Colombia - Power sector restructuring program

"'j ''q xj IsI E nergy Sxtor Management Assistance Programme Colombia Power Sector Restructuring Program Report No. 169194  JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) was launched in 1983 to complement the Energy Assessment Programme, established three years earlier. ESMAP's original purpose was to implement key recommendations of the Energy Assessment reports and ensure that proposed investments in the energy sector represented the most efficient use of scarce domestic and external resources. In 1990, an international Commission addressed ESMAP's role for the 1990s and, noting the vital role of adequate and affordable energy in economic growth, concluded that the Programme should intensify its efforts to assist developing countries to manage their energy sectors more effectively. The Commission also recommended that ESMAP concentrate on making long-term efforts in a smaller number of countries. The Commission's report was endorsed at ESMAP's November 1990 Annual Meeting and prompted an extensive reorganization and reorientation of the Programme. Today, ESMAP is conducting Energy Assessments, performing preinvestment and prefeasibility work, and providing institutional and policy advice in selected developing countries. Through these efforts, ESMAP aims to assist governments, donors, and potential investors in identifying, funding, and implementing economically and environmentally sound energy strategies. GOVERVANCERAND OPER4TIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP and World Bank, the govermnents and institutions providing financial support, and representatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the World Bank's Vice President, Finance and Private Sector Development, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Programme's strategic agenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners and economists from the Industry and Energy Department of the World Bank. The Director of this Department is also the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nations agencie^, the Furopean Community, Organization of American States (OAS), Latin American Energy organization (OLADE), and countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURMER INFORMATION For further information or copies of completed ESMAP reports, contact: ESMAP c/o Industry and Energy Department The World Bank 1818 H Street N.W. Washington, D.C. 20433 U.S.A.  COLOMBIA Power Sector Restructuring Program November 1994 Power Development, Efficiency & Household Fuels Division Industry and Energy Department The World Bank 1818 H Street, N.W. Washington, D. C. 20433 U.S.A. This document has reSticted dibribufion and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without UNDP or World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Colombian Peso (COL$) December 1991 US$1 = COL$ 701.09 December 1992 US$1 = COL$ 807.64 Weights and Measures = Metric System ACRONYMS BOO Build-Own-Operate CENO Centro Nacional de Operaciones CHB Central Hidoelectrica de Betania CHEC Central Hidroelectrica de Caldas CNE Comisi6n Nacional de Energia CONFIS Conisejo Nacional de Politica Fiscal CONPES Consejo Nacional de Politica Econ6mica y Social CORELCA Corporaci6n Electrica de la Costa Atlantica CSSE Consejo Superior del Sector EI6ctrico CVC Corporaci6n Regional del Valle del Cauca DNO Directorio Nacional de Operaciones DNP Departamento Nacional de Planeaci6n DPSL Domiciliary Public Services Law ECLA Economic Commission for Latin America EDF Electricite de France EEEB Empresa de Energia Elictrica de Bogota ELDC Economic Load Dispatch Center EMCALI Empresas Municipales de Cali EPM Empresas Pfiblicas de Medellin FEN Financiera Energetica Nacional FOGAFIN Fondo de Garantfas de Instituciones Financieras GDP Gross Domestic Product GOC Government of Colombia ICEL Instituto Colombiano de Energia Electrica IDB Inter-american Development Bank IFI Instituto de Fomento Industrial ISA Interconexi6n Electrica S.A. JNT Junta Nacional de Tarifas LRMC Long-run Marginal Cost MHCP Ministerio de Hacienda y Cr6dito Puiblico MME Ministerio de Minas y Energia SCG Steering and Coordinating Group SINSE Sistema de Informaci6n del Sector Electrico SSP Superintendencia de Servicios Puiblicos TF Task Force Colombian Fiscal Year January 1 to December 31  CONTENTS Preface EXECUTIVE SUMMARY .......................... I The Sector .......................... 1 Issues Facing the Sector ......... ................. 1 Design of the Process .......................... 2 Phase I .......................... 3 Phase 2 .......................... 6 Phase3 .......................... 9 Effectiveness ............................................ 9 Lessons Lamied ......................................... 10 Organization of this Report ........................... 11 Chapter I. Main Sector Issues ........................... 12 Study Objectives and Scope ........................... 12 The Power Systemln ........................... 13 Power Institutions ........................... 14 Historical Background ......................................... 15 Power Sector Issues ........................... 17 Management ........................... 17 SupplyIssues ........................... 18 Commercial and TariffIssues ............................ 19 Financial Issues ........................... 21 Distribution Issues ........................... 22 Conclusions ........................... 22 Chapter H. Design of The Process .......... ................. 24 Achieving the Goals ........................... 24 Nature of the Process ........................... 24 Country Specific Process ............ ............... 24 Participation of Stakeholders and Colombian Leadership .25 Organizaional Structure .25 Time Frame .27 Phases of the Process .27 Chapter II: Results Of Phase .29 Government Objectives and Policy .... . ........................... 29 Economic and Power Sector Policy Objectives .29 Restructring Objectives Adopted for Phase 1 Analysis .31 Evaluation Criteria for Phae 1 Analysis .32 Phse Structura Options and their Evaluation .34 Degree of Verticai negration. 35 Degree of Horizonta Integration .35 Trading Relationships 36 Broad Options for the Powe .I.dstry. 36 Evaluation of Broad ptions .38 Management and OwnershiP Options ....... 39  Company Ownership . .................................... 40 Management .......................................... 40 Conclusions ......................................... 41 Phase 1 Workshop Summary . .................................... 42 Structural Decisions ......................................... 43 Relation between Transmission and Dispatch ....... ............... 43 Relation between Generation and Distribution ...... ............... 44 System Rents ......................................... 45 ecess to Networks ....................................... 45 Syst, ;Iegulation ......................................... 45 System Planning ...................................... ... 47 Management Measures ......................................... 47 Changes in Ownership ........................................ 47 Conclusions ........................................... 48 Chapter Iv. Results of Phase 2 ....................................... 50 Phase 2 Initation and Organization .............. ................... 50 Task Force I Financial Strategy . .................................. 0 Task Force 2 Tariffs ......................................... 52 Task Force 3 Regulation ....................................... 54 Task Force 4 Pooling and Dispatch ......... ................... 54 Task Force 5 Network Access and Charging ........ .................. 56 Task Force 6 Management and Corporatization Issues .................... 57 Chapter V. Legal Framework ........................................ 61 General Orientation ...................... 61 Constitutional Mandates ...................... 62 Development Plan Orientation ...................... 64 Strategy Adopted ...................... 65 Draft Principles of The Domiciliary Public Services Law ...... ............ 66 The CNE/MME Proposal ................................... 66 The Draft Electricity Law ......... ............... ............ 