Peru - Public investment program 1966-1967 (Vol. 3 of 7) : Electric power

RETURN TO R ESTR I CTE D REPORTS DESK WITHIN WH155 ONE WEEK Vol. 3 This report was prepared for use within the Bank and its affiliated orgonizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AN APPRAISAL OF THE 1966-1967 PUBLIC INVESTMENT PROGRAM OF PERU in seven volumes) VOLUME III ELECTRIC POWER December 28, 1965 Western Hemisphere Department  CURRENCY EQUIVALENTS 1 US $ = 26. 82 Soles 1 Sol (S/.) = 3. 7 US cents 1 million Soles = US $37, 286  TABLE OF CONTENTS Page No. I.P INTRODUCTIONote ................. 1 II. ELECTRIC POWER LEGISLATION ........ . . . . . .... 5 Electric Industry Lai; (No. 12378) .............Q. . S Law of Autonomous Enterprises (No. 13979) ............. 6 Interconnection Law (No. 14080) 00o0.v0.000 ... 7 III. ENTITIES IN THE ELECTRIC POWER SECTORS ................. 9 IV., EXPANSION PLANS .......*@ ....**..**. * *o0eeo ** G.@O* 11 Government's Program ..... 4S.4*.4O*........... *4.*4. 11 The Corporacion de Energia Electrica de Mantaro (CORIAN) Mantaro Corporation . . . ....... . ...... ... 4.. . 11 The Corporacion Peruana del Santa - Santa Corporation.. 15 Corporacion de Fomento y Desarrollo Economico del Departamento de ITacna - Tacna Corporation . ... -o 15 Private Companies .......... a...... .. ...... .. .0. . . 16 Empresas ElLectricas Asociadas and Hidrandina S.A. (Lima Light) ................... ............. 16 Pativilca - Grace and Company ..... 17 Cerro de Pasco .. .e . ..a.... 0.0.......... * 18 Southlern Peruvian Yining Corporation .......... .. 18 V. FUTURE PLANS **.*..** 4*e**4*C eoo4**4* 19 VI. CONCLUSIONS ................. se..,*. 20 Electric Power Service to the Public ............... 20 Captive Plants in Mining and Industry ............ O . ... 20 Autonomous Government-owned Corporations ...4..........20 The Mantaro Corporation % .*......... 21 Servicios Electricos Nacionales ...... 21 ANNEXES 1 - Empresas Electricas Asociadas (Lima Light) and Hidrandina S.A. 2 - Private Companies Serving the Public 3 - Autonomous Government-owned Development Corporations 4 - The Mantaro Project 5 - Mantaro Hydroelectric Project - Actual and Estimated Sources and Application of Funds 6 - Public Electric Power Sector  -2- CHARTS 1 - All Peru: Installed Electric Generating Plant Capacity, 19h0-1964. 2 - Lima Area: Energy Sold to Various Classifications of Customers. 3 - Central Region of Peru - Installed Capacity and Maximum Demand. 4 - Lima Area: Installed Capacity and Ilaximum Demand. MiAPS 1 - Government's Proposed H.V. Trans,mission Line Program 2 - Mantaro Transmission Line Program  P?I"'2ATOT.Y 'TOT- The focal point of reference in this report is the investment program prepared in early 1965 by the National Planning Institute (INP) as a proposed basis for the Government's investment outlays for 1966. Subsequently, the Goverrmentts Budget proposals of August 1965 introduced changes in the INP prepared programi. }1hile it has not been possible to revise this report to take account of these changes and comment on them, certain comments are made and some new information included in the main report (particularly Chapter II and supporting tables). The main aspects of the analysis and policy conclusions in the present report are still applicable in broad terms, and many of the de-tails provide usefiul reference material.  I. INTRODUCTION 1. Electric power was first introduced into Peru in 1886 by a locally formed private company which provided power for street lighting and some private lighting in Lima; by 1907 this company hae grown to have an installed capacity of 9,500 kw. In the meantime other companies had been formed in Arequipa, Huancayo, Cuzco and Trujillo. 2. The development of electric service continued at a steady pace to meet demand until the mid-thirties, when total installed capacity in the country was just over 100,000 kw. From that time on demand began to overtake available capacity as a result of increased industrialization, principally in the Lima area. The advent of the Second World War further aggravated the situation as new generating capacity could not be obtained. After the war, expansion of power facilities was hindered by the lack of adequate eLectric power legislation to establish satisfactory tariff levels needed to create the incentives to stimulate investnents in new plants. Suitable legis'lation was enacted in 1955 and since then growth in power facilities has been rapid. In general the installed capaAity of about 1,100,000 kw is adequate, at the present time, to meet demand and new facilities are being constructed or planned to meet forecast loads of the future in the larger centers. 3. The Government had not taken an active part in the develop- ment of power facilities until the passage in 1955 of Law 12378 (Ley de la Indjastria Electrica). It then started, through the Directorate of Industries and Electricity in the Ministry of Development and Public Works, to install small diesel and hydroelectric plants in outlying small villages and population centers which were not in the service area of any private company or autonomous public entity. Thus electric service to the public has been and is now largely in private hands. More recently, in 1962, under Law 13979 (Ley de Servicios Electricos Nacionales) the Government decided to establish a new autonomous Govern- ment-owned power entity to be called National Electric Services (Servicios Electricos Nacionales-SEN) which would be responsible for and continue the program of providing rural areas and small villages with power when these were without service. Very slow progress has been made in implementing this decision but the Government hopes to have the new organization fulnctioning later this year. 4. The most important and largest load center is Lima, the capital, which has been served since 1910 by the privately-owned Lima Light and Power Company, now known as Empresas Electricas Asociadas, and its subsidiary generating company Hidrandina, having a total combined generating capacity of 360,000 kw in 1965. 5. The next largest company after Lima Light, among the 12 other private companies serving the public, is in Arequipa with an installed generating capacity of 22,000 kw. The other companies have installed capacities of from 500 kw to about 4,000 kw and are mostly  - 2 - located in towns along the coastal belt. The aggregate installed capacity of these 12 smaller companies is 60,000 kw. There are also a number of smaller plants with capacities of 100 kwi each or less serving smaller population centers which have an aggregate of about 16,000 kw of installed capacity. 6. The greater part of the power facilities in the country are owned by private mining and industrial companies and operated for their own use and by eight large autonomous government-sponsored and owned development corporations which are concerned with the industrial and agricultural development of their regions. These two groups combined actually have about 58 percent of all power plant capacity in the country, amounting to about 640,000 kw in captive plants which also give some service to small communities in their vicinity. 