Colombia - Power Projects

Document of The World Bank FOR OFFICIAL USE ONLY FIL p Report No. 1850a-CO STAFF APPRAISAL REPORT COLOMBIA SAN CARLOS I HYDRO POWER AND 500-KV INTERCONNECTION PROJECTS May 17, 1978 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Colombian Peso (Col$) ('o$1 = 100 Centavos (ctv) C:ol$36.985 (1977 average) = US$1 Col$1,000 = US$27.04 (1977 average) Col$1,000,000 (MCol$) = US$27,038 (1977 average) MlS$ US$1,000,000 WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 2 1 square kilometer (km2) = 0.386 square mile (mi ) 1 cubic meter (m3) = 35.315 cubic feet (ft3) = 264.2 gallon (gal) = 6.290 barrels (bbl) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t; metric; 1,000 kg) = 1,100 short tons (sh. tons) 1 kilowatt (kW) = 1,000 Watts (103 W) 6 1 Megawatt (MW) = 1,000 kW (103 kW = 10 W) 1 Gigawatt (GW) = 1,000 MW (106 kW = 109 W) 1 kilowatt-hour (kWi) = 1,QOO Watt-hours (103 Wh) = 830.3 kilocalories (kcal) 1 Gigawatt-hour (GWh) = 1,000,000 kWh (106 kWh) 1 Terawatt-hour (TWh) = 1,000 GWh (109 kWh) 1 kilovolt (kV) = 1,000 Volts (V) 3 1 kilovolt ampere (kVA) = 1,000 Volt amperes (10 VA) I Megavolt ampere (MVA) = 1,000 kVA (106 VA) 1 Megavolt ampere reac- = 1 Megavolt ampere reactive tive (MVAr) power (COS 0 = 00) 1 kilocalorie (kcal) = 3.968 British thermal units (Btu) 1 Hertz (Hz) = 1 cycle/second ... per..= ../. ...per second; ...per hour = .../s; .../h ...per day; ...per year = .../d; ... /a GLOSSARY OF ABBREVIATIONS ISA = Interconexi6n Electrica S.A. EEEB = Empresa de Energia Electrica de Bogota EMCALI = Empresas Municipales de Cali E]'M = Empresas Publicas de Medellin CHEC = Central HidroeIectrica de Caldas CIIIDRAL = Central Hidroelectrica del Rio Anchicaya S.A. CORELCA = Corporaci6n Electrica de la Costa Atlantica CVC = Corporaci6n Aut6noma Regional de el Valle del Rio Cauca ICEL = Instituto Colombiano de Energfa Electrica NPD = National Planning Department II)B = Inter-American Development Bank Ki-W = Kreditanstalt fur Wiederaufbau Fiscal Year = Calendar Year  FM O FflAL US ONLY COLOMBIA SAN CARLOS I HYDRO POWER AND 500-KV INTERCONNECTION PROJECTS TABLE OF CONTENTS Page No. 1. THE SECTOR .........................1...................... Energy resources ...... ..............1................ Power supply .................................... . 3 Regulation .......................................... 4 World Bank participation in the sector .. ............ 5 Power market .................................... . 6 Rural electrification .... ...................... . 7 Sector investment program and studies .. ............. 8 Finances and tariffs ........... ......................... 9 Constraints on sector development ................... 11 2. ISA AND ITS SHAREHOLDERS ................ .. ............... 13 The Borrowers ....................................... 13 ISA ................................................. 13 Bylaws ............................................ 13 Organization and administration ................. .. 14 Employment and training ............. .. ........... 14 Accounting and auditing ............. .. ............ 14 Insurance ............ ............................. 14 Prior Bank lending ................. ............... 14 ISA's Shareholders ... ............................... 15 3. THE POWER MARKET ......................................... 18 Historic ............................................ 18 Forecasts ........................................... 19 Balances of capacities and energies .............. ... 19 Operation of the interconnected system - Load dispatching ....................................... 21 4. THE NATIONAL DEVELOPMENT PROGRAM AND THE SAN CARLOS I HYDRO POWER PROJECT ...................................... 22 The program ......................................... 22 The Project ......................................... 23 Objectives ........................................ 23 Construction and location ..... .................... 23 Description ..... 24 This report was prepared by Messrs. C. A. Besse, J. Cavallotti and W. F. Kupper on the basis of an appraisal conducted in Colombia in April 1977 and follow-up missions in August and September 1977. This desumi hm a rstfrictod distribution and may be usd by recipients only in the performance of their dkial dute. Its contents may not otherwise be disckneWd without World Dank authoriation  TABLE OF CONTENTS (Continued) Page No. Estimated cost .................................... 25 Financing ..... .................................... 26 Engineering and construction schedule, studies ...... 27 Procurement .......................................... 27 Disbursements ....................................... 28 Environmental aspects ...... ..................... .... 28 Project Risks ....................................... 29 Climatic conditions ................ . .... .............. . 29 Geology ........................................... 29 Seaismicity ................................... 0 .............. 30 5. THE 500-kV INTERCONNECTION PROJECT ....................... 31 Objectives .......................................... 31 Description ......................................... 31 Transmission line ................................... 31 Substations ......................................... 32 Terminal substations ........................... ... 32 Intermediate substations .......................... 32 Shunt compensation ............................. ... 32 Voltage selection ....... ......................... ... 32 Project cost .............. .................. ........ 33 Finaincing ........................................... 33 Engineering and construction program ....... .. ....... 34 Procurement ............ ; ............................. 35 Disbursements ....................................... 35 Environment ......................................... 35 Project risks ...................................... 36 6. FINANCES ................................................ 37 Introduction ..................... .................. 37 ISA's performance and financial position ........... 37 Financing plan .................... ................. 39 Future finances ...... .. ............................ 42 Financial outlook of ISA's shareholders .. .......... 43 EEiEB ........................ ..................... 43 EP'M .............................................. 44 C\'C ......................... ..................... 45 IC:EL ........................ ..................... 45 CCiRELCA ...................... ................... 45 Performance indicators and reporting ....... ........ 46 Attachment 6/1 ISA: Income Statements 1975-1984 47 Attachment 6/2 ISA: Balance Sheets 1975-1984 48 Attachment 6/3 ISA: Sources and application of funds 1976-1984 49 7. ECONOMIC ANALYSIS ................................... .... 50 Comparison of alternatives ..... ................ .... 50 Return on investments .......................... .... 50 Risks .......................................... .... 51 8. AGREEMENTS REACHED AND RECOMMENDATION ................... 53  TABLE OF CONTENTS (Continued) Page No. San Carlos I Hydro Power Project ..................... 53 Studies ............................................ 53 General ............................................ 53 Project ..... 54 Financial .......................................... 54 500-kV Interconnection Project ....................... 55 ANNEXES 1.1 IBRD power loans 1.2 1976 Sector installed capacity and generation 2.1 ISA's organizational chart 2.2 Description of ISA's shareholders 3.1 Electricity supply data 1972-1976 3.2 Capacity and energy balances 3.3 ISA's sales and energy interchanges between the Central and Atlantic systems 3.4 Operation of interconnected system - Load dispatching 4.1 Hydro developments on the Nare, Guatape and Samana rivers 4.2 Summary Project cost estimate 4.3 Project implementation schedule - Key dates 4.4 Loan disbursement schedule 5.1 Transmission line details 5.2 Summary Project cost 5.3 Project implementation schedule - Key dates 5.4 Loan disbursement schedule 6.1 ISA: Schedule of existing and proposed long-term debt 6.2 ISA: Estimated capital and bond contribution 1977-1984 6.3 ISA: Forecast amortization 1977-1984 6.4 ISA: Forecast interest schedule 6.5 EEEB: Sources and application of funds 1976-1984 6.6 EPM: Sources and application of funds 1976-1984 6.7 CVC: Sources and application of funds 1976-1984 6.8 CORELCA: Sources and application of funds 1976-1984 6.9 Forecast performance indicators 7 Economic analysis 7.1 Comparison of alternatives 7.2 Rates of return on investments 8 Contents of Project File MAPS IBRD 3948R1 - ISA's Electric Power System IBRD 13005R1 - San Carlos Hydro Power and 500 kV-Interconnection Projects   1. THE SECTOR 1/ Energy Resources 1.01 Colombia's main indigenous commercial energy resources are hydro- power, coal, gas and oil. Potential hydropower appears to be the most promis- ing at some 100 GW of capacity and 250-300 TWh of annual energy capability, as shown by the preliminary investigations made by the Government with technical assistance from the Federal Republic of Germany. 1.02 Colombia is also endowed with very large coal and gas deposits. Crude oil output has declined since 1971 at an average rate of 7.5%/a. Over the same period, consumption has increased by 7%/a. As a result, Colombia is now a net importer of crude oil (it was a net exporter until 1976) and pros- pects are for these imports to rise sharply to onerous levels by the early 1980s unless additional reserves are discovered and developed quickly. Measures are being taken (1.05) to deal with this problem and to develop alternative energy sources. In the case of coal, there have been various obstacles to more adequate utilization of the existing potential: prices as low as one-fifth of those prevailing on international markets, the competition of low-priced petroleum, fragmentation of production among a large number of very small mines with low output and productivity levels, and lack of efficient marketing and transport infrastructure. However, the Government is currently taking action to address these problems, and large-scale development of coal reserves is planned (1.04). With respect to natural gas, a previous decline in known reserves and output has been dramatically reversed with the discovery of large deposit5 in the Atlantic Coast region. These reserves (estimated at over 5 trillion ft ) will provide energy and petrochemical feedstock to this rapidly industrializing region. 1.03 Output of primary energy during 1965-75 has not kept pace with overall economic expansion. It increased only 1.7%/a during 1965-70 when it reached its peak at 657 trillion Btu, and declined since then to 625 trillion Btu in 1975, mainly due to falling crude oil output: 1/ Preparation of this chapter has been greatly assisted by two recent studies of the power sector: "La Electrificacion en Colombia" - Documentos Nueva Frontera No. 5 - Bogota, June 1977; and "El Sector Electrico Colombiano - Problemas y Desarrollo" - Asociacion Nacional de Instituciones Financieras - mimeo, no date.  -2- ---------------- Primary Energy Output I/ ---------------- 1965 1970 1975 Heat Heat Heat Equiva- Equiva- Equiva- lint 2/ lint 2/ lint 2/ Unit Quantitv 10 Btu Quantity 10 Btu Quantity 10 Btu Hyclro power (,Wh 3,649 38.3 6,212 65.2 9,940 104.4 Crude oil 10 bbl 73.2 410.0 80.1 448.3 57.3 320.7 Natural gas 10 ft 65.7 65.7 71.8 71.8 90.5 90.5 Coal 1]06t 3,100 88.9 2,500 71.7 3,800 109.0 Total 602.9 657.0 624.6 --------------- Final Energy Consumption 1/ -------------- 1965 1970 1975 Heat Heat Heat Equiva- Equiva- Equiva- }2nt 2/ Int 2/ lint 2/ Unit Quantity 10 Btu Quantity 10 Btu Quantity 10 Btu Electricity C;Wh 4,790 50.3 7,538 79.1 11,069 116.2 Petroleum 6 IProducts 10 bbl 23.5 131.6 33.8 189.3 42.5 238.0 Natural gas 10 ft 12.1 12.1 23.1 23.1 35.8 35.8 Coal 10 t 2.7 76.9 2.1 61.6 3.4 98.5 Total 270.9 353.3 488.5 In contrast to the declining energy output, domestic consumption has grown by 5.4%/a during 1965-70, and 8.5%/a during 1971-73, when economic growth was high and energy prices declined sharply in real terms. During 1974-76, the economic down-turn and increase in real energy prices had a dampening effect on consumption, which now has settled at a growth of about 4.5%/a compared with a GDP growth of some 6% in recent years. 1/ The difference between primary energy output and final energy consumption, expressed in heat equivalent, constitutes the approximate sum of total losses and exports. 2/ Calculated at: 11,100 Itu/kWh for power, 5.6 MBtu/bbl for oil and its products, 1 MBtu/10 ft for gas and its products and 28.69 MBtu/t for coal and coke.  -3- 1.04 The Government's development strategy is aimed at achieving a more favorable balance between domestic energy supply and use, thus utilizing more fully those energy sources which are in abundant supply, i.e., hydropower, natural gas and coal. The Government is planning a large-scale development of coal deposits by state entities in association with foreign investors. For that purpose, a new enterprise, CARBOCOL, has recently been created and is likely to emerge as the Government's chief agency in coal-related matters. The Government attaches high priority to developing the thermal coal deposits at El Cerrejon (near Riohacha in the department of La Guajira on the Atlantic coast) under CARBOCOL's responsibility. An exploration contract has been concluded with the Exxon subsidiary INTERCOR, covering part of the coal field; the remaining section is planned to be developed by CARBOCOL itself or by foreign companies on the basis of special contracts. Reserves are believed to be as high as 600 million tons and the combined capacity of both ventures is estimated at about 10 Mt/a. On the other hand, small private firms which own coal mines are pursuing plans to expand output in order to supply fuel for heat intensive industrial processes and in-plant power generation. In order to expand potentially viable mines, a well-coordinated Government program is needed to provide a more rational price structure and improve mine safety, credit facilities and support for marketing and infrastructure. Such a program would need substantial technical and capital assistance from abroad. 1.05 In the hydrocarbon sector, the Government has taken action to stimu- late investment in exploration and field development, which had declined after 1971 because of unrealistically low prices applied to domestic sales. The Government is encouraging foreign participation in exploration and development on the basis of association contracts with ECOPETROL (the Government oil agency). The prices paid for oil produced by increasing yields from existing fields and from new fields have been raised, the latter now being close to world market levels, and the discriminatory exchange rate for petroleum has been eliminated. As a result, interest among foreign petroleum companies to expand or start operations in Colombia has been intensified and a significant up-turn in exploration is expected. In order to explore more adequately Colombia's sedimentary basins, outlays of close to US$1 billion appear to be necessary through the early 1980s, with another US$2 billion required for developing possible fields. ECOPETROL is also studying the possibility of increasing the output of existing fields through secondary recovery techniques. 1.06 Plans are underway to explore the country's uranium potential and the Government has concluded an exploration contract with the French Minatome group. The development of any uranium potential that might exist would provide the country with another long-term energy option. Power Supply 1.07 Electricity is the fastest growing form of energy use in Colombia; its share in overall energy consumption has grown from 14% in 1960 to 24% in 1975. This process has been assisted by the gradual consolidation of isolated facilities into regional systems and the interconnection of these systems to facilitate development of Colombia's low-cost hydro resources. The main systems are (see Map 3948) the Central System, covering the interior and the  - 4 - Pacific coast, and the Atlantic (or Northern) System covering the northern part of the country. The proposed San Carlos Hydro Project will be located in the Central Sytem; the 500-kV Interconnection Project will interconnect these systems. Public electricity service is presently provided by: (a) municipally-owned companies, independent of the Central Government, of which the largest are Empresa de Energia Electrica de Bogota (EEEB), Empresas Publicas de Medellin (EPM) and Empresas Municipales de Cali (EMCALI); (b) national enterprises such as Instituto Colombiano de Energia Electrica (ICEL), the Corporacion Autonoma Regional del Cauca (CVC), and the Corporacion Electrica de la Costa Atlantica (CORELCA); (c) a large number of local subsidiaries of ICEL, CORELCA and CVC 1/; and (d) a generating and transmission company, Interconnexion Electrica S.A. (ISA). E]EEB, EPM, ICEL, CVC and CORELCA are the major shareholders of ISA which would be the borrower for the San Carlos I Project and would construct, own and operate the 500-kV Interconnection Project to be financed by the Government (which would be the borrower for the latter project). Colombia has a number o:E public entities known as Regional Autonomous Corporations with a range of functions relaited to development of the regions under their jurisdiction, including legaL capacity to generate, transmit and distribute electricity. CVIC is the largest of these entities. IBRD Map 3948 shows the service areas of the major retailers; further details on the major utilities are given in Chapter 2. Regulation 1.08 Through its Electric Energy Division, the Ministry of Mines and Energy is charged with formulating a national policy for the generation, transmission and distribution of electricity. This division, which is being organized, was also given the responsibility for coordinating and supervising power sector planning. However, it does not have the powers assigned to similar agencies in other countries (issuance of licenses, regulation of tariffs, approval of expansion programs) to enforce its policies and program. 1.09 The Ministry of Mines and Energy owns a part of the sector directly (through ICEL and CORELCA). EEEB and EPM (presently the largest power utilities) are controlled by autonomous municipal governments. CVC reports to the National Planning Department (NPD) as do other regional development corporations which may, as already noted, undertake power projects. 1/ In most cases the ownership of these subsidiaries is shared with local governments.  - 5 - 1.10 Public utility retail tariffs (including those for electricity) are regulated by the Junta Nacional de Tarifas de Servicios Publicos in the NPD, which has customarily approved requests for rate increases. However, utilities are free to set tariffs at levels lower than those approved by the Junta and have done so in the past. 1.11 ISA was established to provide a rational framework for sector expansion by interconnecting the systems of its shareholders, thus creating a national grid capable of sustaining large hydroelectric developments. By pooling their financial resources through ISA, its shareholders have been able to undertake much larger and more economical projects than would have been feasible under the previous arrangements. However, ISA is still in the process of growing into a strong national utility. The municipal utilities have been reluctant to relinquish their role in generation and have experienced severe financial constraints which reduced the availability of funds to ISA. Decisions on system expansion have required protracted negotiations among the shareholders and the Government, further complicated by the original shareholders' reluctance to allow the incorporation of CORELCA into ISA. Throughout these negotiations, the Bank continued to support the concept of centralized planning, construction and operation of the national grid and has resisted proposals that would weaken ISA. Because of the time required by the shareholders to arrive at decisions on these fundamental issues, Bank consideration of San Carlos I, the 500-kV Interconnection and EEEB's proposed Mesitas hydroelectric project, all of them urgently needed to avoid power rationing in Colombia (3.07) suffered considerable delays. A compromise solution was evolved in extensive discussions between Bank staff, the Government and the shareholders over the past eighteen months. In addition to the financial measures detailed in Chapter 6, revisions have been introduced into ISA bylaws which specify that ISA would define the future generation expansion program in the interconnected system. ISA would own plants requiring the joint effort of all its shareholders. Plants of regional interest may be built by one or several shareholders, subject to ISA approval of such regional plants. Under this arrangement, ISA would, in effect, be responsible for an important part of sector regulation and planning; only utilities which do not participate directly in ISA and the regional development corporations other than CVC, would not be covered by its decisions. Voting arrangements in ISA have been restructured to require the concurrence of four of its five major shareholders in all important decisions, thus protecting the interests of the municipal utilities and encouraging a more positive participa- tion in its deliberations. World Bank Participation in the Sector 1.12 Since 1950, the Bank has made 18 loans to Colombia's power sector, totalling MUS$350 (see Annex 1.1). Sixteen loans have assisted the expansion of capacity in the systems of Bogota, Medellin, Cali, Cartagena, Bucaramanga, and Manizales. The most recent loan (874 CO, 1973) included expansion of of electricity distribution in low income areas and the Bank is currently supporting rural electrification under the Integrated Rural Development Project (1352-CO, 1977). The general reviews of Bank lending in the power  - 6 - sector and in Colombia prepared by the Operations Evaluation Division (OED) of the Programming and Budgeting Department 1/ contained a detailed analysis of early Bank activities in the Colombian power sector. The main findings of Lhese reports were _ddressed to general issues of Bank policy in the power sector. A further report of OED 2/ has summarized the actions taken by the Bank on these recommendations. 1.13 The recommendations specifically addressed to further loans in the Colombian power sector include the need to give greater attention to power distribution; the improvement of financial recording and financial planning capabilities; and the need to give more attention to public utility tariff structures. These concerns have influenced the Bank's work in the sector (1.16, 1.20, 1.30, 6.05, 6.13, 6.18). However, priority attention has had to be given to 3 issues on which satisfactory progress was expected when the last loan was made: sector planning, organization and financing (1.11, 1.26-1.34). Performance uncer recent loans for power in Colombia (which have all been made to ISA and its shareholders) is discussed in Chapter 2. 1.14 The two proposed loans, totalling MUS$176 (one to ISA, amounting to MUS$126 million for construction of the first stage of the San Carlos hydro station and one to the Government amounting to MUS$50 for the 500-kV Intercon- nection system) are urgently needed to avoid possible energy rationing in Colombia from 1981 onward, which would have serious consequences for the country's economy. These projects would increase ISA's role substantially since it would control the national interconnection system and, upon completion of the second stage of San Carlos (1984), would own 35% of the country's total generating capacity. Power Market 1.15 Electricity generation in Colombia expanded by an average of 9.7%/a over the period 1960-70 and then decreased to about 8.6% on average until the end of 1976 due to the slackening in industrial growth after 1974 (industrial consumption decreased to 7.4%/a compared with 9.5%/a during the sixties). Present per capita electricity generation is estimated at about 600 kWh, which is below average for Latin America. Installed capacity at the end of 1976 was 3,300 MW, including self-production. Hydro stations accounted for 68% of total energy generation. 1/ "Operations Evaluation Report: Electric Power" (Report No. Z-17 of March 10, 1972); and "Bank Operations in Colombia - An Evaluation" (Report No. Z-18 of May 25, 1972). 2/ "Closing Report on Actions Relating to the Electric Power Evaluation Report of March 1972" (Report No. 690 of April 11, 1975).  -7- 1.16 Colombia has about 1.84 million electricity subscribers in an esti- mated total population of 24.2 million; 87% of these subscribers are residen- tial, and electricity service reaches 60% of the population. Studies by the Bank's Development Policy Staff indicate that Colombia has been able to provide electriciLy service to a very high proportion of its urban population (85%, with the connection rate exceeding 98% in the larger cities). However, only 16% of rural families had service in 1974. Of the electrified municipal- ities, 88% have continuous service, while the other 12% have service only during certain hours of the day. Also, in many towns the quality of the service is unsatisfactory because of lack of maintenance. 