70 Transitional Measures ........................... 76 Conclusions ........................... 77 Chapter VI. Remaining Agenda ............. .................. 79 Project Conception ............................... 81 Financial Studies ............................... 81 Tariff Analysis ........... 82 Dispatch and Transmission ................................ 82 Legal and Corporate Studies ................................ 82 BIBLIOGRAPHY ............................... 84 ANNEX A. INSTITUTIONAL DESCRIPTION ............................ 86 Non-operational Institutions ................................ 88 Legal Constraints ............................... 89 ANNEX B. HISTORICAL BACKGROUND .............................. 90  &Eonomic Background: 1970-1990 ........... ...................... 90 The Power Sector ........................................... 91 ANNEX C. INVESTMENT PLANNING ................................ 94 ANNEX D. OPERATIONS PLANNING AND SYSTEM DISPATCH .... ......... 95 Seaso.-al Dispatch . ........................................... 95 Daily Dispatch .............................................. 95 Issues. ................................................ 96 ANNEX E. SPECIFIC INSTITUTIONAL ISSUES ......................... 97 The Structure and Roles of ISA, ICEL and CORELCA .................... 97 Tables 111-1 Power Sector Policy Objectives ........... ........................ 31 111-2 Phase 1 Restructuring Objectives .......... ........................ 33 111-3 Power Sector Functions . ....................................... 35 V-1 Draft of Colombia's Electricity Law: 1991 Outline .70 Figures I-i Breakdown of Effective installed Generation in Colombia, 1990 .13 1-2 Breakdown of Electricity Sales by Users in Colombia, 1990 .14 1-3 Corporate Structure of the Power Sector .15 1-4 Electricity Demand and Real GDP Growth Rates ........................ 16 I-S Technical and Non-Technical Losses by Subsystem in 1990 ................. 18 1-6 Total Transmission and Distribution Losses, 1975-1991 ................... 18 U-1 Working Structure of Phase 2 . ................................... 26 m-i Broad Models of the Power Sector ........... ...................... 37 1- A Colombian Power Sector-Corporate Sketch ........................... 86  Colombia: Power Sector Restructuring Program Preface Many developing countries and formerly centrally planned economies are considering efforts to restructure public enterprises as part of an overall policy program to achieve sustainable growth in their economies. The power sector usually comprises the single largest group of public entities operating as a vertically integrated public monopoly. In most of these countries, there are also pt' verftil political forces and vested interests opposing the reform. Yet the record of experience on how successful reforms have been carried out is still relatively scarce. This document discusses ESMAP's participation in the 'roject to restructure the power sector in Colombia from the late 1980s through 1991. Several important changes have taken place since ESMAP initial work, among which the most important are (a) the approval by congress of the Electricity Law (EL) and the Domiciliary Public Service Law (DPSL), and (b) the debt-equity swaps that have placed (perhaps temiporarily) a greater proportion of the power sector under the ownership of the Ministry of Finance. The contents of the reform are well documented in a recent World Bank Report.' The reform process is entering now the critical stage of implementation of the regulatory framework, the competitive bulk supply market, developing private generation projects and privatizing existing assets. The Colombian sector has traveled a long road since the reform was being studied. This report nevertheless complements the World Bank Report by focussing on how the restructuring process was designed, organized, and carried out. It brings to light what was the thiinkg at the time the reform was being studied, and what were the prevailing conditions. T'hese aspects are worthy of detailed attention, since they may be taken as (a) an instructive taxonomy of the problems and nuances that many governments will confront in the ir own restructuring efforts, and (b) a valuable set of lessons for increasing the chance that the reform will be implemented by ensuring local ownership and leadership of the process from the start. The purpose of this report is thus to disseminate the lessons learned during the process of studying the restructuring of the power sector in Colombia. The restructuring project was initiated when studies by the World Bank's Operations Evaluation Department (OED) in 1988 and 1990 pinpointed the sector as a source of chronic administrative and financial problems for the goverrnent and an obstacle to development2. After completion of the OED studies and issuing of the report, the Bank postponed lending operations in the sector until the main issues had been addressed. Urgent remedial actions were clearly called for, but they had to be timely, and in the proper direction. It was in this context that the Colombian government requested the World Bank and ESMAP to undertake a full-scale study of alternatives for restructuring the sector. ESMAP mounted a technical assistance program in close cooperation with the World Bank's country departnent (LA3IE) and with Colombia's National Planning Department (DNP) and Nauonal Energy Commission (CNE). This cooperative undertaking was able to examine the issues and options facing the sector openly and constructively. The study and discussion process was devised so that all the entities in the sector that had anything to contribute could do so in a nonthreatening, transparent, and open-to-all environment, ensuring greater common "ownership" and political support for the products of the study. The best way to describe 'Covarrubias, Alvaro J. and Suzanne B. Maia, 1994. Reforms and Pivate Participation in the Power Sector of Selected Latin American and Caribbean and Industrialized Countries, LAT, Regional Studies Program Rep. 33, The World Bank, March. 2The World Bank 1990. Colombia-The Power Sector and the World Bank. 1970-1987, Operations Evaluation Department, Report No. 8839, 28 June.  how the process was devised is that: "the restructuring of the sector was made in Colombia, by Colombians andfor Colombians". It is interesting to note that the participative and transparent manner in which the project was undertaken ensured agreemenit in several areas of the reform, enabling implementation to start despite the fact that the electricity law had not yet been approved. Also, during the preparation of the secondary legislation (statutes, licenses, etc.), new ideas served to improve the draft electricity law. Luis E. Guirrez managed the study and prepared this report. It was kindly reviewed and edited by the following World Bank staff: Jos6 Maria Bakovic, Philippe Durand, Jorge F. Gorrio, Rafael A. Moscote, Jayme Porto-Carreiro, and Kurt F. Schenk. Their valuable comments and suggestions are gratefully acknowledged. The report also benefited considerably by the contributions, comments and suggestions of the following consultants. Sebastidn Bernstein, Fernando Lecaros and Coopers & Lybrand. ESMAP also wishes to express its appreciation to the Nationa; Planning Department, the National Energy Commission and the many enterprises in the power sector in Colombia for the cooperation and assistance they rendered to ESMAP staff and consultants during the preparation of this study. The work was made possible by the generous funding of the United Kingdom's Know-How Fund and by UNDP through bilateral contributions to ESMAP.  EXECUTIVE SUMMARY The Sector 1. The restructu'ing program arose in response to the Colombian power sector's inadequate performance over the 1970s and 1980s and, more immediately, its worsening finanicial crisis since 1984. At the time of the project (1990-91), virtually all electricity in Colombia was generated, transmitted, and distributed through eight organizations, as listed below (the first three are municipal companies in the main cities and the remaining five government-owned companies): Empresa de Enebir d.c n (aEB) Empresas Ptblicas de Medellfn (EPM) Empresas Municipales de Cali (EMCALI) w Corporaci6n Aut6noma del Valle del Cauca (CVC) w Corporaci6n E16ctrica de la Costa Atlantica (CORELCA) w Instituto Colombiano de Energia El6ctrica (ICEL) in the rest of Colombia3 Interconexi6n Electrica S.A. (ISA, the major generation company in the sector) w Central Hidroelectrica de Betania (CHB). 