Responsible for Supplying Domkclia Public Series

5.34 This dtle proposes a definition for the legal status of the enterprises supplying public services.In general terms, it indicates that these enterprises must be organized as mixed capital (i.e., private andpublic) corporations or as local state commercial and industrial enterprises. They are constrained to beingautonomous in the sense of being managed through their boards of directors and their general manager,to the exclusion of other municipal authorities.

Tide 3 Regulaton and Control, Superwon and Inspection of Domiclsay Public Services

5.35 Economic regulation of public services is entrusted to those ministries more directly linkedto the services in question. Among the regulatory functions are establishing methodologies for tariffcalculations and approving maximum tariff levels and the quality of supply.

5.36 Control, supervision, and inspection were proposed to be entrusted to the president throughthe constitutionally mandated Superintendency of Public Services. The superintendency's role was toensure that the entities supplying public services comply with regulated conditions concerning tariffs andquaity. Its duties also called for intervening in these entides if their corporate situation deteriorated or ifa substantal deterioration of supply conditions could occur because of managerial causes.

Mte 4 Relationship between the Corpoations and Users

5.37 Under this title, the sets of rights and responsibilities of users and suppliers are proposed.It also addresses the need to supply information to the regulatory agency and the Superintendency of PublicServices.

5.38 A set of tariff provisions is also proposed; the more relevant of these follow:

v Tariffs were to guarantee a reasonable rate of return under efficient supply conditions. Thisdid not mandate rate of return regulation: it merely indicated that the rate-of-return indicatorshould be taken into account in setting tariffs.

v Tariffs were to correspond to economic supply costs under efficient supply conditions. Theregulatory agency was entrusted with these calculations.

v The regulatory agency was entrusted with establishing tariff alternatives and structures tofoster an efficient allocation of resources.

v Subsidies for public services were to originate within other public authorities. The supplyingenterprises that did not receive the promised subsidies could readjust their tariffs to cover theshortfall.

v Current tariffs that are in excess of costs are to be reduced along with the establishment andeffecdve payment of subsidies by state agencies.


Mkls 5, 6, and 7 DTe Regine of Concessions and Pemis, Exproprations and Rights of Way, and FalConsiderations

5.39 Title 5 established the detailed conditions of the concession contract, given the absence of thisalternative within the existing Colombian laws. It also set the conditions governing permits for privateenterprises to provide public services; this was oriented mainly toward small local entrepreneurs (e.g., forwater supply to small communities).

5.40 Title 6 regulated the conditions and the mode of expropriation of goods needed for the supplyof public services; similarly, the rights-of-way section regulated the procedure whereby suppliers couldapply for rights of way to cross the properties of third parties.

5.41 Title 7 established time limits for existing enterprises to conform to the terms of theDomiciliary Public Services Law.

Epiogue

5.42 It is wordt pointing out that the CNE/MME proposed guidelines and principles for theDomiciliary Public Services Law shared similar points of view and embodied a similar economicperspective as the DNP draft. Both relied on competition and private sector participation in the provisionof public services. The upshot of the debate that surrounded both DPSL drafts was a final version thatreconciled many points of difference, some of the more significant elements of the final draft were:

Streamlining of the DPSL, which entailed the elinmination of more than 100 articles, thusresulting in a more general and less overregulated statute

v Limiting the scope of the law's application to those services that require regulation by lawbecause of their physical characteristics, therefore reducing the "catch-all" characteristic ofthe earlier version

v Reducing compulsory reorganization features contained in the original project, thus renderingit less abrasive to enterprises that would have to undergo undesirable and impracticalrestructuring

v Eliminating compulsory types of organization for municipalities in delivering public services

v Concentrating regulatory functions within the Superintendency of Public Services assemiautonomous regulatory panels

v Allowing for sector-specific regulation statutes such as the Electricity Law or aTelecommunications Law

b Continuing the National Energy Commission.


The Draft Electricity Law

5.43 This sectior! presents a summary of the December 1991 version of the Draft Electricity Law,developed according to the principles set out in the Phase 2 version of the DPSL (Table V-1 lays out thedraft Law). The more relevant articles are highlighted from the point of view of Phase 2 objectives. In amanner similar to the DPSL, this draft legislation evolved during January and February 1992, particularlyin order to conform a coherent unit with the final DNP version of the DPSL. The major changes involvedin the final Draft Electricity Law version are overviewed in the "epilogue" section below.

Table V-1: Draft of Colombia's Electricity Law: 1991 Outline

Section Descripton Chapter

Title I w General Principles

Title 11 w Electricity Sector PlanWnng

Title 11 w Electricity Generation

htie IV o Electricity Transmission Chwter 1: Transmission Networks andLoad Committees

Chapter ll: Load DispatchingChapter III: Network Use and Access

Charges

7itle V w The Domiciliary Public Service of Chapter . Competence andElectricity Distribution Responsibility of Supply

apter ll Economic and Tanff Regime

Ythe VI or Regulation

Title Vil a Competence and Organization ofEnterprises

Title VIII a Concession and Permits Chapter L: The Generation,Transmission andDomicilary Public Service

Chapter!!: Permits

Title IX a Final Prescriptionsa Transitional Measures


Title I General Principles

5.44 This title reaffirmed some of the general considerations contained in the Domiciliary PublicServices Law and included some objectives specific to the electricity sector:

v Supplying the demand for electricity, resulting from an efficient use of energy resources,under minimum economic cost and financial viability conditions;

v Promoting an efficient and reliable operation of the generation, transmission and distributionstages of supply

v Allowing and assisting the participation of private sector entities in generation, transmission,and distribution

v Encouraging competition in those areas of the generation, transmission, and distributionactivities where it is feasible, and establishing regulations that encourage efficiency in thoseareas where competition is not possible

v Restricting abusive practices resulting from a dominant position within the market

a Ensuring the protection of user rights and compliance regarding the duties of differenteconomic agents involved in generation, transmission, and distribution

v Ensuring that environmental constraints are taken into account within plans that may haveimpacts on nature or society

v Ensuring that assets are maintained and operated in such a way that they adjust to quality andsecurity standards set by the Energy Regulatory Commission.

5.45 Generation, transmission, and distribution were classified as essential public services in orderto prevent the possibility of labor strikes (Art. 2).

5.46 The generation of electricity was explicitly open to all economic agents, private and public,national and foreign, which may develop their activities within a freely competitive context. Those areaswhere natural monopoly conditions predominate, namely, transmission and distribution, were subject toregulation (Art. 4).

5.47 Sales of electricity from generators to distributors, and from either of these to large clients,were free; prices for these transactions would be agreed to by the parties involved. Large clients wereinitially defined as all consumers connected at voltages higher than 30kV. Prices of electricity sales toconsumers connected at lower voltages would correspond to regulated tariffs. The Energy RegulatoryCommission was to regulate and authorize the use of networks and the corresponding charges (Art. 5).

5.48 The Energy Regulatory Commission was given the regulatory responsibility for generation,transmission, and distribution stages. The inspection, control, and supervision of the Domiciliary PublicService of Distribution was assigned to the Superintendency of Domiciliary Public Services (Art. 6). Thisarticle was crucial because it clearly established responsibilities for regulating the sector and supervisingits performance; in so doing, it limited the activities of the Superintendency, which otherwise had the


potential for becoming a gigantic watchdog encompassing all public services, to the supervision of supplyto final (distribution-level) consumers.

Title HI Electricity Sector Planning

5.49 This title assigned the responsibility for developing "indicative" (i.e., informative andnoncompulsory) plans to the National Energy Commission. In order to accomplish this, the Commissionwould count on the technical support of the enterprise entrusted with the national transmission grid (i.e.,ISA). The Commission also was assigned the responsibility of developing criteria and policy relating tothe planning of distribution systems, leaving the actual development and execution to the distributionenterprises.

Title HI Electicity Generation

5.50 The construction of generating plants was opened to private and public agents; decisions toinvest in generation were made the responsibility of the entities that develop these stations and that run therisk relating to this activity (Art. 13).

5.51 Transactions between electricity generators and distributors were to be performed throughbilateral contracts at prices to be established between the parties.

5.52 Generating plants were to submit to an economic dispatch to be coordinated through theNational Dispatch Center. Transactions between generators resulting from the least-cost operation are tobe settled according to system short-run marginal cost.

MTie IV Electcity Transmission

5.53 Chapter I of this title defmed national and regional transmission networks. The nationaltransmission grid was defined as the set of lines and substations operating at voltages equal to or higherthan 220kV, together with international interconnections. Regional transmission networks were composedof lines and substations operating at voltages between 30 and 220kV.

5.54 Electricity transmission between regions using the national transmission grid was made theresponsibility of the State. This did not imply single ownership of the grid: parts of it were to be ownedby public or private parties, which must operate according to the "Operations Agreement" and norms tobe established with the National Dispatch Center.

5.55 Nonetheless, one enterprise would be in charge of the national transmission service, with thefollowing obligations:

v To develop the indicative expansion plans for the National Energy Commission

v To build 220kV and higher transmission lines and substations included in the Reference Plan,except those connecting substations of otler enterprises


v To build 220kV and higher international interconnections

V To calculate and submit to the Energy Regulatory Commission the transmission charges tobe levied for its services

v To participate in Regional Load Committees.

5.56 Regional Load Committees were composed of representatives from distribution companies,regional transmission networks, the National Dispatch Center, and the company in charge of providing thenational transmission service. Their function was to coordinate regional operations.

5.57 Regional transmission networks, generation centers, or load centers that connect to thenational grid were subjected to a number of legal obligations in regard to complying with technicalconstraints and obeying the orders given by the National Dispatch Center.

5.58 The owners of transmission or distribution networks were required to allow access to anyelectricity enterprise or large consumer that requires the use of their assets, subject to the payment of thecorresponding charges. This in effect would enable potential large enterprises to access the unregulatedmarket by conneting to voltages above 30kV.

5.59 Chapter II of this title concerned the load dispatch function, entrusting it to the NationalDispatch Center under the National Operations Council.

5.60 The National Operations Council comprised representatives from generating companies withan insalled capacity in excess of 2 percent of the national total, a representative of the national transmissionenterprise, a representative from the National Dispatch Center, and representatives from other generationcompanies to be chosen according to rules that the Council itself would establish.

5.61 The National Operations Council was to be the system's highest-level organization in the areaof operations planming. Its functions would consist of establishing rules and procedures for operating thesystem, which were to be included in the "Operations Agreement," and of making decisions relative tosystem operations.

