Where Do You Draw the Line? Setting Boundaries Between Gencos, Transcos, and Discos

Where Do You Draw the Line?Setting Boundaries BetweenGencos, Transcos, and Discos

Setting boundaries between generation, transmission,and/or distribution companies inevitably requiresreaching acceptable compromises among a number oftechnical, commercial, and regulatory considerations.This article proposes such compromises for theboundaries between a Genco and a Transco, a Transcoand a Disco, and a Disco and another Disco.

Ramon Nadira and Carlos A. Dortolina

Ramon Nadira is a Vice Presidentin the Houston office of Stone &

Webster Management Consultants,Inc. He is an Electrical Engineer

with a Master of Science degree inelectrical engineering and applied

physics, and a Ph.D. degree insystems engineering. For over 23

years, Dr. Nadira has providedtechnical consulting services to

electric utilities, independent projectdevelopers, and the financial

community, in domestic as well asinternational assignments in the

electric power sector. He has recentlyparticipated and/or directed

independent technical consultingservices for electricity transmissionand distribution (T&D) companies

in several countries around theworld.

Carlos A. Dortolina is a SeniorConsultant, also in the Houston

office of Stone & Webster. He is anelectrical engineer with a Master of

Science degree in electric powerengineering, and a Master of

Business Administration degree. Hehas specific international expertise in

business, regulatory, and technicalissues related with restructured

power markets, mainly for T&Dcompanies. His experience covers a

wide range of topics includingprivatization and regulation,

strategic planning, tariff design, riskmanagement and demand

forecasting.

I. Introduction

The need to set boundaries—

physical or otherwise—between

generation companies (Gencos),

transmission companies (Trans-

cos), and distribution companies

(Discos) arises in many contexts.

Such is the case, for example,

when vertically integrated utility

companies are unbundled,

whether this unbundling is from

an ownership, functional, legal,

or financial perspective.1

Unbundling from an ownership

perspective is often required

prior to the incorporation of

private capital into the compa-

nies. Financial unbundling (or

‘‘ring fencing’’ as it is sometimes

known) occurs, for example,

when utilities reorganize them-

selves into separate business

units (SBUs). In the U.S., func-

tional unbundling of transmis-

sion is required under Order No.

888 of the Federal Energy Regu-

latory Commission (FERC).2 This

article focuses on the setting of

boundaries for unbundling from

an ownership perspective, since

arguably this is the case that

gives rise to the most challenging

issues.3

32 # 2003, Elsevier Inc., 1040-6190/$ – see front matter doi:/10.1016/j.tej.2003.09.004 The Electricity Journal

In many cases, the boundaries

are legislated—by law or regula-

tory decree—and generally

involve their specification in terms

of voltage levels. Although this

approach is intuitively appealing,

it creates a practical difficulty: the

boundaries would lie inside the

step-up or step-down transformers!

T o get around that difficulty,

this article proposes a set of

basic principles which result in

the definition of more practical

boundaries. The principles, which

are discussed in Section II, take

explicit account of the technical,

commercial, and regulatory con-

siderations involved in the defi-

nition of the boundaries. Sections

III through V discuss, respec-

tively, setting boundaries

between a Genco and a Transco, a

Transco and a Disco, and a Disco

with another Disco. Section VI

presents several relevant interna-

tional experiences, while Section

VII contains some concluding

remarks.

II. Basic Principles forDefining the Boundaries

We propose the following basic

principles for defining the physi-

cal boundaries among the com-

panies (hereafter, a regulated

customer is one which has no

choice but to purchase electricity

from either the incumbent utility

or a commercialization firm,

while an unregulated—or large—

customer is one which has the

option of instead buying its elec-

tricity directly from the wholesale

market)4:

Principle 1: Asset Property

Must Be Correlated with Asset

Function. For example, if a given

asset is used exclusively to dis-

tribute electric power to a regu-

lated end user, then the property

of that asset should be assigned to

the corresponding Disco.

Principle 2: Boundaries Must

Not Create Artificial Barriers to

the Unencumbered Functioning

of the Wholesale Market. For

instance, no barriers should

artificially hinder the ability of

large consumers to directly

interconnect to the transmission

system.

Principle 3: The Commercial

Impact Caused by a Given

Boundary Must Be Minimized.

