公共隧道尽头的光影与闪电：南部火山锥的电力系统改革

W\tPS2O Li POLICY RESEARCH WORKING PAPER 2074 Light and Lightning at the Competition, rather than privatization, is the key to End of the Public Tunnel transforming the electricity sector in Latin America's Reform of the Electricity Sector Southern Cone-and notjust head-to-head competition. in the Southern Cone Competition for the market and against yardsticks are also Antonio Estache important instruments for Martin Rodriguez-Pardina regulators. The World Bank Economic Development Institute Regulatory Reform and Private Enterprise Division March 1999  | I( Y RESEARCH WORKING PAPER 2074 Summary findings Estache and Martin Rodriguez-Pardina provide an (Here, the structure adopted by Argentina seems superior overview of recent privatization experiences in to that adopted by Chile.) Argentina, Brazil, and Chile. 3) New entry into the system is the ultimate test of They focus on both achievements and outstanding competition. The main gain from competition in problems in the electricity sector. They pay special electricity generation comes from the decentralization of attention to the issue of whether regulators can enforce decisions about when, how much, and what type of compliance and sustain the spirit of reform - bringing generation has to be brought to the market, rather than the forces of competition to the sector - despite the from short-term gains from minimizing costs. unavoidable adjustments and fine-tuning that effective Overall, vertical and horizontal separation in the sector regulation requires. increases rather than reduces the burden and complexity Among the lessons: Competition, rather than of regulation. In a disintegrated system, the issues that privatization, is the key to transforming the sector. For arose in a traditional monopoly situation (fair rate of competition to work, several conditions must be met: return, asset base, tariff to final consumers, and so on) 1) The primary energy source must be competitive for are significantly increased. New issues include third-party competition in the wholesale market to work. (In Chile, access, the promotion of competition, interconnection the fact that most of the water rights have been allocated pricing, and consistency of regulations across stages of to the major generator company seriously limits competitive development. efficiency in the sector.) Restructuring and privatization are still in their early 2) Monopolistic stages must be formally separate from stages so lessons drawn from experience must be other stages, with clear rules for third-party access. considered tentative. This paper - a product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Gabriela Chenet-Smith, room G2- 148, telephone 202-473-6370, fax 202-334-8350, Internet address gchenet@qworldbank.org. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/html/dec/Publications/Workpapers/home.html. Antonio Estache may be contacted at aestache@aworldbank.org. March 1999. (22 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchanlge of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fuilly polished. 7 he papers carry the names of the authors anid should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the atithors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  COMMENTS WELCOME Light and lightning at the end of the public tunnel: The reform of the electricity sector in the Southern Cone Antonio Estache (The World Bank, Washington, D.C.) and Martin Rodriguez-Pardina (Centro de Estudios Economicos de la Regulacion, Buenos Aires, Universidad Argentina de la Empresa) Abstract This paper provides an overview of the recent privatization experiences in Argentina, Brazil and Chile. The paper focuses on achievements but also on outstanding problems, in particular with respect to the capacity of regulators to enforce compliance and to ensure that the spirit of the reform--i.e. to unleash the forces of competition in the sector-- can remain the guiding force through the unavoidable adjustments and fine-tuning that effective regulation requires. JEL Classification Nos.: D82, L5 1 Keywords: Government Organization, Regulation, Multiprincipal, Collusion. We are indebted to Eduardo Bitran, Jose-Luis Guasch and Jean-Jacques Laffont for useful discussions, comments and suggestions. However, the views expressed in this paper are our own and should not be attributed to any of the institutions we are affiliated with.  1 1. Introduction Throughout Latin America, the structure of the electricity sector has been changing dramatically since the beginning of the 11990s. The search for competition in its basic organization to improve performance is widespread and so is the search for private investment to finance the dramatic system expansion requirements. Large countries such as Brazil, Colombia or Peru as well as much smaller countries such as Panama or Bolivia already have or are about to rely on some sort of competitive bulk pricing system. This is how they see the light at the end of the tunnel they were lead through because of the difficulties governments had in managing these sectors effectively without political interferences. All these countries are recognizing that change is possible and often desirable. Until about a decade, the traditional view in the Energy Ministries was that the generation, transmission and distribution of electricity were best ensured by a vertically integrated monopoly. The argument was simple: there were economies of scale in generation and network economies in transmission and distribution and the need to coordinate the various component of the system is obvious. Moreover, the standard view was that the financing requirements of expansion of these networks were so large that only the public sector could afford to own them. As in many infrastructure sectors, technological changes as well as a better understanding of the organizational aspects of these sectors show that policymakers in the UK but also in Chile and in Argentina understood that this line of argumentation was no longer sustainable. The optimal size for generation plants is now smaller, the time to build these plants is generally much shorter than it used to be and there is an increase in the standardization of the design. Similarly, on the supply, technological progress in computers and data processing reduces the transaction costs and significant improvements have been achieved in metering technology. This means that generation and supply