2. The main government entities responsible for the sector and its regulation were, the Ministry of Mines and Energy (MME); the National Planning Department (DNP), particularly its National Tariff Doard (JNT); the National Electricity Fund (FEN); and, since 1990, the National Energy Commission (CNE). The ultimate decisicnmaking authority in the country is the National Economic and Social Policy Council (CONPES), chaired by the president and comprising several cabinet-level officials. Issues Facing the Sector 3. A diagnosis of the power sector's problems, made after a World Bank (OED) evaluation in 1988 and 1990, clarified the sector's underlying structural weaknesses. The most important were the lack of corporate autonomy and inefficiencies in management. Sectoral problems were evident in tariffs below cost-recovery levels (at about 75 percent of long-run marginal cost [LRMCJ), subsidized prices for generating fuels, inadequate commercial practices (loss levels were up to 20 percent of generation), noneconomic selection of generating units, overbuilding of capacity during the 1970s, and frequent cost overruns (especially on the large Guavio hydro project). 4. Colombia's power tariffs were flawed in two basic ways. First, they did not provide the right signals to consumers, thus promoting a misallocation of resources. Second, they did not cover financial expenditures, which deferred spending for necessary maintenance and expansion. The taiiff structure also allowed considerable cross-subsidies from industrial and commercial consumers to residential users, who consumed about 50 percent of total electricity demand. Tariffs for industrial consumers in Bogota were on average about two to three times the LRMC. The pricing mechanism was not transparent and was insensitive both to changes in supply costs and to competition. 3CORELCA and ICEL are the major shareholders in 24 regional companies (the Electrificadoras) with predominantly distribution functions.  Page 2 Colombia: Power Sector Restructuring 5. Political influence (interference or outright intervention) and lack of corporate autonomy were reflected in conflicts of ownership within the enterprises, leading in some instances to the sacrifice of economically sound choices for political gains. In some cases, collusion between participants and other noneconomic considerations prevented selection of the best projects. Optimal selection and timing of projects could not be ensured because of the degree and depth of centralized planning, the manner in which projects and plants werc selected for construction, the way in which plants were constructed, and the allocation of plant ownership. 6. The combination of all these problems made the sector less and less able to provide economic and reliable service, manage its debt, and funcidon without depending heavily on the government. During the 1980s, investment in the sector represented about 24 percent of total public inivestment, and the sector's debt burden for this period was close to 30 percent of total public sector debt service. 7. Analysis revealed that 1nese problems-basic institutional and corporaee flaws and the lack of well-defined and feasible objectives (mainly attributable to contested ownership)-were compounded by weak regulatory mechanisms. In sum, the main issues confronting the power sector were as follows: Weak management. This factor reflected the political aspirations of some managers, indistinct ownership of the utilities, lack of corporate autonomy and accountability, nonexistence of clear and transparent "rules of the game," and lack of a proper regulatory authority. be A poorly dfined nstittional stnucture. Responsibilities between generation, transmission, and distribution were ill-defined. Price and fnancial shortcomings. A long history of energy subsidies, tariff distortions, and poor financial performance plagued the sector. 6e Fiscal dependency. The power sector was burdened by its massive reliance on the national treasury and on debt financing for financias losses and sectoral development. Desig of the Process 8. The process of sector reform is intensely political. Reshuffling responsibilities and power among sector entities necessarily diminishes one group's power and increases another's. In the case of a reform that includes a large infusion of competition and private sector participation, "command and control" functions are transferred to the marketplace. Because this involves a large transfer of economic power from the public sector to the market, political opposition to restructuring is always a serious danger. The restructuring process in Colombia therefore had to be designed to harness the local talents, achieve synergy, and minimize the negative political consequences, if it was to have any chance to succeed. Local authority "owneaW" ot the effort and outcome was therefore considered vital. 9. Given the pitfalls intrinsic in the restructuring, a highly participatory approach to the process was judged essential if the results of the effort were likely to be embraced by the government and implemented. From the start, the project involved the three main groups in the sector: the National Planning Department (DNP), the energy sector authorit ies in the energy ministry through the National Energy Commission (CNE), and the utilities' management.  Executive Summary Page 3 10. The restructuring program was organized in a flexible manner to account for the many unknowns inherent in a new process and to tap the synergetic potential of the local talent The results of the work were dissemmnated and discussed as they became available through various seminars and wor':shops, and by publishing the results of the proceedings4. ES1MP thus performed more the role of a facilitator of the process, by organizing local task forces and complementing its own staff with the expertise from countries whiclh have successfully implemented power sector reforms. In other words, the effort fully reflected a process-driven set of local concerns and judgements. 11. Because an open design would promote sound, quick, and timely solutions, the process was planned in three phases: w Phase 1 would arrive at a diagnostic of the sector, identifying the main sector issues and options. w Phase 2 would evaluate the options and propose the best institudonal setup. ow Phase 3 would carry out the fial implementation of the recommended options. phase 1 12. Analyses of the sector's past performance highlighted its lack of well-defined and achievable objectives. One of the more prominent weaknesses was the reiteration of vague, general objectives that were seldom attained. The nebulous character of these goals impeded assessments of progress toward them. 13. One of the first steps of the restructuring project was thus to define a set of three principal sector objectives: v Enterprise management objectives. These centered on forming autonomous enterprise., independent of political bodies, promoting management responsiveness to economic and financial incentives, adopting hard budget constraints to cap the extent of government support power sector companies could expect, and promoting normal commercial practices in supplier-consumer relations. v Pricing and financial objectives. These involved a structure whereby consumers were protected from potential monopoly practices and tariffs reflected costs of service. The consequent financial strengthening of the sector was plamxed to attract new sources of debt and equity capital, particularly from the private sector. v System operations and investments. These comprised a twofold objective: first, to seek a least-cost operation as well as a least-cost expansion path based on economic signals, and, 4CNE and ESMAP, 1991. Evaluaci6n del sector elktrico colombiano 1970-1990, Preedings of the seminar on "Evaluaci6n del desempehfo del sector electrico colombiano 1970-1990" in Santa Marta, Colombia, 13-15 March; Modelos inuemacion4es de organizaci6n del sector electrico, Proceedings of the ser.iinar on "Organizaci6n institucional del sector electrico: La experiencia internacional" in Paipa, Boyaci, Colombia, 31 May to 1 June; and pWiyadzagi6n del sector electricp: La eweriencia internacionl. Proceedings of the seminar on -La participaci6n privada en el sector el6ctrico colombiano" in Cartagena, Colombia, 28-30 August.  