5.62 The National Dispatch Center would operate under the orders of the National OperationsCouncil. However, the center would be associated with the national transmission enterprise foradministrative purposes; its budget would be covered by the enterprises represented within the NationalOperations Council.

5.63 Chapter m covered network use and access charges. It indicated that the charges for use ofthe national and regiona1 networks must cover investment and O&M costs, and that their structure shouldreflect the services provided by the networks, including reliability benefits. The methodology for levyingnetwork charges was left to the Energy Regulatory Commission.

Page 74 CoIombiA Power Sewor

Ttle V The Domicniary Public Serkice of Electricity Dbton

5.64 This secdon of the law was strongly linked to the final project to be adopted for theDomiciliary Public Services Law. Chapter I assigned the competence for this fimction to the municipalitiesthat could supply the service directly or indirectly, through private agents or organized communities.When a municipality supplied the service directly, the law demanded it to do so through autonomousentities, defined as enterprises whose administration was entrusted to a board of directors and a generalmanager, independently of other authorities. These entities were also constrained to have a budgetindependent from that of the municipality. The constraints were especially significan for companies suchas EEB, which were then tied to city council decisions.

5.65 When the municipality provided the service indirectly, it could do so through other publicenterprises, through private agents, or through mixed public/private companies; in all cases, themunicipality was required to establish a concession contract with the chosen organiation. This alternativewould probably cover a large number of municipalities that were then being served by the"Electrificadoras." The municipal authorities would have to establish concession conact with them, thusindirectly assumming the responsibility for sWplying the community.

5.66 Private agents and organized commumiues were also allowed to engage in electricitydistbution through a municipal permit. This altenative, different from the concesion, would cover caseswhere private agents (e.g., groups of industries) or communities (e.g., isolated clusters) organizedthemselves to provide electricity among themselves.

5.67 Electricity distribution companies were required to guantee, through long-term contractswith generators, the supply of their demand for a two-year pericd at all times. These contas were to benegotiated through public bidding procedures to promote competition between generators.

5.68 Chapter II covered the economic and tarff regime. Maximum tariff for distributioncompanies were limited to supply costs, the latter defmed as the sum of energy purchase costs, networkaccess charges, distribution ivetwork capital costs, and O&M costs. The parameters for cost calculation(e.g., discount rates and amortization periods) were to be determined by the Energy RegulatoryCommission.

5.69 The most controversial aspect of the law concernme. the treatment of subsidies. It allowed forlower-than-cost tariffs exclusively for low-income users; the difference was to be covered from subsidiesprovided by the state (by the central govermnent, the departments, the districts, the municipalities, ordeenalized agencies). Subsidies were to be provided direcdy to the companies in charge of electricitydistribution. If the companies did not receive agreed subsidies, they could readjust tariffs to finance thesubsidies.

5.70 Distnbution enterpris could direct tarff readjustment petitions to the Energy RegulatoryCommission, which was put in charge of authorizing them.

Legal Framework Page 7,¶

Title VI Regulation

I 11 This title established the functions and composition of the Energy Regulatory Commission.fhe commission was composed of the Minister of Mines and Energy, the Mfinister of EconomicDevelopment, the head of DNP, the Economic Secretary of the Presidency, and the Superintendent ofDomiciliary Public Services.

5.72 The Executive Secretary of the National Energy Commission was named Secretary of theEnergy Regulatory Commission. Likewise, the technical staff of the National Energy Commission wouldsupport the Energy Regulatory Commission. Similarly, this commission was conceived of as encompassingthe energy sector in general, in much the same way that the National Energy Commission was a sectorwideorganization. The possible areas for regulation in other subsectors would be in natural gas regulation andboth oil and natural pipeline regulation. However, given that these areas were not included in theRestructuring Program, the regulatory commission would function, at least initially, as an electricityregulatory commission.

5.73 The functions of the Energy Regulatory Commission follow:

Mr Proposing regulations relative to electricity generation, transmission, and distributionow Defining standards for quality of servicew Defining methodologies for cost calculations, economic costs of supply and regulated tariffsm Approving network chargesw Defining procedures for the progressive liberalization of electricity marketssr Indicating the maximum tariff levels for distribution enterprisesow Establishing regulations to avoid monopolistic practicesw Appointing a referee for solving conflicts within the National Operations Council

or Authorizing the access of consumers connected to voltages below 30kV to the deregulatedmarket

or Regulating the treatment given to generators and cogenerators.

5.74 At this ,.int it is worth listing and summarizing the functions of the different organizationsproposed in the Di:..t Electricity Law:

The Energy Regulatory Commission, composed of ministerial-level officials and supportedby National Energy Commission staff

v The National Operations Council, comprising representatives from generation companies and,in charge of operations coordination

V The National Dispatch Center, that implementing decisions taken by the National OperationsCouncil and serving as technical secretariat of the latter

V The regional load committees, serving as operational coordinators between generators anddistributors.


ke VII Competence and Organization of Enterprises

5.75 This title reaffirmed some of the basic concepts of responsibility for electricity supply andrestricted private agents as well as mixed (public/private) enterprises that supply electricity to beingorganized as corporations or limited liability societies. It also enabled the Domiciliary Public ServicesSuperintendency to take over their management in case of expected insolvency.

5.76 Enterprises that engaged simultaneously in supplying multiple services were constrained toadopt separate accouning systems for each of them; this included the accounting separation of generation,transmission, and distribution.

Mle VIII Concessions and Permits

5.77 Title HI was an extensive section of the law covering the characteristics of the public serviceconcession contract, hitherto undeveloped within Colombian legislation. The permit regime was orientedto cases in which the concession contract did not apply.

Ytkle IX FY Prescripons

5.78 This title included the following considerations:

00 Enterprises engaged in the different stages of electricity supply were mandated to take intoaccount environmental considerations

V ISA was designated as the national transmission enterprise, together with harboring of theNational Dispatch Center

V The National Energy Commission was entrusted with organizing the electrical sectorinfonnation system, the Sistema de Informaci6n Nacional del Sector Energetico (SINSE).

Transitfonal Measures

5.79 These measures were required on two counts: first, the situation at the generation level, withthe potential for energy surpluses, made it awkward for a market to function, as this was seen as likely tolead to an even more financially compromising situation for some generators, in particular ISA and CHB.Second, the distorted tarffs in some companies would require painful readjustments, particularly forhouseholds.

5.80 Accordingly, the Drafft Electricity Law specified the following measures:

v Cross-subsidies were to be eliminated gradually by lowering those tariffs in excess of costs;the Energy Regulatory Commission was entrusted with developing a transition program forevery enterprise, based on the assigment of subsidies from external government sources.


v T'he National Operations Council was entrusted with defming the commercial agreements tobe enforced during the transition period to the generation-level market; the duration of thetransition period was to be determined by the Regulatory Commission.

Organizations that were providing distribution service, were allowed to continue to do so andgiven a period of two years to modify their bylaws to comply with the dispositions of theDraft Electricity Law.

v The President was empowered to change the bylaws of ISA, ICEL, CORELCA, and CVCto bring them into line with the Draft Electricity Law.

Conclusions

5.81 The CNE/MME proposal of the principles and guidelines of the DPSL served to prepare thefirst draft of the electricity law. After the fial DPSL was drafted by the responsible government entity(DNP), the Draft Electricity Law was modified to make it compatible with the dispositions of the DPSL.

5.82 The final Draft Electricity Law as developed in the ESMAP activity contained the followingelements:

V A chapter of general principles (largely the same as the original draft)

V A chapter on regulation in line with the final contents of the DPSL, with the sector-specificfunctions of the Energy Regulation Panel within the Superintendency of Public Services

v A chapter on sector planning that established the responsibilities of the National EnergyCommission

V A chapter on electricity generation laying out the general principles for entry into this stageof the supply process, including cogeneration

v A chapter on electricity transmission encompassing the definitions of the National Grid,regional grids, and distribution neiworks; it sets out the principles for coordination and theobligations and conditions for allowing third-party access

V A chapter on system operation setting out the principles and functions of the NationalOperations Center and the National Operations Council

v A chapter on general principles for determining network charges (given the complexity of thesubject, the ultimate methodologies were to be approved by the regulatory body)

b A chapter governing the supply contracts to which distribution enterprises must agree toprovide reliable service to their customers

V A chapter on pricing where generation prices were to be market determined, and in whichtariff regulation principles for lower-voltage customers were established (the subsidy questionbeing left to the DPSL)

Pogt- 78 Colombia: Power Sector Reslrucima

v A chapter on enviromnmental priniciples to be observed within the electricity industry

v A chapter on conicessioni contracts that, although logically belonging to the DPSL, wasincilided in Ibe Draft Electricity Law given (a) that the former did not contemplate it and (b)ile imIportance of this type of contract for private capital

V A chapter with final dispositions similar to the original draft.

Chapter VI. Remainin Agend

6.01 The Electricity Law complemented the Domiciliary Public Services Law. Together, they setout a framework for the future development of the electricity industry in Colombia based on the followingelements:

i The creation of a competitive market between enterprises as a means for fosteripg efficiency

if The eliminaton of rigid and compuory power expansion plans, discarding them in favor ofan indicative planning scheme to provide guidelines for decisiomnaking of public and privateenterprises alike, which ultimately would be responsible for investment decisions and wouldshoulder the corresponding risks

if The regulation, by the state, of markets where natural monopoly conditions predominate inorder to avoid the misuse of market power and to protect consumers

be A tariff reform for promotng efficiency, togethe with effectve and transparent managementof subsidies

if The opening of imvestment opportunties to privtte capital within the electricity industry asa means for strengtening competition and attracting resources

i The inroducdon of administrative reforms in electricity enterprises in order to stimulate theapplication of sound management principles

be The endowment of budgetary, financial, and administrave autonomy to the sector'senterprises so that they could operate in a competitive environment

if A system for controlling distnbution enterprises to ensure quality and continuity of service.

6.02 The avowed intentions of the two laws, as listed above, were to open new, positive, prospectsfor the system. However, the laws as such could not guarantee an appropriate outcome of the restructringprocess. Indeed, the list of enabling legiation elements posed an equal number of counterpart issues;these were expected to arise because the laws had to be necessarily developed in general terms in orderto ensure the longevity of their saes. Furthermore, Colombian law allowed the government to interpretthe law through subsidiary legislation not reuiring approval by Congress; these complementary rulingscould constitute the basis for the application of the statutes, and a successful implementation would haveto incorporate also careful drafting and design of these rlings.