For example, in the case of the

boundary between Discos, it is

advisable to establish these at

places that minimize—at least

initially—the impact of such

boundaries on the existing com-

mercial processes and systems

(e.g., not altering existing meter

reading routes, and establishing

the boundaries at places where

interchange meters are already

installed).

In addition, a number of con-

siderations—of a technical, com-

mercial, and regulatory nature—

must be explicitly accounted for

when establishing the bound-

aries. These include:

1. Regulatory Jurisdiction.

Unbundling is much more

complicated if there is more than

one regulatory entity with

jurisdiction over the various

assets. This is the case, for

instance, in the U.S., where FERC

has jurisdiction over transmission

while the states have jurisdiction

over local distribution.

2. Ownership of the Assets.

Unbundling can proceed more

quickly and with fewer road-

blocks if at the start of the process

the majority of the assets are

publicly owned (as opposed to

privately owned). This was the

case in many countries that re-

cently restructured their electri-

city sectors (e.g., the U.K. and

Argentina).

3. Operation and Mainte-

nance of the Assets. For example,

in cases where assets that belong

to one company end up in the

territory of another, contractual

arrangements must be entered

into in order to establish the

rights and obligations of the

various parties with respect to:

(1) access, operation, and main-

tenance of these assets, (2) op-

eration under emergency

conditions, etc.;

4. System Expansion. An im-

portant consideration when de-

fining the boundaries has to do

with the ability of the generation

and distribution companies to

expand their systems without

No barriersshould artificiallyhinder the abilityof large consumersto directlyinterconnect tothe transmissionsystem.

November 2003 # 2003, Elsevier Inc., 1040-6190/$–see front matter doi:/10.1016/j.tej.2003.09.004 33

supervision from the regulatory

entity. For example, if the prop-

erty of the boundary substations

is assigned exclusively to the

transmission company, then the

expansion of these substations

will be subject to the scrutiny of

the regulatory entity.5

T he ultimate objective should

be to implement a

reasonable and practical

segmentation of the utility’s

system, based upon sound

technical principles, and that will

ensure a smooth functioning of

the new entities after they are

unbundled. All of these must be

in compliance with applicable

regulations and give due

consideration to the efficient

operation of the system.

In our experience, this issue

needs to be considered with care,

to avoid a number of pitfalls that

would hinder the smooth func-

tioning of the new entities. In

addition, the issue requires a fair

amount of technical expertise

combined with a deep under-

standing of the control/opera-

tional implications of the

commercial arrangements that are

put in place. The latter are dis-

cussed next.

Allocation of the Property of the

Assets. The natural boundary

between a Genco and a Transco

is at (or more precisely within)

the step-up substations. Simi-

larly, the natural boundary

between a Transco and a Disco is

at (within) the step-down sub-

stations. It is generally at these

substations where power is

respectively transferred from the

Genco to the Transco and from

the Transco to the Disco for final

delivery to the customers. By

contrast, the boundaries between

Discos are generally driven by

geographical considerations,

and often cross medium

and/or voltage lines.

As indicated before, any

attempt to draw the line by

splitting the substation facilities

and equipment in terms of voltage

levels is impractical. Further,

doing so exclusively according to

function (i.e., generation, trans-

mission, and distribution) is likely

to fail. The challenge is that

although it would be rather

straightforward to allocate some

of these facilities and equipment

according to their main function

(e.g., measurement transformers

or switches), there is an important

group of equipment that would

be relatively difficult to split. For

example, the high- and medium-

voltage control cabinets generally

share the same physical space

inside the substation control

room. Other examples are the

substation grounding and the

direct current system, which

are shared.

The above notwithstanding,

our recommendation is that

according to Principle 1 above,

and inasmuch as possible, assets

should indeed be assigned

according to their main function.

The remaining assets (e.g., com-

mon-use equipment which

should represent a relative min-

ority) should be assigned to the

Transco (at Genco/Transco or

Transco/Disco substations) or

the Disco (at Genco/Disco sub-

stations).

F urther, in our opinion, from

an operations and mainte-

nance perspective, the allocation

of assets should not unnecessarily

place the companies in a situation

that may be completely unfami-

liar to them. For example, allo-

cating ultra-high-voltage

equipment to the Disco forces it to

have to develop human resources

and expertise (at a significant

cost) in an area very unfamiliar to

the company. On the other hand,

allocating such equipment to the

Transco does not represent a sig-

nificant additional operations and

maintenance (O&M) burden to

that company. That is, the allo-

cation should promote the further

specialization of the companies.