Page 4 Colombia: Power Sector Restructuring second, where possible, to base expansion on a competitive process, as opposed to the system of compulsory planning. 14. The foregoing objectives were intended to form a consistent whole: to foster a management whose responsibilities and risks would entail rewards and penalties through the establishment of hard budget constraints to promote the development of sound pricing policies, and to encourage operating and in.estment decisions that would minimize costs. These economic signals were intended to create a financial climate conducive to attracting private capital. 1S. Finally, to judge alternative institutional structures, a number of evaluation criteria were developed that were congruent with both the proposed objectives and the constraints faced by a restructuring program: ow Feasibility of implementing hard budget disciplines uw Ease of implementation of regulatory control and acceptability to the regions or Attractiveness to external investors and lenders and potential to interest new entrants o Feasibility of implementing normal commercial practices to create an attractive business climate or Incentives for preserving least-cost dispatch and maintaining service quality. 16. Structural Options and Case Studies. A number of alternative organizational proposals were reviewed and evaluated according to the above criteria, ranging from an extreme of total integration to a structure of competition at the generation level for supplying regulated distributors as well as large consumers. This evaluation highlighted the fact that structures promoting competition were preferable to those based on vertically integrated industries. Furthermore, the fact that the existing Colombian organization of relatively decentralized enterprises was amenable to restructuring based on competitive principles pointed out the desirable direction for institutional change. 17. In order to obtain greater insight into the feasibility of embarking on the restructuring process, a number of precedents, based on the experience of the United States, France, Spain, Chile, and England/Wales were examined. This review led to the following conclusions: s The pervasive presence of the state as an owner of assets in the electricity industry is sometimes an obstacle to satisfactory performance in supply and distribution. A strong private capital presence is feasible and indeed representative of most of the case studies except France. s The govermnent's presence in the sector is necessary to safeguard against market failure associated with natural monopolies, but its role is that of a regulator of the industry rather than that of an investor. s A radical restructuring of the electricity industry to create a competitive organization is feasible, as shown by the examples of Chile and England/Wales. b The restructuring of the industry is a necessary step before embarking on privatization schemes; otherwise the effort could have the undesirable effect of replacing public monopolies with private ones.  Execudve Summary Page S 18. Adopted Strategy. Results of the preceding analysis, together with the case studies, were discussed at a seminar held on 1-2 June 19915. In a policy paper issued by CONPES', the Colombian government adopted a strategy comprising the following main directives: w Promote competition within the power sector and its linkage to the price system. w Strengthen the regulatory functions of the state. w Open the sector to alternative suppliers by assuring freedom of access to transmission. w Restructure existing enterprises owned by the central government--that is, ICEL and CORELCA. 19. The promotion of competition was the central directive guiding the restructuring decisions. This implied the need for reorganizing the sector at the generation level where competition was feasible, creating new generation enterprises from the existing ones, breaking up vertically integrated companies to foster the development of an active market, and organizing regulatory authorities to supervise its operation. 20. The CONPES directives, together with the considerations of the preceding analysis, pointed out three broad stages of the restructuring process: Rehabilitagon. The rehabilitation stage would necessarily entail central government support as well as its significant short-term presence within the industry in order to surmount the sector's present financial difficulties. -p Reorganizaion. A reorganization stage would put in place the competitive structure and the regulatory authorities. Privaion. A privatization stage would divest the state of its current holdings and attract private investors. 21. Phase 1 of the Restructuring Program culminated with a workshop held on 12 July 1991, at which representatives from the power sector and government endorsed the main decisions relating to the process: w Developing competition between generators for supplying distribution companies eV Allowing competition for supplying large users or Unbundling generation and transmission within ISA w Sepazating the generation and distribution businesses of vertically integrated municipal companies (EEB and EPM) w Reorganizing ICEL and CORELCA and their subsidiaries in Ihie with the proposed directives 5CNE and ES"P, 1991. Modelos-intemacionaes de organizacion del sector elero, Proceedings of the seminar on 'Organizaci6n institucional del sector el6ctrico: La experiencia internacional" in Paipa, Boyaca, Colombia, 31 May to 1 June. 6CONPES, 1991. "Estrategia de reestructuraci6n del sector el&otrico", Document DNP-2534-UINF-DELEC, 21 May.  Page 6 Colombia: Power Sector Restructuring Making subsidies explicit and make the government resnonsible for them through direct transfers to distribution companies w Revising the existing rates to reflect costs Fostering corporate responsibility, at least on a medium-term basis, through management contracts to be managed by FEN w Creating the necessary regulatory bodies. Phase 2 22. Following the July 1991 workshop, Phase 2 of the Restructuring Program was designed in order to achieve the following target structure for the power sector: v A competitive market at the bulk level whereby generators, distributors, and large consumers freely established long-term supply contracts v A minimum-cost dispatch organized through a control center whereby energy interchange would be valued at short-run marginal cost v Freedom of access to networks to facilitate the operation of the competitile market v Regulation of stages in electricity transmission and distribution that constituted natural monopolies v Establishment of a regulatory authority v Reorganization of electricity enterprises into autonomous corporations responsible for their investment and operative decisions v A cost-reflective tariff system and the establishment of explicit state subsidies. 23. Phase 2 was developed as a natural coinuadtion of Phase 1, establishing in greater detail the structural reforms to be tundertaken within the power sector. This effort was accomplished at a seemingly propitious juncture: the new Constitution, enacted in July 1991, required the presentation of public service legislation to Congress for consideration during the legislature inaugurated in December 1991. The thrust of Phase 2 was therefore toward developing an -!ectricity law as its final product. 