1.17 Residential consumers were responsible for the largest share of electricity sales by the major utilities in 1976, followed by industry: Category Sales Clients GWh % No. % Residential 4,384 41.6 1,590,000 86.5 Industrial 3,656 34.7 26,002 1.4 Commercial 1,385 13.1 202,295 11.0 Others 1,397 10.6 20,075 1.1 Total 10,542 100.0 1,838,372 100.0 1.18 Public utilities accounted for 93% of total electricity supply; the rest was provided by self-production. EEEB generated 26%, EPM 25% and CVC, ICEL and CORELCA about 13% each. Self-suppliers (mainly oil refineries, petro-chemical plants, steel mills and cement works) owned 5.8% of the country's installed capacity; these plants are also connected to the public electricity service. The public-service labor force totalled 13,358 at the end of 1976, including 6,663 manual workers; this gives ratios of 233 kW/employee and 138 subscribers/employee, which compare favorably with the average for Latin America. The following table summarizes (Annex 1.2) installed capacity and energy generated in Colombia in 1976: Public Service Self Producers Total NW % GWh % MW % GWh % MW % GWh % Hydro, Subtotal 2,221 67 9,874 68 4 - 11 - 2,225 67 9,885 68 Steam 524 16 2,215 15 127 4 696 5 651 20 2,911 20 Gas turbine 224 7 923 6 34 1 168 2 258 8 1,091 8 Diesel 141 4 573 4 26 1 88 - 167 5 661 4 Thermal, Subtotal 889 27 3,711 25 187 6 952 7 1,076 33 4,663 32 Total 3,110 94 13,585 93 191 6 963 7 3,301 100 14,548 100 Rural Electrification 1.19 About 30% of the population live in areas classified as rural. Most of the rural villages with electricity service are close to the urban  centers. In 1974 only 16% of the rural population had electricity service. It is estimated that the cost of a rural electrification network, for the country as a whole, would be about US$500 per household and that over a p. iod of six years electricity could be brought to about 20% of the rural population presently without service (about 40,000 dwellings a year) at a cost of some MUS$120. 1.20 Rural electrification programs are currently under way in a number of regions in the country. Among the most important are (a) the electrifica- tion subproject of the 1977-79 Integrated Rural Development Program supported by IDB, Canadian International Developement Agency and Bank financing (Loan 1352-CO); (b) the electrification program in the department of Choco financed by the Netherlands Government); and (c) the electrification program in the coffee-growing areas, financed by coffee sector resources. Sector Investment Program and Studies 1.21 Investment in generation and transmission facilities during 1977-84 is expected to amount to about Col$250 billion in current prices (about US$5 billion in 1976 prices), some 60% of which would be in foreign exchange. The investments in distribution are only partially known (for EEEB and EPM amount- ing to some Col$22 billion) because details are not available for the subsi- diaries of CVC, CORELCA, ICEL and the smaller entities. A master plan for power development to be prepared by ISA (1.24) would provide such information. 1.22 The jprogram of investments in generation and transmission includes, im addition to the projects already decided upon by the Government and ISA's shareholders (4.01), the start of construction of projects that will form part of the 1984-90 expansion program. ISA has recently submitted to the Bank a study 1/ indicating that the 1984-88 portion of this program would be the least-cost alternative for system expansion. Thermal plant should be analyzed in detail to establish location, unit sizes, fuels and other technical aspects. In addition, since additional thermal plant will be required mainly to provide r-eserves for the interconnected system, thus benefitting all utilities connected to the grid, proposals for sharing investment and operating costs and agreement oni dispatch responsibilities must be worked out soon (3.09 and 4.02). The Bank expects to review these issues with ISA in the course of the preparation of- the generation projects which would follow San Carlos I and Mesitas. 1.23 The study described above was undertaken by ISA in view of the delays encountered in the execution of a more comprehensive study which the Government decided to carry out when the Bank made its last loan for power in Colombia (874-CO for the Guatape II project - 1973). ISA is cooperating in the comprehensiLve survey of hydro resources included in the study (1.32) and 1/' Programa cle Expansion del Sistema Interconectado-Periodo 1984-1988 (ISA, Junio 197,7).  - 9 - a long-term expansion program based on the survey's findings is expected to be available in mid-1979. The Government agreed to present this portion of the study to the Bank for review not later than September 30, 1979. 1.24 In order to improve the allocation of resources between the various categories of investment which the power sector will have to carry out, ISA and its shareholders agreed to prepare and present to the Government and the Bank for comments by December 31, 1979, a Power Sector Development Master Plan. This plan would cover the period 1980-90 in detail and 1991-2000 in general terms and consolidate the programs for generation and transmission. Similarly ISA's shareholders have agreed, under coordination of the Ministry of Mines and Energy, to prepare and present, as part of ISA's, Master Plan, to the Government and the Bank for comments, by December 31, 1979 a Sector Development Master Plan for Distribution for the period 1980-2000, which would consolidate all existing and future programs for distribution; the period 1980-85 would be covered in detail. The Master Plan would overall provide a valuable framework for long-range decisions on sector financing, pricing and rural electrification which are presently being based on partial and uncoordinated information. 1.25 The generation investment program will impose a heavy financial burden on ISA and its shareholders. To ensure that only sound projects are undertaken, assurances have been obtained that ISA and its shareholders would not undertake construction of any generating plant or combination of plants of more than respectively 200 MW (ISA) and 100 MW (shareholders) capacity prior to completion of the proposed San Carlos I Project unless satisfactory evidence has been presented to the Bank that it is economically justified and that adequate financing is available to carry it out without jeopardizing the proposed Project. Finances and Tariffs 1.26 The power sector has relied heavily on borrowings and budgetary contributions to finance its investments. EEEB and EPM, which operate low- cost systems, have received a large share of the borrowings and have been able to charge low rates in their service areas, which cover the most affluent markets in the country. CVC, ICEL and CORELCA, which operate high-cost systems, have had to rely on budgetary contributions from the Government and subsidies, despite their higher rates. 1.27 Rate adjustments have lagged considerably behind yearly inflation; for 1971-1976 the developments were the following:  - 10 - ----Average Rates--- Col$/kWh Average Rates at Current Average Col$/kWh Year Prices % Change Inflation at 1970 Prices (%) 1971 0.205 1.6 11.8 0.183 1972 0.220 7.1 13.8 0.173 1973 0.243 10.2 22.0 0.157 1974i 0.277 14.2 25.2 0.143 1975 0.355 28.2 23.6 0.148 1976 0.423 19.2 20.0 0.147 Over the period, average rates increased only by about 13%/a, while inflation averaged 19%. Thus, the 1976 average revenue - at prices of 1970 - was equiva- lent to only Col$0.147/kWh (73% of the 1970 average revenue of Col$0.202/kWh). Despite recent increases the current rates are among the lowest in the world. Residential consumers in Medellin pay from one-tenth to one-fifth of the price charged to the average consumers in the rest of Latin America. This is the principal reason for the per capita residential consumption in that city being among the highest in the region. 1.28 The lag of adequate rate. increases, particularly until 1975 (as can be observed in the above table, rate increases in 1975-77 have about kept pace with inflation), appears to have been attributable mainly to the Government's concern with the impact of energy prices on overall cost of living and the pressures of local and regional interests. In view, however, of its extremely low cost to the average consumer, the price of electricity is a marginal con- tributor to the cost of living and the problem appears to have been mainly political. The favorable trend in rate setting which began in 1975, is expected to continue with gradual increases in real terms (see Chapter 6 for the agreements reached with ISA and its shareholders). In view of the importance to economic growth of adequate electricity service, the Government has adopted a policy calling for adequate rates in order to ensure that the sector generates internally a reasonable portion of the funds required. 1.29 In order to increase the contribution of power sector consumers to the financing of its investment program, the Minister of Mines and Energy submitted legislation to Congress in late 1976 creating a National Energy Fund. The Fund would be financed by a surcharge on power tariffs and would be used to finance rural electrification (25%) and projects approved by ISA and the Ministry of Mines and Energy (75%). The Fund was expected to raise a modest amount of resources for the sector (on the order of US$25 million annually) and to increase the role of the Ministry of Mines and Energy in shaping sector development. However, largely as a result of opposition from municipal authorities to the basic objectives of the legislation, its enactment appears doubtful at this time.  - 11 - 1.30 As pointed out by OED, 1/ the greatest distortion in retail tariffs results from the low level of residential rates noted above. To address this problem, ISA's shareholders agreed to carry out, coordinated by the Ministry of Mines and Energy, a study of the cost of service to final consumers and its implications fr_- power pricing, in the following major markets: Bogota, Medellin, Cali and Barranquilla, under conditions and terms of reference satisfactory to the Bank. The study, which also includes the area covered by the rural electrification component of Loan 1352-CO, would be completed not later than December 31, 1978 and its recommendations (together with the views of the Ministry) would be discussed with the Bank not later than June 30, 1979. 1.31 The implementation of the agreed recommendations of the tariff structure study would be a major objective of further Bank lending in the sector. Constraints on Sector Development 1.32 In the past, the large number of entities associated with the power sector, the lack of adequate regulation, coordination and planning at the national level and low electricity rates have contributed to the poor perform- ance of the sector in making rational use of Colombia's abundant hydroelectric resources. The regionalized nature of the sector, reflecting the political and economic decentralization of Colombia, led to a lack of technical coopera- tion and difficulties in coordinating investment allocation; decisions were made on a local basis without due regard to overall country planning for power development. This, together with the lack of funds, resulted in uneconomic use of fuel and caused recurring power shortages, a problem that will not be solved before well into the early eighties, provided the agreed development program is implemented expeditiously (the latter in turn, being largely dependent on adequate rate setting). In an effort to address the sector problems, the Government indicated in 1973, when the Bank made its previous loan for power (Guatape II, Loan 874-CO), that it planned to carry out with the assistance of consultants a study of the sector covering its institutional and financial problems and its long-term expansion program. The study, for which assistance was obtained from the Federal Republic of Germany, is being executed by two groups of German consultants. The first of these, working with NPD, concentrated on sector institutions and financing. The Government would present this report to the Bank by June 30, 1978. The second group of consultants is working with ISA on a hydro survey and long-term expansion plan (1.23). 1.33 The Government has recently taken a number of positive measures to address the sector's institutional constraints. In 1975 it eliminated the jurisdictional overlap between ICEL and CORELCA on the Atlantic Coast by transferring control over the electricity distribution companies in that region to CORELCA. Another positive measure was the reorientation of ICEL, 1/ Report No. Z-17, pages 59-63 (1.12) contains an analysis of tariff structure problems in Bogota.  - 12 - which in future will be responsible basically for electricity development in rural and semi-rural areas, where the Government will continue to subsidize the service since it cannot be financially self-supporting in those areas. 