Bolivia - Private power generation and transmission

i2Bl Energy Sector Management Assistance Progiramme ftvate Power Gneration and Trasmsilon Report No. 137/91  JOINT UNDP I WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/Wodld Bank Enegy Sector Management Assistance Programme (ESMAP) was launched in 1983 to complement th Enegy Am ent Proamme, established three years earlier. EMAP'sor ~ purpose was to implement key recommendations of the Ener Assessmet rports and ensure that proppoe investments in the energy sector represented the most efficient use of scarce domestic and exteal siuces. In 1990, an international Commission addressed ESMAP's tole for the 1990s and, noing the vital tole of adeqte and affordable ene in coomic growth, concluded that the Pro eslould intensify its efforts to assist deveoping couties t maage their engy sectors more effectivelv. The Cmmi also recommended that ESMAP concen on makdng long-term efforts in a smaher number of countie The Cmmissions reprt was osed at ESMAP's November 1990 Annual Meeting d prompted an extensive reorgandtion and reorientaton of the Progmmme. Today, iSMAP is conducting Eney Assessments R g pmeinvestment and prefcasibllity work, and providing institutional and policy advice in selected developing counties. nrough these effors, ESMAP aims to assist governments, donors, and poteial investors in identifying, funding, and implementing economically and! envir l d er strategies. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP ad Worl Bank, the governments and itus providing financial supor and representatives of the recipients of ESMAP's assistance. The ESMAP Co is chaired by the World Bank's Vice President, Opatidons and Sector Policy, and advised by a Technical Advisor Group (TAG) of independent enegy expes that reviews the Progamme's strategic aenda, its work program, and other issues. The Manager of ESMAP, who rports to the World Bank's Vice Prsident, Operans and Sector Policy, administers the Prgmme. The Manager is assisted by a Secretariat, headed by an Executive Secretary, which supports the ESMAP CO and the TAG and is responsible for relations with the dons and for securing fuing fo the Promm's activities. The Mana direc ESMAP's two Divisions: The Strategy and Division advises on selection of countres for assistance, cames out Energy Assesments, relevant programs of technical assistance, and supports the Secretariat on funding issues. The ons Division is rewonsible for formulation of subsectoral stategies, preinvestment work, institutomnal studies, techmcal assistnce, and taining witin the framework of ESMAP's country FUNDING ESMAP is a coopeaive effort supported by the Wodd Bank UNDP md other United Nations agencies, the Eurpean Commuity, Organzation of Ameican Staes (OAS), Latin American Enegy Ornization ( OLAOE), and countries incuding Australia Belgium, Canada, Denmark, Germany, Fmland, Fance, ceand, Irland, Italy, Japan, ds, New Zealand, Norway, Potgal, Sweden, Switzerlmd, the United Kingdom, and the United Stas. FURTHER INFORMATION For fwiher informadon or copies of completed ESMAP reports, contact The Mnar or Th Executive Seta ESMAP ESMAP Consultative Group The World Bank The World Bank 1818 H Stree N.W. 1818 H Steet, N.W. Washington, D.C. 20433 Washington, D.C. 20433 U.SA U.SA  BOLIVIA PRIVATE POWER GENERATION AND TRANSMISSION I JANUARY 1992 ESMAP Strategy and Programs Division Energy Sector Management Assistance Progamme (ESMAP) The World Bank Washington, D.C. 20433  FOREWORD On 4 May 1990 a Presidential decree granted Compafiia Boliviana de Energfa Electrica (COBEE) a 40-year license to develop generation resources (and hydro plants in particular) and to operate its existing facilities. The decree Incorporates conditions such as the area covered by the concession and COBEE's obligations vis a vis the government and other power sector institutions. The generation concession fulfills the short-term objectives of the power sector by providing the legal basis for COBEE's continued presence in Bolivia. However, the long-term conditions for achieving public policy goals depend more on the institutional setup and the signals it provides different partes within the system than on the stipuladons of a contract. The purpose of this report is to address these institutional issues within a wider perspective and to propose a strategy for institutional reform. The report was prepared by the joint UNDP/World Bank/Bilateral Aid Energy Sector Management Assistance Program (ESMAP) and is based upon the findings of a mission that visited Bolivia in Jamnary, 1990. v The mission members express their appreciation for the cooperation and hospitality displayed by the Government of Bolivia, COBEE, ENDE, UNDP and the bilateral donor agencies. Funding for the report was provided by the Italian Government through a bilateral contribution to ESMAP, and supplemented by an in-kind contribution from the World Bank. LI the mnslo members were Mesrs. Jayme PomD Carrero, EheW Spcialt ES" anm Fernando Lecaros, consu. Mr. Salvdor Rivera, &wergy Spec,laW asisd in d final prparados of the rport.  ACRONYMS COBEE Compaftia Boliviana de Energia Eldctrica (Bolivian Power Co.) COMIBOL Corporacidn Minera de Bolivia (Bolivian Mining Corporation) DINE Direccldn Nacional de Ilectricldad (National Electricity Directorate) ELFEC Empresa de Luz y Puerza de Cochabamba S.A. (Electric Power Company of Cochabamba) ELPEO Empresa de Luz y Fuerz de Oruro (Electric Power Company of Oruro) ENDE Empresa Nacional de Electricidad (National Electric Power Company) ESMAP Energy Sector Management Assistance Programme IDA International Developmnt Association IDB Inter-American Development Bank MEH Ministero de Energda e Hidrocarburos (Ministry of Energy and Hydrocarbons) NEC The National Electricity Counsel OLADE Latin-American Energy Organization PFM Proyecto de Fortalecimiento Municipal (La Paz Municipal Strengthe Project) UNDP United Nations Development Programme YPFB Yacimientos Petrolifferos Fiscales Bolivianos (Bolivian National O Company)  ABBREVIATIONS GWh Gigawatt hour kW Kilowatt kWh Kilowatt hour c.i.f. Cost, insurance, freight IlDC Interest during construction MCF Thousand cubic feet MW Megawatt kVA Kilovolt-amper mWh Megawatt hour TWh Terawatt hour V Volts XCHO Eauivalents Currency Unit: Boliviano (Bs) Exchange Rate: 2.97 Bs/US$ (May, 1990)  TABLE OF CONTENTS I. EXECUTIVE SUMMARY 1-7 II. BACKGROUND 8 Private Power Transmission and Generation Technical Assistance .............. . 8 The GenerationLicense .................................... 8 The Inrconnection Contract ...... .......................... 10 Power Setor Background ....................................... 12 Macroeconomic Environment ................................ 12 Institutional Stmcture and Legal Framework .......... ............ 12 Generation and Transmission ................................ 14 System Finances ........................................ 16 System Operations ....................................... 16 Conclusions .......................................... 17 m. POWER SECTOR EVALUATION 18 Power Sector Objectives and Policies ............... . 18 Power Sector Performance ... ............. 19 Evaluation ..21 IV. INSTTUTIONAL ANALYSIS 22 Isues .. 22 Options .. . .... ..23 'he Reuatory Agency .............................. 23 Taft ..... ............................. 25 Economic Rents .............................. 26 Income Taxes .............................. 26 MarketStructure .............................. 26 Implementation Strategy ... ............................. 28 V. AGENDA FOR ACTION 31 Short-term Actions .............................. 31 Ihe National Electricity Counsel -NEC ......................... 31 Medium-term Actions .............................. 32 Long-trm Acions ................................ 33  TABLIS Table 1 Sales(GWh), 1988 .................................. 13 Table 2 Mar gn Eectricity Costs .............................. 15 Table 3 Buik Trasfers from ENDE (GWh) ........................ 16 Table 4 Bit Trafers from COBEE to ENDE(GWh) . . 17 Table 5 Action Plan - Cost Estinates ........ . ................... 33 Table 6 Action Plan - Schedule .............-. 34 Table 1.1 Istalled Capacity (1i88) -MW- ........................... 35 Table 1.2 Eectricity Production (1988) -GWb- ........................ 