6.03 The following list of quetions requiring farther defminton was developed by the study group:

if Even if the law creates the conditions for a competitive market, will it develop effectively?What are the possible sources of market failure that could inbibit its development?

i By elirinating the need for keeping to a rigid expansion plan, te law allows the developmentof suboptal projects: what policy should the government adopt insofar as new expansionis concerned?

79


g How will state regulation operate in order to control natural monopolies? How will theregulating agency detect unfair practices, and what instruments will it apply to correct them?Will regulation effectively increase economic welfare?

a What path will be followed in order to correct the existing tariff distortions? How willsubsidies be managed apd what guarantees will the power sector enterprises enjoy concerningthe government's obligations to provide them?

v Are the conditions set out in the law sufficient to guarantee the attractiveness to the privatesector of investments in the electricity industry? What volumes of private capital can bereasonably expected to be incorporated? What legal action will be recessary concerning laborunion contracts if a transfer of enterprises to the private sector is envisaged?

v How will the purported sound management practices be put in place? An initiai effort hasconsisted of setting up management performance contracts: will they be successful inaccomplishing this objective?

V What legal instruments are necessary to achieve managerial and financial autonomy forpublicly owned power sector enterprises? How will the Boards of Directors be integrated?

V What technical support will be required by the regulating agency in order to effectivelycontrol service quality?

V Finally, the overriding concern related to short-term problems cannot be avoided: even if thelaw provides an adequate framework for the future, the sector's financial crisis requiresdetermining a feasible adjustment strategy based upon a mutually agreed policy between thegovernment and the existing enterprises.

Phase 3 of the Power Sector Restructuring Program was developed to build on the foundation set by theDomiciliary Public Services Law and the Electricity Law in order to provide answers to the questionsraised above.

6.04 The study group raised two major concerns with regard to undertaking Phase 3:

V Many of the questions raised above could be expected to surface in Congress during thediscussion of the two, laws, for which well-thought-out answers would be required

V Some of the decisions to be taken as part of the implementation of the Domiciliary PublicServices Law and the Electricity Law would be quasi-irreversible, and any mistakes incurredat this particular moment could lead to regrettable consequences in the future.

6.05 Given the strong linkages between the Domiciliary Public Services Law and the ElectricityLaw, the study group concluded that the support provided in Phase 3 should encompass backing for theinstitutions involved in the implementation of both statutes. This would require an explicit commitmentat the level of the National Planning Department of the Finance Ministry and the Ministry of Mines andEnergy.

Agenda for Tomorrow Page 81

Project Conception

6.06 The project was conceived with two main stages:

v A preparatory stage consisting of an in-depth evaluation of both the Domiciliary PublicServices Law and the Electricity Law, with the objective of bringing to light possible sourcesof mistakes that should be avoided in the implementation of Phase 2 results.

v Addressing the issues identified beforehand through a number of detailed tasks.

6.07 The preparatory stage was conceived to capitalize on the experience of systems that haveundergone similar restructuring processes and identifying, on this basis, the weaknesses of both laws andthe areas where strengthening through complementary rulings was required.

6.08 The bulk of vwork for Phase 3 was to be conducted in the second stage, which was stnaw redaround four tasks:

-V The analysis required for ensuring that the institutional reforms lead to sound financialstructures for the sector's enterprises

v A tariff analysis to define the detailed pricing rules, given that although the law providesbroad principles, their application for control purposes by the regulatory authority requiresprecise guidelines

V A dispatch and transmission study concerned with the operating procedures for the powersystem, particularly for dealing with the competitive market in order to ensure incentives forgeneration enterprises to rtach the m_ium-cost operation

v A legal and corporate organization module to draft the complementauy legislation and todevelop the legal groundwork required to restructure the existing power sector companies.

6.09 The terms of reference for the two stages were to involve a preparatory stage, which wouldbe executed by a group of local and international consultants who would evaluate the two laws and theconclusions contained in the technical reports produced during Phase 2 in terms of their appropriatenessfor attaining the program's objectives.

Fnancial Studies

6.10 Some of the issues to be clarified were financial aspects related to the restructuring of someenterprises (the possible breakup of transmission/generation and generation/distribution); quantification offinancial consequences related to the organization of the bulk energy market; and design of financialmodeling support for the future Energy Regulatory Commission.


Tariff Analysis

6.11 The studies identified as a follow up to the work developed by Task Force 2 during Phase 2consisted of the following:

w Methodology for designing tariffs subject to Regulatory Commission approvalCost analysis for distribution enterprises and distribution charges to be levied on largeconsumers supplied by generators other than the local distributorIncorporation of prices in the bulk energy market and transmission network charges into thetariffsQuantification, targeting, and control of subsidiesOrganization for supporting the Regulatory Commission in the tariff design area.

Dispatch and Transmission

6.12 These two strongly linked areas would be supervised by a single group that would cover thefollowing topics:

o Design of the bidding process for long-term bulk energy supplyor Design of standard contracts between generators and distributors and between generators or

distributors and large consumerso Control procedures related to long-term contracts at the dispatch levelw )Operational application of short-run marginal costs to transactions between generators- Quantification of network chargesw Assignment of network-charge income to owners of different portions of the interconnection

networkDefinition of service quality parameters to be controlled by the Domiciliary Public ServicesSuperintendency.

Legal and Corporate Studies

6.13 Restructuring a number of power sector enterprises to render them responsive to economicand financial stimuli was seen by one group as requiring groundwork in the following fields:

v Legal instruments with which to endow the regulatory office for detecting and preventingmonopolisdc behavior

V Legal instruments for assuring the provision of accurate information on the part of bothprivate and public electricity enterprises

V Definition of the government's role in the execution of the expansion plan and its pardcipationin new projects

V Procedures for controlling enterprise performance


l Legal and financial feasibility of separatng generation from transmission and generation fromdistribution

l Legal procedure for driving enterprises into receivership and control on the part of theDomiciliary Public Services Superintendency

v Bylaw changes for specific enterprises in order to accommodate the provisions of theElectricity Law and/or the Domiciliary Public Services Law

v Design of concession contracts for distribution and definition of the obligations of distributionenterprises concerning the provision of information.

BIBLIOGRAPHY

CNE, 1991. "Bases de lapolitica disefiadapor la administraci6n Gaviriapara el sector electrico ".

CNEand ESMAP, 1991. Evaluaci6n del sector electrico colombiano 1970-1990 Proceedings of the seminaron "Evaluacion del desempefio del sector electrico colombiano 1970-1990" in Santa Marta,Colombia, 13-15 March.

CNE and ESMAP, 1991. Modelos internacionales de organizaci6n del sector electrico. Proceedings of theseminar on "Organizaci6n institucional del sector electrico: La experiencia internacional"in Paipa, Boyacd, Colombia, 31 May to 1 June.

CNE, ESMAP andAID, 1991. Privatizaci6n del sector electrico: La experiendia internacional. Proceedingsof the seminar on "La participaci6n privada en el sector electrico colombiano " in Cartagena,Colombia, 28-30 August.

CONPES, 1991. "Estrategia de reestructuracion del sector electrico ", Document DNP-2534-UINF-DELEC,21 May.

Covarrubias, Alvaro J. and Suzanne B. Maia, 1994. R&forms and Private Particivation i. the Power SectoralectdLainAmericnadCaribbe andlndustrialize,dCotriJ, LATI Regional Studies

Program Rep. 33, The World Bank, March

ESMIP 1991. Colombia. Power Sector RructurgProgram. Phase 1, Consultant Draft Report, WorldBankIUNDP, September.

ESMAP 1992. Qlombia: Power Sector Restructwing Prog= Phase 2, Consultant Draft Report, WorldBankIUNDP, Januivy.

ESMAP 1993. Poland. Enera= Sector Restructuring Program. Vol 1: Main Renort and Vol, 4: TheEletit and Ligite Subsector Report No. 153/93, World Bank/UNDP, Januaiy.

ESAAP, Task Force 1, 1991. "Sector electrico colombiano: Problemas y perspectivasfinancieras 1991-2000 -Anexo: Sintesis de informaci6n del sector electrico colombiano- proyeccionesfinancieras periodo 1991-2000 ", November 29.

ESMAP, Task Force 2 1991. "Reestructuraci6n sector el6ctrico-Avance sobre el anrAlisis institucional yfinanciero", Documento de Trabajo, 15 February.

FEN, 1991. "CiJras proyecciones financieras del sector electrico Colombiano -Periodo 1991-2000",Vicepresidencia de Planeacidn, Divisi6n de Andlisis Sectorial, November 27.

Glynn, Lenny 1990. "Privatization fever hits Latin America, " Global Eno= (U.S.), Vol. 4 pp: 49-56.Privatization in Argentina, Brazil, Chile, and Mexico, March

84


Gutierrez, L.E. 1989. "Economic Analysis of Power Loss Reduction Projects. " ESMAP/OLADE,Proceedings of the Regional Seminar on Electric Power SWstem Loss Reduction in theCaribbea. Kingston, Jamaica. July 3-7.

Guttierrez, L.E. 1992. Infrastructure Maintenance in LAC: _The Costs of Neglect and Options forImprovement: Vol. 2: The Power Sector Regional Studies Program Report No. 17. The WorldBank. June.

Ochoa, Francisco 1993. "Modelo Colombiano ': en Luis E. Gutierrez (ed) 1993. Primer seminario sobrereformas en el sector elkctrico Boliviano. Conference Proceedings, ESMAP, La Paz, BoliviaMay.

Presidencia de la Republica, 1991. La revolucion pacifica, plan de desarrollo econ6mico y social 1990-1994, Departamento Nacional de Planeaci6n, Bogota, October.

Ribi, Rene, Trevor Byer and Jean Francois Landeau 1990. Colombia: The Power Sector and the WorldBank 1970-1987. Operations Evaluation Department Report No. 8893, June 28.

The World Bank Colombian Power Sector: Problems and Perspectives 1991-2000.

The WorldBank 1990. Colombia-he Power Sector and the WorldBanik 1970-1987 Operations EvaluationDepartment, Report No. 8839, 28 June.

The World Bank (LA TIE) & OLADE 1991. The Evolution. Situation and Prospects of the Power Sector inLatin America and the Caribbean (LAC) Countries. Report No. 7, Regional Studies Program,Vol. I and II, August.

Vergara Munarriz, Luis F. 1991. "Hacia un sector electrico colombiano eficiente y abierto a la inversi6nprivada", IBPD, The World Bank (LA TIE) & OLADE, the Evolution. Situation and Prospectsof the Power Sector in Ltin Ameria and the Caribbean (LAC) Countries. Vol. II, August.