7. In order to provide generating capacity for forecasted future demand in the larger centers throughout the country, there is now under construction and due to be completed during 1965 to 1968 about 380,000 Lwq of plant, from 20,000 kw to 60,000 kw capacity each. Of this capacity 120,000 kw will be for public service in the Lima area while the re- maining 260,000 kw wil'l be in captive plants in industry and mining (150,000 kw) and in the autonomous development corporations (110,000 kw). 8. In addition to the new plants under construction, a number of potential projects are under study by the Government agencies and the private companies. By far the largest of these is the Mantaro project which would have an ultimate capacity of about 2,600,000 kw and an estimated gross annual generation of about 15,000 millicn kwh. A consortium of three European firms offered in 1962 to construct the first stage of this project and finance part of the cost. Mx5er this plan the civil' works of this project would initially be built for a ccpoacity of 660 1M wh,ile the equipment would be installed in two steps of 330 UW each utilizing units of 110 NW. The project site is on the Mantaro River in the Department of Huancavelica on the eastern slopes of the Andes. The power would be delivered by transmission lines crossing the Andes to the Lima area and the central region of Peru. 9. In view of the magnitude of this project, the Government created the autonomous Mantaro Corporation in 1961 to develop the power potential of the Mantaro River. This corporation is still in active discussions with the consortium of European firms and no decision has yet been published. The reason for the protracted discussions between the consortium and the Government (Mantaro Corporation) is that the original offer was not supported by a project description, firm cost estimates or a construction timetable and the contract was signed sub- ject to the Government's later approval of these matters. In the interim there has been considerable public debate about all aspects of the pro- posal. In particular the cost of the project and its impact on the national budget have been of great concern, especially since the latest estimates of cost for the first stage alone are about S/. 7,000 million  (about US $250 million), which is more than double the original amount contemplated. Furthermore, there is still some doubt about the timing of' this project; at present the Lima area has sufficient plant capacity in its present installations and those under construction or planned to meet forecast demand until about 1973; therefore, if ivIantaro is to be the next major power source for central Peru the decision to construct it could be taken some time within the next two years without prejudicing power supply in the immediate future. There appears to be a need for more complete economic studies to establish optimum timing for Mantaro by taking into consideration the construction of other smaller potential projects to meet power demand until the annual load growth had reached a level where the large blocks of Mantaro power could be absorbed quickly enough to make the project viable considerably sooner and thereby reduce the heavy government subsidy othenrise necessary. 10. The procurement procedures to be followed could have a con- siderable effect on the final cost of a project of this size. The financ- ing terms also are a vital element in making the project viable. Thus, since this project alone represents 83 percent of the proposed 1966 public investment for the power sector and in view of its large size, it is clearly the problem of major concern in electric power. The Plantaro Corporation has the authority by government decree issued in 1964 to reach an agreement with the consortium or to terminate the con- tract and seek other means of building Mantaro, Until a decision is reached it is not possible to give any other comment on this matter. 11. The regional public development corporations are considering a number of potential power projects; many of these are part of irrigation projects now being constructed or planned. The Government, through the Directorate of Industries and Electricity in the iviinistry of Develop- ment, is also studying a number of smaller potential power projects throughout the country. Practically all these projects are in the very early stages of execution or investigation and in some cases no definite reports are yet available. 12. Thle private companies serving the public are also formulating and studying plans for plants beyond those now in construction. The largest among these would be the 120 MW N7iatucana plant to be added to the existing Lima system in about 1969 by Hidrandina with a further 200 Nil in two other potential plants being given preliminary study for possible future construction. 13. In addition to generating plants, both the Government and private groups are discussing transmission and distribution system ex- tensions. The more important aspects concern the Government's plan for the gradual construction of transmission lines along the entire coast eventually to form a continuous interconnection of all coastal towns. This is at present simply in the general planning stage and it will be a number of years before any practical steps would be economically justifiable except for the gradual and progressive extension of existing  transmission systems. In the central region of the country, and as part of the Mantaro project, there is contemplated a high voltage loop which would interconnect 1!Iantaro with Cerro de Pasco, Lima, Ica, Pisco, Chimbote and Pativilca. These transmission lines have as part of their purpose the interconnection of load centers so as to provide a sufficiently large potential market for N5antaro power. There is some doubt as to the justification of the proposed timing of the constructing of these lines and consideration should be given, along with the timing of Nantaro, to the possibility of a more gradnal development of this transmission plan so as to keep construction and investment in line with the actual growth in demand. There has apparently been a tendency at times for some planners in Peru to assume that electric power demand can be created simply by makdng power available; unfortunately, this is not al-ways the case and such an approach can be financially very costly. There are some very evident examples among the government-owned development corporations to illustrate this point.  II. ELECTRIC POWER LEGISLATION Electric Industry Law (No. 12378) - 4 1 The first law to regulate the Electrical Industry - defined as the generation, transformation, transmission, distribution and purchase or sale of electric energy - was enacted in July 1955 as Law No, 12378. The stated principal purposes of this law are: (i) to regulate the Elec- trical Industry; (ii) to promote the development and improvement of the Electrical Industry; and (iii) to stimulate the investment of private capital in the Electrical Industry by assuring its recovery and an adequate return on investments in installations for service to the public. The law also specifies that state or municipally-owned entities which provide electric service to the public shall be subject to the provisions of this law. 15. Law 12378 provides for the creation of the. National Tariff (ommission composed of seven persons. A Chairman appointed by the Pres- ident of the Republic serves a four-year term. Six other members serve two-year terms and represent the Directorate, Industries and Electricity (of the iinistry of Development and Public Works), the Department of Taxes, the National School of Engineers, the National Society of Industries, the Electrotechnical Association of Peru and the Association of Peruvian ELlectrical Companies (the private power companies). The members must be professionally qualified and, except for the representative of the lLssociation of Peruvian Electric Com.panies, must not have direct or indirect interests in electric public service companies. The Commission is empowered to authorize, modify and interpret electric tariffs and, wihen necessary, to impose fines as prescribed by the law upon entities which infringe its provisions. 