35 Table 1.3 Public Utlity Sales (1987/88)-GWh- ........................ 36 ANNEXES Annex I Generation andTransmission ............................ 35 Annex 2 The Natenal Electrification Plan .......................... 37 Annex 3 Marginal Generadon and Transmission Costs ................... 42 Annex 4 System operations ........... ........................ 44 Annex 5 Electticity Tariffs .........48...--..-.-....... .. 48 List of Completed Activities .49  l- EXCU SUMMARY 1. The "Compftfa Boliviana de Energa Eldctrica* (COBEE) has operated in Bolivia for over sixty years. It Is one of the few surviving private power utilities in Latin America. Its 40-year concessio contract for the generation tsmission and distribution of electricity in the municipality of the La Paz expired in September 1990. 2. In May 1989, ESMAP provided technical assistance to the municipality of the La Paz for renewing the distribution contract. The result of the latter project consisted of recommendations for Implementing control mecnism and insdtutional measures in order to sdmulate an efficient operation of the distribution company. 3. The genration and transmission activities of COBEE require a license; granting these licenses is a responsibility of the Miny of Energy and Hydrocarbons (MEH). whilst licensing for distribution is a responsibility of the municipalities. These certificaton processes are carried out independeady. In Jamuay 1990, at the request of the Bolivian government, an ESMAP mission visited MEH to stdy the terms of COBEE's generation entitement. The mission's suggestions were incorporated to the generon licemsing contract. 4. The process culnatud on 4 May 1990 with a Presidential decree granting COBEE a 40- year license to develop generation resources (and hydro plants in particular) and to operate its existing facilities. The decree Iuwrporates conditions such as the area covered by the concession and COBEE's obligations vis a vis the goverment and other power sector institutions. 5. The ESMAP mission also reviewed the draft of an interconnection contract between COBEE and ENDE Empresa Nacional de Electricidad, the government-owned enterprise in charge of generion and transmission). The suggestions for improvements were incorporated in this contract and the document was signed on 21 June 1990. 6. The generato concession and the interconnecton contract fulfill the short-term objectives of the power sector by providing the legal basis for COBEE's continued presence in Bolivia. However, the long-erm conditions for achieving public policy goals depend more on the institutional setup and the signals it provides different parties wihin the system than on the stipulations of a contract. The purpose of this report is to address these instittional issues within a wider perspective and to propose a strategy for institutional refom Poer Sector Ojcie 7. The objective of the government is to provide a reliable and minimum cost service to electricity users tirough publicly or privately-owned corporations. For analysis purposes, overall power sector objectives were classified as: Effgicienz ArAivs for providing minimum cost service at the supply level and encouraging the economic use of electricity at the demand level.  2 Qualiq of service objctives for assuring the provision of electricity under acceptable conditions of reliability. ndisb which involve the allocation, according to national priorities, of the economic surplus generated by sales of electricity. bPublic finaneog=ves concerning the extent of government-supported financing, resource mobilization altematives and tax policy. 8. Asssing the power sector's performance at present, as well as in the recent past, the following conclusions were drawn: The sector has relatively abundant energy resources which are being developed in a cost efficient manner. The sector provides electricity to its existing users with a reasonable level of continuity. From a wider point of view, coverage continues to be low compared to other Latin American countries. The distribution of economic rents derived from hydroelectric generation is open to question, as the major beneficiaries are only the customers of COBEE in La Paz. (See Par. 14.) The power sector is going through a phase of financial health, after having been supported by the Government through the capitalization of ENDE. It is no longer a drain on public funds. Tariffs do not reflect marginal costs at the consumer level, particularly in the areas served by COBEE. However, before a readjustment can take place, a policy regarding the allocation of rents from COBEE's hydro plants should be formulated and implementd. The current regulatory provisions do not encourage cost-minimizing behavior on the part of the sector's enterprises due to the deficient application of a tariff-setting criterion based upon the rate of retrn on assets. Future generation system expansion is circumscribed to ENDE and COBEE to the exclusion of capital mobilization from other sources.  3 There is a lack of effective government regulation in the sector: the existing regulatory office lacks resources and is unable to monitor, set goals and much less control the sector's institutions. 9. The general conclusion of the assessment is that there are no major problems confronting the power sector in the short run but that institutional rigidities subsist and that they should be addressed (taking advantqae of the sector's current buoyancy) if long run objectives are to be met. 4su,es 10. The issues that were identified in the analysis consist of those relating to the regulatory process, of those related to efficiency (mainly tariffs) and of those related to the allocation of economic rents and tax policy. 11. A basic problem to emerge from the analysis relates to the weakness of the government's presence and the lack of an effective regulatory agency in the power sector to control and enforce tariff policy and to oversee the sector's performance. 12. Efficiency-related issues concern: - Tle structure and level of tariffs perceived by consumers, particularly the gap beween tariffs and marginal costs. - The tariff signal as perceived by producers (i.e. generation as well as distribution companies) and, specifically, the regulatory procedures and rules contained in the Electricity Code. - The, organization for reaching a least cost operation of the system. - The responsibility for developing the least cost expansion plan and the allocation of duties for the execution of specific projects within the plan. 13. Issues related to quality of service and, to a certain extent, to efficiency, concem the assignation of functions to different entities in a rational manner consistent with their activities. For example, ENDE is currently managing both high voltage developments and the provision of service to small isolated communities which should normally be attended to by a local distribution enterprise. 14. Economic distribution issues involve: llTe allocation of economic rents produced by existing inframarginal generation resources owned by COBEE. This issue arises because the average generation cost to COBEE (measured on the basis of the book value of its investments) is significantly (around 60%) below the power system's long run marginal cost. This is due to the use of a very  4 efficient hydro resource (and not to an accouniing problem of asset valuation), coupled to the fact that COBEE's plants have already been considerably depreciated. The need for establishing an unambiguous subsidization policy for low income groups; in the case of Bolivia flail marginal cost pricing (which would ensure demand efficiency by providing the correct economic price signal to users) could lead to large tariff increes which would unduly burden poor consumers. If favoring these groups Is deemed desirable from a social standpoint, the question of subsidy targets and financially feasible subsidy levels should be addresed explicitly (e.g. lifeline rates, rural rates). 15. Public finance issues relate to (a) the generation of funds within the power sector through fiscal measures and (b) to the fact that the sector has depended on government support, particularly In 1987 and 1988, to reach its current financially acceptable situation. The problem consists of avoiding the recurrence of this type of situation and reversing it in order for the power sector to become a source, rather than a desdnation, of public funds. doNm and -StrO 16. An analysis of the issues led to the formulation of a number of alternatives for facing them. These were combined into a coherent strategy to address the institutional problem using a phased approach. 