ANNEX A. INSTITUTIONAL DESCRIPTION

A.O1 Through the 1950s a large number of power companies were set up by local governmentalauthorities aud, lacking interconnection with each other, were operated independently in response toregional needs. With encouragement from the World Bank, the Government persuaded the regional powercompanies to break with tradition and pool their resources in a shared effort to develop the country's largehydroelectric potential. To accomplish this, Interconexi6n Electrica S.A. (ISA) was created as anindependent, national generation and interconnection company, of which the shareholders now include allthe large municipal power utilities and the Government-owned power companies. At present, publicelectricity service is provided by:

v Municipally owned companies which are independent vis a vis the National Government, ofwhich the largest are Empresa de Energfa de Bogota (EEB), Empresas Nblicas de Medellfn(EPM) and Empresas Municipales de Cali (EMCALI).

Figure 1. National enterprises such as Instituto Colombiano de Energia Electrica (ICEL), Corporaci6nAut6noma Regionaldel Cauca (CVC) andthlCe Corporacion Figure 1-A: Colombian Power Sector - Corporate SketchEl6ctrica de la CostaA t I a n t i c a of National planning(CORELCA). and E"neg(H) Department (DUD)

o 24 local distribution r)PEN N~~ationtal U c o m p a n i e s IUL r

('electrificadoras") Commission

which are owned ' .) .Meither by ICEL or byCORELCA; some ofthese companies ownand operate smaller ICBL CI1X

generat stations but Blectrificadoras: Electrificadorass

their principal purpo 8antander Atlanitco

is to provide service to Solma Cdrdoba

their Departments CwbquetS ajla

(states). C/marca (CBLGCJ SucreChoo6 Ban Andths

V A generating and Kota eogivat

transmission company, ltataionI

ISA, the main Caldas (CHBC)

shareholders of which Aut(oqula (BADE)

are EEB, EPM, CVC, o0lnSoICEL and CORELCA;and, finally, CHB(Corporaci6n Hidroel6ctica de Betania) which is a power plant owned by ICEL, some of itssubsidiaries, and ISA.

86

Annex A: Instutional Description Page 87

A.02 Figure I-1 shows the organization of the principal institutions in the Colombian Power Sector.The nonoperational institutions are the Ministry of Mines and Energy, the National Planning Department(DNP). the National Tariff Commission (JNT), the National Energy Commission, the Municipalities andFEN (a Financial Energy Sector Corporation).

A.03 The Ministry of Mines and Energy owns part of the sector directly through ICEL andCORELCA. EEB and EPM, currently the largest utilities, are controlled by municipal governments. CVCreports to DNP, the National Planning Department. A brief description of each principal utility follows.

A.04 E (Interconexi6n El6ctrica S.A.). Established in 1967 as a public corporation, ISA hasprovided a cohesive framework for sector development by creating a national grid capable of transmittinglarge amounts of power at 220kV and 500kV. By building large hydro power plants on behalf of itsshareholders, the latter have been able to share the costs and benefits of the country's low cost hydropowerpotential. Headquartered in Medellfn, ISA is administered by a Shareholders' Assembly, an 8-memberBoard of Directors and a General Manager supported by a competent technical staff. The Board ofDirectors seats the Minister of Mines and Energy, the Minister of Finance and the director of the NationalPlanning Department. The odher members are elected by the shareholders' Assembly. The Assembly mustact on all major issues and, to ensure that decisions are based on a consensus, ISA's bylaws specify thatthey be adopted with the concurrence of 75% of the shares. The holdings of ISA's shareholders aredivided into "shares" which provide voting rights and "entitlements" which are equity proportional toenergy holdings in ISA's power plants and do not provide voting privileges.

A.05 EE (Empresa de Energia de Bogota). EEB is owned by the Municipality of Bogoti. Itgenerates, transmits and distributes electricity. It serves more than IM customers in metropolitan Bogotaas well as some surrounding towns. It sells bulk power to an ICEL subsidiary, CELGAC, whichdistributes electricity in the Department of Cundinamarca. EEB is adminstered by a 7-member Board ofDirectors and a General Manager. The mayor of Bogota serves as the Chairman of the Board. TheGeneral Manager is nominally appointed by the Board, subject to the mayor's approval who, consequently,is the person who de facto appoints him.

A.06 1PM (Empresas Piblicas de Medeilfn). EPM is owned by the Municipality of Medellin. Itprovides power, water, sewage and telephone services to the city of Medellfn and its environs. It servessome 0.5M electricity consumers and sells in bulk to the ICEL subsidiary (EADE) which distributeselectricity in the rest of the department of Antioquia. EPM is headed by a 7-member Board of Directorschaired by the mayor of Medellin, and a General Manager.

A.07 CYVC (Corporaci6n Aut6noma Regional del Valle del Cauca). CVC is an autonomousmultipurpose State corporation under DNP. CVC is responsible for developing the Cauca Valley; for thispurpose it manages irrigation and flood control projects, it has built power plants and it distributes energyin the Valle Department. CVC sells bulk power to EMCALI, the municipally-owned electricity distributorin the city of Cali. CVC is managed by a 7-member Board of Directors and an Executive Directorappointed by the President of the Republic.

A.08 IMML (Instituto Colombiano de Energia Electrica). ICEL is a government institute whichreports to the Ministry of Mines and Energy. It can be visualized as a holding company which has amajority interest in 15 subsidiaries which serve the different Departments in the country. Its onl, directoperations consist of providing services to some small towns and rural areas not served by either itssubsidiaries or other utilities. ICEL is managed by a 5-meiaber Board of Directors chaired by the Ministryof Mines and Energy and a General Manager appointed by the President of the Republic.


A.09 CORELCA (Corporaci6n El6ctrica de la Costa Atlantica). CORELCA has been responsiblefor power generation and transmission in 7 departments of the Atlantic Coast. It has a majority interestin its subsidiaries. However, unlike ICEL, CORELCA owns and operates a number of large all-thermalpower stations together with transmission lines within the Atlantic region. It sells bulk power to itssubsidiaries. CORELCA is administered by a 7-member Board of Directors and a Managing Director.

A. 10 CHBli (Central Hidroelectrica de Betania). The Betania power plant was built with capitaI rromICEL, somne- of its subsidiaries, and ISA. For this purpose these three companies created CHB as a newentity within the sector.

A. 11 EMCALI (Empresas Municipales de Cali). EMCALI supplies water, power and telephoneservices to the cities of Cali, Yumbo and Puerto Tejada. Despite being the third-largest distributor ofelectricity in the country with around 0.3M customers, it has not been actively involved in the power sector(its interests being indirectly represented by CVC who also sells it energy in bulk); in recent yearsEMCALI has been incorporated informally to the sector's planning and financial analysis committees butit has no formal links to it.

A. 12 ICEL and CORELCA subsidiaries ("electrif_cadora". Colombia's political division coilsistsof territorial units called "Departments". Most of the electrificadoras were created in the 1950s to provideelectricity service in the departments. They are majority owned either by ICEL or by CORELCA but theyretain a regional character in their management.

Non-operational Institutions

A. 13 DM (Departamento Nacional de Planeaci6n). The national planning office studies, approvesand submits to Congress the budget of all government institutions. It is also in charge of channelling mostplans and decisions that require Cabinet approval.

A. 14 IC (Comisi6n Nacional de Energfa). The National Energy Commission was created in 1989and became operational in late 1990. It is in charge of coordinating energy sector planning and approvingenergy sector investment decisions such as the building of hydro power plants or the establishment of a newoil refinery. CNE is integrated by the Minister of Mines and Energy, the head of DNP, the President ofECOPETROL (the national oil company), the President of CARBOCOL (the principal public coalcompany), the rGeneral Manager of ISA, the director of the Nuclear Affairs institute and two permanentmembers from power sector companies. The Commission acts on the advice of two independent advisorswho work for the Commission on a fixed contract basis for 2-year periods and who have no laborrelationships with it.

A. 15 IN (Junta Nacional de Tarifas). The National Tariff Board was created in 1968 for regulat-ing public service prices. It depends on DNP and it is composed by the Director of DNP who presides itand three members who are appointed by the President of the Republic. Until 'he early 1980s JNT's rolewas limited to rubber-stamping requests for tariff adjustments. Since then it has become active in forcingcompanies to adopt new tariff structures, particularly in the electricity subsector.

A. 16 FEN (Financiera Energ6tica Nacional). PEN is a public fnancial enterprise. It was createdin 1982 for channelling credits to power sector companies; in 1990 its charter was enlarged to encs,mpassthe oil and coal subsectors. It has operated by channelling power sector fiunds obtained from the World

Annex A: Institudonel Descripdon Page 89

Bank, from cofinancing and from other foreign sources; it has also raised fuaids in Colombia's financialmarkets which it has lent to the sector's utilities.

Legal Constraints

A. 17 Institutional reforms may require considerable legal groundwork. This section presents anoverview of the legal status of the different institutions and the degree of difficulty in reforming them.

A. 18 Public institutions have the following classification relative to the composition of their equity:

SW Mixed corporations have both public and private fundsw Industrial and Commercial State Enterprises have more than 90% public fundsw Public Establishments and Regional Corporations are 100% government owned.

A. 19 According to the administrativt level they arc classified as na1iQn1 when central governmentfunds are part of their equity, as dpatmen-levl when state (department) fund.- are part of their capitaland as muiial when only local townships capitalize the enterprises. The consequence of this classifica-tion has to do mainly with the supervision of these companies: the Ministry of Mines and Energy onlycontrols national-level enterprises and has no power over department-level or municipal companies.

A.20 Enterprises are also classified according to whether they are dir=c, i.e. created by law orinirect, i.e. created by two or more other enterprises. Reforms hat require a change in a law arenaturally more difficult to implement. "Direct" enterprises in the power - ctor are: ICEL, CORELCA,CVC, EEB, EPM and EMCALI. ICEL and CORELCA would require Congress to enact a law in orderto reform them; EEB, EPM and EMCALI would require City Council ordinances.

A.21 ISA is an Industrial and Commercial State Enterprise but although it was formed by a numberof public companies, its bylaws are regulated by a law recently enacted by Congress. Its shareholdersassembly is not empowered to change the basic nature of the enterprise.