24. Phase 2 was organized by establishing six task forces in charge of providing a coherent frame of reference for designing the Electricity Law. They covered the following aspects of the legal framework of the sector: Task Force 1: Financial Strategy Task Force 2: Tariffs Task Force 3: Regulation w Task Force 4: Pooling and Dispatch wt Task Force 5: Network Access and Charging we Task Force 6: Management and Corporatization  Execudve Summary Page 7 25. Given the time constraints for producing the Electricity Law, the task forces focused on defining its essential elements so that Task Force 3, which was in charge of producing the draft legislation, could structure the proposed law. This necessarily foreclosed the possibility of fully developing many of the detailed aspects to be considered in the implementation of the proposed reforms; these were to have been developed later. The oatput of the different Phase 2 task forces should be viewed as constituting the basic building blocks for achieving the desired restructuring of the sector. 26. From a legal standpoint, the challenge faced in drafting the Electricity Law consisted of harmonizing the constitutional provisions that emphasize a number of aspects related to the supply of public services with the sector's target institutional structure and the government's general development policy. Problems arose because the Constitution's general orientation is toward establishing welfare-state conditions for the supply of public services, whereas the thrust of the government's policy and the power sector restructuring effort pointed toward allowing the price system to dictate the allocation of resources through competitive markets whenever possible. Consequently, the general strategy followed in drafting legislation was to assemble all the constitutional elements that enabled the establishment of the desired institutional structure while formulating the law so that provisos that were required but were likely to damage the desired orientation of the law would have only a limited impact. The final result was draft legislation that was effective and hardened as far as possible against being disqualified as unconstitutional. 27. Domiciliary Public Services Principles. An important constraint in drafting the Electricity Law was the consdtutional requirement for the government to develop a Domiciliary Public Services Law (DPSL) encompassing electricity, water, sewage, natural gas, and possibly other services. Given the "umbrella" characteristic of the DPSL as essential background for the Electricity Law, and given that the DPSL draft was being prepared by DNP (who had the primary responsibility for this project), Task Force 3 (Regulation and Legislation) outlined a set of preliminary principles for the DPSL to guide the preparation of the Electricity Law. It is important to note that this report documents only the principles prepared during Phase 2, which are different from the principles in the draft DPSL developed by DNP and presented to Congress in March 1992. 28. The legal principles for the supply of residential public services postulate (a) the state's role in the various public services, (b) the limits to the state's intervention, and (c) the entities responsible for their provision. The scope of these principles are limited to those services with natural monopolies features, or those that, because of their external effects, are necessarily a public sector responsibility. The former include those services that reach final consumers through networks-electricity, water supply, sewage, natural gas, and telephone services-whereas the latter category encompasses only garbage collection. 29. In the context of the power sector's objectives, these principles facilitate achievement of the following goals: v Competitive bulk supply of power not encompassed by the DPSL, therefore allowing the competitive generation market to develop according to the Electricity Law. v High-voltage networks exempt from regulation by the DPSL. v Distribution enterprises that fall under the category of regulated services covered by the DPSL, but that can be organized as autonomous, possibly private, units with primarily financial and economic incentives.  Page 8 Colombia: Power Sector Restlrcturing 30. With regard to tariffs, the draft DPSL called for setting cost-reflective tariffs with allowance for explicit subsidies that may originate within the municipality, the departmnent, or the central government. This proviso sought to correct the gross distortions that afflicted commercial and industrial tariffs by expressly disallowing cross-subsidies between consumer groups. 31. Concerning regulatory authorities, the constitution, together with the DPSL, established the Superintendency of Domiciliary Public Services (SSP). Given the potential problem of overregulation, associated to the power to regulate all public services, the draft DPSL limits the range of ftinctions of the SSP to the control and supervision of die utilities, whereas the regulatory authority is explicitly assigned to bodies independent from the SSP. It endows the SSP' with the power to assume the direction of public service companies whose unsatisfactory financial or technical performance may endanger the continuity of supply. 32. The draft DPSL prepared by Task Force 3 was transmitted to DNP in early November 1991. DNP had developed its own version of the DPSL which was confronted w'ith the former in various meetings held during December 1991. The substantial differences between the two drafts lead to intense but constructive debates, which eventually lead to a consensus. DNP developed the fnal draft of the DPSL, which was presented to Congress on the 28 February 1992 deadline. 33. Draft Electricity Law. Building on the foundations of the draft DPSL, the Electricity Law was drafted based on an open, unbundled and conmpetitive electricity supply industry. The draft law accepts competition in generation and third-party access in transmission. It assigns responsibility for system planning to CNE, the National Energy Commission. However, this planning is indicative only, serving as a guideline to orient investment decisions of existing and potential power producers. The latter are free to undertake investments other than those shown in the plan and are responsible for the commercial risks inherent in such decisions. 34. The draft law sets basic parameters for the unregulated market at the generation level so that generators, large consumers and distributors are free to negotiate their own long- term contracts (at least two years). Large consumers are defined as those connected at voltages above 30 kilovolts. The regulatory authority is empowered to extend this definition to lower voltages. Distributors are allowed to compete for the supply of large users. 35. Operation of generation is to be coordinated by a National Operations Council represented by all major generators. This council supervises the National Dispatch Center which also acts as clearinghouse for transactions between generators. 36. Energy trading between generators resulting from system optimization decisions is valued at short run marginal cost. The Energy Regulatory Commission is responsible for developing the methodology for cost calculation. The actual cost estimates are done by the National Dispatch Center. 37. The National Transmission System is defined to encompass all lines and substations at voltages equal to or above 220 kilovolts. The corresponding service is entrusted to ISA and with the operation of the National Dispatch Center. 38. The transmission networks, both national and regional, are made freely accessible to all generators and distributors subject to payment of connection and service charges.  Execudve Summary Page 9 39. The draft law establishes the Energy Regulatory Commission at the ministry-level. The commission is charged with approving regulations concerning the conduction of commercial transactions within the sector as well as the regulated tariffs within the system. 40. Finally, the draft law reaffirms the general principles stated within the DPSL for distribution companies, restricting them to certain types of organization in order to assure their financial and managerial autonomy. The law also requires a separate accounting system for enterprises engaging in activities other than electricity distribution. Phase 3 41. In March 1992 a continuation of the Restructuring Program, Phase 3, was conceived to design complementary legislation for the Electricity Law. Once the law was approved, it would be necessary to establish specific and detailed conditions for its implementation. Colombian law allows for this through the enactment of executive decrees. Consequently, Phase 3 was created to support energy sector authorities in identifying those areas of the Electricity Law that needed complement and strengthening. Finally, because all elements of the Restructuring Program could not be implemented at once, given their complex repercussions on sector organization, Phase 3 would include a schedule for putting the reforms in place. 