17. The core short-term proposal consists of strengthening the regulatory authority in the sector by activating the National Electricity Commission (NEC). This organization is mentioned in the Electricity Code but it has not been operative: the NEC would be an autonomous body and represented equitably by the several actors involved In the power subsector. It would count on an executive secretary and the services of two independenty contracted advisors. The NEC would consist of a small, well funded and integrated group of professionals: it would be financially and politically independent. Its executive secretry would be accountable to the Commission but not to any one Ministry in particular. NEC's funds would be levied from the power sector itself, following the stipulations contained in the Electricity Code. 18. Within MEM, the organization of a Rural Energy Directorate should be pursued for formulating policy related to service extensions. This organization would also be in charge of coordinatg the execution of specific projects through regional organizations such as the "development corporations" in different deparments. 19. In the institional front, the principal options consist of: shifting from the current mode of cost-based regulation to price regulation whereby electricity companies can increase their rate of return through cost reduction measures as long as they mantain service quality standards.  5 creating the conditions for an organization whereby there is free entry at the generation end (opening up the market to private capital and to cogenerators) and where the interconnection between generators and distributors would be established by a regulated transmission company with dispatch and clearing house functions. 20. With regard to taxes and public finance, electricity enterprises are at present exempt from income taxes. Given that there does not appear to be any fundamental reason for this privilege, it would be desirable to abolish it and to establish the normal income tax rate for corporations. 21. When addressing the problem of economic rents associated with hydro plants, the option to be considered consists of establishing a royalty for the use of hydro facilities. This alternative would channel the rents to the central government without distorting cost-minimizing incentives of the companies in question. 22. The proposed implementation strategy consists of the following elements: (a) Short-Term Actions: - Etablishing the NEC. Initiating the process of tariff reform by revising the rate schedules and adjusting their structure to reflect the composition of marginal costs. Tariff levels would still be based on the current cost-plus rate base systemn. Establishing the functions and attributions of the Rural Energy Directorate within MEH in order to formulate a policy for extending electricity services. (b) Medium-Term Actions: Commissioning, by the NEC, of a feasibility study to analyze the basis for a package of legal measures encompassing the income tax on power sector companies, the shift from cost-based to price-based regulation and the royalty on hydro resources. Commissioning of a tariff/organization study in order: (i) to estimate marginal costs and a tariff system based upon them, (ii) to design in detail a procedure for managing the entrance of new generating enterprises in the system, together with the regulatory requirements and the dispatching requisites, and  6 (iii) to provide a long-tem plan for implementation of a market-oriented organization at the generation level. Reforming the Electricity Code and agreeing with COBEE revision of the Interconnection Contract according to the conclusions of the previous studies. Adjusting the tariff levels in order to reflect marginal costs once the procedure for allocating economic rents has been detewrnined. (This would require a revision of COBEE's concession contract. Since full marginal cost pricing would be introduced as part of a package of measur.s that would include price based regulation, which would allow utilities to reap part of the profits resulting from gains in their overall productivity (see Par. 114), COBEE would have the incentive to agree with the revision of its concession contract.) Implementing institutional and organizational reforms to attract additional enterprises to enter at the supply level, either as generators or cogenerators. (c] Long-Term Actions: These measures would be oriented towards implementing a market-based organization at the dispatch level as well as at the level of developing new generating plants. Such actions would take place once the system has grown substantially beyond its present level of 600MW in installed capacity and they would be based upon the recommendations issuing from the tariff/organization study. Ago"a for Action 23. Chapter 5 of the report presents a detailed summary of short- and medium-term actions to be taken for the implementation of the strategy. The essential short-term elements of this agenda are: - Setting up of NEC by issuing a decree specifying which government organizations will be represented, together with the general functions of the Commission's executive branch and its fiuning. - Appointment of the NEC's Executive Secretary and its advisors. - Structural modifications to tariffs. - Commissioning cf the tariff/organization study together with the legal analysis study. 24. Tbe major medium-term undertaking would consist of the modification to the Electricity Code and the prepartion of a proposal for modifying the Interconnection Contract based upon the results  7 of the tariff/organization and legal studies. This reform would be undertaken directly by NEC with appropriate legal and tecnical advisory/consulting services. 25. Following the reforms to Electricity Code, and particularly the changes to the tariff-setting procedures, a readjustment of tariffs in order to reflect marginal cost levels would be undertaken. 26. The resource requirements for the studies outlined in this report, and to be included in the ESMAP Country Work Program Paper (ECWPP), are: Action Plan - Cost Estimates Tariff/Organization study Consulting Services US$250 000 Local Resources US$ S0 000 Sub-Total US$300 000 Tax Study and Electricity Code Updating Consulting Support US$130 000 Local Legal Services US$ 20 000 Sub-Total US$150 000 Total Resources US$450 000  U. BACKGROUND 27. Tis chapter reviews the objectives of ESMAP's technical assistance to the Miistry of Energy and Hydrocarbons of Bolivia (ME1 regarding the contctual relationship of the government and CompaMa Boliviana de Energfa Eldcrica (COBEE); it also presents background information about the power sector to assit the reader in following the rationale for the recommendations made in the report. 28. The chapter is divided into two sections; the first one illustrate the process of ESMAP's Involvement and its contibutions; the second provides power sector information such as legal and insttional data, together with geeration, tansmission and operations data. Mm Power Tr_mion andGenraton Technica Assisac 29. COBEE is a private utility which generates and distributes energy in La Paz. It oped under the terms of a 40-year contract with the municipality of this city; the contract expired in Ssptember, 1990. ITis event led COBEE to request a generation concession from the government. The latter sought ESMAP's advice in defining the terms of the contract; the mission that visited La Paz for this purpose provided MEH with suggestions for improving the license which were subsequently incorporated into the text The final licene was proclaimed through a Presidential Decree on 4 May 1990. 30. Together with the license, a new interconnection contract was necessary for stipulating the right and obligations of ENDE and COBEE as the major generating enterprises in the system, given hat the previous contract was obsolete and contained a number of ad-hoc clauses hat addressed particular problems of the hypeMnation years. The following subsections provide an overview of both the license and the interconnection contra. 