A.22 The group of ICEL and CORELCA subsidiaries (the "Electrificadoras") exhibit the followingfeatures:

g r they are all "indirect" in nature and their bylaws can be modified by their shareholders.w most of them are "national" (although the extent of their operations is eminently regional)

with the exception of Guajira, Cesar and Magangu6. The latter are all department-levelinstitutions.

w they are roughly evenly divided in "mixed" capital institutions and Industrial and CommercialState Enterprises (ICSEs):I Mixed: Cauca, CELGAC, Choc6, Meta, Nariflo, Tolima, Atlantico, Bolfvar, C6rdoba,

Magdalena, San Andr6s, Sucre.8 ICSEs: EADE, Boyaca, CHEC, Caqueta, Huila, Norte de Santander, Santander,

Guajira, Cesar, Magangu6.

ANNEX B. HISTORICAL BACKGROUND

Economic Baclkground: 1970-1990

B.01 The 1960s were a decade characterized by significant demographic activity: hig' populationgrowth rates together with major migration from the counftryside to the cities. The economy yielded rela-tively high GDP growth rates which were, however, diminished in per capita terms due to the constantpressures of population growth. The prices of coffee, the principal export product, were uniformlydepressed which translated into a pe.:nanent scarcity of foreign exchange; the latter was one of theprincipal problems of economic policy throughout this period.

B.02 In terms of institutions, the 1960s were a period of public sector reorganization, and planningwas institutionalized with a clear objective of seeking coherence between government plans and an efficientallocation of resources. In operative terms, the 1960s also saw the development of public decentralizedinstitutions which became executors of government plans instead of the Ministries. The lat.er kept policy,regulation and sector planriing functions with, however, meager resources vis A vis their new operativecounterparts.

B.03 Economic policy in the early 1970s continued to be overshadowed by the demographicproblem. Accordingly, government sought to find solutions to unemployment and housing problems, theexcessive growth of cities and the rich/ poor gap. The principal strategies for coping with these issuesconsisted of (a) increasing productivity in urban areas and using the construction industry as a leader injob-creation and (b) developing export-oriented industries to cope with the permanent scarcity of foreignexchange.

B.04 These policies were largely successful, and GDP grew at an average rate of 6.5 % between1971 and 1974. Per capita income averaged a growth rate of 4.2%. Exports grtw more erratically (4.3%in 1971, 12% in 1972, -3.3% in 1974) but averaged 5% for the period. On the other hand, demandpressure as well as government spending led to economic bottlenecks and increased inflation which wentfrom 14% in 1971 to 26% in 1974.

B.05 In 1975 and 1976 the first oil crisis was felt by the economy as the price of its oil derivativeimport. mainly gasoline) went from US$4.5/BBL to US$12.6/BBL; additionally, the country ceased tobe an exporter of crude and became an importer. Consequently, the oil bill soared from 3MUS$ in 1974to 121MUS$ ir. 1976.

B.06 Under normal circumstances the oil crisis would have meant a catastrophe for the economy;however, in 1975 the price of coffee (which was normally below lUS$/lb) increased to a level aboveUS$1.50; in 1976 it averaged US$2.2/lb having reached a peak in excess of US$3/lb. Coffee exports wentfrom 672MUS$ in 1975 to 996MUS$ in 1976, 1512MUS$ in 1977 and 2026MUS$ in 1978. Total exportsincreased from 1700MUS$ in 1975 to 3200MUS$ in 1978.

B.07 Due to the balancing effect of coffee exports, the first oil crisis had a negligible effect on itheeconomy: GDP grew on average 4.9% between 1974 and 1978 (8.5% in 1978), and per capita incomeincreased by 2.9% per annum (6.4% in 1978).

B.08 On the monetary front, inflation maintained a high level of around 27%, fueled by foreignexchange being converted into local currency. On the other hand, the exchange rate did not keep pace with

90

Annex B: Histo,ical Background ?age 91

inflation and there was a constant under-valuation of the Colombian peso with respect to the US dollar (theblack market exchange rate was consistently below the official rate).

B.09 During the 1979-1982 period government plans shifted in emphasis given that the mainproblems of the first years of the decade were not present: population pressures had decreased significantlywith growth rates changing from around 2.8% in the late 60s to 2%, foreign currency was no longer scarceand internal migration had stabilized.

B.10 1981 marked a shift in the growth trends of the country and a long period of economicstagnation set in. This shift was associated with the expected decrease in coffee prices together with theinternational recession caused by the second oil crisis. As a consequence, GDP growth decreased from5 % in 1979 to 0.2% in 1982 and per capita income decreased by 1 % in 1982 for the first time in more thana decade.

B. 11 Despite the recession, inflation continued at levels of around 26% whereas the exchange rateonly increased by about 11 % in 1979-80. This long period of wiLder-valuation of the currency, which hadstarted in the mid 70s, led to the gestation of a foreign currency crisis as the need for earning more dollarsrequired a more competitive exchange rate. In 1981 and 1982 the exchange rate grew at a rate of around17%, increasing to 23%, 28% and finally 40% in 1983, 1984 and 1985, respectively. During the final fouryears this rate was significantly above inflation with the objective of regaining competitive ground inforeign markets.

B. 12 During the 1982-1985 period, GDP growth was low but it picked up in 1984 and 1985 (3.4%and 3.1 %). In 1986 the combination of exchange rate adjustments which promoted exports and theemergence of the country as an exporter of crude led to a GDP growth of 5.1 %; the growth was led byexports which increased by 44%. The devaluation of the peso continued at a rate of 39% per annum.

The Power Sector

B. 13 In Colombia, as in most countries, electrification started at the turn of the century, at a verysmall scale, in the main urban centers. Private coinpanies provided this new service. Towards the middleof the century, the general trend towards public ownership of public services led, in Colombia, to theacquisition, mostly by municipalities, of the assets of the power companies. EEB, EPM and EMCALI arethe present-day successors to these enterprises.

B. 14 In 1946 government created ELECTRAGUAS, ICEL's predecessor, as a dependency of thethen Ministry of Development to promote the development of power and irrigation in the country. In the1950s ELECTRAGUAS founded the majority of the regional electricity companies (the current ICELsubsidiaries "Electrificadoras").

B. 15 In the 1960s, following the institutional changes in the rest of the economy, (a) ICEL wasformally created in 1968 and its responsibilities limited to the development of electric power; (b) ISA wasalso created in 1967 (largely at the World Bank's insistence) with the ambitious objective of interconnectingthe principal markets and planning, commissioning and operating the future power plants; (c) CORELCAwas created in 1967 and took over ICEL's responsibility for the local "electrificadoras" on the AtlanticCoast. In 1968 the Government created the National Tariff Board (Junta Nacional de Tarifas -JNT-) whichwas to oversee public utilities' tariffs in general and electricity rates in particular.


B. 16 The 1968-1973 period was characterized by a consolidation of ISA through (a) the buildingof the 220kV initial intercomection grid between EEB, EPM, CVC and CHEC, (b) the start of constructionof the 500MW Chivor I power plant owned by ISA and (c) the development of the first integrated powerdevelopment plan. In 1971 the interconnection lines started operating under ISA using a commercialscheme which, with some changes, has survived until the present time.

B. 17 In 1974-76 a crisis developed which was to become the norm, under one form or another,of relations between power sector enterprises for the next 15 years. Sharp increases ir. inflation (from 16%to the 23-26 % levels) during 1973-74 which were not associated with commensurate tariff adjustments, ledto a quick and dramatic deterioradon of all the utilides' financial position. Woist affected was ISA, as itstopped receiving the proper contributions from its shareholders, themselves in dire straits. In early 1975,after the World Bank had informally suspended disbursements to the power sector, tariffs were readjustedand ISA's shareholders paid up their arrears. However, the tariff readjustment did not allow the udilitiesto catch up with losses incurred in previous years and by the end of the year the situation was even worse:shareholders owed ISA about US$17 million and ISA owed its contractors over US$25 million.

B.18 An obvious consequence of this financial crisis was the construction delay experimented inthe development of the Chivor power plant of ISA as well as the Guatape power plant of EPM. Both plantswere commissioned in 1977 and 1978, about two years late. Therefore they could not help avoid supplyshortages which occurred in 1976-1977, amounting to 5-10% of requirements.

B.19 Overshadowing the financial and energy supply crises was the subject of plant ownership.This issue can be traced to the origins of ISA when its initial charter made provisions for the constuctionof certain power plants by its shareholders even though it assigned a virual monopoly to ISA for all futurestations. This state of affairs was challenged foremost by EPM and in 1976 a new agreement wasnegotiated which assigned the construction of power plants to ISA, EEB, EPM, CVC and CORELCA, thusappeasing che building aspirations of the regional utilities.

B.20 Despite these agreements, the supply situation for the early 1980s loomed more menacingand the need for undertaling additional plant construction became urgent. This process involved (a) thehasty design of an emergency plan based upon thermal plants which was ultimately not implemented and,more significantly, (b) the assignment of a massive construction program involving 2700MW to ISA'sshareholders. The latter decision, known as the "Acuerdo de Cali" effectively locked the power sectoronto a course that would ultimately lead to a decade of financial crisis.

B.21 In 1980 and 1981 the supply deficit, anticipated in 1977, erupted and led to shortfalls of upto 18 % of peak demand, equivalent to about 3.5% of energy sales. In parallel, the financial situationdeteriorated and in early 1980 ISA was again shore of fimds from its shareholders. This pattern dominated1980, 1981 and 1982. Again at the start of 1992, severe supply shortages occurred because a combinationof a number of factors. The prolonged dry season, mismanagement of water reservoirs, and poormaintenance of thermal generating plants reduced generation by more than 20% of the installed capacity.The government instituted a rationing program during the 1992-93 drought which cut residential consumers(with a share close to half of total consunption) for up to ten hours a day, and industrial users were askedto cut back their demand.

B.22 The supply shortages of 1980-81 a fur more serious development: the weakening of theColombian economy, caused both by the end of the coffee boom and the starting recession of the worldeconomy led to a slowing down of demand at a moment when, as noted above, the power sector had

Annex B: Historical Backgroand Page 93

embarked on a massive investment program. This slowing down of demand was only belatedly recognizedin 1984 when the major construction projects were already underway. Furthermore, the government, inlate 1982, had imposed a freeze on tariffs which further exacerbated the fncial difficulties of the sector.

B.23 Both supply shortages of 1980-81 and 1992-93 pressure the govermnent to address the long-term issues of the sector. The successive swings between supply shortages and surpluses also question thesector's ability sector to plan its operations and expansion.