42. Phase 3 was designed with a preparatory stage in which a number of Colombian sector experts, along with international consultants, would identify and agree on the issues to be addressed, followed by a stage consisting of a number of specific studies. The fial outcome would be the secondary legislation together with the detailed recommendations for the implementation of the proposed reforms. Effectiveness 43. The reform process and "outcome" were viewed as Colombian. Given the profound institutional changes, the major policy and political contents of the reforms contemplated, "Colomnbian ownership" of the reform was essential. The open and highly participatory approach of the process enabled the results to be accepted and promoted by the main sector players, specially the government. They were part of the effort from the beginning, forming an integral part of the analytical and prescriptive process. 44. The effectiveness of the project may be judged based on the high degree of client participation and sense of ownership. The collaboration with the local Coordinating Group and Task Forces over the whole project life gave the opportunity to the Colombians to voice their opinions at any stage and facilitated building consensus when lifficult issues emerged. The active role played by the Colombians in defining the scope and structure of the project, analyzing the issues and recommending solutions ensured local ownership of the process and the results. The Colombian Govermnent supported the project with human and financial resources, as well as providing logistic support, indicating the Government's high priority assigned to the project. 45. The project findings were widely discussed and disseminated, ensuring that the stakeholders shared most of the basic premises and recomendations of the proposed reform. Dissemination relied more  Page 10 Colombki Power Secd, Resuructuring 46. The project had also a significant impact on the outcome of the reform. Although the two primary pieces of legislation -the Electricity Law and the DPSL- took more than two years in passing through congress, the project promoted a constructive and informative debate, leading to the implementation of sustainable policy changes with their beneficial development impact. For instance, implementation of the reform started despite the fact that the electricity law had not yet been approved. The nature of the process ensured agreement in several areas that could be implemented. Also, during the preparation of the statutes, licenses, etc., new ideas served to improve the draft Electricity Law. 47. The main final project outputs was the consensus around the need for reform, the industry model, the draft Electricity Law and the Action Plan outlined for the final phase of the process. The implementation of policy changes and sector reforms were initiated by the Government of Colombia with Bank support as soon as the ESMAP project was concluded after phase 2. Lessons Learned 48. Perhaps the most important single lesson of the project is that an effective reform process needs strong political support and commitment. In the case of Colombia several factors contributed to the government resolve to reform the sectcr: a) the inadequate performance of the 1970s and 1980s, especially the financial shortages due to inadequate tariff levels, high debt service and operational inefficiencies, b) the Bank's commitment lending policy applied after the OED report of 1990 pinpointed the sector as a source of chronic financial problems and an obstacle to development7, and c) the severe power shortages experienced in 1991-92. 49. Other key factors however reinforced this commitment and helped the project, among which the following should be emphasized: ow The timely and highly publicized seminars, with abundant public media coverage and the publication of seminar proceedings helped the process to continue on a fast-track and made all concerned parties stakeholders in the project. w The seminars were important in gathering the main sector players, widely disseminating the findings, reaching consensus on policy concerns and technical issues, and learning from other countries' experiences. The Government and utilities commitment of resources (financial and human) ensured ownership of the project, facilitating consensus on outcomes, and action after the recommendations were made. The formation of several thematic task forces under a coordinating group, provided alternative forums in which interested sector players could focus their energies and discuss their main corcerns without slowing the overall project. 7The World Bank 1990. Colombia-The Power Sector and the World Bank 19-1987, Operations Evaluation Deatment, Report No. 8839, 28 June.  Executive Summary Page 11 W These working groups also provided the opportunity to use and train local expertise, enabling a high quality forum to examine difficult issues with foreign expert assistance, and to reach consensus. e The Bank and ESMAP's role as facilitators ensured that all parties concerned were involved, enabling Colombians to benefit from the international expertise in a "constructive" and "pragmatic" manner. SW The close on-going dialogue and collaboration of the Bank during the whole process ensured a better understanding of Colombia needs and strengthened the country dialogue. It helped the Bank defne its future operations and its role in promoting sector reform and private sector development. Organization of this Report 50. The report contains the following chapters: v Chapter 1 presents a background of the power sector and describes its main issues. v Chapter 2 discusses the design of the restructuring process and its phases. v Chapters 3 and 4 discuss the results of Phase 1 and Phase 2, spelling out the restructuring objectives, structural options studied, evaluation criteria, adopted strategy, and conclusions. v Chapter 5 deals with the legal framework for the reformed sector, summarizing the final products of Phase 1 and Phase 2, the Electricity Law, and the draft Domiciliary Public Services Law. v Chapter 6 focuses in the "Agenda for Tomorrow", presenting the terms of reference for Phase 3, and what remains to be done.  Chapter I. Main Sector Issues 1.01 By the early 1990s, the Colombian power sector had become a chronic economic problem for the government and an obstacle for development because of the magnitude of the resources it consumed and the paucity of funds it generated. These problems were evidenced in the sector's decreasing ability to service its debt and its growing dependence on public capital. 1.02 Despite a number of adjustment programs, the sector was largely unable to rehabilitate itself, and its basic institutional flaws became increasingly evident. It was this situation that led the government into a major reassessment of the power sector's structure and into a commitment to reform. 1.03 The government's overall reform agenda included opening the economy to foreign competition and liberalizing trade. It also encompassed, on the investment front, an intention to dedicate resources to sectors such as water supply or transportation, which were more dependent on public funds or whose markets did not operate satisfactorily. 1.04 The power sector was seen as a particular target for reform not only because of its difficulties in servicing its debt but also because of its uncommonly high energy losses and the marked lack of coordination between its institutions. 1.05 Toward the end of reforming the sector, the government appointed a National Energy Commission, the "Comisi6n Nacional de Energia" (CNE), to supervise studies of institutional restructuring. In turn, the CNE requested technical assistance and advice from the joint World Bank/UNDP Energy Sector Management Assistance Programme (ESMAP) in conducting the studies and planning implementation. 