16. The law provides for electric tariffs to be established at a level which will produce gross revenues to cover all operating costs and give a return of from 11.5 percent to 15 percent on the capita'l invested by the concessionaire. The higher rate of return applies to small companies only. The return is divided into two portions: (a) from 86.5 percent to 12 percent annual dividend on invested capital and (b) a three percent "commercial profit" to give the total return mentioned above. The operating costs allowed include all direct costs, interest payments, depreciation, contributions to the System Expansion Fund (described below) and all taxes. 17. The electric tariffs are subject to a statutory review and adjustment as needed every three years to meet the provisions of the law. At that time the Tariff Commission will appoint experts to revalue the physical assets of the concessionaire by appraisal. The Depreciation Reserve will be correspondingly adjusted. The concessionaire is obliged to reflect the resulting increase in the value of his assets in an appro- priate increase in the value of his capital stock. An extraordinary tariff adjustment and revaluation of assets may be requested by the Nlinistry of Development and Public Works or the concessionaire at any time.  18. The law obligates the concessionaire to expand the distri- bution system in his service zone and to create a "Fondo de Ampliaciones" (System Expansion Fund) out of which the concessionaire is obliged to extend the distribution system beyond the original service zone to meet demands for electric service. The annual contributions by the con- cessionaire to this fund may not exceed five percent of the investments made by the concessionaire nor may the accumulated amount of the fund exceed 20 percent of the total investment in system expansions. The System Expansion Fund and the part of the Depreciation Reserve pertaining to assets financed out of the proceeds of the System Expansion Fund be:Long to the public domain. 19. The annual contribution to the Depreciation Reserve may not exceed five percent of the total amount of the physical assets in service. Also, the Depreciation Reserve will be kept in two accounts, so that the part pertaining to the depreciation of the assets belonging to the public domain and financed from the System Expansion Fund will be kept separate and only used to replace or expand these same assets. 20. The law also creates the Superior Electrical Council (Consejo Superior de Electricidad) consisting of four regular members (representing the College of Engineers, tne Peruvian Electrotechnical Association, the Association of Electric Companies of Peri and the College of Lawers of Lima) and two ex-officio members, namely the Minister of Development and Public Works, as chairman, and the Director of Industry and Elec- tricity. The stipulated duties of this body include granting and can- ceLlation of concessions, proposing measures to stimulate the develop- ment of the electric industry, suggesting modifications to electric power laws and making suggestions to the Executive for the better ap- pl:ication of the existing law. 21. The Electric Industry Law has stimulated the development of the electrical sector and it has enabled the private companies to obtain financing to expand their plants to meet substantial increases in electric power demand. Prior to 1956 the average annual increase in total installed capacity in the country was 17,000 kw whereas since 1956, when the Electric Law became effective, the average has risen to 68,000 kw a year. Chart 1 shows this trend. Law of Autonomous Enterprises (No. 13979) 22. In February 1962, Law 13979 was enacted to authorize the Executive to organize as autonomous enterprises the National Railroads, the Potable Water Service of Lima and the National Electric Services. In July 1962 a supreme decree was published to authorize the creation of National Electrical Services (Servicios Electricos Nacionales - SEN). The decree states that SEN would be responsible for providing the country with sufficient electric energy to stimulate its economic development and to raise the standard of living of its people, in conformity with the National Electrification Plan. It would collaborate with private  capital by encouraging the channelling of private investments into the electrical industry. 23. SEN would start by taking over and operating the small diesel and hydroelectric plants already built by the Directorate of Industries and Electricity (DIE) with government funds in several hundred small villages and population centers throughout the country. These plants range from 10 kw to 1,000 kw in size, most being small; aggregate capacity :is about 25,000 kw. SEN would continue the Govermnent's program of in- stalling plants in rural locations and would encourage the organization of cooperatives and concessionaires, principally in rural areas and, where the private companies are not providing service, would form in- dependent electric power entities. The decree further states that SEN would have the obligation of making itself self-financing within five years out of its revenues and foreign and local borrowings. Prior to that time the Government would make annual contributions from the national bud- get to SEN to cover its deficits, which presumably would include those iresulting from operations and investments in new plants. SEN has not yet been formed although the DIE has made progress in planning an organ- :izational structure and is now giving attention to the problems of selecting staff for the futiure entity which is expected to begin operations by the end of 1965. 