are potentially competitive activities. Moreover, fiscal crises throughout Latin America have impeded the governments to offset the dissatisfaction with deteriorating service quality through the financing of the investment requirements. Once the liberalization of international capital flows was decided by reforming governments, the opportunities to rely on foreign private capital further reduced the likelihood of survival of a public provision of electricity in countries or regions that could be attractive to foreign investors. An institutional reform that would allow some type of privatization of the sector was difficult to avoid. This is basically the story that explains the changes in the Southern Cone. The specific institutional form adopted or being considered to introduce competition and attract private investment to finance the investment requirements is however somewhat different in each country as discussed next. The leaders in the implementation of these changes are Chile and Argentina and it is quite obvious that the most recent reformers are trying to learn from these main precursors. As a matter of fact, Chilean and Argentinean consultants can be found throughout Latin America, presenting the lessons of their country's experience and explaining to potential reformers how the market can work in this sector and generate the light at the end of the "public tunnel". They are obviously successful in their quest to spread the word since to a large extend, the latest reformers are adopting and improving upon many of the elements of the changes brought about by these precursors. What these consultants often fail to discuss is the lightning that shows up with the newfound light. These lightning results from the difficulty governments are having in taking on their role as regulators. Yet this role is essential if the gains from private sector involvement and competition in some segment of the electricity market are to  2 be shared between investors and consumers rather being fully captured by the new owners of the sectors. The Chilean and Argentinean reforms are the main focus of the paper. It provides an overview and assessment of the impact of what these changes have actually achieved in Argentina and Chile and the main lessons that can be drawn for countries, large or small, with relatively large shares of thermal sources of energy. The paper also shows how the principles underlying these changes can in fact also be adopted and adapted to countries such as Brazil where the large proportion of hydro-based electricity lead many sector specialists to believe that market based instruments would be difficult to implement. The paper is organized as follows. Section 2 presents how these revolutions allowed the market dreams to turn reality in Chile and Argentina. Section 3 shows how some nightmares still haunt the dreamers. Section 4 explains how Brazil is managing to draw on these experiences in spite of the very particular nature of its generation sources. Section 5 draws the main lessons from the experiences reviewed in the paper. 2. How the dreams of light turned reality in Argentina and Chile Historically, it is difficult not to describe Chile's experience first. It led the way very clearly in the region and in the developing world in privatization in general. Argentina is also a precursor but more in tenns of the scope and speed with which change took place in infrastructure in particular. It managed to improve not only on what Chile had achieved but many would argue also over what was achieved in the UK. The Chilean and Argentinean privatization experiences in electricity reform are now reviewed in that order. Chile. 1 As in most countries considering reform, the conditions that lead to reforms in the sector included price controls, service rationing, overstaffing and large deficits in the public electricity utilities. Within an overall deregulation strategy for the economy but in a context that required strong political support after a difficult earlier privatization wave, the main "declared" goal was increasing the distribution of ownership rather than maximizing revenue or simply returning the economy to the market. The privatization strategy. The overall privatization strategy was simple enough. The utilities had to be transformed in public companies with tradable shares and subject to standard commercial auditing procedures. Privatization per se started in 1986 and most took place within 4 years--only two generation companies were left to be privatized by 1990 and have been privatized since. This was done through three mechanisms: * the sale of the smallest companies through public auctions --awarding the deal to the highest price bidder--; * the auction of share packages on the stock market for the largest companies and; I This section builds on Bitran, Estache, Guasch and Serra (1997), mimeo  3 * the sale of small packages of shares in the largest companies (popular capitalism). 2 The percentage of private owners of ENDESA increased slowly from 30% in December 1986 to 72% three years later. Institutional investors (such as pension funds) would eventually account for about 25% of the total stocks of privatized utilities, providing a good long term commitment to the financing of the sector. Usually workers of the privatized utilities would get between 5 and 10% of the shares to ensure their political support although a small percentage of forner civil servants in fact managed to acquire a large percentage. The restructuring strategy. The restructuring per se was done in two stages. The first took place between 1974 and 1979. Its main purpose was intended to adjust price to allow the public utilities to achieve self-financing and to prepare for the future private sector participation. The second stage, started between 1979 and 1990, with the separation of generation and transmission from distribution and continued with significant institutional reforms discussed below, including the introduction of a new regulatory framework in 1982. From an historical perspective, these events were quite important: they were showing that unbundling in the electricity sector could work. More specifically, the two existing utilities, ENDESA and Chilectra, had been decentralized and regionalized. ENDESA, the largest company, had been divided into 14 companies: 6 generation companies (with capacities varying from 35MWE to 1832MW), 6 distribution companies (with customers bases varying from 5,000 