31. The generation contract between COBEE and the government of Bolivia is a means for legalizing the fotmer's operations after the expiration of the contact with the Municipality of La Paz. Accordingly, COBEE applied for a generation concession following the terms stipulated in Bolivia's Electricity Code. 32. In Januy, 1990, the ESMAP mission that visited MEH discussed the terms of the contract, a draft of which was being analyzed at the time. The fo11owing suggestions were made: To make explicit that the concession for development of hydro rerces is not exclusive and that the construction of power plants can be done by ENDE. To make explicit that notwitsnding the latter condition, the concessionaire company is rponsible for executing the power plants according to National Electification Plan priorities if their execution is assigned to it.  9 - The contract should specify that informaton conceming power developments shall be freely interchangeable, i.e. that the results of feasibility or prefeasibility analyses will be furnished to ENDE as central planner for the purpose of determining the desirability of their execution. EThe contract should specify a commitment of the concessionaire to cooperate with ENDE in the departments where it is licensed for the purpose of providing electricity to marginal communities. 33. The license was made official on 4 May 1990 with a decreeV/ which contains the following elements: The Government grants COBEE a 40-year, non-exclusive license to develop hydro resources, to generate and to transmit electricity according to Electricity Code conditions. - The areas which are subject to the development of hydro resources comprise COBEE's existing generation facilities as well as future projects on the Zongo and Miguillas rivers. In order to maintain its concession COBEE must present the feasibility studies for developing tho Miguillas river before December 1995. - Te Gavernment extends a license to conduct activities pertaining to the electricity industry in the La Paz and Oruro Departments as well as in the Bustillos province of the Potosf Department. However, the decree specifies clearly that the distribution activity within the concession area must be negotiated with the Municipalities. COBEE is constrained to supply licensed distribution companies within its concession area. COBEE is constrained to follow the investment priorities set out in the National Electrification Plan by presenting its generation projects to DINE who will decide whether or not to incorporate them in the Plan. The decree establishes explicitly which works will be undertaken by COBEE for the first 5-year period of the concession, i.e. the axtensions of the existing Zongo plants, the 9MW Tiquimani plant, the 28MW Huaji plant and the transmission lines associated with these projects. COBEE is to submit 5-year expansion plans on a yearly basis. 2/ ResolSc0n sWama 207640 of 4 May 1990  10 Fiancing for fuure project is to be sought by COBEE,and MEN agrees to provide uantes similar to those it gan other power sector enterprises. COBEE Is to retain property of its assets after te coimcession contract expires. COBEE's dispatch of its generation facilities is subject to priorities set out by the ENDE National Dispatch Center. COBEE is constrained to agree, with ENDE, on an interconnection contract that will supersede the 1986 agreement. 34. The decree conforms to the objective of providing COBEE with a basis for its continued operation in Bolivia. It also contains the basic obligations concerning compliance with national priorities as set out by the Electrfication Plan and it spells out dispatch responsibilities as well. It incorporated the basic suggestions made during the mission's stay in La Paz. However, the contract should be viewed as an element within more genera power sector policies, particularly as a mens for matining as well as incorporatng additional private capital into the sector, which otherwise would constitute a drain on public resources. For these reasons, the analysis witin this document will extend beyond the narrow scope of the concesion conct and will seek to analyze more general and long-term issues which can provide guiance regarding the institutional development of the power sector. mm lernUQneciontract 35. Transfers of energy between ENDE and COBEE were governed by an interconnection agreement of May, 1986. As shown in Annex 4, this agreement can be considered to be an ad-hoc contract designed for a short time span, until the expiration of COBEE's municipal contract, i.e. for the 1986-1990 period. 36. The contract provided a basic tariff stucture with capacity and energy charges; however, these prices become meaningless because a so-called participation agreement limited ENDE's total billing to a percentage of gross revenues collected by COBEE-La Paz. The percentage in question was equal to ENDE's share in supplying peak demand. 37. The intercomnection contract was also reviewed by the ESMAP mission of January, 1990. Although it is a contract between ENDE and COBEE its endorsement was made a precondition of the concession contract. The new interconnection contract was signed on 21 June 1990; although it is an updat.ag of the older contract mentioned previously, it eliminates the ad-hoc commercial conditions which were incorporated to overcome conmfontations between ENDE and COBEE during the years of economic crisis. 38. Ihe interconnection contract is conceived for the current situation, i.e. a bilateral agreement, rather an a frame of reference for more participant. It establishes (a) the commercial  11 conditions for energy transfers between the two parties; (b) the tariffs together with their structure and the basis for their calculation; and (c) billing conditions. 39. Tariffs are set in US dollars. They are based on a capital cost corresponding to ENDE's last installed gas turbine with a capital recovery factor for a 9% interest rate and a 30-year life. The energy component is based on the cost of natural gas for ENDE of 1US$ per thousand cubic feet. The energy charge is immediately readjustable with any change in the price of natural gas. The capacity charge has a 3-year duration after which it is updated. The tariffs also incorporate a transmission component in the capacity charge and a provision for losses. 40. The interconnection tariff for sales from ENDE to COBEE at the Vinto substation (Oruro) has a capacity charge of US$10.35SkW-month and an energy charge of 1 .4US/lkWh. The energy charge corresponds roughly to the marginal energy cost in the system with a gas price of US$1 per thousand cubic feet. The capacity is roughly equivalent to the incremental capacity cost of the system as calculated by ENDE in 1990. 41. The tariffs are designed for existing conditions, i.e. those in which COBEE is mainly an importer of energy. There is a provision for secondary energy sold by COBEE to ENDE in case there is excess hydro runoff in which case the tariff is 70% of the "normal" tariff. 42. In general terms, the conditions of the interconnection contract provide a sound basis for the operation of the system on a medium-term basis. It will need modifications (a) if the current composition of generation changes, (b) if new enterprises access the generation market or (c) if the power sector is reorganized at the generation level. 43. One of the commercial conditions that is a matter of concern consists in the billing stipulations: 30-day bills are established in US$ which were the origin of disputes between the parties in the high inflation periods. Given that COBEE does not generate foreign exchange and that its tariffs (in local currency) may not be readjusted in the same proportion as the exchange rate, these problems could recur. Furthermore, the contract stipulates that neither of the parties may ration its customers in order to limit its purchases from the other. This is exactly what occurred in the crisis periods and, consequently, a hedging mechanism may be in order for COBEE to be able to reduce its risk under unexpected fluctuations of the exchange rate. 44. The contract establishes an operations committee to take care of all technical matters related to the interconnection and a "Planning Coordination" Committee for analyzing progress on new construction and the need for rescheduling short- and medium-term plans. The interconnection contract has a scheduled duration equal to the concession contract. 