B.24 In order to enhance the compeUtiveness of Colombian products, the government acceleratedthe devaluation of the peso in 1984 and particularly in 1985 and 1986. This dramatically increased thepower sector's debt and its servicing. Unfortunately, this also coincided with a tightening of the financingtenis for the new projects which led to even higher amortization requirements. The inability of the sectorto service its debt led it to acquire debts with the Government which effecdvely became a reluctant lenderof last resort. This pattern has dominated the sector's performance since 1985.

ANNEX C. INVESTMENT PLANNING

C.OI Long term investment planning is performed, at present, primarily by ISA. The processinvolves three basic stages:

c Gathering and analyzing basic information: demand modeling and demand forecasts, andcomplementing the resource inventory (prefeasibility and feasibility studies of power plants).

A long term planning phase which yields a basic least cost expansion path for generation(including projects with prefeasibility studies) and transmission.

Medium and short term planning, involving projects having advanced to the feasibility stage,where specific future plants are chosen for construction.

C.02 When plants are to be built by ISA, its shareholders contribute equity during the constructionperiod. The aggregate amount of these equity contributions is roughly the non-financed portion of theproject; the equity contribution of a given shareholder corresponds to the expected use it will make of theenergy and capacity issuing from the future plant.

C.03 In exchange for its equity contributions, a shareholder receives a preferred option to purchasehis corresponding share of energy in the project at the prevailing bulk tariff at the moment of purchase.If the option is not exercised, ISA can commercialize the corresponding capacity with another buyer.

C.04 Once a sequence of projects has been identified, it is presented to the Board of Directors andto the Shareholders' Meeting of ISA. If approved by ISA's shareholders, the projects are submitted to theEnergy Board (CNE) which can veto the plan; if approved by CNE, the projects are submitted to theNational Planning Department and, ultimately, to the cabinet-level National Economic and Social PlanningCouncil (CONPES).

C.05 At the purely technical level, there has been no controversy with respect to ISA's competencein putting together the expansion plan. However, there is, in many instances, a project lobbying effortwhich originates at the level of local politics, usually within the region where the future plant is to be locat-ed. These political forces gather strength over the years and ultimately acquire influence within ISA'sshareholders' meetings.

C.06 The National Energy Commission (CNE) was put in place as a means for preventing theconstruction of uneconomic projects. So far, given the swings between supply deficits and surpluses, thecommission's nominal power has been increasingly questioned.

C.07 The -introversy surrounding project financing arises in good measure due to the coercivecharacter in ISA's statutes: the equity contributions are assigned by ISA's planning departnent and, insome cases, against a utility's will. This, not surprisingly, is the case with expensive projects where onlyone system may be interested and where the others would avoid investing. The coercion results from thefact that without contributing the equity payments, there is a risk that the shareholder may not be able tomeet his demand during some future period.

94

ANNEX D. OPERATIONS PLANNING AND SYSTEM DISPATCH

D.01 This annex describes the procedures used by ISA to assign generation on a medium and shorttime basis within the interconnected system. At this level, all resources for generation are deterministic,i.e. capacities are fixed and the only random variable to be taken into account is the hydrological variation.

Seasonal Dispatch

D.02 The time fr; ised for the allocation of medium term generation comprises the 'season".For operational purposes, true year is divided into a dry season (December to April) and a wet season (Mayto November).

D.03 The objective of medium term dispatch is to deternine how much energy should be purchasedor sold by each subsystem during a given season. In practical terms, this translates into how much energyand capacity each subsystem purchases from ISA.

D.04 The procedure used for seasonal dispatch consists of analyzing an energy balance of eachsubsystem. The basic data are

w a demand forecast for the seasonor the available generation resources of each subsystem which comprise:

8 its own power plants, andd its share in jointly owned power plants (either in ISA or in the Betania power plant).

D.05 Each system is dispatched such that its forecast demand can be supplied with a given levelof reliability. Any excess demand is supplied if there is available energy, with additional purchases eitherfrom ISA or eventually from other subsystems. The resulting imports are taken as fixed purchasecomnmitments for the season.

D.06 The tariff applied to these bulk purchases is regulated by the National Tariff Commission(JNT). Although the bulk tariff should roughly reflect long run marginal generation costs, in practice itslevel has only been a fraction of the latter; however, it is in the p of being readjusted to a "correct"value.

D.07 Once the needs for each subsystem are determined, these become in effect "take or pay"contracts for the season under study.

Daily Dispatch

D.08 The daily and hourly dispatch of the system is performed centrally by ISA. The procedureused consists of assigning generation to the different power plants for minimizing overall system costs.This dispatch takes into account the long and medium term consequences of assigning generation todifferent plants given that the system has a significant seasonal and multiannual hydro storage capacity.

D.09 The take or pay contracts are not taken into account within this cost minimizaon procedure.They intervene only at an accounting level, where the difference between "expected" (i.e. seasonal a priori

95


generation) and real dispatch is explained by the optimization process. In the actual dispatch, high costresources of one system may be displaced by low cost resources of another system. The savings generatedin this process are split between the buyer and the seller on the basis of differences between operatingcosts.

D. 10 The procedure for determining the short run savings and the corresponding purchases andsales is performed ex post. In this manner the optimal dispatch of the system does not depend either onthe property of any given plant or on the medium term (seasonal) commitments.

D. 11 Figure A5-1 illustrates sales and purchases between power sector companies in 1989. Mostsales to ISA (around 4TWh) correspond to short term energy which originates mainly in EPM. Long term(i.e. seasonal) sales from ICEL and CORELCA to ISA are negligible. Most ISA sales correspond toseasonal contracts, principally to EEB and ICEL. The sales to EPM, although they appear as seasonal,respond primarily to the rule of forcing companies to absorb 75% of their entitlements in ISA's generation.

Issues

D. 12 The previous description is a simplified presentation of a highly involved set of calculations.The final result is that the short term allocation of resources in the interconnected system is done at leastcost. However, a number of problems appear at the operating level for managing special circumstances,namely:

o situations of supply shortages and excess demand where rationing measures are needed.w situations of excess supply.or the pricing of short term purchases where the cost of stored hydro energy depends on the

implicit "cost of rationing".

D. 13 In the case of excess demand for the system as a whole (e.g. during a prolonged drought),it may be that a given subsystem can supply its demand with its own resources. However, the regulationsgoverning the operation of the system under these circumstances require that rationing be shared betweenall the sub ystems.

D. 14 In the case of excess supply, such as the current situation, the "normal" application of theprocedure for determining seasonal contracts would lead to most subsystems purchasing only what theystrictly need to fulfill their customers demand. Consequently, most excess supply would be concentratedin the exporting systems, and in ISA in particular. Under such circumstances the latter's revenues wouldbe drastically curtailed and therefore a rule was instituted whereby ISA consumers must use at least 75 %of their share in ISA's power plants, even though they may not need it. The system most harmed by thisrule has been EPM.

D. 15 Lasdy, the problem associated with the 'rationing cost" lies in that the commercial rulesimplicitly allow a subsystem to either buy energy under a seasonal contract or to purchase it short term.In cases in which the latter is lower cost (due to a low value of stored water), some subsystems can benefitfrom overstating the seasonal availability of their generation equipment and "cheating" within the existingcommercial structure. The solution to the problem would consist of requiring long term contracts (forseveral years in advance) instead of the current seasonal approach.

ANNEX E. SPECIFIC INSTITUTIONAI, ISStJES

The. Structure and Role% of ISA, ICEI, and COREILCA

A) I) Thlese iltree coiipaniies have in common tIhe fact ihlt they were thc creation o'' the cenlralgovernment (ICEIII, CORlELCA) or, as in ISA's case, that ot reluctamt regional powei sector comtipaniesprodded by the governmllent aNd the World Bank. They are also the sector entlities whose roles are iot-eopen It) question; the followinig sectionis provide an examiiiation ol' the issr .s that arise in connection withthem.

'.02 Thle role and structure of ISA lhave been since its inception, tndi continie to be, a pervasivepoint of contention in the system at the investment level, at the operations levei, anid froni the tarifl'standpoinit. 'I'he problems surrounding ISA's structure and role were identified in the OlUD) report as:

w the difficulties with ISA becoming the sole developer of major generation additiolis to thesystem,

w the shortcomings of the investment decision making process.ow the role of ISA's bMMlk tariff as an economic signal.w ISA's poor resource generation and liquidity record.

Any new institutional alternative must address these problems and must also take into account the positive(in the sense of being commonly accepted as successful) aspects of ISA's performance, mliamely:

w its information-gathering rolew its system-level planning analysis, including the eommissioning of feasibility studieswt its system dispatch function

E.03 ISA's supposed monopoly on new power plants have been discussed beforehand: a foregoneconclusion is that its exclusivity insofar as plant ownership is concerned cainot be sustained and that newinstitutional and commercial approaciles are required for their development. This aspect of the problemshould be aadressed concurrently with the possibility of restricting ISA's role to the functiois it performssuccessfully, i.e. as an interconnection enterprise. In relation to the investment decision making, althoughits planning role has been accepted, the process by which new power plants are chosen to) conie on line,i.e. the investment decision making procedure, should be stripped of regional bargaining characteristicsand made more transparent.

i.04 ISA's bulk tariff level and its failures with respect to resource generation are strongly linkedand share structural features due to the shareholders' lack of identification with the company's objectivesand their dual role. These aspects are also linked to the plant cornstruction issue giveni that it is the latterfunction which has led to ISA's resource generation difficulties.

Pi.O5 The restructuring of ICEL and its subsidiaries has been studied periodically since the late1970s without any visible progress. ICEL's activities can be analyzed (a) as an electricity company, (b)as the major shareholder of its subsidiaries and (c) as a government agency in charge of developing policyand implementing electrification programs on a national scale.

97


E.06 As a power enterprise, ICEL has limited itself to dhe direct operation of small power plantsin isolated regions. Otherwise, power plants and transmission lines which are directly owned by theInstitute are built through contracts with its subsidiaries; these .ssets are also operated through AOM(Administration, Operation and Maintenance) contracts with the subsidiaries. Otherwise, ICEL's operativefunctions are concentrated in the representation of its subsidiaries' interests before ISA as well as thecommercial operation and dispatch of their assets with relation to the rest of the system; in this way, ISA'sdispatch and billing involves ICEL as a block and does not require it to negotiate with individual subsidiar-ies. Finally, ICEL's planning functions are weak and have been limited to the administration of programsor projects which arise from other government activities.