to 143,000 and two companies combining generation and distribution (Edelaysen (15,000 clients) and Edelmag (35,000)). Chilectra was divided into three firms: a generating company (Chilgener with 756MW capacity) and two distribution companies, (Chilectra with 1,064,000 clients and Chilquinta with 322,000 clients). The restructuring did not go to the limits of the possibilities offered by technology to introduce competition in the sector. The most important failure in that respect was the fact that Endesa was privatized jointly with its transmission system, which is the largest one in the country. The main reason was that the transmission pricing rules had not yet been fully defined and as seen below, this decision is continuing to haunt Chile's regulators. This brings us to the discussion of the regulatory framework. The strong legal support reforms. A new electricity sector legislation was introduced in 1982. Its stated goal is to maximize social welfare by establishing conditions in which the energy system can develop and operate efficiently. Distinguishing explicitly between generation, transmission and distribution, the electricity law spells out the main rules for their regulation but also for the allocation of licenses, pricing, investment, quality and safety. In addition, it makes clear the obligations and rights of all players involved: the service providers as well as the government institutions. It also includes detailed regulations with explicit mechanisms for settling disputes between the regulators and the utilities, with the judiciary as final arbiter. Distribution (to small users) and transmission are considered natural monopolies. Competition is the norm in generation and in the supply to large users (those requiring more than 2MW of power and it could be argued that this is too large a number to be able to achieve effective competition). There are no limits to vertical or horizontal integration. The access rules are different 2 Privatization was also conducted though a very specific approach which involved giving shares as a way of returning the financial deposits users had to make per kW of connected power.  4 for generation, transmission and distribution. The use of property for the generation of electricity requires a concession. This implies that entry is free for thermal generation while it is not for hydro and geothermal generation. However, while some firms can operate without a license, most will want to have one since a license provides some exclusive rights. The granting of the license is organized as a competitive process in which projects are ranked according to costs. Each year, the Energy Commission assesses the minimum cost expansion plan for the system and clears the conditions for entry. For transmission, entry is free. For distribution, concessions are needed for systems larger than 1SO0kW. These licenses are granted for an indefinite period, but they can be withdrawn when service quality falls below the legal standard. It is possible for the service areas of two or more operators to overlap to further promote competition in the sector. The price system. The price system consists of regulated charges for small customers and freely negotiated rates for large customers whose maximum power demand exceeds 2MW. The regulated rates must be within a 10% band of the average price of freely negotiated contracts. These contracts represent about 40% of the total consumption. The regulated price to final customers has two components: a node price, at which distributors buy energy from generating companies, and a distribution charge. The node price adds up to the sum of the marginal cost of energy, the marginal cost of peak power and the marginal cost of transmission. It is thus designed to approximate long run marginal costs. The Economics Ministry, with technical support from the National Energy Commission, calculates node prices. The distribution charge is recalculated every four years in a procedure that consists of determining the operating costs of an efficient firm and setting rates to provide a 10% real return on the replacement value of assets. These rates are then applied to existing companies so as to ensure that the industry average return on the replacement value of assets does not exceed 14 percent or fall below 6 percent. If the actual average industry return falls outside this range, rates are adjusted to the nearest bound. The operating costs of an efficient firm and the replacement value of assets are obtained as a weighted average of estimates made by consultants hired by the industry and by the NEC, respectively, where the weight of the NEC estimate is two thirds. The Regulatory Institutions. The sector is controlled by three key government institutions. In fact, their creation preceded the actual privatization--which is in principle a good thing. The National Energy Commission (NEC) was established in 1978 to develop medium- and long-term guidelines for the sector independently of the potential influence of the large utilities in the sector. It is managed by a board of directors composed of seven Ministers and has an executive secretariat, technical staff and resources to recruit special advisors as needed. The NEC proposes policies to be implemented through laws, decree of ministerial resolutions. It sets tariffs. It also grants licenses to public service distributors for specific areas.  5 The electricity law also resulted in the creation of an Economic Load Dispatch Center (ELDC) to coordinate the activities of all generating companies--in other words, it is essentially a generators' pool. Its specific objectives are to achieve the minimum total operating cost for the system as a whole and ensure equitable market access to all generating companies. Each member of an ELDC is entitled to make direct supply contracts with clients for amounts up to its available firm capacity. Any shortfall has to be purchased from other members at the marginal cost of peak power, equal to the annual cost of increasing installed capacity during peak demand periods by one kilowatt. The ELDC plans daily production and computes the instantaneous marginal energy cost by considering the variable costs of generating units currently operating, independently of any direct supply contracts there may be. The programming of electricity generation, disregarding supply contracts, gives rise to energy transfers between generators, and these are priced at the system's