This specialization should lead to

a more efficient functioning of the

electricity industry.

Finally, and based on our own

experience, allocating the maxi-

mum amount of assets to the

companies that are to be priva-

tized is often times a key driver in

the setting of boundaries, on the

belief that:

(i) this will increase the sales

price at privatization time;

The allocation ofassets shouldnot place the

companies in asituation that

may be completelyunfamiliar

to them.


(ii) from a regulatory perspec-

tive, the privates will be more

successful than the government

at making sure that their asset

costs are fully and properly re-

covered;

(iii) this way, the assets will be

better operated and maintained;

and

(iv) in case expansion is re-

quired, private entities are better

able to raise the needed capital.

One should resist the tempta-

tion of following these seemingly

compelling considerations,

which—although apparently

grounded in reality—do not

comply with the principles

enunciated earlier.6

Establishment of Agreements. In

the case of common-use equip-

ment and/or equipment of a

company that is physically

located within the property of

another, it is necessary for the

companies to enter into contrac-

tual agreements to establish the

rights and obligations of each

party with respect to, among

other issues, operations, mainte-

nance, expansion, and access to

this equipment. Another key

aspect is to clearly establish fair

responsibilities for non-compli-

ance with quality of service stan-

dards, especially when monetary

penalties are involved.7

The agreements should contain

non-discriminatory terms and

conditions that are acceptable to

all parties, and should be made

available to the independent sys-

tem operator (or similar entity).

Additionally, if required, some of

these contracts should be subject

to review by the regulatory entity.

System Expansion. An important

consideration when drawing the

line has to do with preserving the

ability of the Gencos and Discos to

expand their systems at will,

without supervision from the

regulatory entity. For example, if

the step-down substations are

completely assigned to the

Transco, then the expansion of

these substations (including the

distribution feeder sections) is

generally subject to regulatory

approval (since transmission is

almost always regulated as a

natural monopoly). This is not

very desirable since it limits the

ability of the distribution com-

pany to expand its system with-

out regulatory supervision.

Besides, the expansion of the

distribution system should be at

the risk of the Disco itself.

Monitoring and Recording of

Power Transfers between Companies.

In line with Principle 3, and as far

as possible, the boundaries

should be set at places that are

already fitted with the appropri-

ate equipment for measuring

power and energy transfers

between companies. Otherwise,

such equipment needs to be

installed. Although this might

seem to be a minor consideration,

it is very important for cash-

strapped utilities that are about to

unbundle.8

Impact on the Operation of the

Wholesale Electricity Market.

Boundaries should not artificially

interfere with—or create barriers

to—the unencumbered operation

of the wholesale electricity mar-

ket. For example, assigning high-

voltage buses to the Disco may

create artificial barriers for large

customers who wish to connect

directly to the Transco, by forcing

them to pay distribution wheeling

rates. This situation should be

avoided.

III. Boundaries betweena Genco and a Transco

Figure 1 shows a simplified

one-line diagram of the typical

way a generation unit connects to

the corresponding bulk trans-

mission system. In general, all of

the equipment connecting the

generation unit to the high-vol-

tage bus, including the circuit

breakers, the step-up transformer,

and all of the auxiliary equipment

(e.g., switches, protections, etc.)

are specifically sized for that

specific generation unit. In other

words, all of this interconnection

equipment serves a ‘‘generation’’

function.

T herefore, we propose that

the boundary between the

generation and the transmission

companies be defined at the

interconnection point between the

The agreementsshould containnon-discriminatoryterms andconditions thatare acceptableto allparties.


generator (including its corre-

sponding interconnection equip-

ment) and the transmission bus,

as illustrated in Figure 1.

This proposal is in agreement

with all three principles enun-

ciated in Section II. That is:

1. The property of the assets is

correlated with their ultimate

function.

2. No additional barriers to the

unencumbered functioning of the

wholesale market are introduced.

For instance, it is rather unlikely

(and impractical) for a large

customer to want to connect to

the low-voltage side of the step-

up transformer. Furthermore, it is

not technically possible for addi-

tional generators to connect to the

low-voltage side of the step-up

transformer, since, as mentioned

earlier, the interconnection

equipment is generally sized

specifically for the associated

generation units.