24. The creation of an organization to operate and maintain the large number of existing small plants seems necessary to safeguard the investment already made. However, it is questionable whether the program of installing small plants should be continued. It would seem better for SEN to encourage and foster the formation of municipal, private or mixed independent enterprises of such a size that they would have a reasonable chance of being viable entities which could provide acceptably (efficient electric service at reasonable cost. Later on, the program could be directed at gradually integrating as many as possible of these saall entities into larger groups by transmission line ties. Wherever possible the generation of power is more economically accomplished by large entities which can then sell power in bulk to smaller distributors. Therefore, SEN should serve as a catalyst to stimulate the creation and development of the initial small groups and then encourage them to amalgamate in the manner suggested above. Interconnection Law (No. 14080) 25. In May 1962 the Interconnection Law was enacted for the purpose of' encouraging and fostering the interconnection of the electric systems irL the country in order to secure a more efficient and economical use of power generating facilities by the interchange of energy. The law stipulates, however, that no public or private power entity will be caused to supply energy to the interconnection until its own demand has 'been satisfied and no entity will be caused to accept energy when its own facilities are still able to supply the demand. At present, the  - 8 - widely dispersed location and small size of most of the power systems arid entities in Peru does not lend itself to interconnection. However, the possibilities of interconnection have been under study by individual private companies and it can be expected that at a suitable time inter- connections will take place. In all probability, they will first occur in the central region where the larger power entities are situated.  III. ENTITIES IN THE ELECTRIC POWER SECTORS 26. The entities in the electric power sector may be placed in four main groups: (a) The private companies serving the public - about 434,000 w-. (b) The captive plants in major private industry and mining - about 5h0,oo0 kw. (c) The government-owned autonomous corporations - about 100,000 kq. (d) The small government-owned plants supplying rural popu- lation centers - about 25,000 kw. The generating capacity of all these groups aggregates about 1,100,000 kw. The largest power entity is the Empresas Electricas Asociadas and its subsidiary Hlidrandina with a combined capacity of 360,000 ku which serves the greater Lima area. (See Annex 1 for a brief description of the Empresas Electricas Asociaclas.) Lima is the capital city and the commercial and industrial center of Peru where over two million of the country's eleven million population live; there is no other town of csmparable size in the country. The electric energy generated is utilized at present in -the following proportions: Category Percentage of Total of User Entire Country Lima Area Mining 37 - Industry 28 36 Domestic 15 35 Agriculture 9 - Commerce h 22 Others 7 7 Total 100 100 Chart 2 shows the growth rates for these various classifications of users in the Lima area during the past 18 years. 27. Fourteen other larger private companies serving the public have an aggregate of 60,000 kw of installed capacity (see Annex 2 for list) of these the Sociedad Electrica de Arequipa with an installed capacity of 22,000 kw is tihe largest. Servicios Electricos serves a group of small towns and has an aggregate capacity of 18,000 kW but the individual units are much smaller. The remainder of the companies range from 100 kw to 4,000 kw in installed capacity. There are in acidition a number of very small companies with an aggregate of about 14,000 kw of installed capacity serving small population centers. 28. The captive plants in mining and industry aggregate the largest group of electric power plant capacity having 540,000 kw. The largest entities in this group are three mining companies - Cerro de Pasco, Southern Peru and Marcona - and the Pativilca industrial complex which aggregate over 270,000 kw or half the total of captive plants. The re- maining half is in six plants of from 10,000 kw to 15,000 kw each, totalling 70,000 kw and a large number of much smaller plants in indi- v:dual industries totalling 200,000 kw.  - 10 - 29. Of the eight autonomous government-owned development corporations, (see Annex 3), the Corporacion de la Santa has the largest electric gen- erating capacity in a hydroelectric plant of 50,000 kw. The Santa Corpo- ration has built a steel mill at Chimbote and is studying plans to ex- pand it by the addition of a rolling mill and other facilities. It is a:Lso involved in coal mining, irrigation and colonization. The other development corporations, except the Mantaro Corporation described separate- lyr under expansion plans below, are involved in public works, irrigation, colonization, industrial development and general area development. In most cases the power facilities serve their own needs and the small ccm- mtnities in their area. The power sources usually result from the irri- gation plan and form part of it; although in some cases separate hydro- electric sources have been built. Most of the existing plants are under 10,000 kw capacity, with the exception of the Santa Corporation (50 IlM) and the Cuzco Corporation (0 hM).  IV. EXPANSION PLANS Government's Program 30. The Government's expansion plans for the electric power sector are being implemented through the autonomous government-owned corporations and through DIE (Ministry of Development), discussed above. The major expansion plans are summarized below. The investment program proposed by the Government's National Planning Institute (INP) for 1966 and the Bank .ission's proposed investments for 1966 and 1967, are set forth in Annex 6. The Corporacion de Energia Electrica del Mantaro (CORNAN) 31. The Mantaro hydroelectric project would make use of the three bends in the Mantaro River to develop a total of about 2,000 meters head for a proposed two-stage, five-step development of an ultimate electric generating capacity of 2,650 MW. Annex 4 gives a resume of the details of the proposed project. 32. The Mantaro project has been discussed for over 20 years as the largest potential electric power project to supply central Peru. It was described in the l956 report by Slectricitede France concerning a general plan of electrification for the country and in tihe 1960 Arthur D. Little report on a national development plan known as "Peruviarr. In view of the large size of this project, the Government created the Mantarc Corporation in December 1961 by Law 13769, for the purpose of developing the electric power potential of the Mantaro Valley. 33. In 1962 a consortium of European firms (The English Electric Company, George Wimpey and Company, Ltd. and Siemens-Schuckertwerke A.G.) offered to construct the first stage of the project and through Lazard Brothers and Kreditanstalt fur Wiederaufbau offered to provide up to about $52 million equivalent of financing to cover a substantial part of the cost. The contract offered did not specify the extent of the work or the estimated cost but was subject to the Government's approval of the preliminary plans, cost estimates and construction schedule which were to be submitted by consulting engineers at a later date. The con- tract was signed by the Government in May 1962 and the firm of Electro- consult was engaged to prepare the engineering and construction plans and cost estimates for the Government's approval. 34. The amount being considered at the time of the signing of the contract with the consortium, based on a memorandum from English Electric and Siemens of June 1961, was S/. 2,407 million as the cost for a 300-400 MW plant. In their report of May 1963 Electroconsult increased this estimate to S/. 