1/ -order to remedy Lhe problems that exist between the generating and dis- tributing companies in the Cauca Valley as a consequence of the complex organization of electricity service in that region, the Government has supported the establishment of a regional power company whose basic function w:ill be to consolidate that region's electricity sector in a single enterprise (2.14). With the incorporation of CORELCA into ISA, most of the sector is represented directly or indirectly 2/ in ISA's Board and a better coordina- t:ion of power sector planning in Colombia will now be possible. ISA's effec- tiveness in achieving this coordination, however, will depend on its ability to sustain the consensus developed over the past 2 years among its shareholders. 1/ The sector's organization fragmentation has to date precluded the usual practice of deriving resources from well-developed urban markets to support service in rural areas (1.26). The proposed National Energy Fund (1.29) would, if approved, make this type of cross-subsidization feasible. 2/ Through ICEL, CORELCA and CVC.  - 13 - 2. ISA AND ITS SHAREHOLDERS The Borrowers 2.01 The borrower for the San Carlos I Hydro Power Project would be Interconexion Electrica S.A. (ISA). ISA would also construct, own and operate the 500-kV Interconnection Project; this is highly desirable to ensure cen- tralized operation of the national grid. Because of the high priority which it attached to the fuel savings arising from the project and in view of the fact that CORELCA would be the principal initial beneficiary, the Government decided to finance the entire local cost of the project (CORELCA has always relied on the Government for such financing) and proposed that CORELCA should opwn the facilities. Te Bank suggested, for the reasons noted above, that IDA be the owner. This was accepted by the Government; however, it did not wish to reverse its prior decision that it should be the borrower for the foreign loans (including the proposed Bank and KFW loans) for the project and that ISA and its shareholders should not be required to assume any financial obligations in connection with it. The Bank agreed, in view of the measures adopted by CORELCA and other ISA shareholders to strengthen their finances and carry out their large investment program while reducing CORELCA and CVC's dependence on budgetary resources in the future. The Republic of Colombia would thus be the borrower for the 500-kV Interconnection Project. ISA 2.02 Bylaws. ISA is a public corporation established in 1967. Its share- holders (with their holdings as of March 1978) are: Utility Shares EEEB 4,868 28 EPM 3,775 22 CVC 3,422 20 CHIDRAL /1 66 - ICEL 2,561 15 CHEC /2 67 - CORELCA 2,577 15 17,336 100 /1 A CVC subsidiary - see 2.14. /2 Central Hidroelectrica de Caldas, an ICEL subsidiary. As already noted in 1.11, ISA's bylaws give it many regulatory and planning functions. They also contain important provisions with regard to the financing of the major generation projects entrusted to ISA which are detailed in Chapter 6. The bylaws are consistent with the decentralized structure of the power sector; when taken together with the agreements for the proposed loans, they would provide a basis for improved sector performance. ISA has agreed to secure the assent of the Bank before amendments are introduced in the bylaws.  - 14 - 2.03 Organization and Administration. ISA is administered by its Shareholder Assembly, a 5-member Board of Directors and a General Manager. The Assembly must act on all major issues, and decision-making is slow as the interests of the various shareholders may differ. To ensure that decisions are based on a consensus, ISA's bylaws specify that the decisions of the Share- holders Assembly require the concurrence of 75% of the shares. 2.04 The General Manager, who is appointed by the Board of Directors for a 2-year term, renewable indefinitely, is in charge of the day-to-day manage- ment of the company. He is assisted by the chiefs of four departments (Technical, Operations, Finance and Administration). ISA's organization is adequate (Aknnex 2.1). With the help of consultants, it has handled well the technical and administrative aspects of the 230-kV interconnection and Chivor I, and is not expected to encounter problems in implementing the proposed projects. ISA's transmission facilities are being operated satis- factorily and operation of Chivor I is proceeding smoothly. Financial planning is expected to improve following the recent creation of the Finance Department. [SA's main off-ice has recently been transferred from Bogota to Medellin, a consequence of the Government's decentralization policy. The transfer should prove generally advantageous, as ISA 's major projects for the foreseeable future will be closer to Medellin than to Bogota. 2.05 Employment and Training. ISA's staff is sufficiently large (about 500 people) and experienced to handle its responsibilities and its pay levels are satisfactory. ISA has a satisfactory training program at various national institutions (technical schools) offering different levels of training. 2.06 Accounting and Auditing. ISA's accounting and data processing systems are good. Its monthly financial statements are produced promptly and contain the required data. ISA is reorganizing its internal auditing office to ensure that its auditing procedures keep pace with the company's growth. 2.07 Until 1975, ISA's annual financial statements were audited by independent external auditors acceptable to the Bank. In compliance with Government regulations, ISA's financial statements for 1976 and subsequent years will be audited by the Office of the Comptroller of the Republic. However, because this audit does not satisfy the Bank's requirements, the financial statements for 1976 have also been audited by an independent auditor, Cuellar, Feged & Co., which is satisfactory. ISA agreed that independent auditors acceptable to the Bank, will continue to be used and that audited financial statements, together with a detailed auditor's report, will be submitted to the Bank within 4 months of the end of each financial year. 2.08 Insurance. ISA's transmission facilities are insured in accordance with normal utility practice. ISA agreed to take out appropriate insurance for the Chivor I project by June 30, 1978. 2.09 Prior Bank Lending. ISA has received two Bank loans totalling MUS$70.3. The first (Loan 575-CO for MUS$18) was made. in 1968 to finance part of the foreign cost of the 230-kV interconnection project, which linked ISA's original shareholders, and a series of hydroelectric studies. The intercon- nection was completed in 1972 at a cost below the appraisal estimate and the Bank agreed that the savings could be used to finance the 230-kV Guatape- Barrancabermeja transmission line. Studies of the Cauca and Saldana rivers  - 15 - were respectively completed by Integral (Colombia) and Compania de Estudios e Interventorias (CEI, Colombia); a feasibility study of the Sogamoso hydro- electric project was carried out by the consortium Hidroestudios (Colombia)- Harza (US); a prefeasibility study of projects on the Guavio river was carried out by Ingetec 'Colombia); similarly a study of projects in the Rio Sinu basin in the Atlantic region was completed by the Consorcio Alto Sinu (Colombia)- Chas. T. Main (US). As a result of these studies a project on the Guavio river (1,300 MW) and 2 on the Rio Sinu (Urra I, 340 MW; Urra II, 710 MW) have been identified and included in ISA's long term development program. 2.10 The second loan (681-CO for MUS$52.3) was made in 1970 to finance part of the foreign cost of the 500-MW Chivor I hydroelectric project, ISA's first power station. The Inter-American Development Bank (IDB) made a MUS$35 loan for the project, and is providing MUS$48.5 in financing for Chivor II, which would add a further 500 MW capacity for operation in 1980. Chivor I was completed in mid-1977, two years behind schedule, with a cost overrun of approx- imately MUS$86 (75%). The delay was due mainly to a contractor defaulting oLn construction targets (and being replaced) and to geological problems encoun- tered during construction of the project's dam and tunnel. The cost overruns resulted from these problems and from higher-than-expected bids and Colombian and foreign inflation. 2.11 In connection with the above loans, ISA agreed to review its bylaws with the assistance of consultants. The review was carried out by Motor Columbus of Switzerland and completed in 1974, two years later than the agreed schedule. After delays resulting from the negotiations referred to in 1.11, the most important of Motor Columbus' recommendations are reflected in ISA's bylaws or in the proposed loan documents. The experience gained in the implementation of these projects has influenced the technical, financial and institutional arrangements for the proposed San Carlos I Project: (a) To reduce the risk of unexpected geological problems (such as those encountered with Chivor I) the appraisal mission included a consulting geologist (4.28); (b) To prevent a recurrence of the financial problems of ISA's shareholders during implementation of the first two projects and the resultant difficulties in meeting their commitments to ISA in a timely manner, financial targets were agreed with four of the five major shareholders and programs of rate increases have been initiated which should ensure availability of adequate funds to ISA (6.19-29); and (c) Finally, agreement was secured on various amendments to ISA's bylaws to establish a clear basis for the utility's future operations and its relations with its shareholders. ISA's Shareholders 2.12 ISA's shareholders fall into two categories: (a) The two major municipal utilities, EEEB and EPM, which own 50% of ISA shares; and  - 16 - (b) The t:hree National Government utilities, CVC, ICEL and CORELCA, which, together with their subsidiaries, own the balance. 2.13 The municipal utilities have been generally successful and relatively well-managed. Both serve concentrated urban markets in Colombia's two largest urban areas and have access to low-cost source of power. In 1974-75, EPM encountered some difficulties as a result of political inter- ference in management and both utilities' finances were adversely affected by low power rates. These problems are now being corrected and EEEB and EPM's performance is expected to improve. The other three major shareholders of ISA have in the past been less successful than EEEB and EPM as a result of the nature of the mlarkets they serve and the complexity of their organization, briefly summarized below. Annex 2.2 contains additional details on the five major shareholders and Chapter 6 reviews their financial outlook. 2.14 CVC is an autonomous corporation which, together with other regional development corporations, reports to NPD. It is responsible for multipurpose development of the Cauca Valley. It is active in the fields of power, coal mining, irrigation, rural development and hotel operation. The largest city in the Cauca VaLlley, Cali, is served by a municipally-owned utility, EMCALI. Most of the othier important communities in the area are served by CVC directly or through 26 subsidiaries. CVC owns 65% of the shares of CHIDRAL, the principal bulk power supplier in the area; the balance of the shares are owned by EMCALI and the Municipality of Cali. CVC and EMCALI have agreed to set up a new regional power company to take charge of power generation and transmission in the Cauca Valley. They have expressed their intention of consulting their creditors (among which the Bank is included as a result of its early power loans to CVC and CHIDRAL - Annex 1.1 - and its more recent loans to EMCALI for wa,ter supply: 682-CO and 1523-CO in 1970 and 1978, respectively) on this proposal. 2.15 ICEL is a government institute reporting to the Ministry of Mines and Energy. Through 11 subsidiaries, ICEL is responsible for power development in most of the country, with the exception of the areas covered by CVC, CORELCA and the various municipal utilities. ICEL's subsidiaries will be major users of the output of the San Carlos I project. To enhance their efficiency, ICEL agreed to take all necessary action to strengthen the management, planning, operations and finances of its subsidiaries. To formulate an improvement program, ICEL's central staff would conduct a study of at least five of its subsidiaries. ICEL would present the study to the Bank, together with its proposals for imtplementation, by December 31, 1979. Implementation of the proposals, with any modifications resulting from the comments of the Bank, would be completed by December 31, 1981. 