3. The proposal has a mini-

mum commercial impact due to

the fact that, in vertically inte-

grated systems, the natural

boundary between generation

and transmission generally oc-

curs at the point where the gen-

erator connects to the high-

voltage transmission bus. Thus,

power exchanges between the

generation and the transmission

companies are generally mea-

sured at that point. Further, in

many instances, the required in-

frastructure for relaying these

measurements to the system op-

erator is already in place (e.g.,

telemetering facilities).

A s mentioned in Section II,

even though the property

of the interconnection equipment

may be the Genco’s, the operation

and maintenance responsibilities

of this equipment may be

assigned to a third party (e.g., a

Transco) via a contractual

arrangement. This may be the

case, for instance, when the gen-

eration facilities are in remote

locations. In that case, it may be

more cost-effective to contract

with a third party the operation

and maintenance of the intercon-

nection equipment, rather than to

have Genco personnel and equip-

ment on site to handle these rela-

tively infrequent tasks.

F inally, it is sometimes the

case that generation units

connect to distribution—rather

than transmission—facilities. In

those cases, the boundary is

established between a Genco and

a Disco. We propose this bound-

ary be established in a similar

manner as shown in Figure 1, that

is, at the interconnection point

between the generator unit

(including its corresponding

interconnection equipment) and

the distribution bus.

IV. Boundaries betweena Transco and a Disco

Figure 2 shows a simplified one-

line diagram of the typical layout

of a boundary substation between

transmission and distribution (i.e.,

a step-down substation). In this

case, it is possible to postulate at

least five boundary alternatives.

Table 1 describes and contrasts

Figure 1: Proposed Boundary Between a Genco and a Transco

Figure 2: Boundary Alternatives at Step-Down Substations


Table 1: Analysis of Boundary Alternatives at Step-Down Substations (Transco/Disco)

Alternative Description Advantages Potential disadvantages

A The property of

the substation is

completely assigned

to the Transco

� Simplifies the expansion, operation and maintenance

of the substation

� Contrary to Principle 1. Property is not assigned according to function

� Approval and supervision by the regulatory entity is required in order

to modify or expand the distribution portion of the substation

� An agreement is required between the Transco and the Disco to establish

clear responsibilities related to penalty payments arising from interruptions

of the distribution primary circuits. This agreement can potentially lead

to numerous claims

B The boundary is set

immediately after

the medium

voltage bus

� In agreement with Principle 1. Property is assigned according

to function. Note that if large customers connect to the medium

voltage bus, they would be connecting directly to transmission

� The distribution company has control over

modifications/upgrades to the outgoing primary distribution

circuits without any need for approval from the regulatory entity

� In agreement with Principle 3. Meters are generally present at

B to measure the power that flows on each primary distribution

feeder

� THIS IS OUR PREFFERED ALTERNATIVE

� An O&M agreement is probably required for the Transco/Disco to operate

the assets of the Disco/Transco as well as the common-use assets. This

agreement must establish clear responsibilities related to penalty

payments arising from interruptions of the distribution primary circuits,

and can potentially lead to numerous claims

C The boundary is

set just after

the step-down

transformer

� The Disco has control over modifications/upgrades to the

medium voltage bus and the outgoing primary distribution

circuits without any need for approval from the regulatory entity

� In agreement with Principle 3. Meters are generally present at

B to measure the power that flows on each primary distribution

feeder, and therefore, the power that flows from point C on

� Contrary to Principle 2. This boundary may introduce artificial barriers

to the unencumbered functioning of the electricity market, since a

large customer connecting to the medium voltage bus would have to

pay distribution wheeling charges

� An O&M agreement is probably required for the Transco/Disco to operate

the assets of the Disco/Transco as well as the common-use assets.

This agreement must establish clear responsibilities related to penalty



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Table 1 (Continued )

Alternative Description Advantages Potential disadvantages

D The boundary is

set just before

the step-down

transformer


step-down transformer, the medium voltage bus, and the

outgoing primary distribution feeders without any need for

approval from the regulatory entity


to the unencumbered functioning of the electricity market, since a large

customer connecting to the medium voltage bus would have to pay

distribution wheeling charges

� Contrary to Principle 3. Additional meters will need to be installed at D

� An O&M agreement is probably required for the Transco/Disco to

operate the assets of the Disco/Transco as well as the common-use assets.