45. The observations made to the concession contract are also applicable to the interconnection, namely that the scope of the agreement encompasses the present situation and corrects the problems of previous arrangements but that a longer term perspective is in order for the purpose of  12 visualizing the issues and altenatives open to the system it faced with changes In its institutional structure. Powr Sector Backgrond lMacn)ic nvkmne 46. The Bolivian economy suffered a brutal crisis in the first half of the 1980's. During this period GNP fell at an annual average rate of 2.5% and inflation escalated to hyperinflation, reaching a rate of more than 10,000 % p.a. in 1985. The immediate cause of this depression was a sudden reduction in the inflow of foreign capital, combined with an unfornmate sequence of natura disasters. However, poor investments financed by external capital borrowed in the 1970's, a large and inefficient public sector, poor economic management and extensive and harmful government intervention in the economy contributed decisively to the economic chaos. 47. When the 1985-1989 govnent took office it immediately imposed an austere economic stabilization program, which quickly brought inflation under control; in 1987 inflation was down to 11t% and in 1988 it was 22%, a low figure by Latin American standards. However, Bolivia continues to face serious economic problems and it depends largely on exports of natura gas and minerals (mainly tin and silver) as sources of foreign exchange to service its relatively huge external debt. In 1988 these com- modities represented 83% of total merchandize exports. Terms of trade declined 46% between 1985 and 1988 due to a decline in international prices of tin and hydrocarbons, thereby increasing the current account deficit. After six years of contious decline GDP resumed growth in 1987, but not enough to compensate for the increase in population and consequendy per capita income continued to fall. 48. The future of Bolivia's economy will still be constrained by a large external debt, the concentration of exports on a small number of traditional products, low domestic savings, and limited managerial resources in the public sector. Nevertheless, the present Government has achieved remarkable progress with its economic reforms. If the Government continues to adopt sound economic policies, manages to reschedue the debt service payments and obtains support from international donors, it may be possible to revert the decline in GNP per capita (US$ 570 in 1988) and achieve sustained economic growth, in the order of 4.0 - 4.7 % p.a. Instittiona Structure-an Le 49. The Bolivian power sector is nominally regulated by the Ministry of Energy and Hydrocarbons (MEH) through its electricity sector directorate (Direccidn Nacional de Electricidad - DINE-). The operating functions are divided among the following companies: Empresa Nacional de Electricidad S.A. (ENDE): organized as a corporation, in practice it plays the role of a state utlity. ENDE's shareowners are MEH (80%), YPFB (20%) and, in a very small proportion, COMIBOL. ENDE is principally a generation and  13 transmission company selling in bulk although it has some final customers it serves directy. Compafila Boliviana de Energia Ellica (COBEE) is part of a US corporation (Bolivian Power Co. Ltd-BPCo). It has operated in Bolivia since 1925 and has functioned as both a generation and a distribution company. COBEE has two divisions: the La Paz division with hydro generation facilities totalling 114 MW in the Zongo valley and the Ouro division where It sells power to a number of mining clients and to the Oruro distribution company, ELFEO. ELFEO, in turn, is majority-owned (95%) by COBEE and has a small participation of the municipality and the Oruro development corporation. In the area of La Paz, COBEE serves the city Itself and a number of smaller municipalities. At present, COBEE generates 34 percent of Bolivia's power. Empresa de Luz y Fuerza Electrica de Cochabamba S.A. (ELFEC) serves the municipality of Cochabamba and its surrounding region. It is owned by ENDE, the municipality and the Cochsbamba development corporation. Cooperativa Rural de Electricidad (CRE) is organized as a cooperative and it distributes electricity in the Santa Cruz region. Cooperativa Electrica Sucre S.A. serves the Sucre region. Servicios Electricos Potosf serves the Potosf region. Corporacidn Minera de Bolivia (COMIBOL): the state mining company owns generating equipment and is also a major client connected to the grid in a number of different locations. AMll the latter enterpdrises are part of the interconnected system. Non-interconnected companies include: - Servicios Electricos de Tarija S.A. (SETAR) in the Tarija region. Cooperativa de Servicios Electricos Trinidad Ltda. (COSERELEC) in Trinidad. 50. The relative size of these companies can be visualized by their final customer sales: Table 1: Sates (Ch), 1988 -... OMEE ------ La Pat Oruro ELFEO CRE ELFEC CESSA SEPSA COSERELEC SETAR ENIDE TOTAL awh 461 59 53 382 237 ST 31 11 27 53 1371 X 34 4 4 28 17 4 2 1 2 4 100 Source: ENDE, Resultados de Exptotacf6n 1988.  14 51. From a legal standpoint, the sector is regulated by the Electricity Code. The latter is a presidential decree of July, 1977. It covers the following aspects: concession-related regulations, rights of way, asset valuation, service conditions and tariffs, taxes, and fines and penalties. 52. The Electricity Code's more significant stipulations are: It is mainly oriented towards regulating concessions for electricity generation whenever natural resources are involved, or concessions for distribution of electricity to the general public. It establishes general attributions for the state to intervene in the case of right of way disputes as well as prerogatives and obligations concerning compensation of third parties affected by electricity concessionaire's works. Concession contracts are covered in very general terms concerning their contents, their expiration terms and the circumstances for nullifying them. The value of assets associated to a concession are to be approved by DINE. Asset revaluation due to price fluctuations is contemplated but no specific guidelines are set out. Tariff provisos are spelled out in detail. Tariffs must be approved by DINE. According to the Code, they are supposed to be calculated on a cost recovery basis, including a fixed 9% return on the "Tariff Base". The latter is practically equivalent to the net assets in operation. Since the Electricity Code is inadequate to promote the overall efficiency of the power sector, its revision is recommended as detailed in Chapters IV and V. eneration and Transmission 53. This section contains an overview of (a) the generation and transmission enterprises (ENDE and COBEE) from an operational and financial point of view, and (b) the contents of the National Electrification Plan developed by ENDE. 54. As in many countries, electricity service in Bolivia developed initially on a regional basis and progresaive integration has only taken place since the late 1960's with the creation of ENDE. However, it was only in 1989 that the interconnection with Santa Cruz, with its large gas potential, was put into service. The load center of Tarija in the south remains isolated. 55. In December, 1988 installed capacity in Bolivia was 605MW, of which 50% (301MW) were hydro units; thermal plants consist of gas turbines and diesel units. Annex 1 shows a breakdown of generation capacity.  15 56. Generation of electricity during 1988 was performed by ENDE (52%), by COBEE (34%) and, for its own consumption, by COMIBOL and other companies (12%); the remainder (2%) is generated by other public service companies. 57. Annex 2 presents a summary of the National Electrification 1 lan prepared in 1989 by ENDE with the services of ENEL. The principal resources that were analyzed for being developed in the plan were a number of hydro plants and gas-fired thermal plants (either gas turbines or combined cycle units). 58. Natural gas resources in Bolivia are plentiful. Most production is dedicated to export and a minimum amount is consumed internally. Tle opportunity cost of gas, for the purpose of power sector planning, was set at US$1.0/kCF, equivalent to approximately US$0.96/MBTU (with a heat content of 1045BTU/CF). 