instantaneous marginal energy cost. The last key government actor of the sector is the Superintendence of Electricity and Fuels created in 1985. It was set up as an administrative branch of the Economics Ministry. It supervises compliance with the law and regulation and monitors the quality of services. Finally, it deals with users' and suppliers' complaints and prepares the information for the price-setting process carried out by NEC. The multiplicity of these institutional actors and their lack of independence may be the most salient feature of these institutional arrangements. The only apparent form of independence in the whole system stems from the role of the antitrust commission. The regional Comisiones Preventivas and the Comision Resolutiva seem to have the required independence but in dealing with the electricity sector they may lack the required technical skills to make the most of their independence. The outcomes. Overall, performance has improved greatly with deregulation and privatization.4 Coverage rates have reached 97% and over 70% of the required investment has been done by the private operators. Consumption has grown at an average 8 percent between 1986 and 1997.' Energy losses are about a third of its historical levels (less than 8 percent in recent years). Labor productivity has doubled (from less than 300 clients/employee at the end of the 1980s to almost 600 by 1997). Similarly, the number of GWh of output generated per worker went up from less than 5 to almost 8. Argentina Following partially the models adopted for the electric sector in Chile and the United Kingdom, and in order to allow competition in those stages of industry where it is possible, the new legal framework of electricity vertically separated the industry. Generation, transport, distribution and supply (or commercialization which is an activity which was not unbundled in Chile) were separated and legal restriction were put to prevent reintegration. But in many ways, one of the most innovative aspects of Argentina's reforms is the introduction a quite a rigorous set of processes. In fact, this is one of the things most systematically copied by most other 3The firm capacity of each producer is the maximum power which its generating units can contribute in the peak period of the system with a reliability exceeding 95%. 4 A more analytical assessment of the welfare gains of utilities deregulation and privatization is provided by Galal (1992) and Luders (1993) and summarized in a critical survey by Paredes (1995). The growth rate was almost 9% between 1990 and 1996.  6 countries in the region and this is one of the main focuses of this section.6 This is because it seems increasingly clear that establishing a regulatory framework before privatization improves the outcome of the restructuring process. A comparison of Argentina cross-sectoral experience seems to confirm that Gas and Electricity, where law established the regulatory framework before the restructuring and privatization took place show better performance and less controversy than telecoms and transport privatization. This success requires time and preparation and this deserves some detailed explanations. The big picture of the privatization process. The main purpose of the reform of Argentina's electricity sector was to reach efficient pricing and production levels in the short term, and an investment level sufficient to meet demand in the long run. This entailed a major restructuring of the sector which started in 1989 and is still going on in the provinces. The legal basis of the restructuring process is spelled out in the 1989 laws deciding the global reform of the state. For the electricity sector, the process began when the federal government franchised the distribution and commercialization activities of SEGBA,7 the vertically integrated utility supplying electricity to 13 million people in the Greater Buenos Aires. The main next step was in 1992, with the privatization of the electric generation and transmission activities that SEGBA was still carrying. With these two changes, the original public firm had been vertically disintegrated into seven business units: four generation firms,9and three distribution firms. These units were either sold or concessioned to the private sector through international bids.'0 The Regulatory Framework. A law (Law 24065) provides the regulatory framework of the electricity sector. Congress approved this law in 1992. This law sets up the general objectives for the sector and creates an independent regulator in charge of enforcing them. Its discussion and approval by Congress guarantees the strong support and the matching commitment to the changes and their stability. The general objectives spelled out in the electricity law--and now found in most similar laws in Latin America -- guide not only the overall design of the regulatory framework but also the regulatory decisions taken by the regulators. According to the law, the objectives of the reform are to protect adequately user's rights; promote competitiveness in both electricity production and demand markets and encourage investment ensuring long term supply; promote development, reliability, equality, free access of all transmission and distribution facilities; regulate electricity transmission and distribution ensuring fair and reasonable tariffs; promote efficient supply, transmission, distribution and use of electricity by establishing the appropriate pricing systems and promote private investment in production, transmission and distribution 6 A peculiarity of the Argentinean restructuring process is that there were restrictions on the jurdisdiction over which the reformers could act. Indeed, the reforms were intitiated by the National government and were only of direct application to activities under their responsibilities. This included generation and transmission but it only cover the distributions services that were provided in the capital city of Buenos Aires. This is still significant since about a third of the population live in or around that metropolitan area. The initial outcome was that the 3 large companies that were under federal responsibility before 1991 (one with generation and distribution., one with generation and transmission , one with all stages) were transformed into 18 new companies (13 in generation, 2 in transmission and 3 in distribution) 7 Ser-icios Electricos del Gran Buenos Aires 8 Law no 24.065 (December 1991) and decree n