2.16 CORELCA is a government-owned corporation reporting to the Ministry of Mines and Energy. It is responsible for generation, bulk supply and the coordination of power development in Colombia's Atlantic Coast region. The newest of ISA's shareholders, it has been functioning since 1972 and in 1975 took over ICEL's controlling interest in the 7 local utilities serving the area. In order to increase its effectiveness in handling its rapidly growing  - 17 - operations, CORELCA agreed to strengthen its management and finances. To this end, it would carry out a study with the assistance of consultants acting under terms of reference to be furnished to the Bank for comment by September 30, 1978. The study's conclusions would be presented to the Bank for comment by June 30, 1979, together with CORELCA's proposals for implementation. By December 31, 1980, CORELCA would carry out an improvement program based on its proposals and the Bank's comments thereon.  - 18 - 3. THE POWER MARKET HisLoric 3.01 In 1976 total electricity requirements in the country were about 14.6 TWh (1.18). Of this, the Central Market system (serving the Pacific Coast and the interior), with the main utilities EEEB, EPM, EMCALI and various subsidiaries of CVC and ICEL accounted for about 76% (11.1 TWh), the Atlantic Coast system (CORELCA and subsidiaries) about 14% (2 TWh) and numerous isolated public utilities about 3% (0.5 TWh). The remainder (7% or about 1 TWh) was generated by industrial plant for its own purposes. 3.02 The overall 1972-77 power data for ISA's shareholders (Annex 3.1) is summarized as follows: Average 1972 1974 1976 Growth Generation (Gross) (GWh) 8,868 10,719 13,087 10.2 Maximum demand (MW) 1,740 2,010 2,460 9.0 Sales (total) (GWh) 7,405 (100%) 8,862 10,542 (100%) 9.2 Residential 3,018 ( .41%) 3,650 4,384 ( 42%) 9.8 Industrial 2,612 ( 35%) 3,056 3,656 ( 35%) 8.8 Commercial 940 ( 13%) 1,176 1,385 ( 13%) 10.2 Others 835 ( 11%) 980 1,117 ( 11%) 7.5 Losses (%) 16.5 17.3 19.4 14.8 /1 /1 For losses expressed in GWh. In 1967-1976 the country's growth rate of electricity production was about 10.5% compared with a growth rate of GNP of 6%/a. Growth of sales, which averaged 9.2%/a, varied from a low 6.1%/a for the CVC-CHIDRAL system to a high of 11.7% for ICEL's system. The pattern of supply and demand has not changed materially: the share of each system in the market hardly varied and the distribution among the various consumer categories was the same in 1972 and 1976. The rather large difference in the 5-year growth pattern of generation compared with maximum demand and sales appears to be due to the combination of the rationing in 1976 (suppressing maximum demand) and the increases in losses. Losses increased considerably in the three largest systems (probably due to the rapid expansion of urban networks and an increase in theft). For the CORELCA system, where generation is practically all thermal, losses are comparatively low (taking into account that these losses include plant use). In view of the importance of reducing losses to a minimum, ISA agreed to carry out, with the assistance of consultants satisfactory to the Bank, a study of the nature, size and occurrence of losses in its own system and those of its shareholders. The study is expected to make recommendations for reduction of losses and (if required) improved metering systems. The report would be  - 19 - completed and submitted to the Bank for review and discussion not later than June 30, 1979. This study would be financed by the proposed San Carlos I loan (4.14) and ISA's shareholders agreed to assist in its execution. 3.03 During late 1976 and early 1977 supply was seriously rationed (about 5-10% of requirements could not be met during the 5-month dry season depending on the supply area) in the Central Interconnected System, principally in the areas served by CVC and CHEC. The 1976/77 rainy season was unusually dry, and commissioning of Chivor I hydro and the thermal plant at Barranca were delayed. Supply was also rationed in the Atlantic system due to the gas shortage resulting from delayed completion of a gas pipeline to Barranquilla. Forecasts 3.04 Projected demand and energy requirements are based on ISA's detailed analysis of past consumption trends in the market served by each of ISA's shareholders and on a study of the correlation between power sector growth and growth of GNP at rates of 6%, 6.5% and 7%. During appraisal some adjust- ments have been made in the industrial forecast in order to reflect possible construction delays for new factories and their ability to reach full produc- tion. From 1981 onward the Central and Atlantic systems are considered as integrated in view of the completion of the 500-kV Interconnection Project (Chapter 5). 3.05 The 1977-85 electricity requirements in the interconnected system are expected to grow at an average of 10.6%/a, approximately in accordance with historic trends. As a result, gross energy requirements of the utilities would be the following: Coincident Year EEEB EPM CVC ICEL CORELCA Total /1 Maximum Demand ---------------------------(GWh)------------------------------- (MW) 1977 4,079 3,514 2,126 2,971 2,076 14,766 2,843 1980 5,600 5,072 2,690 4,590 2,814 20,766 3,898 1983 7,689 6,314 3,402 6,022 4,224 27,651 5,123 1985 9,273 7,337 3,979 7,164 5,030 32,783 6,068 /1 The differences between these totals and the total generation shown in Annex 3.2 represent the losses in ISA's system. This forecast appears reasonable. Balances of Capacities and Energies 3.06 In accordance with information obtained during appraisal, in order to meet the forecast power requirements in the national interconnected system by 1984, about 4,200 MW in effective generating capacity would have to be added to the 3,250 NW (2,970 MW effective) installed at the end of 1976. The 1976-85 balances for energies and capacities are shown in Annex 3.2 for average water availability. Summarized they show the following:  - 20 - 1976 1979 1982 1985 Requirements Maximum Demand (MW) 2,478 3,500 4,680 6,068 Gross Generation (TWh) 13.1 18.5 25.4 33.3 Effective Capacities (MW) 2,970 4,133 5,564 7,019 % Hydro 74 71 76 81 % Thermal 26 29 24 19 Capacity Margin (MW/%) Central System 470/18 524/15 - - CORELCA System 22/6 109/19 - - Interconnected System - - 492/10 951/14 Generation (TWh) 13.1 18.5 25.4 33.3 % Hydro 75 70 71 77 % Thermal 25 30 29 23 Due to delays in hydro plant construction the capacity margin in the central system is expected to decrease to 16% until interconnection. This is low, because in dry years the effective capacity of the hydro stations could be reduced by some 20-25% due to the lower water head above the turbines. Even after interconnection, the overall capacity margin is not expected to improve (although reserves would be shared) before 1984. The average for 1981-85 would be 15%, which appears to be lower than the minimum required in view of the large hydro share. 3.07 Because the proposed San Carlos I and Mesitas projects, originally scheduled for 1980, are not expected to be commissioned before 1982, and because certain reservoirs may not have reached the normal water-level, energy rationing may be required during 1982 to 1985 if hydrology conditions are below average. The energy shortfalls in any of the years (1 in 5 years probability) could be as follows: Dry Year Shortage (GWh/%) 1982 797/3.1 1983 672/2.4 1984 705/2.3 1985 1,662/5.0 To avoid this situation ISA has recently introduced some changes in its program (4.02). 3.08 With the commissioning of Chivor I (Loan 681-CO) in September 1977, ISA for the first time generated energy in the interconnected system. Its generation is expected to rise rapidly from 1.2 TWh in 1977 to some 11 TWh in 1985 when it would meet about 35% of total requirements:  - 21 - -------Isolated-------- -----------Interconnected----------- 1977 1979 1981 1983 1985 TWh % TWh % TWh % TWh % TWh % Generation (GWh) ISA 1.2 8 3.1 17 4.4 19 7.6 27 11.5 35 EEEB 3.4 23 4.1 22 4.6 20 6.0 22 5.8 17 EPM 3.5 23 3.0 16 5.3 23 4.3 15 5.7 17 CVC-CHIDRAL 2.0 14 2.5 14 2.6 11 2.6 9 2.6 8 ICEL-CHEC 2.7 18 3.3 18 3.6 16 3.7 13 3.8 11 CORELCA 2.0 14 2.5 13 2.5 11 3.8 14 3.9 12 14.8 100 18.5 100 23.0 100 28.0 100 33.3 100 ISA's sales to its shareholders for 1977-85 are shown in Annex 3.3; the energy to be transferred from the Central system to the Atlantic system (by means of the 500-kV Interconnection Line, see Chapter 5) would be in the order of 1.1-1.3 TWh by 1984/85, representing an average capacity of 125-150 MW. Operation of the Interconnected System - Load Dispatching 3.09 ISA's bylaws give it the function of coordinating the operation of the systems of its shareholders in order to use the available resources economically. Its activity in this area has been limited due to lack of adequate control facilities; a national dispatch center in Bogota and 2 regional dispatch centers (Medellin, Manizales) are scheduled for completion by 1981 under a project expanding Chivor II project, financed by IDB. It is expected that by that time agreements will be reached on the responsibilities to be assigned to ISA and the entities operating in the interconnected system, with a view to efficient operation of all facilities, optimum reliability of the system and the creation of an intersystem power sale and purchase pool (Annex 3.4).  - 22 - 4. THE NATIONAL DEVELOPMENT PROGRAM AND THE SAN CARLOS I HYDRO POWER PROJECT The Program 4.01 The 620-MW first stage of the hydro plant at San Carlos (and the 500-kV Interconnection--see Chapter 5--of the Central and Atlantic Coast systems) forms part of the 1977-84 national expansion program. At the time of appraisal the program comprised the following: Expansion Program 1977-1984 Year Entity Location Type /1 Capacity/MW 1. Under Construction 1977 ISA Chivor I H 500 CORELCA Barranquilla GT 42 1978 CORELCA Cartagena I, II S 132 ICEL Barranca S 66 CORELCA Ballenas GT 25 EPM Guatape II H 280 1979 CHEC Insula H 12 1980 ISAk Chivor II H 500 1,557 2. New Projects 1981 ISA 500-kV Inter- connection /2 CORELCA Barranquilla III /2 Cartagena III /2 S 132 EPM Ayura /3 H 19 EPM Troneras /3 H 26 1982 EEEB Mesitas /2 H 520 ISA San Carlos I /2 H 620 1983 EPM Guadalupe I /3 H 100 ISA Jaguas /3 H 120 ISA San Carlos II /2 H 930 2,467 /1 Plant Types: H-Hydro; GT-Gas Turbine; S-Steam. /2 Detailed engineering completed. /3 Feasibility study completed. The sequence of completion of the above plants is in accordance with their economic merit order (7.03).  - 23 - 4.02 The plants assigned to specific shareholders have been approved by ISA's Board, as has the 180 MW power component of CVC's Salvajina multi- purpose project 1/. Construction of Mesitas is underway, and ISA has intro- duced some revisions to avoid shortages in the event of a dry year during 1982-85. These include diversion of additional water into the Chivor reservoir to increase its average generation from 3.7 TWh to 4.5 TWh and addition of 200 MW of steam plant in 1980-81. The Project 4.03 The San Carlos hydro plant will be located in northwest Colombia at an elevation of 775 m above sea level. The inlet to the plant would be at the confluence of the San Carlos and Guatape rivers, downstream of the outlet of EPM's existing Guatape hydro plant (Annex 4.1). The output of both Guatape and San Carlos would be regulated by the large Santa Rita reservoir (which is being expanded under Loan 874-CO to EPM). As reported in Annex 2.2 filling of this reservoir has been delayed, and action is being taken to ensure that it commences in mid-1978. 4.04 Objectives. The San Carlos Project will considerably increase ISA's capacity in generating plant and, together with the 500-kV Inter- connection system (Chapter 5), enhance ISA's role'as the agency, operating throughout the country on behalf of the main utilities, to harness the larger hydro potentials for meeting future power requirements. One of the principal objectives would be to strengthen ISA's role as coordinator of sector development and as dispatch agency in the interconnected system. ISA, through the Project, would meet incremental power requirements in the Central system and would additionally supply firm and secondary energy to the CORELCA system in order to replace part of its expensive thermal generation. 4.05 Construction and Location. The San Carlos plant will be built in two stages. San Carlos I (4.07) comprises the Punchina dam on the Guatape River, inlet and discharge tunnels and an underground power station suitable for ten 155 MW generating units (and their transformers) of which four will be installed initially (620 MW). San Carlos II comprises construction of a second inlet and discharge tunnel, some civil engineering works (main excavation will be completed during Stage I) for the power station and the installation of six 155 MW generating units, increasing the total installed capacity to 1,550 MW. 4.06 The project area is at a distance of 150 km from the city of Medellin by a road of which 60 km are paved; the remaining 90 km correspond to a serviceable all-weather road. The Project design takes into account the weight limit (60 tons) and volume limit imposed by the existing roads. 