1.06 An important forerunner of the restructuring program, it should be noted, was the review and analysis of the power sector's performance from 1970 to 1987, which the World Bank's Operations Evaluation Department (OED) conducted during the late 1980s. That effort provided substantial insight into the sector's institutional problems.7 Study Objectives and Scope 1.07 The restructuring study sought to provide the government with an analysis and plan for undertaking a lengthy process of institutional reform. The project was organized in three phases to (a) allow for a timely response to the many unanticipated factors inherent in initiating an unprecedented institutional reform, (b) to tap the synergetic potential of the local talent, and (c) to build consensus on the direction of the reform. The process vwas also designed in an open fashion to promote sound, quick, and timely solutions. The project's three phases were as follows: w Phase I aimed at identifying the main sector issues and available options. tw Phase 2 tried to appraise the main options and propose an institutional setup conducive to sector efficiency. w Phase 3 would carry out the final implementation of the recommended options. 7The World Bank 1990. Colombia-The Power Sector and the World Bank, 1970-1987, Operations Evaluation Department, Report No. 8839, 28 June. 12  Main Sector Issues Page' 13 1.0S Phase 1 began in March 1991 and culminated in a workshop on 12 July 1991, where two proposals concerning the preferred structure for the power sector were presented. Consensus was reached on the broad outline of the preferred model for the industry, which included separating generation and dispatch within the main interconnection company (ISA), developing competition between generators, fostering corporate responsibility and accountability, and creating the necessary regulatory bodies. The results of the workshop paved the way for the subsequent phases. 1.09 Phase 2 began immediately after Phase 1 in July 1991; its goal was to present to Congress a draft National Electricity Law. This stage was designed to develop a legal framework supporting the structural reforms ident,fied in Phase l. Six task forces were formed from the representatives of the sector entities to provide a coherent framework for designing the Electricity Law. Each task force was entrusted with one of the six areas of concern identified in the previous phase: (a) Financial strategy; (b) tariffs; (c) regulation; (d) pooling and dispatch: (e) network access and charging; and (f) management and corporatization. The output of these six working groups or task forces were the basic building blocks for restructuring the sector. The law was presented to Congress in February 1992. 1.10 The Electricity Law, the central product of Phases I and 2, outlined the proposed structure of the power sector and its guiding operational, economic, and commercial principles. However, careful and clear regulation of the Electricity Law was deemed essential to ensure the efficient and equitable operation of the proposed institutional structures. Inadequate regulation of the law would result in costly mistakes in system operation and in resource allocation. 1.11 Phase 3, the final stage of the program, was to implement the policies and principles embodied in the Electricity Law. This phase included follow-up studies on issues and implementation that could not be properly addressed in Phase 2, partly because of time limitations, and partly because all problems had not been identified. The major areas to be covered were financial studies, tariffs, dispatch, use-of-network issues, regulation, and legal and corporatization work. The Power System 1.12 In 1990, the Colombian power system had an effective installed power generation capacity of about 6,500 MW (78 percent) in hydroelectric plants and 1,800 MW (22 percent) in thermal units (see Figure 1.1). In 1990, peak Hydro 78.3% demand reached 5,915 MW; energy production in the system was 34 TWh (a load factor of 66 percent); sales amounted to 26 TWh; and losses accounted for 22 percent of production, of which about 12 percent were tcchnical losses and the 21.7% remainder nontechnical losses. 1.13 Demand concentration was greatest around the principal cities of Bogota (1,500 MW), Medellfn (1,000 MW), Cali (500 MW), and Figure 1-1: Breakdown of Effective Installed Ba-ranquilla (350 MW). The country's two Generation Capacity in Colombia, 1990 distinct electrical regions-the Central region,  PaRe-14 Colombia: Power SectorRestructuriaf which encompasses Bogota, Medellfn, and Cali, and the Atlantic Coast region-were interconnected via a 500kV link. Within the regions, interconnections between load centers were through 230kV lines. 1.14 Volume sales (measured in kilowatt hours) show predominantly residential consumption (48 percent), followed by industrial (30 percent) and commercial (10 percent) uses. RuMesft4a.1% The balance was accounted for by government, - public lighting, and other services (see Figure 1.2). 1.15 Further information on the power Gov me.% system, including data on demand, supply, and l301 W8w-dl8|5 market structure is provided in Annex 1. Power Istitutions 1.16 The operating institutions in the Figure 1-2: Breakdown of Electricity Sales by sector in 1990 consisted of several municipal Users in Colombia, 1990 companies and some national institutions that grouped sev_ral regional and smaller local companies, along with an interconnection company. These institutions are described below. 1.17 The principal municipal companies were EEB (Empresa de Energfa de Bogota); EPM (Empresas P6blicas de Medellin); and EMCALI (Empresas Mianicipales de Cali), serving their respective cities. EEB and EPM owned generating plants and distributed electricity; EMCALI operated as a distribution enterprise only. 1.18 ICEL (Instituto Colombiano de Energfa El6ctrica), a government institution, owned the majority of shares in 24 local distribution companies (the "electrificadoras"). ICEL owned generating stations and transmission lines, but their operation was subcontracted with its subsidiaries, which own distribution networks. 1.19 CORELCA (Corporaci6n Electrica de la Costa Atlantica), also a government institution, owned the majority of shares in nine subsidiaries; CORELCA also owned and operated generation stations and transmission lines. 1.20 CVC (Corporaci6n Aut6noma Regional del Valle del Cauca), a national institution, served the Cauca Valley region, generating and distributing electricity and selling it in bulk to EMCALI. 1.21 ISA (Interconexi6n Electrica S.A.), the national interconnection company, owned and operated power stations as well as the national interconnection grid. It was also responsible for system dispatch and investment planning. ISA was owned by EEB, EPM, CVC, ICEL, and CORELCA. 1.22 CHB (Central Hidroel6ctrica de Betania) owned and operated a 500 MW hydro plant. The company's shareholders are ICEL, ISA, and some ICEL subsidiaries.  Main Sector Issues Page is 1.23 The ICEL and COREL.CA subsidiaries, regional companies serving relatively small markets, acted primarily as distribution enterprises, although they may have had some generation capacity. Figpre 1-3: Corporate Structure of the Power Sector Their service area typically comprised a "department," | sbxetrvy of M)ine | a1ona1 Planni.ng following the political subdivision L , , , of the country. mmicipalities 1.24 The most significant Nationea nonoperational entities in the sector Co 1X1iX1 in 1990-91 were the Ministry of Mines and Energy (MME); the National Planning Department ("Departamento Nacional de ! _|__ _ I Planeaci6n"; DNP); the "Financiera 15I 9 Local Energ6tica Nacional" (FEN); the Distribution Distribution National Tariff Commission ("Junta Ces Coes Nacional de Tarifas"; JNI); and the National Energy Commission (CNE). At the municipal level, the city councils of Bogota, Medellfn, and Cali also played a role in the sector by appointing representatives to the boards of directors of EEB, EPM, and EMCALI. 