This agreement must establish clear responsibilities related to penalty



� The Disco is responsible for the operation and maintenance

of high-voltage equipment

� There is a regulatory risk associated with the possibility that the step-down

transformer would not be recognized as a distribution asset

E The property of

the substation

is completely

assigned to

the Disco

� Simplifies the expansion, operation and maintenance

of the substation


substation without any need for approval from the

regulatory entity

� Contrary to Principle 1. Property is not assigned according to function


to the unencumbered functioning of the electricity market, since a

large customer connecting to the medium voltage bus would have

to pay distribution wheeling charges

� Contrary to Principle 3. Additional meters will need to be installed at E

� The distribution company is responsible for the operation and maintenance

of high-voltage equipment

� There is a regulatory risk associated with the possibility that the

transformers would not be recognized as distribution assets and therefore

those costs cannot be recovered in the distribution rates.

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The

Electricity

Journ

al

these five alternatives taking

into account the basic

separation principles enunciated

in Section II.

As shown on Table 1, Alter-

native B is our preferred one.

Note that this alternative results

in substations whose facilities

are of mixed property (some

equipment belongs to the

Transcos and some to the

Discos). This creates

opportunities for the O&M

responsibilities of some of the

equipment to be assigned to the

other party via contractual

arrangements. For example,

when the step-down substations

are in very remote locations, the

Transco may allocate the O&M

responsibilities of its equipment

to the Disco, which must already

have personnel and equipment

in the area to handle its own

O&M responsibilities.

A s mentioned earlier, it is

key to enter into O&M

agreements that establish clear

and fair responsibilities for non-

compliance with quality of service

standards, especially when

monetary penalties are involved.

This is particularly true of the

step-down substations, since

modern regulatory thinking

imposes penalties for service

disconnections (above a given

threshold) to individual custo-

mers of the Discos.

V. Boundaries betweenDiscos

In practice, boundaries

between Discos have been

drawn to maximize the total

value of the resulting companies,

especially when unbundling is in

anticipation of the incorporation

of private capital. In many

instances, this means balancing

out the resulting electricity

market (i.e., load demand)

to be served by each Disco.

Such balancing is often per-

formed with respect to the

number of customers, load

density, energy sales, and

customer mix (i.e., large vs.

regulated customers)9.

A secondary consideration in

the segmentation is that pre-

scribed by Principle 3, which

states that, as much as possible,

the commercial impact caused by

a given boundary should be

minimized. In practice, this has

generally meant that boundaries

are drawn so as to minimize

changes to the existing regional

structure of the distribution

companies. For example, entire

regions are kept within the same

Disco. As a result, the impact on

the commercial procedures and

systems (e.g., customer data-

bases, meter reading routes,

branch offices, etc.) is minimized.

Further, given that historically

the distribution networks are

generally developed from a

regional perspective, this has the

added advantage of also mini-

mizing the technical impact of

the unbundling, since the net-

works in each region are mostly

independent.

N ote that in the case of

the Disco/Disco

boundaries, Principle 1 is

satisfied by definition, since

such boundaries separate

distribution-only assets. On

the other hand, Principle 2

should not come into play in

this case, since the functioning

of the wholesale market

should not be dependent

upon the way the load demand

is organized.

VI. SelectedInternational Experience

This section describes several

international experiences with

regards to the definition of

boundaries among Gencos,

Transcos, and Discos. As can be

seen from the descriptions below,

there is not a unique and uni-

versally accepted solution for the

establishment of these bound-

aries.

United States. In the U.S., the

definition of the boundaries

between transmission and dis-

tribution (the so called ‘‘bright

line’’) has been a topic of debate

for many years. The need to

properly establish this boundary

is particularly important in the


U.S, since the regulatory entity at

the federal level (i.e., FERC)

generally has jurisdiction over

interstate electricity trading

(using the bulk transmission

network), while public utility

commissions (at the state level)

have jurisdiction over local

distribution. Interestingly

enough, the same term, bright

line, is used to refer to the

separation between state and

federal jurisdiction.

In Order 888,10 FERC proposed

the following seven indicators to

evaluate when determining—on a

case-by-case basis—whether par-

ticular facilities are transmission

or local distribution:

� Local distribution facilities

are normally in close proximity to

retail customers.

� Local distribution facilities

are primarily radial in character.

� Power flows into local dis-

tribution systems; it rarely, if ever,

flows out.