3,771 million and in February 1964 again raised the estimate to SI. 5,251 million, after more detailed plans and specifi- cations had been prepared and some site investigation had been under- taken. In general the Electroconsult plan envisaged the construction of the civil works for about a 660 P1M plant in the first bend of the river and the installation of the equipment in two steps of 330 IW each to meet system demand as this developed. The subsequent stages and steps wouild depend upon future pow-yer demands.  - 12 - 35. This project is the largest single project in Peru's national investment plan for the public power sector, representing 83 percent of the total proposed. In view of its very large size and the considerable investment involved, particularly the large annual contributions the Government would be required to make, the contract with the consortium and every aspect of the Mantaro proposal has been the subject of con- siderable ciiscussion which is still going on. 36. Another very important aspect which has given rise to extreme concern has been the more than doubling of the cost estimates which caused the Government, through Supreme Decree No. 67-5 of August 1964, *to authorize the Corporacion de Energia Electrica del Nlantaro (CORMAN) to carry out the Mantaro Project and to renegotiate or terminate the contract with the consortiuzm. These negotiations are still going on but at the time of writing no announcement had yet been made by CORI,AN or the Government. The purpose of the negotiations, as declared by CORiAN in its published report of August 1964, is to obtain a firm price on acceptable conditions and to obtain financing terms that the Govern- ment could find manageable. The stated alternative would be to cancel the contract with the consortium under mutually agreed conditions and for CORMAN then to seek financing from other sources on more advantageous terms. 37. CORIAN engaged the French consultants, SOFRELEC, in 1964 to review the Mvantaro project and to make certain economic comparisions with two other projects (a) the Huaura hydroelectric project (330 MW), (b) the construction of a thermal plant (150 MW) to burn newly discovered natural gas at Aguaytia. The economic comparisons made by SOFRELEC showed that Mantaro would be more advantageous than these alternatives, This comparison was not a sufficiently complete study of alternatives to Mantaro, neither did it provide an adequate basis for a judgment of the timing of Mantaro in relation to the possibility of first constructing other projects. SOFRELEC clid, however, in consequence of its study, increase the estimated cost of Mantaro by raising the cost of the first step (660 1N civil works with 330 IMW equipment) to S/. 5,990.2 million and the second step (330 MiT equipment) to bring the total to SI. 7,002.7 million as compared with the lower estimates previously submitted by Electroconsult (see paragraph 34). :38. The Nlantaro project forms the focal point of the Government's electric power expansion program for central Peru and would provide the power requirements for that region for one to two decades. In addition to the generating plants the program includes a high voltage (220 kv) transmission ring (see Map 2) connecting Mantaro, Lima and Pisco with later extensions to Pativilca, Chimbote and Cerro de Pasco. The purposes of this interconnection would be to provide a larger potential market for Mantaro power and an attempt to stimulate load growth by making Mantaro power available at these locations. It is also hoped that gradually the existing diesel power plants in public or private service would be replaced by power from IIantaro. This aspect receives further comment when the power market is discussed below.  - 13 - 39. Reference has already been made (see paragraph 36) to the impact this very large investment would have on the national budget; Annex 5 gives a cash flow prepared by COalAN and based upon estimated figures given by SOFRELEC in their 1964 review and made available by CORIIAN in February 1965. According to this estimate the Government would be called upon to contribute substanuial amounts of about SI. 350-500 mdllion a year during the construction period (1964-1970) and would have to continue contributing during 1971, 1972 and 1973 in the amount of S/. 187 million, S/. 150 million and S/. 66 million, because Niantarots revenues during that periodi would be insufficient to provide the funds to meet debt service. Thus the total Government contribution during the period 1964-1973 would be at least SI. 3,396.5 million. Moreover, the cost could be substantially increased during the construction period of at least five years as a consequence of the rising trend in local labor and material costs. W0. The financial aspects of any project of this size are also greatly influenced by the financing terms and the procedures to be followed in the procurement of goods and services which affect the final cost. Since discussions are still proceeding with the consortium it is obviously not possible to comment further on these aspects. The Government in Decree 67-F deduces from the reports of consultants that there is a possibility that a lower price could be obtained if inter- national competitive bidding procedures were followed for the construction of the project, and it is aware that long-term debt amortization would bE much more advantageous to the financial viability of the project than the period contemplated in the cash flow prepared by COR14AN. l1. It is generally conceded by the consultants and others who have been involved in reviewing the Mantaro project that it is technically feasible. However, the main questions center around the timing of the project and the size of the steps to be undertaken. In a project of this size there is clearly a minimum first stage, which both Electro- consult and SOFRELEC appear to agree should be about 660 EN. It would also appear from the cash flow prepared by CORMAN that, once started, this stage of the project should continue until completed in order to obtain a viable project. h2. In order to examine the feasibility of adding this proposed generating capacity to the power system, several market studies have been made. The earliest was in 1961-62 by Ing. Juan Orellana Z and was followed in 1963 by a study by Electroconsult and in 1964 by a further review by SOFRELEC. All these studies have again been reviewed and brought up-to-date in a recent (March 1965) market survey report by CORMAN. Chart 3 shows the forecast demand and the proposed generating capacity installations prepared by CORMAN, which assumes that Mantaro would enter the system with a capacity of 220 NIW in 1971 and 110 SW each year in 1972, 1974, 1975 and 1976, to complete the first stage of 660 IW. It is interesting to note that this forecast, which should be considered optimistic, estimates the construction and loading of Mantaro at the rate of about 110 MW annually over a period of six years. During  - 14 - all that time substantial annual government contributions are required and these can only cease if load growth matches the forecast so that the entire energy output of' the first step of Mantaro can be sold at t;he revenues estimated. 