59. With these low energy costs (an inefficient unit with a heat rate of 15000BTUl/kWh would have a running cost of only UScl .44/kWh) the resulting expansion plan is characterized by the following choices: a development of gas turbine units, principally in the Santa Cruz region where the lower altitude does not derate the units as much as in other areas of Bolivia. a development of low cost hydro, which consists of a repowering of the COBEE Zongo river plants. a longer term development of hydro (beyond 2000) with the Huaji power plant (28MW), located in the COBEE concession area. 60. Marginal electricity costs at the high voltage level which encompass generation, transmission and substation (transformation) components yield the following values (see Annex 3), based partially upon ENDE calculations: Table 2: Marginal Electricity Costs Energy Costs (USe/kWh) Peak Cost: 1.7 Off-Peak Cost: 1.5 Capacity Costs CUS$/kW-year): Generation 59 Transmission 42.8 Transformation 6.2 Loss Cost 2.2 Source: ENDE and mission estimates.  16 61. Within the plan, COBEE's role would consist mainy of developing hydro resources, stg with the xtensions to its existing plants. These would require an investment on the order of US$22.4 million, including transmission reinforcements. In the transmission area, servicing COBEE would require the present 115kV link to opera at its rated voltage of 220kV. It is not clear as yet whether the cost of substaton equipment required for this purpose, at least at the COBEE end of the line, will be shouldered by COBEE or by ENDE. 62. COBEE reached September, 1990 with no long-term debt, having paid off its IDA loan of 1963 and having canceled its debt with ENDE. The book value of net assets in operation (December 1989) is around 50 million US$. 63. The Bolivian branch of COBEE shows an operating income for 1989 before interest of 4.1 million US$, arximately equal to the 1988 level. This is equivalent to a rate of return on net assets in operation in the 8-9% range. 64. ENDE's fiancial projections are based on an average tariff of 3.6USc/kWh which is appropxiately equal to the system marginal cost level. Its opeting income before interest for 1989 is on the order of 7 million US$. It is expected to increase to around 10.7 million US$ in 1990 with the same tariff level. 65. ENDE's assets are estimated to have reached 289 million US$ In 1990. ENDE's debt has decreased because the government capitalized 107 million US$ in order to strengthen the company fter the financial weakening of the hyperinflation years. ENDE's fiancial indicators are saisfactory and it generated enough innl resources to contribute up to 49% to investment in 1989. The latter figure is not epected to go beneah 23% in the near future. 66. On the whole, system finaces for the major generation companies are expected to show a stable situation which can support the expansion program proposed by ENDE. 67. The network operates as a 2-system interconnection between COBEE and ENDE (see Annex 4). ENDE is the major provider of electricity, as shown in the following table: Table 3: Bulk Transfers from ENDE (GAt) 1987 1988 1969 ELFEC (Cochabe) 243 258 274 CElIA (Sucre) 54 63 66 SEPSA (Potosu) 23 33 38 COmE-La Paz 48 74 90 Cobee-other a 33 65 Sub-TotaL C0EE 56 107 155 CtE (Santa Cruz) 406 430 437 Source: ENDE, Resultados T6cnicos de Explotacl6n, 1988.  17 There are also transfers from COBEE to ENDE during the rainy season: Table 4: Bulk Transfers from COSEE to ENDE (GWh) 1987 1988 1989 22 31 63 Source: ENDE, Resutados TYcnicos de Exptotacion, 1988. In tho La Paz division of COBEE, energy transfers from ENDE showed a peak of 47MW in 1989. SQnluiQm 68. The generation license awarded to COBEE will allow it to continue its operations in Bolivia for the next 40 years. This is to the advantage both of COBEE and of the Boliviar., ower system. On one hand, COBEE retains control on its productive assets and, on the other, the power sector benefits from the services of an enterprise which has proved to be a responsible and competent supplier. The interconnection contract normalizes the commercial and technical relationship between the two companies and will enable a closer cooperation between COBEE and ENDE. 69. The power sector does not face uy outstanding problems, either from a lack of physical resources or from financial constraints. This report will focus on the institutional performance of the sector where its major weaknesses are to be found.  m. POWER SECIYR EVALUATION 70. Uhe genation license and the trconnetion contract ahieve the immediate objecdve of provwiding a sound basis for the continued opeation of COBEE in Bolivia. However, fundamental quesdons remain, puticularly concening the structure of the power industry, the incentives perceived by different companies and the role of goverment within the power sector. The purpose of this chapter Is to evaluate the sector's perfmance, to idenify the relevant issues to be addressed, and the need for longer term instiudoonal restucturng. 71. The procedure followed for the eauation consists of (a) defining the power subsector's objectives and policies and (b) confronting them with it performance. PLQr OWbeand iis 72. Power sector goals can be conveniently classified into four categories: Efficiency objectives oriented towards providing service at minimum cost at the supply level and fostering economic choices at the demand level. Qtuality of service and reliability objectives consistent with customer needs and the country's resources. - Distribution objectives whereby the economic surplus generated by sales of electricky is allocaed according to government priorities. - Public finance objectives consistent with the government's economic policies and, specificaly, with the alocaion of public fiuns to power sector instittions. 73. These objectives are rarely made explicit in policy statements and they have been inferred either from basic economic goas or indirectly from stipulations such as the price guidelines for power companies sipulated in the Electricity Code. 74. Efficiency at the investment level involves (a) establishing a least cost expansion plan and (b) executing it according to specifications. Ihe basis for designing a minimum cost plan is a demand forecast which, in tum, will deped on the price signals provided consumers, the relative prices of substitute fuels and overall policy goals, such as service coverage and the penetration of new market. 75. Efficiency at the operaton level is achieved mainly through a minimum cost dispatch, together with measures such as manteance coordination and control of losss. 76. Efficiency at the demad level canot be garanteed due to price distortions. The source of the problem lies in the Electricity Code which stipulates a 9% rate of reurn on asse as the basis for estblishing prices. This condition leads to (a) low prices at the consumer level, pardcularly in COBBE's La Paz division, which encourage waste and () a lack of Incenives for underaing new generation projects and ttractg capital mresu from the private sector.  19 77. Quality of service objectves are related to basic concepts of effectiveness In delivering electicity. Altiough the optmal level of reliability or quality may be open to discussion and may be of a subjectve nture, the quesionbeig addressed involves evaluating whether the sector's service quality is in accordace with Its goals and, If not, whether the problem is efficiency-related, i.e. whether a better service quality could be attained with the same resources. 78. Ihe question of surplus distribution is related principally to the allocation of hydroelectric rents: as natural resources become more scarce, choice sites for electricity production which were initialy developed (such as the COBEE-owned plants) generate profits above the nonral rates of return. These unearned profits are res whose best allocation is not necessarily the first beneficiary, i.e. the owner of the mechanical equipment used for hanssing the hydro resource; the issue revolves around (a) who should benefit from them and (b) the mechanisms for extcting and allocating the rents. 