1.25 A corporate sketch of the sector is shown in Figure 1.3; additional information about the different organizations appears in Annex 2. The relationship between MME and ISA has been formal in the sense that the minister has acted as ISA's chairman of the board. In addition, in 1990, after a long period of refinancing the sector's debt, the government swapped debt for equity in ISA and other sector enterprises. Historical Background 1.26 The Colombian economy went through three growth periods between 1965 and 1991: (a) a stage of relatively high growth to 1980; (b) a period of decline and recession to 1985; and (c) a phase of resumed growth, albeit at lower rates than those of the late 1960s and the 1970s. 1.27 1.28 In general terns, the economy evolved from a situation of high demographic growth and s.ong migration to the cities in the 1960s to a state of more modest population increases and less pressure on urban resources in the !ate 1970s and the 1980s. The economy also went from a permanent scarcity of foreign exchange to more balanced foreign trade because of the increase in coffee prices in the late 1970s and the resumption of oil exports in the late 1980s. 1.28 Within the energy sector, Colombia was a modest oil exporter until the first oil crisis of 1973- 74; in the middle of this crisis, the country began importing in small quantities. Despite a rising and significant oil bill in the late 1970s, the extraordinary growth in coffee exports more than compensated for the macro effects of increased oil expenditures.  Page 16 Colombia: Power Sector Restructuring 1.29 In the early 1980s, the effects of the second oil crisis were felt, and the economy went through recession and economic stagnation that lasted until 1985. In 1986, the country again was able to export oil as a result of a successful exploration effort. 1.30 The late 1960s were years of major institutional change in the power sector. The heretofore- isolated subsystems of EEB, EPM, ICEL, its CHEC subsidiary, and CVC-prodded in part by the World Bank-created ISA to build and operate the interconnection network. They endowed ISA with a monopoly on the construction and ownership of new power plants, the first being the 500 MW Chivor plant. This prerogative has been the principal point of dispute within the sector since ISA's creation in 1967. Its power was successfully challenged in the mid- and late 1970s, when a significant construction program was developed in which both ISA and its shareholders were assigned new plant construction. 1.31 Demand for electricity roughly 1,% followed the economy's growth pattern. Until the --- t D s late 1970s, overall energy consumption was 12% -- le--- icD-- d--- ---- -- mostly in excess of 10 percent per year. During j l the 1980s, demand growth however swung from ------- one year to the next. Growth in electricity 8% --l,--- consumrption has tended to normalize at about 5 / \ percent per year (see Figure 1.4). 6% - --'- -r- _-- 1.32 The ability of the power system to 4% l ----- track electricity demand has not been particularly 2z4 -- ---------- impressive because of construction delays; a lumpy, inflexible investment plan; and financial 0% , , ,,,n ;,,, crises caused primarily by inadequate tariff levels. 1976 198 190 19'2 194 1986 1988 10 Energy shortages occurred in 1976, 1977, 1980- Figure I4: Electricity Demand & Real GDP 81, and again in 1991-92. In trying to correct for Growth Rates the expected shortages of the 1980s, the sector embarked on an ambitious plant-building program in the late 1970s but belatedly (around 1984) realized that the expected demand would not materialize. 1.33 Thus began a period of permanent financial crisis in which the sector was unable to generate enough internal funds to service its debt. The situation was aggravated in 1985 by a devaluation of the peso, done to compensate for its overvaluation since the coffee-boom years. The sector's debt, mostly in foreign currency, had to depend on financing from the government. This, in turn, thwarted the government's efforts to assign resources to other sectors of the economy. 1.34 In 1990, the power sector's debts to the government reached such a state that a radical measure was adopted-the government would swap its debt for equity in the companies, particularly in ISA. Thus the government acquired leverage for adopting radical measures, in particular for strengthening the sector through the institutional restructuring that is the subject of this study. 1.35 Further detailed information on the background of both the economic situation and the power sector is included in Annex 3.  Main Sector Issues Page 17 Power Sector Issues 1.36 Three general proc'ems were identified in the Phase I analysis. First, the sectors objectives were set out in vague terms, without a well-defined set of achievable subobjectives. Second, the sector lacked a regulatory mechanism with the mandate to monitor and enforce corrective measures for achieving specific objectives. Third, the sector suffered from indistinct "areas of autonomy" for regional enterprises and an inbalance in centralized and decentralized functijns (this issue will be discussed in rel.tion to planning, investments, and operations). 1.37 The analysis also highlighted a number of specific issues confronting the power sector, singling out those that could be addressed through institutional restructuring. They are grouped in the following five categories anc discussed in the subsections below: ow Management issues and the incentives perceived by the management of the utilities ow Demand and supply issues covering losses, planning, and developing of power plants ow Commercial and tariff issues concerned with power trading between utilities or Financial issues and t,heir relation with the sector's institutional setup cw iElectricity distribution issues related to investment, management and regulation. Management 1.38 Absence of clear objectives, coupled with the lack of a well-defined regulatory structure, created managerial difficulties in most electricity companies. The problem was in the composition of the boards of directors, the incentives they perceived, and the scope of their mandate. 1.39 A conspicuous case was the composition of ISA's board of directors. Except for three representatives from the national government, ISA's board comprised representatives from the different shareholding companies, whose primary allegiance was to their regional enterprises. ISA's shareholders were thus both investors and customers of the company, and the board members' orientation changed depending on which of these two roles predominated. Under such circumstances, periodic crises caused by arrears in capital contributions or by accumulation of energy bills should not have been surprising. 1.40 The situation was similar for other companies, the study found. For example, a typical board of directors of an ICEL or CORELCA subsidiary consisted of a representative of ICEL or MME, one or two representatives from the local government (i.e., the governor of the departnent), and representatives from the local industrial and commercial organizations. With the possible exception of the ICEL and MME representatives, the majority of the board members were accountable either to their constituents or to the organizations that sponsored them (as in the case of the representatives from the local chambers of industry or commerce). Given the absence of hard budget constraints and the certainty that the government, acting either through ICEL or CORELCA, would provide financial relief, the board would oppose unpopular tariff increases. It tended to favor measures with short-term benefits as opposed to more desirable decisions with long-term benefits.  Page 18 Colombia: Power SectorRestructuring 1.41 The scope of authority of the boards of directors was also an issue. By taking part Systtm (formally or informally) in the day-to-day ISA management of the company, many of them acted EPM m as administrative rather than directive boards. This situation created a conflict in the sense that EMCALI - the management of the company was no longer ICEL held accountable to the board for its performance, CORBLC A leading to its administrative deterioration. cvc BEB - _ 1.42 A dramatic example of negligent 5 1 _, _ 2 management was in the losses for all subsystems,