43. In analyzing the power market CORNIAN gave the following tabu- lation of energy consumption for the large consumers in the region which could be served by Mantaro. Percentage of Energy Consumed by Large Consumers in Central Region 1960 1964 1970 1975 1980 Empresas Electricas Asociadas 52.5 48.8 45.9 44.h 45.h (Lima Light) Cerro de Pasco 31.3 28.1 24.5 21.7 20.1 Crrace and Company 3.9 4.0 4.4 5.0 5.9 Zinc Refinery (proposed) - - 4.0 2.5 1.7 NIarcona Mining Company 0.9 4.2 4.8 5.3 5.3 Irrigation 1.0 1.2 1.5 3.2 2.4 Others 10.4 13.7 14.9 17.9 19.2 Total 100o 100d 100% 100% 100% L4. The major share of the demand in the central region is being served by Empresas Electricas Asociadas in the Lima-Callao area. It is excected that this will continue to be the case for many years to come. Lima Light has its owm expansion program which is described below (see paragraphs 54-58) and which. is designed to satisfy forecast demand until about 1973. Furthermore, preliminary studies are being made of other potential plants which, if the projects prove feasible, would provide a possible 200 NWl to 225 MW to add to the present program of system ex- pansion. 45. The next largest consumer in the tabulation above is Cerro de Pasco mining company which has its own power plants and has its own program for expanding these (see paragraph 60). This is followed by Grace and Company which also has its own expansion program (see para- graph 59). L6. The load growth in the Lima-Callao area is estimated by Empresas Electricas at about ten percent per year. According to the forecast by Lima Light, its system demand is expected to be about 550 IW in 1973. Therefore the annual increment in demand would be about 55 MW at that time and would increase progressively thereafter. This would be only half the growth in demand needed to load Mantaro even over the six-year period contemplated. The tabulation above shows that the major share of the remaining increase in demand is assumed to take place among 'lother" consumers; Marcona Mining Company and Grace and Company. There  - 15 - is sound reason for being skeptical of this part of the forecast until a complete economic study is available to show that existing consumers could be offered tariffs which would induce them to shut down their own plants in favor of purchasing power from Mantaro and that such tariff levels would enable Mantaro to be viable. 147. It would seem that a more complete economic study of system development in stages by first starting other smaller projects compared with the immediate starting of the larger and more spectacular Mantaro project would be essential to a decision on the best program to follow and to determine which course would place the lesser financial burden on the national economy. Ihe load forecasts indicate that there is still the possibility of a one or twio year delay in starting Mantaro without prejudicing the future power supply to the region. This time could be used in completing all the studies required to form the basis of a sound judgment. This course of action would, of course, be con- tingent upon COBMAN's ability to deal with problems related to the present contract. The Corporacion Peruana del Santa 48. The next largest power expansion wqas started in 1964 by the Santa Corporation, the largest of the autonomous government-owned develop- ment corporations located in the departments of Ancash and La Libertad. I't has constructed a steel mill at Chimbote and is studying the feasi- bility of enlarging it by adding a rolling mill and other facilities. It is also concerned with the irrigation and colonization project in the coastal belt between Chimbote and Trujillo known as the Chao Viru project. 49. The Santa Corporation has an existing hydroelectric power plant (50NW) on the Santa River to which another 50 MW unit is being added and scheduled for service in 1966, principally to meet the anticipated in- crease in demand which would result from the proposed steel mill expansion. The power plant expansion is being financed by a US $7.9 million loan in which the Export-Import Bank, US AID and Westinghouse Electric Company are participating. The Santa Corporation is providing about S/. 30 million towards the local costs. 50. Consultants have been engaged by the Santa Corporation to study the feasibility of certain proposed irrigation projects, further hydro and thermal power plant expansion and other development projects in its area. Until the consultant's report is available no judgment can be made as to the feasibility of these projects. Corporacion de Fomento y Desarrollo Economico del Departamento de Tacna (Tacna Corporation) CS1. After the Santa Corporation, this autonomous government-owned development corporation, located in the Department of Tacna on the border with Chile, has the next largest electric power plant under construction,  - 16 - It has obtained a US $70 million Japanese Government credit for area develop- ment including a 35 M4W hydro plant now being constructed and scheduled for service in 1966. The plant would drain the waters of Lake Aricota which contains sufficient water (700 million cubic meters) to operate it at full capacity for 20 years. The inflow to the lake would not make a significant contribution to the water needed to operate the plant. 52.. At the present time there is no market for the power to be gen- erated by this plant, which originally was planned partly to supply power to the Southern Peruvian Mining Corporation and partly to attract industry to the area. The mining corporation is installing its own plant extension which will meet its needs for several years and the other an- ticipated loads have not materialized. More careful planning and the phasing of power plant construction on the basis of accurate load fore- casts would avoid premature investments of this nature. Private Com)anies 53. The expansion plans of the private companies are essentially those of Lima Light and Hidrandina. The smaller companies are concerned with small plant additions and distribution system expansion; the largest of these being Arequipa where a 5,000 kw hydro unit is being added to the existing system. Exnpresas Electricas Asociadas and Hidrandina S.A. (Lima Light) 54. Lima Light'.s system serving the greater Lima area obtains its power from a series of hydrc, plants along the River Rimac and its tribu- tary the River Santa Eulalia, both of which are fed from natural and man-made lakes on the western slopes of the Andes. In addition the company has constructed a tunnel through the Andes to bring water from the eastern slopes by another system of man-made reservoirs and diversion works to greatly augment the controlled flowi in the Santa Eulalia and lower Rimac Rivers. See Annex 1 for details. 55. During 1964-65 Lima Light commissioned the first two units (2 x 60 MW) of the Huinco plant on the Santa Eulalia River. Units 3 and 4 of the same size are scheduled for service in 1966 and 1967 to bring the plant to its final capacity of 240 M4W. In addition the company is adding to the capacity of the Marcapomacocha reservoir and diversion wiorks to provide the increased water flows needed for the final stages of the Huinco plant expansion. The project is being financed by a U1S $24 million Bank loan made in 1960 and a second loan of US $15 million miade in 1963. The company through its Swiss affiliates and through stock sales and internal cash generation is providing an amount about equal to the Bank loans to complete the financing required. 