� When power enters a local

distribution system, it is not

reconsigned or transported on to

some other market.

� Power entering a local dis-

tribution system is consumed in a

comparatively restricted geogra-

phical area.

� Meters are based at the

transmission/local distribution

interface to measure flows

into the local distribution

system.

� Local distribution systems

will be of reduced voltage.’’

Note that the above indicators

are, for the most part, functional/

technical in nature, and that they

provide little specific guidance on

where to exactly set the boun-

dary(ies).

With respect to the boundaries

between Gencos and Transcos,

no specific guidelines for

drawing the lines exist in the

U.S. However, some ‘‘de facto’’

experiences do exist. For

example, private power

generators are generally

responsible for building the

step-up substations that

connect the plant to the bulk

transmission system (or to the

distribution system, if that is the

case). In such situations, the

boundary is generally set at or

near the substation fence.

Further, in this case, the technical

and commercial rights and

obligations of the Genco and

the Transco (or the Disco) are

established in interconnection

agreements, subject to review

by the regulatory entity with

jurisdiction over the matter.

Argentina. Step-down

substations in Argentina are

allocated completely to the

Transco. The rationale is that this

simplifies the allocation of

responsibilities between the

Transco and the Disco, thus

minimizing potential conflicts

between these companies.

The boundary is then at the

point where the primary

distribution feeders connect to

the substation.11

T he rights and responsibil-

ities of the Transco and the

Disco at each of the connection

points are established in

‘‘Interconnection Agreements,’’

which are made available

to the ISO. The agreements

establish in detail: (1) property

boundaries, (2) asset ownership,

(3) O&M responsibilities,

(4) facility access, (5)

information exchange

procedures, (6) expansion

procedures, and (7) safety.

The boundary between Gencos

and Transcos is established

immediately after the step-up

transformer. This notwithstand-

ing, the breaker—but not the

high-voltage bus—at the step-up

substation belongs to the Genco

(see Figure 1), but its actual

operation and maintenance is the

responsibility of the Transco. This

is established in an O&M Agree-

ment entered into by the Transco

and the Genco.

Finally, the main basic princi-

ples adopted for drawing the lines

amongst Discos in Argentina

were the following:

(1) Balance out the resulting

load demand to be served by each

Disco. The balancing was

performed with respect to

number of customers, load

density, energy sales, and

customer mix (i.e., large vs.

regulated customers).


(2) Minimize changes to existing

regional structure. This meant

that, for the most part, regions

were not split into separate

Discos. As a result, the impact

on the commercial procedures

and systems (e.g., customer

databases, bill reading routes,

branch offices, etc.) was

minimized. Moreover,

given that historically the

distribution networks had

been developed from a regional

perspective, the technical

impact was also minimized,

since the networks in each

region were mostly

independent.

Guatemala. In contrast with

the previous case, the boundary

between the Transco and the

Disco in Guatemala is

established immediately

after the medium-voltage bus

(Alternative B in Figure 2). The

rationale was that this enables

the Discos to expand their sys-

tems without having to rely on

the procedures and regulatory

constraints that are applicable

to the Transco (as discussed

earlier). The O&M of the

distribution assets within the

substation may be performed by

the Disco itself, or alternatively,

the Disco may choose to enter

into an agreement with the

Transco for the latter to assume

these O&M responsibilities

for a fee.12

O n the other hand, the

boundaries between

Discos were rather simple

to set, since the decision was

made not to split the distribution

systems of any of the larger

cities into separate Discos.

As a result, and for the most

part, the technical and

commercial difficulties

discussed earlier were

altogether avoided.

Panama. Again in contrast with

the previous case, in Panama the

step-up substations themselves

were allocated completely to the

Gencos. As a result, the boundary

between Gencos and Transcos

was established after the high-

voltage bus in the step-up sub-

stations.13

On the other hand, the

step-down substations were

allocated completely to the

Discos. Further, the transmission

lines that connect to these

step-down substations were

also allocated to the distribution

companies. Therefore, the

boundary between the

transmission and the distribution

companies was generally

established at the point in

which the transmission lines

that tie to the step-down

substations are connected to

the source (i.e., high-voltage

switching) substations, whose

property was completely

allocated to the transmission

company.

A s mentioned earlier, the

above examples illustrate

the fact there is not a unique and

universally accepted solution for

the establishment of the bound-

aries between companies.