79. Public finance objectives arise in the case of electricity production due to the substantial govemment Involvement in the sector. The debt crisis, together with the recession of the early 80s, led the power sector to resort to public funds for servicing its debts. This destnation of resources drained means from other areas, partivc.larly in the social domain, whose needs are more dependent on public funds due to their intrinsically suibsidized nature. A reersal of this trend is deemed desirable from an overall public finance point of view. Poerm Sector 80. Based upon the stated system goals, the power sector's performance can be evaluated for the purpose of idendfying weakness and areas subject to corrective measures. V. The electricity industry supplies the major urban centers of Bolivia, and does so with reonable condmtity. From an oveal perspective, Bolivia's per capita consumption of electricity is only M4MkWh, compared with a regional average of 11OOkWha/, which ranks it among the three lowest in the Latin America and Caribbean region. Service coverage is on the order of 30%. At present, MEH policies relative to service extnsions consist of supporting them when productive activities can be identified for electricity use. Otherwise, service extensions to villages, and rual electrification in general, are not being coordied at the government level although local and regional development corporations are expected to assume this responsibility. 82. The provision of wider coverage should respond to market forces and should also be a responsibility of government, if only insofar as establishing goals, plans and gathering Information relative to the sector. At present there is no organization taking care effectively of the planning or the implementation aspects of is problem. 83. Power sector plannig is perfrmed by ENDE. The current expansion program, based upon the insllaon of relatively small (20MW) gas turbines together with a hydro complement, poses I/ OLADE, Eu#zjv Stodst, 18.  20 no significan issues or elements of unceaity. ENDE uses appiopriate models and advisory services for the task. 84. Concening project execution, the current short-term decisions consist of assigning thermal plant development to ENDE and having COBEE build new hydro plants for commissioning in the 90s. There are delays in the execudon of other projects such as the interconnection between ENDE and COBEE in La Paz: at present the existng line operates at lSkV and the voltage should be raised to 230kV for serving the peak demand in COBEE's La Paz division. The execution of this project, which consists mainly of intalling substation equipment, has been delayed and may lead to service curtailments. 85. With respect to efficiency at the dispatch level, ENDE coordinates system-wide generation following a straightforward process given the simple cost structure ot available generation resources, and the new interconnection contract addresses the operational issues posed by this structure. However, in the future a more complex generation structure is to be expected, with correspondingly more involved dispatch conditions. 86. Ihe question of the distribution of economic rents is indirecty addressed through tariffs: COBEE's rates for La Paz division customers are based on a 9% allowed rate of return and, given that COBEE's generation plants are both depreciated and low cost, the tariffs in La Paz are about 40% lower than those in other companies. Consequently, the rents are being reaped by La Paz customers through low electricity prices. From an economic point of view, these distorted prices promote inefficient consumption. From a public finance outlook, the question is whether such an allocation is reasonable from a national point of view. 87. The latter traits point out one of the major shortcomings in the present system: current electricity prices vary significantly from one company to another without keeping any relationship to marginal costs. Additionally, neither the metering system nor the tariff structure bear any reflection of the underlying cost structure. 88. The root of the tariff problem lies, in large measure, within the Electricity Code's stipulatiotns: on one hand, regulation is based on controlling the enterprises' rate of return (rate base reguation) which provides no incentives for reducing costs and, on the other, the lack of correlation to marginal costs promotes inefficient consumption, as in the case of the La Paz customers. 89. On the financial front, COBEE's situation is extremely healthy: it has no debt and its assets are in good operading order. ENDE's finances are equally satisfactory since it obtained an injection of government fiuds in 1987 and 1988. ENDE's rate of return on net assets is low (on the order of 3- 4%, gradually increasing to 5-6% in the late 90s). However, ENDE's tariff is in line with marginal costs; the reason for the low rate of retrn lies in its large asset base which results from the relatively large past investments on hydro plants. 90. Concerning the public finance objectives, it can be said that there are at present no guarantees for avoiding the pitfalls of the past where the central govemment had to capitalize ENDE (on  21 the order of US$100 million) In order to mainain its financia health. Under the current situation, investment will still be concentrated in ENDE and the government will continue to bear the risk of its investments. Tbis ftor is at crosapuposes with the government's policy which seeks (a) for the power sector to be selfsustaining, hence avoiding its dependence on the national budget and (b) to incorporate private capital Wto the electricity industry. 91. Despite having subscribed the new generation contract, COBEE's willingness to participate in the power sector and, in particular, to undertake investments should be judged with skepticism: COBEE's return on its marginal investmen tswith current tariffs cannot be,ustified; a possible explanation for the company's behavior lies in the protection of its historical investment, for which the rae of return on assets is atracive as it consiss, for the most part, of depreciated generating plants in good working order. The isue is therefore whether incentives (higher retns for new investments, possibly lower risk) can be put into place to attract willing private capital. COBEE's management has also made explicit statements to the effect that it inends to undertake the building of new plants with (a) low cost loans, hopefully from mutilateral lending agencies and (b) internally-generated income in future years. It is not the intention of COBEE to import capital from its parent company in the United States. 92. A first conclusion of this brief assessment of the power sector is that there do not appear to be any major flaws in the system. A summing up of the situation shows: (a) That Bolivia's power sector does not fice an energy resource availability problem; quite on the contrary, it has relatively abundant sources of low cost energy for the near future. This translates into a low cost, flexible, generation expansion plan. (b) That despite problems in the past, its present financial expectations are reasonably solid. (c) That notwithstanding the frmer positive aspects, the sector could operate more efficiently if appropriate incentives are put in place, such as: - cofrect price sipgals both at the level of bulk deliveries and final consumers. - incentives for utilities to operae efficiently through a modification of the regulatory mechanism (e.g. price regulation instead of rate base regulation). - thW possibility of promoting competition at the generation level in the fiture. 93. The following chapter will examine these aspecs in more detail in order to identify organiztional measures that will encourage the fulfillment of the sector's objectives.  22 IV. INSTITlUTIONAL ANALYSIS 94. Ihe power sector evaluation presented in the last chapter concluded that the main issues in the sector were insd onal in nature. This chapter analyzes the power sector's insdtutions to identify means for providing incentives to improve its performance. It recommends a stronger regulatory agency in the short run, an improved regulatory system in the medium-term, and a balance of regulation and competition in the long run. 95. The analysis proceeds (a) by identifying the Issues to be addressed, (b) by subsequently examining each Issue and oudining options to the problem and finally, (c) by combining the proposed measures into a consistent strategy. 