E.07 As a holding company and the major shareholder in its subsidiaries, its supervision andcontrol functions show the following balance:

a' Most of the "electrificadoras" do not possess sufficient technical, administrative or financialexpertise for guaranteeing an efficient performance.

v ICEL's control in these areas has improved in latter years but still lacks effectiveness. Inparticular, the performance of certain subsidiaries has deteriorated due to inadequatemanagement and ICEL's lack of determination in taking action to control it.

ZICEL provides weak technical backup to subsidiaries who require it, except for the projectswhich it contracts with them. On the financial front it limits itself to following the budgetingprocess and approving their financial statements with little or no planning support.

v In the administrative area, ICEL has been instrumental in reorganizing its subsidiaries andunifying the process of labor negotiations, loss control programs and the management of itsreceivables However, it only performs a perfunctory antd apparently ineffective auditingfunction.

E.08 With respect to ICEL's subsidiaries, they present a diverse picture: a few of them are solidcompanies with good technical and management skills whilst others, as noted, are weak and their existenceis only justified on the grounds that their service territory corresponds to a political subdivision of thecountry. Of the latter a few have potential in the sense of counting with an adequate base of 'good"markets (i.e. urban and industrial) whereas others are inherently inviable from a financial point of viewdue to the predominance of a rural, domestic, customer base.

E.R) The case of CORELCA is similar in many ways to that of ICEL. However, CORELCA isconsiderably more active in its function as a power company: it owns and operates the larger plants andtransmission lines on the Adantic coast and sells bulk power to its subsidiaries. It also represents theregion's interests before ISA both at the Board and operations levels. Its subsidiaries present, as in the caseof ICEL, a mixed picture of a few efficient companies together with inherenly weak ones.

Joint UNDP/World BankENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)

LIST OF REPORTS ON COMPLETED ACTIVITIES

Region/County Activity/Report Title Date Number

SUT-SAHARAN AFRICA (AFR)

Africa Regional Anglophone Africa u alvsirj Workshop (English) 07/88 085/88Regional Power Seminar on Reducing Electric Power System

Losses in Africa (English) 08/88 087/88Institutional Evaluation of EGL (English) 02/89 098/89Biomass Mapping Regional Workshops (English - Out of Print) 05/89 --Francophone Household Energy Workshop (French) 08/89 103/89Interafrican Electrical Engineering College: Proposals for Short-and Long-Term Development (English) 03/90 112/90

Biomass Assessment and Mapping (English - Out of Print) 03/90 --Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG

Power Rehabilitation and Technical Assistance (English) 10/91 142/91Benin Energy Assessment (English and French) 06/85 5222-BENBotswana Energy Assessment (English) 09/84 4998-BT

Pump Electrificatian Prefeasibility Study (English) 01/86 047/86Review of Electricity Service Connection Policy (English) 07/87 071/87Tuli Block Farms Electrification Study (English) 07/87 072/87Household Energy Issues Study (English - Out of Print) 02/88 --Urban Household Energy Strategy Study (English) 05/91 132/91

Burkina Faso Energy Assessment (English and French) 01/86 5730-BURTechnical Assistance Program (English) 03/86 052/86Urban Household Energy Strategy Study (English and French) 06/91 134/91

Burundi Energy Assessment (English) 06/82 3778-BUPetroleum Supply Management (English) 01/84 012/84Status Report (English and French) 02/84 011/84Presentation of Energy Projects for the Fourth Five-Year Plan(1983-1987) (English and French) 05/85 036/85

Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85Peat Utilization Project (English) 11/85 046/85Energy Assessment (English and French) 01/92 9215-BU

Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CVHousehold Energy Strategy Study (English) 02/90 110/90

Central AfricanRepublic Energy Assessement (French) 08/92 9898-CAR

Chad Elements of Strategy for Urban Household EnergyThe Case of N'djamena (French) 12/93 160/94

Comoros Fnergy Assessment (English and Frencn) 01/88 7104-COMCongo Energy Assessment (English) 01/88 6420-COB

Power Development Plan (English and French) 03/90 106/90C6te d'Ivoire Energy Assessment (English and French) 04/85 5250-IVC

Improved Biomass UJtilization (English and French) 04/87 069/87Power System Efficiency Study (Out of Print) 12/87 --Power Sector Efficiency Study (French) 02/92 140/91

Ethiopia Energy Assessment (English) 07/84 4741-ET

- 2 -

Segion/Country Ac Tvk/Report This Date Number

Ethiopia Power System Efficiency Study (English) 10/85 045/85Agricultural Residue Briquetting Pilot Project (English) 12/86 062/86Bagasse Study (English) 12/86 063/86Cooking Efficiency Project (English) 12/87 --

Gabon Energy Assessment (English) 07/88 6915-GAThe Gambia Energy Assessment (English) 11/83 4743-GM

Solar Water Heating Retrofit Project (English) 02/85 030/85Solar Photovoltaic Applications (English) 03/5 032/85Petroleum Supply Management Assistance (English) 04/85 035/85

Ghana Energy Ass..ssment (English) 11/86 6234-GHEnergy Rationalization in the Industrial Sector (English) 06/88 084/88Sawmill Residues Utilization Study (English) 11/88 074/87Industrial Energy Efficiency (English) 11/92 148/92

Guinea Energy Assessment (Out of Print) 11/86 6137-GUIHousehold Energy Strategy (English and French) 01/94 163/94

Guinea-Bissau Energy Assessment (English and Portuguese) 08/84 5083-GUBRecommended Technical Assistance Projects (En;gish &Portuguese) 04/85 033/85

Management Options for the Electric Power and Water SupplySubsectors (English) 02/90 100/90

Power and Water Institutional Restructuring (French) 04/91 118/91Kenya Energy Assessment (English) 05/82 3800-KE

Power System Efficiency Study (English) 03/84 014/84Status Report (English) 05/84 016/84Coal Conversion Action Plan (English - Out of Print) 02/87 --Solar Water Heating Study (English? 02/8? 066/87Pen-Urban Woodfuel Development (English) 10/87 076/87Power Master Plan (English - Out of Print) 11/87 --

Lesotho Energy Assessment (English) 01/84 4676-LSOLiberia Energy Assessment (English) 12/84 5279-LBR

Recommended Technical Assistance Projects (English) 06/85 038/85Power System Efficiency Study (English) 12/87 081/87

Madagascar Energy Assessment (English) 01/87 5700-MAGPower System Efficiency Study (English and French) 12/87 075/87

Malawi Energy Assessment (English) 08/82 3903-MALTechnical Assistance to Improve the Efficiency of Fuelwood

Use in the Tobacco Industry (English) 11/83 009/83Status Report (English) 01/84 013/84

Mali Energy Assessment (English and French) 11/91 8423-MLIHousehold Energy Strategy (English and French) 03/92 147/92

Islamic Republicof Mauritania Energy Assessment (English and French) 04/85 5224-MAU

Household Energy Strategy Study (English and French) 07/90 123/90Mauritius Energy Assessment (English) 12/81 3510-MAS

Status Report (English) 10/83 008/83Power System Efficiency Audit (English) 05/87 070/87Bagasse Power Potential (English) 10/87 077/87

Mozambique Energy Assessment (English) 01/87 6128-MOZHousehold Electricity Utilization Study (English) 03/90 113/90

Namibia Energy Assessment (English) 03/93 11320-NAM

-3 -

Region/Co wiy _ Ac4vivy/Rep.1 TWok Date Number

Niger Energy Assessment (French) 05/84 4642-NIRStanzs Report (English and French) 02/86 051/86Improved Stoves Project (English and French) 12/87 080/87Household Energy Conservation and Substitution (Englishand French) 01/88 082/88

Nigeria Energy Assessment (English) 08/83 4440-UNIEnergy Assessment (English) 07/93 11672-UNI

Rwanda Energy Assessment (English) 06/82 3779-RWEnergy Assessment (English and Fren;h) 07/91 8017-RWStatus Report (English and French) 05/84 017/84Improved Charcoal Cookstove Strategy (English and French) 08/86 059/86Improved Charcoal Production Techniques (English and French) 02/87 065i87Commercialization of Improved Charcoal Stoves and CarbonizationTechniques Mid-Term Progress Report (English and French) 12/91 141/91

SADC SADC Regional Power Interconnection Study, Vol. I-IV (English) 12/93 -

SADCC SADCC Regional Sector: Regional Capacity-Building Programfor Energy Surveys and Policy Analysis (English) 11/91 --

Sao Tomeand Principe Energy Assessment (English) 10/85 5803-STP

Senegal Energy Assessment (English) 07/83 4182-SEStatus Report (English and French) 10/84 025/84Indsal Energy Conservation Study (English) 05/85 037/85Pre1aratory Assistance for Donor Meeting (English and French) 04/86 056/86Urbaa Household Energy Strategy (English) 02/89 096/89Industral Energy Conservation Program 05/94 165/94

Seychelles Energy Assessment (English) 01/84 4693-SEYElectric Power System Efficiency Study (Enlish) 08/84 021/84

Sierra Leone Energy Assessment (English) 10/87 6597-SLSomalia Energy Assessment (English) 121/85 5796-SOSudan Management Assistace to the Ministry of Energy and Mining 05/83 003/83

Energy Assessment (English) 1)7/83 451 1-SUPower System Efficiency Study (English) i/84 018/84Status Report (Engish) 11/84 026/84Wood Energy/Foresty Peasibility (English - Out of Print) 07/87 073/87

Swaziland Energy Assessment (English) 02/87 6262-SWTanzania Energy Assessment (English) 11/84 4969-TA

Peri-Urban Woodfels Feasibility Study (English) 08/88 086/88Tobacco Curing Efficiency Study (English) 05/89 102/89Remote Sensing and Mapping of Woodlands (English) G6.'90 -

Industrial Energy Efficiency Technical Assistance(English - Out of Print) 08/90 122/90

Togo Energy Assessment (English) 06/85 5221-TOWood Recovery in the Nabeto Lake (Engish and Prench) 04/86 055/86Power Efficiency Improvement (English and French) 12/87 078/87

Uganda Energy Assessment (English) 07/83 4.t33-UGStatus Report (English) 08/84 020/84lnstitutonal Review of the Energy Sector (English) 01/85 029/85Energy Efficiency in Tobacco Curing Industry (English) 02/86 049/K6Fuelwood/Forestry Feasibility Study (English) 03/86 053/86Power System Efficiency Study (Englih) 12/88 092/88

-4 -

Regwn/County Actvity/Report Ttle Date Number

Uganda Energy Efficiency Improvement in the Brick andTile Industry (English) 02/89 097/89