56. The company is preparing the feasibility report and designs for the next hydroelectric plant development on the Rimac River, to be called the Matucana plant (120 MW), scheduled for service in 1968 and estimated to cost about US $35 million. In addition, the company has  - 17 - an extensive program of distribution system expansion estimated to cost about US $8 or US $9 million equivalent annually through 1969. The company intends to ask the Bank to assist in financing this plant ex- pansion. Such plant and distribution system expansion would meet the forecast demand of the Lima area through 1972 or 1973 as shown in Chart 3 which also shows the progressive, step by step, expansion being carried out by the company to meet service requirements while keeping its invest- ment program within manageable bounds. 57. In order to be prepared in case the Mantaro project does not come into service by 1973 the company has given preliminary consideration to other potential plant sites and is studying tentative plans for the 1]illoc (100 nil) and Yanacota (120 }XW) projects, both on the Santa Eulalia River. Moreover, the company has had discussions with the Government concerning the possibility of constructing a high-voltage transmission line from Lima to Ica and Pisco in the south and from Lima to Chimbote and Pativilca in the north., These lines would form a large part of the high voltage system plannecd for the Mantaro project so that if and when Hlantaro was built it would simply complete this system development. The two plants (Milloc and Yanacota) and the transmission system are -tentatively estimated by the company to cost US $35 million plus interest during construction. The advantage of first building the transmission lines between Pisco and Lima and Pativilca is that they would start the :interconnection of load centers and foster load growth which the existing system of Lima Light could supply with its present program of plant construction. There would then be a slower investment program than if IMantaro was started immediately and when it finally did come in, the rate of annual load increase would be at a higher level which would enable the larger blocks of Mantaro capacity to be more readily absorbed as they were built. 58. It would be necessary to study the economics of this proposal because the existing potential demand at the load centers outside Lima would probably not justify the cost of the transmission lines at the beginning and some form of government participation in the financing might be necessary. In any case, some form of graduated development of the whole Mantaro plant and transmission line complex would seem to be the more prudent course for the Government to take. Pativilca 59. The River Pativilca valley and the town of the same name form part of an industrial complex owned by Grace and Company since the end of the last century. It was originally a sugar cane producing project but in recent years has been developed to produce many basic materials for industry. Grace and Company have firm plans to expand the industrial capacity of this complex and requires a 40 PW hydroelectric plant ad- dition to meet these new loads. Arrangements have been made for Hidrandina to build the plant and to own it jointly with Grace and Company. Part of the US $114 million cost of the project is being obtained through supplier credits, a US AID loan and a small loan by the Banco Industrial of Peru.  - 18 - Cerro de Pasco 60. The Cerro de Pasco Mining Company is increasing its present 1L45 F1W hydro plant to 167 NM by adding another unit to the existing plant to serve its own needs. This expansion will be financed from the company's oam resources. Southern Peruvian Mining Corporation 6S1. The Southern Peruvian Mlining Corporation is adding a new 60 NW steam plant to its existing power facilities to serve its own needs; this will be financed from its own resources.  V. FUTURE PLANS 62. The Government's policy, as stated in the decree creating the Servicios Electrico Macionales, is to stimulate the demand for electric power so that an annual growth in demand of at least eleven percent may be attained for the purpose of reaching an average annual consumption per inhabitant of 1,000 kwh in ten years. To achieve these goals about 1,000 3W of new planit will have to be added by 1970. As steps in this direction, a great many studies of potential projects are being made in addition to the major projects already mentioned in this report. Most of the autonomous government-otvmed development corporations are study- ing possible power additions to their irrigation projects or installations elsewhere in their areas. Consultants have been engaged to study 14 potential hydroelectric projects which would provide an aggregate capacity of 1,000 1W and 29 other small projects. 63. There is evidence of a tendency, illustrated by the power policy and by past actions in some regional corporations, for planners to believe that a demand for power can be created simply by making it avail- able. The fallacy of this basis of planning for power exspansion has been amply demonstrated by the present situation in Tacna where a power plant is being completed although no load exists and there is no evidence of any new industrial or other development even being planned. It would therefore seem much more prudent first to make market studies or surveys to ascertain the need for new or additional power facilities and then to seek the most economical means of providing it.  VI. CONCLUSIONS 64. The following will summarize the conclusions reached in this report. (1) Electric Power Service to the Pubic Electric service for the public has been and is almost entirely in private hands. The Empresas Electricas Asociadas (Lima Light serving the Lima-Callao area) is the largest among the 1l larger companies serving the public, having five times the generating capacity (360 MO) of the aggregate in all the other private companies (74 MW). The Electric Industry Law provides a clear and comprehensive legal basis for regulation of the electric industry. It stipulates the procedures and basis for establishing tariffs at levels to give the industry adequate returns on its investment, so that it can keep ob- taining the financing needed to make the continuous invest- ments in plant necessary to meet growing demands for service. Since the enactment of this law in 1955 the private companies have expanded their systems to meet demand, so that the present generating plant capacity is adequate to meet the power demand in the major load centers and forecast load increases are being met by planned new plant construction which is scheduled for service in time to meet the higher demands until about 1970 to 1973. (2) Captive Plants in Mining and Industry The largest aggregate of electrical generating plant capacity is in the captive plants in private mining and industrial companies which comprise 58 percent of the total generating plant capacity (1,100,000 kw) in the entire country. These plants serve the private needs of these companies and are generally adequate for the demand and are efficiently operated. (3) Autonomous Government-owned Corporations Among the government-owned autonomous development corporations the picture is not as clear. These corporations have not always planned their programs adequately and in some instances expensive projects in electric power have been constructed prematurely or larger than was needed at the time, thus im- mobilizing capital unnecessarily and over-burdening the pro- jects with capital costs. The Government would benefit by insisting on more realistic planning and accurate power market forecasts, so that generating capacity would be phased in to meet growth in demand.  - 21 - (4) The Nantaro Corporation This corporation, which was created mainly to develop the electric power potential of the Mantaro River, re-resents the Government's major effort in the power sector. The project itself, which would have a first stage of 660 MW and a potential ultimate capacity of 2,600 MW, is by far the largest single project in Peru. It alone represents more than 2-1/2 times the total existing installed capacity in the entire country. The Mantaro project is not only a very large project which has to be constructed in relatively large steps but, in consequence, is costly and even the first step alone would have a most important impact on the national budget during its construction period of five years and, for several years thereafter wou'.d require government assistance to meet its debt service payments. The economic studies so far made have not been sufficiently complete to provide the basis for a judgment of the timing of Plantaro in relation to the possibility of constructing other smaller projects before Mantaro. The market studies show that about half Mantaro's energy output and capacity would have to be absorbed by Lima Light, thus leav4ng the remaining half to be absorbed by future loads still to be created and to replace the output of existing private plants. Even on the basis of optimistic forecasts it would take at least six years to load the 660 MIVT first stage. There would appear to be a real need for more complete examination of the timing, cost estimates, financing terms, economic justification and investment program of this project before a final decision is made. The load forecasts and planned system expansion program by the existing power entities in the central region appear adequate to meet power demands until about 1972 or 1973. There would, therefore, appear to be a year or two of time during which this exam- ination could be made, so that complete information would be available to make the final decision wyithout prejudicing the future power supply for the region. (5) Servicios Electricos Nacionales (SEN) Sen is the proposed governrment entity to be formed by the Directorate of Industry and Electricity to operate the many small plants the Government has already built to serve small rural villages and population centers and to continue this program. SEN could serve a useful purpose by operating the present installations but it is doubtful that the program of installing these small plants should be continued, except perhaps at a very limited pace. It is considered that SEN would perform a muich more useful service by concentrating on fostering the forrmation of small power companies or entities which could later be integrated into larger units to pur- chase power in buLk from the big power generators for dis- tribution to their customers.  ANNEX 1 EMPRFESAS ELECTRICAS ASOCIADAS (LIIVIA LIGHT) AND HIDRANDINA S.A. 1. Empresas Electricas Asociadas serves the Limna-Callao or greater Lima area (shown on Attachment 1). This is a private company first formed under Peruvian law ;in 1910 under the name Lima Light Power and Tramway Company (Lima Light). About 60 percent of the shares are held by Swiss interests and the remainder are widely distributed with a large number held in Peru. 2. Energia Hidroelectrica Andina (Hidrandina S.A.) is a subsidiary of Empresas Electricas Asociadas and was established in 1946 to finance, operate and construct poaer plants. Hidrandina owns the hydroelectric plants constructed since 19h6 and has a contract with Empresas Electricas Asociadas to sell them the entire output of these plants. Attachment 2 lists the plants serving the Empresas Electricas Asociadas system and Attachment 1 shows the plants and the water sources feeding them. These plants now have a total installed capacity of 360 Pi-V with a further 120 1iiW under constructicn at Huinco and 120 YNW being designed for construction at Matucana. 3. In addition to the power plants serving this system a very important water diversion project was started and is now in its final stage of expansion to double the minimum flow of water to the chain of plants on the Eulalia and Rimac rivers. This project, also shown in Attachment 1, was planned in two stages. The first stage consisted of the construction of the 10,122 meter long transandian tunnel through the continental divide at an altitude of 4,330 meters above sea level; the construction of two concrete gravity dams to convert two natural lakes into controlled reservoirs and the construction of five km of canal and ten km of diversion tunnel to divert the waters of the Tuctu, Antacasha, Cuevas and Sanagar streams and from the two reservoirs, all si-tuated on the eastern slopes of the Andes, through the tunnel to the western slopes to join the sources of the Eulalia River. The second stage, now being constructed will convert the lMarcapomacocho and Antaco lakes into reservoirs and connect them to the transandian tunnel. L. The first stage of the diversion project added two cubic meters of water to the minimum flow to the power plants, thus increasing it to eight cubic meters/sec. The second stage will bring the minimum flow to 12 cubic meters/sec and make feasible the addition of the second stage of the Huinco plant (120 MW) now also under construction. 5. The following statistics illustrate the general size of Empresas Electricas Asociadas at the end of 1963.  ANWEX 1 Page 2 Classification Number of of Customers Customers Kwh Sales (millions) Industrial 3,156 343 Domestic 189,748 333 Commercial 46,568 205 Others 703 66 Total 240,175 947 6. Since the enactment of the Ley de Industria Electrica in 1955 the company has been in good financial condition and, with the help of new capital investments by its shareholders in Switzerland and Peru and through loans from the Bank, has been able to finance the phase of rapid expansion illustrated by the plant capacity data given above and illustrateld in Chart 2. The company maintains a good standard of service in its concession area.  ANNEX 1 Attachment 1 / _ 1,74 M rcococh Z \r>,^P, --ffi ; l *, c MO1 ,COPOO,OOO_ _ C F O O N L ! 0-< 1 V.o.coroomOCocho \ ~ - > ~ "'-\ Ma RtOICATtON = ' S' AMATUCANA A CANTA LIMA~~ ~ ~ LIH and POWER COMPAN /Hchopompo 7 S/roge ~ ~ 4 29 RERE LLAT //UINCO t t PERU \; LIMA LIGHT cond POWER COMPANY t-\si .MY0OPAMPA HX COICA EXISTING PROPOSEl) Hyv,ro Pl.nts U U YANACO ../.COLOMBIA ' Diversion Tu,nnels HUAMPA // "s Choclocoyo ECUADOR) - / Canal.s -- ! .I ., a ' Tra-- -r1-er Stations B _ ' ERAZIL Trannnission Liles _ *C) 620KV_ ? Cacessias Area .. .. :.j n...s ..o Catchment Area -= I z _ . 6' Rese-s-irs 0 Q O 5 10 1 ZOR2 K.