96. The foremost issue to emerge from the previous evaluation is the weakness of the government's presence, either as a regulator of electricity enterprises or as a policy maker. This function is necessary becuse of the power sector's numerous areas of potential market failure, ranging from the allocation of hydro rents to the natb monopolies in transmission and distribution, which require the state's intervention. The present regulatory agency operates with scarce resources and lacks the capability for conducting a dialogue on the same level with the operating companies. Additionally, the need for formulating policy and coordinating actions associated with service extensions is not being attended to at present. 97. The second issue concerns the efficiency of the system and particularly the incentives imbedded within the present pricing rules. Despite the fact that it appears to be competendy planned and operated, the current regulations are such that there is no incentive for the operating companies to minimize costs or losses since the latter can be transferred to consumers via tariffs. 98. In order to generate "efficient demand" levels, prices for electricity should be established in line with marginal costs both in terms of structure and level. The current regulations do nft envision such a policy. 99. Although the sector is no longer dependent on government financing, it does not contribute towards public funds through income taxes. It would appear reasonable for an advanced subsector such as this one to strengthen the government's income. 100. A number of additional issues appear with respect to what can be termed "execution responsibilities". At one extreme there is the question of the execution of the expansion plan, which is strongly linked to the market structure at the generation level; at the other there lies the lack of definition of responsibilities with respect to service extensions which has led to having ENDE, a generation/ transmission company, provide service to small communities at medium voltage. The issue consists of defining responsibilities with respect to the execution of both large, high voltage projects and small, possibly rural, lines and distribution networks. Although the organization and regulation of distribution enterprises requires study in its own right, it lies outside the scope of this analysis which will concentrate on the institutional aspects of generation and transmission.  23 101. The following sections present a more detailed discussion of the issues identified beforehand, together with suggested approaches for taclding them. Th egla=o Agenc 102. At present DINE has, on paper, the power to control utilities' performance through the tariffsetting process. It is endowed primarily with faculties for controlling electricity supply concessions. The Electricity Code does not empower DINE with an explicit mandate to supervise the electricity industry insofar as more ample goals than mere tariff control. As a consequence, these functions have, de facto, been taken over by ENDE. In fact, neither DINE nor MER have enough resources to monitor the sector's performance or control the companies involved in supplying electricity. - It is doubtful whether DINE or MEH will be able to effectively control the conditions contained In COBEE's generation license. ENDE, with its considerable resources appears to be the dominant institution of the power sector; the problem with this situation is that there is a void of control mechanisms, either in the form of market forces or in the form of regulatory mechanisms, that may provide a measure of balances to this company's command of the sector. 103. In a restructuring of the regulatory agency, the following major functions are visualized: * Control of Expansion Plan * Allotment of responsibilities for Expansion Plan execution * Tariff Policy and Supervision O Control of concessionaires' quality of service 104. When the Electricity Code was promulgated, DINE was designed as an independent agency. Subsequently, DINE was practically taklen over by MMH, presumably in order to take advantage of the resources which the Electricity Code allocates to DINE. Consequently, DINE has become a Department of MEH with Insur nle difficulties for attracting qualified personnel due to depressed salary levels. Moreover, DINE's director is in fact a subordinate to the upper levels of the Ministy and is therefore subject to the political pressures of government office. To modify this sitaion, and  24 particularly to attract qualified personnel, DINE's sitaion can be reversed, by wresting it from MEH and creating a strong, independent office. 105. The implementation of this measure calls for practically no new legislative-type measures: at present, DINE's role and resources are defined within the existing Electricity Code (Tide VIII. According to the Electticity Code, DINE's resources originate in duties to be paid by electricity companies per kWh generated. A similar arrangement could be maintained in the future. 106. The Electricity Code also defines the functions of The National Electricity Council, a body composed of representatives from state ministers, from the National Planning Agency, from DINE, from the Mining Corporation (COMIBOL), from ENDE and from the private sector electricity enterprises. Until the present time this council has not been active within the power sector, but its composition, with a diverse and high level representation, shows promise for using it to advantage in a restructuring of the sector. 107. The main proposal for the restructuring of the regulatory agency consists of the following elements: * The National Electricity Council (NEC) would replace DINE and would become the main regulatory agency. X Tne Council would count on the services of an executive secretary appointed by the Minister of Planning and the Minister of Energy and Hydrocarbons for a three year term, with the current attributions of DINE's director. * The principal technical support of the Council would consist of one or two advisors to be hired as independent contractors for fixed periods, without public servant status. X The staffing of the Council would be kept to a minimum and the technical support would be provided either by power sector organizations or by contracting consulting services. This would include legal advisory services. The objective is to establish a small, tightly knit professional group with enough resources to attract qualified personnel and to contract all required consulting support. 108. This proposal differs sharply from DINE's current organization whereby there is a Director appointed by the Ministry of Energy and Hydrocarbons, a legal advisor, and three Departments (Institutional, Tariffs and Admrinistraive) staffed in a conventional manner. The proposed organization would become more independent, would count on greater resources and would be less subject to interference due to the council's composition with representatives from government and the sector.  25 109. For taking care of the extensions of service and electrification policies, MEH is creating the Rural Energ Directorshipl which will fornulate policies for service extensions. The execution of specific project will be delegated to regional entprises, such as the Development Corporations of diffeent departments. Insofar as the power sector is concerned, the principal point to be made is that it has a responsibility for execudng certain projects that are economically justified and financially viable. Otherwise, the funds for projects that require subsidization must be provided elsewhere. 110. With respect to tariffs, the problem can be broken down into consumer-level tariffs and bulk tariffs. The first category corresponds to final users whilst the second applies to transactions between power companies. 111. Consumer-level tariffs should follow the standard marginal-cost prescription with respect to their level and their structure, subject to financial constralnts. 112. Annex 5 shows average tariff levels in different enterprises. A cursory examination of this data shows (a) that the tariff structure does not reflect the cost structure insofar as the distinction between voltage levels is concerned, (b) that peak and off-peak charges to provide the correct cost-related signals are absent from current tariffs and (c) that levels tend to be low (less than 5US