VII. Conclusion

Restructuring of the power

industry generally means that

vertically integrated utilities

On the other hand, the boundaries between Discos were rather simple to set.


must be unbundled from an

ownership, functional, legal,

or financial perspective.

Unbundling always brings the

need to establish physical

boundaries between the newly

formed companies. Doing so is

by no means easy.

T his article advances a

number of proposals for

the establishment of physical

boundaries between unbundled

companies. Based on our experi-

ence, these proposals should be

followed as closely as possible.

That is, the decision-maker

should avoid the temptation of

following the seemingly compel-

ling considerations (that contra-

dict the principles enunciated

here) that will inevitably arise

during the segmentation

process.&

Endnotes:

1. In many countries that haverecently restructured their electricitysectors, legislation mandates thelegal separation—or segmentation,as it is often called—of verticallyintegrated companies into theirvarious functions: generation,transmission, distribution, andcommercialization. Further, thislegislation prescribes the inabilityof participants in the electricityindustry of simultaneouslyengaging into selected pairs ofactivities, such as generation andtransmission, or transmission anddistribution.

2. Federal Energy RegulatoryCommission, Promoting WholesaleCompetition Through Open AccessNon-Discriminatory TransmissionServices by Public Utilities, andRecovery of Stranded Costs byPublic Utilities and TransmittingUtilities, Order No. 888, issuedApril 24, 1996.

3. Unbundling a vertically integratedutility from an ownership perspectiveis, to say the least, complicated.A number of issues must beaddressed, such as the allocation ofthe physical assets. This is where ourproposal comes into play, since bydefining a practical boundary, theassets on one side of the boundarybelong to one company, and theassets on the other side belong tothe other.

4. Together with the separationof activities, recent electricity

legislation in many countriesprescribes the establishment of aWholesale Electricity Market (WEM).Further, legislation only allows‘‘large’’ customers to participate inthe WEM, such that these customershave the option to purchase theirown requirements directly fromthe market. Small customers mustpurchase their electricity fromtheir local distribution companies,or in some countries, fromspecialized commercializationentities. It is often the case thatcustomer size is measured interms of peak demand (i.e., peakMW load).

5. For the most part, transmissionand distribution are activities stillsubject to regulation. The differenceis that, in many countries, theregulatory style is evolving fromone of regulating inputs to one ofregulating outputs. In the case ofdistribution companies, what thismeans is that regulators measureperformance in terms of a set of

output indicators, such as frequencyand duration of customers outages.Discos are then free to manipulatetheir inputs (such as systemexpansion) without regulatoryintervention.

6. We say this from experience.

7. Key to the output regulation men-tioned above, is the establishment ofpenalties for non-compliance with theminimum acceptable performancestandards. In some countries, suchpenalties have been rather stiff. Forexample, as a result of the outage eventin 1999 at the Azopardo Substation ofEdesur in Argentina, that companywas fined several tens of millions ofU.S. dollars.

8. Again, this is from experience.

9. In practice this has meant thatthe distribution systems of thelargest city in the country is split inhalf, so that one half is allocated toone Disco and the other half toanother Disco. This is done tomaximize the proceeds from theprivatization, and for the regulatorsto be able to establish regulation bycomparison. A notable exception isGuatemala, where the distributionsystem of the capital city wasprivatized as a single unit.

10. Supra note 2.

11. This is in National Law No.24,065, issued Jan. 16, 1992, and inseveral regulatory orders issued bythe Ente Nacional Regulador de laElectricidad (National ElectricityRegulator of Argentina), (ENRE),including decree 1398/1992, issuedAug. 11, 1992, and decree 0186/1995,issued July 27, 1995.

12. This is in the General ElectricityLaw of Guatemala, Decree No. 93-96,issued Nov. 21, 1996, and the regula-tions of this law, issued by the Comi-sion Nacional de Energıa Electrica deGuatemala (National ElectricityCommission of Guatemala),Agreement No. 256-97.

13. See the Electricity Law, issued Feb.6, 1997. Rules issued June 19, 1998, andthe regulatory decree issued by theEnte Regulador de los Servicios Pub-licos (Public Services Regulatory Entityof Panama), issued Feb. 26, 1998.


Documents

Where Do You Draw the Line? Setting Boundaries Between Gencos, Transcos, and Discos