Tobacco Curing Pilot Project (English - Out of Print) 03/89 UNDP TerminalReport

Zaire Energy Assessment (English) 05/86 5837-ZRZambia Energy Assessment (English) 01/83 4110-ZA

Status Report (English) 08/85 039/85Energy Sector Institutional Review (English) 11/86 060/86

Zambia Power Subsector Efficiency Study (English) 02/89 093/88Energy Strategy Study (English) 02/89 094/88Urban Household Energy Strategy Study (English) 08/90 121/90

Zimbabwe Energy Assessment (English) 06/82 3765-ZIMPower System Efficiency Study (English) 06/83 005/83Status Report (English) 08/84 019/84Power Sector Management Assistance Project (English) 04/85 034/85Petroleum Management Assistance (English) 12/89 109/89Power Sector Management institution Building

(English - Out of Print) 09/89 --Charcoal Utilization Prefeasibility Study (English) 06/90 119/90integrated Energy Strategy Evaluation (English) 01/92 8768-ZIMEnergy Efficiency Technical Assistance Project:

Strategic Framework for a National Energy EfficiencyImprovement Program (English) 04/94 --

EAST ASIA AND PACIFIC (EAP)

Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90China County-Level Rural Energy Assessments (English) 05/89 101/89

Fuelwood Forestry Preinvestment Study (English) 12/89 105/89Strategic Options for Power Sector Reform in China (English) 07/93 156/93Energy Efficiency and Pollution Control in Township and

Village Enterprises (TVE) Industry 11/94 168/94Fiji Energy Assessment (English) 06/83 4462-FUIndonesia Energy Assessment (English) 11/81 3543-IND

Status Report (English) 09/84 022/84Power Generation Efficiency Study (English) 02/86 050/86Energy Efficiency in the Brick, Tile and

Lime i'dustries (English) 04/87 067/87Diesel Generating Plant Efficiency Study (English) 12/88 095/88Urban Household Energy Strategy Study (English) 02/90 107/90Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90Prospects for Biomass Power Generation with Emphasis on

Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87

Gas Utilization Study (English) 09/91 9645-MAMyanmar Energy Assessment (English) 06/85 5416-BA

- 5 -

Region/County Activity/lReport Title Date Number

Papua NewGuinea Energy Assessment (English) 06/82 3882-PNG

Status Report (English) 07/83 006/83Energy Strategy Paper (English - Out of Print) -- --

Institutional Review in the Energy Sector (English) 10/84 023/84Power Tariff Study (English) 10/84 024/84

Philippines Commercial Potential for Power Production fromAgricultural Residues (English) 12/93 157/93

Solomon Islands Energy Assessment (English) 06/83 4404-SOLEnergy Assessment (English) 01/92 979/SOL

South Pacific Petroleum Transport in the South Pacific (English-Out of Print' 05/86 --Thailand Energy Assessment (English) 09/85 5793-TH

Rural Energy Issues and Options (English - Out of Print) 09/85 044/85Accelerated Dissemination of Improved Stoves and

Charcoal Kilns (English - Out of Print) 09/87 079/87Northeast Region Village Forestry and Woodfuels

Preinvestment Study (English) 02/88 083/88Impact of Lower Oil Prices (English) 08/88 --Coal Development and Utilization Study (English) 10/89 --

Tonga Energy Assessment (English) 06/85 5498-TONVanuatu Energy Assessment (English) 06/85 5577-VAVietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94Western Samoa Energy Assessment (English) 06/85 5497-WSO

SOUTH ASIA (SAS)

Bangladesh Energy Assessment (English) 10/82 3873-SDPriority Investment Program 05/83 002/83Status Report (English) 04/84 015/84Power System Efficiency Study (English) 02/85 031/85Small Scale Uses of Gas Prefeasibility Study (English -

(Out of Print) 12/88 --India Opportunities for Commercialization of Nonconventional

Energy Systems (English) 11/88 091/88Maharashtra Bagasse Energy Efficiency Project (English) 05/91 120/91Mini-Hydro Development on Irrigation Dams and

Canal Drops Vols. I, II and III (English) 07/91 139/91WindFarm Pre-Investment Study (English) 12/92 150/92Power Sector Reform Seminar 04/94 166/94

Nepal Energy Assessment (English) 08/83 4474-NEPStatus Report (English) 01/&5 028/84Energy Efficiency & Fuel Substitution in Industries (English) 06/93 158/93

Pakistan Household Energy Assessment (English - Out of Print) 05/88 --Assessment of Photovoltaic Programs, Applications, and

Markets (English) 10/89 103/89National Household Energy Survey and Strategy Fomulation

Study: Project Terminal Report (English) 03/94 -

Sri Lanka Energy Assessment (English) 05/82 3792-CE

-6 -

Region/Countrv AcEt/tRepotl tle Date Number

Sri Lanka Power System Loss Reduction Study (English) 07/83 007/83Status Report (English) 01/84 010/84

Sri Lanka Industrial Energy Conservation Study (English) 03/86 054/86

EUROPE AND CENTRAL ASIA (ECA)

Eastern Europe The Future of Natural Gas in Eastern Europe (English) 08/92 149/92Poland Energy Sector Restructuring Program Vols. I-V (English) 01/93 153/93Portugal Energy Assessment (English) 04/84 4824-POTurkey Energy Assessment (English) 03/83 3877-TU

MIDDLE EAST AND NORTH AFRICA (MNA)

Morocco Energy Assessment (English and French) 03/84 4157-MORStatus Report (English and French) 01/86 048/86

Syria Energy Assessment (English) 05/86 5822-SYRElectric Power Efficiency Study (English' 09/88 089/88Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89Energy Efficiency Improvement in the Fertilizer Sector(English) 06/90 115/90

Tunisia Fuel Substitution (English and French) 03/90 --Power Efficiency Study (English and French) 02/92 136/91Energy Management Strategy in the Residential andTertiary Sectors (English) 04/92 146/92

Yemen Energy Assessment (English) 12/84 4892-YAREnergy Investment Priorities (English - Out of Print) 02/87 6376-YARHousehold Energy Strategy Study Phase I (English) 03/91 126/91

LATIN AMERICA AND THE CAR1BBEAN (LAC)

LAC Regional Regional Seminar on Electric Power System Loss Reductionin the Caribbean (English, 07/89 --

Bolivia Energy Assessment (English) 04/83 4213-BONational Energy Plan (English) 12/87 --National Energy Plan (Spanish) 08/91 131/91La Paz Private Power Technical Assistance (English) 11/90 111/90Natral Gas Distribution: Economics and Regulation (English) 03/92 125/92Prefeasibility Evaluation Rural Electrification and DemandAssessment (English and Spanish) 04/91 129/91

Private Power Generation and Transmission (English) 01/92 137/91Household Rural Energy Strategy (English and Spanish) 01/94 162/94Natural Gas Sector Policies and Issues (English and Spanish) 12/93 164/93

Chile Energy Sector Review (English - Out of Print) 08/88 7129-CHColombia Energy Strategy Paper (English) 12/86 --

Power Sector Restructuring (English) 11/94 169/94Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR

Recommended Technical Assistance Projects (English) 11/84 027/84Forest Residues Utlization Study (English and Spanish) 02/90 108/90

-7-

Region/County AcLividy/Repor T e Date Number

DominicanRepublic Energy Assessment (English) 05/91 8234-DOEcuador Energy Assessment (Spanish) 12/85 5865-EC

Energy Strategy Phase I (Spanish) 07/88 --

Ecuador Energy Strategy (Engli.:h) 04/91 --

Private Minihydropower Development Study (English) 11/92 --

Energy Pricing Subsidies and Interfuel Substitution (English) 08/94 11798-ECEnergy Pricing, Poverty and Social Mitigation (English) 08/94 12831-EC

Guatemala Issues and Options in the Energy Sector (English) 09/93 12160-GUHaiti Energy Assessment (English and French) 06/82 3672-HA

Status Report (English and French) 08/85 041/85Haiti Household Energy Strategy (English and French) 12/91 143/91Honduras Energy Assessment (Engl;sh) 08/87 6476-HO

Petroleum Supply Management (English) 03/91 128/91Jamaica Energy Assessment (English) 04/85 5466-JM

Petroleum Procurement, Refining, andDistribution Study (English) 11/86 061/86

Energy Efficiency Building Code Phase I (English-Out of Print) 03/88 --Energy Efficiency Standards andLabels Phase I (English - Out of Print) 03/88 --

Management Information System Phase I (English - Out of Print) 03/88 --

Charcoal Production Project (English) 09/88 090/88FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88Energy Sector Strategy and Investment Planning Study (English) 07/92 135/92

Mexico Improved Charcoal Production Within Forest Management for 08/91 138/91the State of Veracruz (English and Spanish)

Panama Power System Efficiency Study (English - Out of Print) 06/83 004/83Paraguay Energy Assessment (English) 10/84 5145-PA

Recommended Technical Assistance Projects (English-(Out of Print) 09/85 --

Status Report (English and Spanish) 09/85 043/85Peru Energy Assessment (English) 01/84 4677-PE

Status Report (English - Out of Print) 08/85 040/85Proposal for a Stove Dissemination Program inthe Sierra (English and Spanish) 02/87 064/87

Energy Strategy (English and Spanish) 12/90 --Study of Energy Taxation and Liberalizationof the Hydrocarbons Sector (English and Spanish) 120/93 159/93

Saint Lucia Energy Assessment (English) 09/84 5111-SLUSt. Vincent andthe Grenadines Energy Assessment (English) 09/84 5103-STVTrinidad andTobago Energy Assessment (English - Out of Print) 12/85 5930-TR

GLOBAL

Energy End Use Efficiency: Research and Strategy(English - Out of Print) 11/89 -

Guidelines for Utility Customer Management and

Region/County Activity/Report Title Date Number

Metering (English and Spanish) 07/91Women and Energy--A Resource Guide

The International Netwvork: Policies and Experience (English) 04/90 --

Assessment of Personal Computer Models for EnergyPlanning in Developing Countries (English) 10/91 --

Long-Term Gas Contracts Principles and Applications (English) 02/93 152/93Comparative Behavior of Firms Under Public and Private

Ownership (English) 05/93 155/93

12/14/94

ESMAPclo Industry and Energy DepartmentThe World Bank1818 H Street, N. W.Washington, D. C. 20433U.S.A.

Documents

E nergy Sxtor Management Assistance Programme€¦ · 15.08.1999 · GDP Gross Domestic Product GOC Government of Colombia ICEL Instituto Colombiano de Energia Electrica IDB Inter-american