1/ Not included in the program examined in Chapter 7 because its generation will be subordinated to irrigation requirements and the construction schedule has not yet been defined.  - 24 - In 1979, ISA will begin constructing the San Lorenzo dam and the Jagual power station (120 M!W) on the Nare river, to harness additional waters (39 m Is on average) whiclh will be discharged into the Guatape river upstream of the San Carlos plant, thereby providing for additional generation at San Carlos. 4.07 Description. The San Carlos I Project will use an average discharge of 98 m /s supplied by the Guatape River and the flow diverted from the Nare River via the Guatape power station and regulated by the Santa Rita reservoir, with a useful capacity of 1,200 million , for generating an average of 3.7 TWh/a. The Project comprises: 3 (a) An iearth dam 70 m high with a volume of 6 Mm , 1/ a cut and cover double diversion conduit later serving as bottom outlet on the right abutment, 413 m long, and a concrete lined chute spillway, 125 m wide at the apogee and 304 m long; (b) Two concrete intake towers, 54 m high, for both the first and second stage connected to two lined vertical shafts 149 m deep; (c) A power tunnel, concrete lined, 4,530 m long and 6.10 m in diameter; a surge tank of the restricted-orifice type; a concrete lined pressure tunnel inclined at 450, bifurcating in itwo steel lined penstocks (total length 276.7 m, with diameters ranging from 5.50 m to 3.30 m; (d) Two caverns, one for turbine-generators and one for trans2 formers, Iach 203 m long and with cross-sections of 510 m and 190 m respectively, interconnected by a number of galleries. Both caverns will be excavated completely to accommodate final development of the power station, but concrete structures would only be built for the powerhouse and for the first four generating units at this stage; (e) A two-lane, concrete-paved access tunnel 2to the powerhouse. 802 m long, with a cross-section of 39 m ; (f) A dLschirge tunnel, 1,471 m long, with a horseshoe cross-section of 74 m , which will not be lined except at the terminals and in fault zones; 3 3 I/ The reservoir will have a total storage of 72 Mm , of which 50 Mm are useful storage for power generation. The dam will serve both the first and second phase of construction.  - 25 - (g) Four 6-jet vertical shaft Pelton turbines operating under a gross head of 595 m with single runner, 300 rpm, and four vertical shaft 60-Hz generators rated 183 MVA at 800 C and 85% power factor; (h) Two 3-phase banks of single-phase transformers, each 122 MVA, 16/230 kV, water-cooled. Two generating sets will be connected to each bank; (i) Underground, the connections of the generators and transformers and to the outside will be by oil-insulated 230-kV cables; 230-kV switchyard; (j) A control building for operation of the power station and the substation; (k) A 34 km double circuit 230-kV transmission line between the Guatape and San Carlos power plants and a 210 km double circuit 230-kV transmission line between San Carlos and Torca (near Bogota) and related terminal substations; (1) A study of losses in the systems of ISA and its shareholders (3.02). 4.08 Estimated Cost. The Project is estimated to cost MUS$367, with a foreign component of MUS$204. The costs, which are detailed in Annex 4.2, are summarized as follows: Local Foreign Total Local Foreign Total -------- MCol$ -------- --------- MUS$ -------- Engineering, study 547 62 609 15.0 1.7 16.7 Civil works 2,183 2,793 4,976 59.7 76.5 136.2 Electrical equipment 101 781 882 2.8 21.4 24.2 Mechanical equipment 153 996 1,149 4.2 27.3 31.5 Transmission system 234 555 789 6.4 15.2 21.6 Subtotal 3,218 5,187 8,405 88.1 142.1 230.2 Contingencies Physical 297 540 837 8.1 14.8 22.9 Price escalation 3,415 2,952 6,367 67.1 47.0 114.1 3,712 3,492 7,204 75.2 61.8 137.0 Total project cost 6,930 8,679 15,609 163.3 203.9 367.2 4.09 A first cost estimate was made by ISA's consultant (Integral- Colombia) in 1972. In 1973, the US firm of Jacobs Associates (financed by loan 575-CO) reviewed both the construction program and the estimate. Integral later introduced a number of changes in the project as surveys and final design advanced (4.13), and prepared the final estimates. 4.10 The cost estimate of the civil works is based on the cost of similar work being carried out in Colombia (Chivor II, Guatape II); the bids received by ISA for the major civil works correspond closely to the total estimated  - 26 - base cost for these works (4.08). The equipment estimates are based on the prices quoted at the end of 1976, in response to an international call for bids on similar equipment for the Chivor II power station. The physical conwingencies have bee'n estimated to average 15% for the power station, 10% for the remaining civil works and 8% for equipment. These percentages are considered appropriate, having regard to the status of detailed design. The base estimated cost is in prices calculated for the end 1976, to which a price contingency has been added; the following percentages have been used for external inflation: Year Civil Works Equipment Consultants 1977 10 8 10 1978 9 7.5 10 1979 9 7.5 10 1980 8 7.5 8 1981 8 7 8 1982 8 7 8 1983 8 7 8 1984 8 7 8 Internal inflation was assumed to decrease gradually from 36% in 1977 to 8% by 1982, remaining constant thereafter. The exchange rate (Col$ 36.50 per US$ in 1977) has assumed to increase to Col$ 58.58 per US$ by 1984. Construction equipment accounts for about 56% of the foreign cost component of the civil works. 4.11 Financing. Including financial charges on loans and credits, the total foreign exchange requirements are estimated at MUS$258. A Bank loan of MUS$126 is proposed, representing 49% of these requirements, which would finance part (MUS$99.2) of the foreign cost of the Project and the financial charges on the Bank loan during construction, as follows: MIUS $ a) Engineering and studies 1.7 b) Underground civil works 60.5 c) Electrical equipment (miscellaneous) 8.4 d) Mechanical equipment (miscellaneous) 4.4 e) Mechanical equipment (dam) 3.3 f) Transmission: Lines 16.8 g) Substations 2.6 h) Control and communication equipment 1.5 Subtotal 99.2 i) Financial charges during construction 26.8 Total 126.0 4.12 The remaining foreign exchange costs are expected to be met by IDB (MUS$70) which would finance the Punchina Dam, some equipment including the penstock and financing charges on the IDB loan; supplier's credits (MUS$40) and ISA's shareholders (MUS$22, mainly for the access tunnels, financing  - 27 - charges, down payments and price adjustments). The local costs would be financed by equity contributions and bonds to be subscribed by ISA's shareholders (6.10). Engineering ard Construction Schedule, Studies 4.13 With the assistance of Integral, ISA completed a study of the hydroelectric potential of the Nare-Guatape-Samana river complex in 1971. This study identified the projects of San Carlos, Jaguas apd Las Playas. Subsequently (1972) ISA engaged Integral for final design of San Carlos and with the Bank's agreement, ISA has retained the services of these consultants for all phases of the project. Integral will engage outside expertise for specialized tasks during construction, as needed. 4.14 IDB will finance the services of a group of international experts to advise ISA on specific technical aspects and problems during construction. The estimated cost of these services (excluding price contingency) is MUS$0.5. The proposed Bank loan will finance the remaining foreign cost (MUS$1.2 base cost) of (a) the purchase of laboratory equipment (MUS$0.25) and vehicles (MUS$0.40); (b) factory inspection (MUS$0.25) and testing of equipment (MUS$0.10); and (c) study of losses (3.02; MUS$0.25). Contingencies on these items amount to MUS$0.5. About 70 man-months of consulting services is required at an average base cost of US$7,000/man-month. 4.15 The access tunnel is being constructed, for completion in 1978, by the Brazilian firm Mendes Junior. The contract amounts to MUS$4.6 equivalent and ISA is financing the works with its own funds. 4.16 The main underground works, which are expected to be started during the second quarter of 1978, would be concluded by mid-1982. The critical path of construction is the excavation of the caverns for the generating units and transformers. The Project implementation schedule of which key dates are shown in Annex 4.3 would be used to monitor progress during the project construction period; this schedule also covers the transmission lines to connect San Carlos to the system and the study of losses (3.02). Procurement 4.17 Procurement of goods and services to be financed by the proposed Bank loan (other than those of consultants) would be in accordance with international competitive bidding consistent with the Bank's Guidelines for Procurement. Colombian manufacturers would receive a preference of 15% or applicable duties, whichever is the lesser, for purposes of bid evaluation. The cost estimate assumes that local manufacturers would supply conductors, towers and certain miscellaneous electromechanical equipment, with an estimated cost of about MUS$10, the ex-factory cost (net of taxes) of which would be financed by the proposed loan. In view of legal freight preferences for Colombian ships, satisfactory evidence is to be provided to the Bank for the purpose of financing, that freight cost are in accordance with international levels.  - 28 - 4.18 A total of 14 firms were perqualified for the major civil work contract in accordance with procedures acceptable to the Bank and ISA called bids in June 1977. Bids were opened in November 1977 to permit award of s_ntract in early kpril 1978 because major construction activity is limited to the dry season (November/December to April/May of the following year (see also 4.24)). This would provide the contractor 6 months for mobilizing all required construction equipment, construction of the workers' village and clearing of sites during the wet season of 1978. Any delay beyond April 1978 for award of contract would cause a delay in Project completion (and give rise to severe rationing of electricity in Colombia during the period of delay). The Bank therefore concurred with ISA's proposal to award the contract to the lowest evaluated bidder, a consortium comprising Ingenieros Civiles Asociades (ICA) of Mexico and GRANDICON of Colombia. Retroactive financing is proposed for the downpayment of this contract, expected to be signed in the near future l(MUS$ 4.0) and for consulting services for the preparation of the Project subsequent to January 1, 1977, estimated to amount to MUS$ 0.2. 4.19 Bid documents for the remaining components to be financed by the proposed loan are being prepared by Integral in accordance with the implemen- tation schedu:Le for Bank review. The recommendations for award of the various contracts wou:Ld be prepared by ISA with the assistance of Integral. Disbursements 4.20 Funds from the proposed loan would finance 100% of (a) the foreign expenditures iEor underground civil works; (b) the foreign expenditures for imported equipment and materials; (c) the foreign expenditures for erection of works; (d) the foreign expenditures for consultants' services or 50% of total; and (e) 94% ofE the ex-factory cost of locally produced materials and equipment; and (f) interest and other charges on the Bank loan accrued up to March 14, 1983. Annex 4.4 shows the estimated loan disbursements, assuming loan effectiveness in September 1978. The first unit is expected to be operational in September 1982 and the Project is expected to be completed by June 30, 1983. The closing date would be June 30, 1984 to allow for the payment of retention moneys. Environmental Aspects 1/ 4.21 The project area is characterized by extremely hilly topography, lpoor soils and high rainfall, making the entire area unsuitable for farming or stockraising. A small village in the reservoir area with about 70 families will be displaced by the Project. An adequate program for acquiring all properties in the area and the evacuation of people has been communicated to the Bank. Evacuation would be completed by June 1979 and implementation of the first part of the agreed program would be a condition of effectiveness, in order to assure that construction is not affected by delays. The construction of San Carlos I and the other power plants (San Carlos II, Jaguas and Playas) to be built in the area would create new sources of income for the local 1/ Estudio Ecologico Proyecto Hidroelectrico de San Carlos; Cesar Perez Figueroa for Integral Ltda., September 1976.  - 29 - population during the respective construction periods. Thereafter, employment opportunities would arise in connection with the control of the land use in the area (4.22). 4.22 ISA will have to take adequate measures to control development of water hyacinth (Eichhornia crassipes) in the reservoir area; conditions there are favorable to its development, and it has already caused problems in Colombia in hydroelectric and irrigation projects. Before December 31, 1980, ISA would, in consultation with the Bank, formulate a satisfactory medium-range program for rational use of the Project basins, including reforestation. ISA also agreed to organize a unit with adequate funding, staffing and facilities to carry out the program not later than December 31, 1981. Project Risks 4.23 The Project is subject to the risks normally associated with large civil works in difficult terrain as summarized in the following paragraphs. 4.24 Climatic Conditions. Climatic conditions will not greatly affect the underground works except that landslides on the access roads could temporarily hold up the work. Heavy rains may affect dam construction, although this should be mitigated by careful selection of materials and maxi- mum utilization of construction equipment during the dry season. Another factor that could affect the Project is the flooding of the Guatape and Samana rivers. In view of this, the cofferdams have been designed to be built in two stages. The first stage (to be started at the beginning of the 1978 dry season) will protect the works against a dry-season flood occuring once in 25 years and the second stage (to be completed before the end of the 1978 dry season) against a 25-year wet-season flood. The water level in the Samana River can rise by more than 12 meters within a few hours, but the discharge tunnel outlet has been located above the maximum recorded cresting elevation, in order to avoid interruption of operations during floods. 4.25 Geology. The Punchina dam, the intakes and the greater part of the pressure tunnels (80-85%) are located on and in sound igneous rocks, not requiring any kind of support. The remaining part of the pressure tunnels, the power house and the discharge tunnels are located in metamorphic rock requiring rock bolts or shotcrete and possibly some steel rib supports. A small portion (5-8%) of tunnelling would be done across fault zones, where metal supports will be used in combination with shotcrete. 4.26 Before the first stage of San Carlos is completed, the adduction tunnel for the second phase will be under construction. The consultant therefore recommended concrete lining throughout, to avoid water leaks to the works under construction through faults and to better protect the San Carlos I works against the effects of blasting of the San Carlos II tunnel. This measure has been shown to be advisable by recent experience with Chivor I and II which have similar parallel tunnels.  - 30 - 4.27 Although excavation of the caverns is not expected to present any major problems, unforeseen situations may arise having regard to the volume of the excavation work and the width of the galleries. To minimize this ri k, once the acce-- tnnel now under construction is completed, two exploratory tunnels will be built for the length of the caverns in order to ascertain the rock conditions at the powerhouse site more precisely and to define the final orientation of the caverns. The bidding documents allow for this contingency and indicate the maximum permissible limits for locations of the powerhouse. 4.28 In order to review the Project's geological aspects, the Bank engaged Dr. A. Merritt, a U.S. engineering geologist, to participate in the appraisal. Dr. Merritt agreed with the design recommendations of INTEGRAL and additionally recommended that the method of supporting the cavern roofs and walls should be restudied as and when more information on geologic condi- tions becomes available once the access tunnel and the exploratory tunnels are completed. 4.29 Seismicity. There are a number of faults in the zone located within a radius of 15-20 km around the project area. Two of them (the Mulato and Jetudo faults) are classified as probably active (though there is little evidence). The others are regarded as inactive. However, the works have been designed for a seismic acceleration of 0.4 g (3.9 m/s2) with its epicenter in one of the faults and with a spectrum similar to that recorded at Lima, Peru, during the earthquake of October 1966. The dam is provided with an impervious core and a clhimney-type filter of adequate thickness to be self-sealing in the event of rupture due to an earthquake. The dam will be adequately instrumented to continuously monitor its soundness. ISA agreed to engage qualified experts for annual inspections of its dams and related facilities in accordance with sound engineiering practices.  ^ 31 - 5. THE 500-kV INTERCONNECTION PROJECT Objectives 5.01 The 500-kV Power Interconnection Project will interconnect the country's two largest electricity systems: the Central System, which is predominantly hydro, and the Atlantic Coast (CORELCA) System, which is totally thermal. The Project will result in more economical development and operation of the national power system, by substituting some hydro for thermal generation and obtaining substantial savings on equipment through reduced capacity reserve requirements. ISA would construct all facilities on behalf of the Government in accordance with an agreement on Project financing and execution satisfactory to the Bank to be signed between the Government and ISA before effectiveness of the proposed loan. The Government agreed that, by December 31, 1981 ISA will operate and own the 500-kV Interconnection. Description 5.02 The Interconnection Project comprises: (a) a single-circuit 500-kV transmission line, 523 km long, between San Carlos in the central region and the Sabanalarga substation in the Atlantic (Northern) region; (b) two 500/230/34.5-kV terminal substations, each with an initial capacity of 450 MVA, one at San Carlos and the other at Sabanalarga; (c) two intermediate 500/115/34.5-kV substations, each with an individual capacity of 150 MVA, one at Cerromatoso and one at Chinu; (d) A shunt compensation system with a capacity of 600 MVAr. Transmission Line 5.03 The southern section of the transmission line between San Carlos and Cerromatoso, which is 210 km long, crosses a mountainous region at elevations of up to 2,000 m over its first 130 km. On this section lattice towers will be used carrying four bundl2d conductors per phase of 740.8 MCM aluminum alloy, shielded by two 46.5 mm Alumoweld wires. Over the 313-km northern section between Cerromatoso and Sabanalarga the terrain is slightly rolling as far as the Chinu substation (km 342 from San Carlos). The line then continues over similar terrain to a marshy area (at Dique Canal) which it crosses for a distance of 15 km until about 43 km from the terminal point. The last part of the line is on solid and flat terrain. Over most of the northern section the line will be on guyed V-type towers supporting sour bundled conductors per phase of 559.5-MCM aluminum alloy and two 46.4-mm Alumoweld shield wires. The profile of the line, a single line diagram and some details of construction are shown in Annex 5.1.  - 32 - 5.04 The diameter of the conductors was selected so as to limit the radio interference level to obtain a signal-to-noise ratio of not leFs than 22 db for 90% of the time at a distance of 80 m from the axis of the line. The arrangement of quad bundles was adopted because it offers a lower imped- ance and lower conductor, structure and foundation cost for a given radio interference level, low Corona losses and minimal wind vibration. The insulator strings will be V-strung, consisting of 24-29 units per string, depending on the elevation and the level of saline pollution (which occurs on the northern section in the vicinity of the Sabanalarga substation and in some intermediate areas). The total weight of the structures will be approximately 9,700 t. Where the line crosses marshy areas, prefabricated piles will be used; for most of the rest of the line conventional foundations will be used. Substations 5.05 Terminal Substations. The initial layout of the 500/230/34.5/kV- San Carlos and Sabanalarga substations will be a ring arrangement using a double-circuit-breaker scheme. Owing to the transport limitations, the San Carlos substation will have a transformer bank consisting of six 75-MVA single-phase units connected in groups of two parallel units per phase, with a 75-MVA reserve unit. At Sabanalarga the transformer bank consists of three autotransformers of 150 MVA and one reserve unit. The transformer capacity can be doubled in a later stage in both substations for full utiliza- tion of the transmission capacity of the line (900 MVA). 5.06 Intermediate Substations. A three phase autotransformer of 150 MVA (500/115/34.5 kV) will be installed in the Cerromatoso and Chinu substations with a breaker-and-a-half scheme for the outgoing lines. 5.07 Shunt Compensation. In order to compensate for reactive power at low-load conditions, to provide better control of the voltage under the various operating conditions, to facilitate single pole reclosings, and to reduce voltage surges at service frequency caused by line switching or by single- phase faults, the system will have 100% compensation (600 MVAr), of which 60% will be connected solidly to the 500-kV line at the beginning and end of each of the three line sections, while the remaining 40% will be connected to the transformer's tertiary winding (34.5 kV) at the Cerromatoso and Chinu sub- stations. Full inductive compensation and reclosing are of great importance in the first stage until a second transmission line is installed, because at 500 kV most faults are expected to be transient ground faults. Voltage Selection 5.08 The Colombian firm of Salgado, Melendez y Asociados (SAMEL), ISA's consultants for the 500-kV Interconnection Project, carried out the studies to determine the service voltage for the future national interconnection network. The voltage of 500 kV was selected as the most economic over alternatives of 400 kV and 700 kV, taking into wccount the transmission distances and the transmission capacities required over a period of 20 years. In its comprehensive system design study, SAMEL was assisted by Kennedy and Donkin (UK) which jointly with Westinghouse (USA) carried out detailed transient-switching studies.  - 33 - Project Cost 5.09 The construction cost of the 500-kV Interconnection Project. esti- mated at MUS$167 with a foreign component of MUS$100, as shown in Annex 5.2 is summarized as follows: Local Foreign Total Local Foreign Total -------- MCol$ ------ ------- MUS$ -------- Transmission line 851 1,342 2,193 23.3 36.8 60.1 Substations 279 1,372 1,651 7.6 37.6 45.2 Engineering 222 121 343 6.1 3.3 9.4 Subtotal 1,352 2,835 4,187 37.0 77.7 114.7 Contingencies Physical 74 146 220 2.1 4.0 6.1 Price 1,305 1,087 2,392 28.1 18.3 46.4 2,731 4,068 6,799 67.2 100.0 167.2 5.10 The cost estimates for the equipment and the civil works were based on current world and local prices for works of this kind. SAMEL has carried out a detailed study of all elements, equipment, manpower utilization and work quantities that will be required in the execution of the works; the physical contingencies include 20% for right of way, 8% for the civil works and 5% for the equipment, which are considered appropriate. The price contingency factors used, are the same as for the San Carlos project (4.10). Financing 5.11 A Bank loan of MUS$50 is proposed to finance the total foreign exchange cost of the transmission line (50% of the total foreign cost of the transmission facilities): MUS$ (a) Engineering 1.8 (b) Materials 40.3 (c) Civil works and erection 7.9 Total 50.0 5.12 Kreditanstalt fur Wiederaufbau (KfW) of the Federal Republic of Germany would finance part of the foreign exchange components of the sub- stations, for a total of DM 80 million, equivalent to about MUS$40. The remaining foreign cost would be covered by suppliers' credits (MUS$10); the Government would finance interest and finance charges on any loan or credit. The local components of the Project (MUS$67 equivalent) would be financed by the Government.  - 34 - 5.13 Bank financing for expenditures incurred by ISA for foreign engineer- ing services for the Project during 1977 and early 1978 has been requested. Retroactive f inancing up to an amount of US$200,000 from January 1, 1977 onword is proposed to -r^er these services. Engineering aLnd Construction Program 5.14 ISA and CORELCA engaged the services of SAMEL and Commonwealth (USA) in 1972 to study the feasibility of the Interconnection Project. The study, which was completed in early 1975, shows the economic benefits of interconnecting the Central and the Atlantic systems in view of the fuel savings that would result from substituting thermal energy to be generated in the northern system by hydro energy from the central system. Subsequently, because the Board of ISA did not authorize the funds for execution of the field work (surveys and selection of line route), ICEL assumed responsibility for this work. A steering committee composed of ISA, ICEL and CORELCA repres- entatives presented the feasibility study to the Government which approved the Project. 5.15 SAMEL, with the assistance of Kennedy and Donkin (UK), also prepared the bidding documents, with financing by Fondo Nacional de Proyectos de Desarrollo (FONADE) from the proceeds of Loan 971-CO. ISA has also engaged SAMEL, assisted by Kennedy and Donkin, for continuation of their services for the detailed design of the line and substations and for supervision of the works. Colombian law requires engagement of independent consultants to ensure that work is executed in accordance with the contracts. ISA is currently negotiating writh Integral for this service. Because multiple expertise appears justified for the Project (the first 500-kV facilities in Colombia), these servicets would also be eligible for financing by the loan. The engagement of these consultants under conditions satisfactory to the Bank should be a condition of effectiveness of the proposed loan. 5.16 The! foreign base cost of the consulting services to be financed by the proposed loan amounts to MUS$1.5, with the following breakdown: engineer- ing, MUS$0.3; supervision during construction, MUS$0.9; and inspection and testing of equipment, MUS$0.3. About 200 man-months of consulting services are required at an estimated cost of US$7,200 per man-month. The foreign cost of engineering services (also by SAMEL) for the substations (US$1.5 million) is included in the proposed KfW loan. 5.17 The! construction of the 500-kV line would start in the third quarter of 1978 and works would be completed by April 1981. The construction of the four substations would start in early 1979 and would also be completed in April 1981. The critical path of construction is the supply of power trans- formers, reactors and circuit-breakers. The project implementation schedule Annex 5.3, based on the critical path program, would be used to monitor progress during the construction period.  - 35 - 5.18 ISA has not previously encountered major problems in acquiring right-of-way for construction of its transmission lines. It has submitted a satisfactory program to the Bank for obtaining right-of-way and permits to ensure that the contractor can enter the various work sites at the appropriate time. Acquisit ons would be completed by June 30, 1979 for the line. ISA has already acquired the lands on which the substations would be built. Procurement 5.19 Procurement for goods and services to be financed by the proposed Bank loan (other than consulting services) would be through international competitive bidding under Bank guidelines. Bids for the transmission line were called in July 1977 and opened in November. The lowest evaluated bid was received from a consortium comprising Sul Americana de Engenharia (SADE, Colombia, Brasil), Sociedad Venezolana de Electrificacion (SVECA, Venezuela) and Societa Anonima Electrificazione (SAE, Italy). Award is expected to be made immediately following approval of the proposed loan. 5.20 The supply and erect contract would cover all works for each of both sections of the line (materials and civil works). Though local manufacturers did not bid (because they lack experience with equipment of the kind included in the Project), any qualified Colombian bidder would receive a preference margin of the lesser of 15% or applicable custom duties on minor equipment that still has to be procured. With respect to freight, financing of these costs would be subject to the conditions mentioned in 4.17. The bid documents for the substation, transformers and reactors have been issued in February 1978, after KfW review, and award is scheduled for October. Disbursements 5.21 Funds from the proposed loan would finance (a) 100% of the foreign expenditures for the imported materials and equipment; (b) 94% of the ex-factory cost of locally produced materials and equipment; (c) 100% of the foreign expendi- tures for civil works and erection; (d) 100% of the foreign expenditures or 50% of total cost for consultants' services. Annex 5.4 shows estimated loan dis- bursements, assuming loan effectiveness in September 1978. The closing date would be June 30, 1982 to allow for the payment of retention moneys. Environment 5.22 No environmental problems are anticipated. 1/ The transmission line will cross a rural area that is partly mountainous, with few inhabitants, little farming activity and sparse woodlands. People affected would be compensated for any damage to property or crops and for the use of rights- of-way. Radio and television interference would be minimal (5.04). Visual impact will be reduced because the line will, for most of its length, be carried on V-type pylons. 1/ Consideraciones sobre el impacto ecologico de la Interconexion; Salgado, Melendez y Asociados. April 1977.  - 36 - Project Risks 5.23 While this would be the first 500-kV transmission system to be installed in Colombia, ISA has incorporated adequate safeguards in the design against anticipated problems (5.07). ISA agreed to prepare by the end of 1978 a satisfactory program for training of the staff required to operate the interconnection system and to implement it thereafter. Because the Government considers the project to be of top priority, the implementation schedule (Annex 5.3) appears realistic.  - 37 - 6. FINANCES Introduction 6.01 ISA will continue to depend heavily on its shareholdezs to finance its investments during the project construction period. In the past, ISA has encountered major problems when its shareholders had financial diffi- culties (as a consequence of their low rates). ISA's financial situation during the project construction period, therefore, depends largely on the application of adequate tariff policies by the shareholders, based on technical and financial rather than political and regional considerations. The tariff policies agreed with ISA, EEEB, EPM, CVC, and CORELCA together with Government assurances on the provision of funds to CVC, ICEL and CORELCA, would provide a sound financial basis for the projects. ISA's Performance and Financial Position 6.02 ISA was created in 1967. Over the following ten years it functioned in accordance with its original bylaws, which were based on the concept of sharing ISA's operating costs, debt service and local construction expenditures among its shareholders according to agreed formulae. The revenue covenants for IBRD Loans 575-CO and 681-CO were consistent with those provisions. 1/ ISA's main financial problems during this period resulted from slow payment by its shareholders of amounts owed; secondary problems included ISA's failure to include depreciation charges in the operating expenses recovered from its shareholders and the tendency of some shareholders to invest in ISA's bonds while allowing arrears to accumulate on accounts payable for transmission charges, energy and equity contributions. To avoid a recurrence of these problems, the Government, ISA and its shareholders agreed that: (a) ISA would: (i) recover from any shareholder the financial costs arising from borrowings incurred by ISA to cover cash shortfalls caused by delays in receiving payments from that shareholder; and (ii) apply any payment made to it by its shareholders (except if such payment were to be made pursuant to legislation which precludes this procedure) in the following order of priority: First: to accounts for energy sales and transmission and interconnection charges; Second: to equity subscriptions; and Third: to bond subscriptions; 1/ Except that they required that ISA earn a 9% rate of return on generating assets. Since ISA's first generating plant, Chivor I, did not commence operations until mid-1977 (at which time the arrangements described in 6.13 were being discussed) this provision was never applied.  - 38 - (b) the shareholders would: (i) reimburse ISA by December 31, 1979 for amounts due on account of depreciation for 1977 and earlier years; and (ii) pay all other accounts within sixty days of billing; and (c) the Government would: (i) make available to the ISA shareholders it controls (CVC, CORELCA and ICEL) any funds they may require to fulfill their financial obligations to ISA; and (ii) assist the other two ISA shareholders (EEEB and EPM) in securing any loans they may require to comply with their financial obligations to ISA. 6.03 The recent amendments of ISA's bylaws specify that ISA will earn a reasonable rate of return on its revalued investment in the transmission system (financed by IBRD Loan 575-CO) and on its generating plants and associated transmission facilities. This is a major improvement over the previous proc,edure, since it would allow ISA to generate funds internally for future expansion (6.12). 6.04 ISA's long-term capitalization (see Attachment 6/2 to this chapter, page 48) reflects the provisions of its bylaws which require that the foreign cost of its projects and a high proportion (previously 60%, now increased to up to 80%) of local costs be financed by debt. As of December 31, 1976, it was as follows: MCol$ %_ Equity 1,533 19 Bonds (held by shareholders) 1,284 16 Other long-term debt 5,225 65 Total 8,042 100 ISA's high debt/equity ratio is mitigated by the fact that the bylaws specify very favorable terms for its bonds, which make them practically equivalent to equity. After the recent amendments, the bylaws provide that bonds will mature when ISA is wound up (the bylaws specify a 50-year life for ISA, which may be extended) and that their yield will be equal to the dividend on ISA's shares. The bylaws require each shareholder to make a contribution in the form of shares and bonds to cover the portion of the local costs of each plant which cannot be obtained from other sources. This contribution should be proportional to the shareholder's agreed participation in the output of the plant. 6.05 ISA's equity is understated, since Colombian legislation only allows, for ac:counting purposes, revaluation of assets to offset exchange- rate adjustments on borrowings. ISA, EEEB, EPM, CORELCA and CVC/GHIDRAL have  - 39 - revalued their assets fully, for purposes of performance measurement. They agreed to continue revaluing their assets annually and to present an annual report on the revaluation; the first report would be presented by June 30, 1978 (for 1977) and those for succeeding years by March 1 of each year. 6.06 ISA-s long-term debt on December 31, 1976 (Annex 6.1) comprised: (a) Bank loans 575-CO and 681-CO (transmission project, Chivor I) totaling MCol$2,603; (b) IDB loans 214-OC-CO and 263-OC-CO (Chivor I, Chivor II) amounting to MCol$1,606; and (c) supplier's and other credits amounting to MCol$1,015; and (d) bonds, held by ISA shareholders (MCol$1,284). Financing Plan 6.07 ISA's 1977-1984 investment program includes: (a) the proposed Projects (San Carlos I and 500-kV Interconnection); (b) the completion of Chivor II; and (c) future expansion in generating facilities (4.01) required by the national interconnected system and the corresponding transmission expansion. ISA's funds statements for the eight-year period are shown in Attachment 6/3 to this chapter (page 49). The financing plan for the disbursement period of the bulk of the proposed loans (1978-1982) is summarized as follows:  - 40 - 1978 - 1982 MCol$ MUS$ % Finaancial Requirements Construction Project: San Carlos 1/ 14181 333.8 16.2 Interconnection 2/ 6693 164.3 8.0 Ongoing works 3892 99.4 4.8 Future works 53440 1132.1 54.9 Other 1842 42.3 2.1 Interest capitalized 11207 241.5 11.7 Total Construction 91255 2013.4 97.7 Increase in working capital 2217 47.3 2.3 T'OTAL 93472 2060.7 100.0 Sources Internal cash generation 17732 394.5 19.1 Less: Net debt service 3/ 8935 198.6 9.6 ISA.'s net internal cash generation 8796 195.9 9.5 Shareholders contribution w/own funds 4/ 25520 551.1 26.7 Total power sector sources 34316 747.0 36.2 Government Contributions: IBRD loan proceeds 2037 50.0 2.4 Contributions for interconnection project 4656 114.3 5.5 Other contributions 5/ 11446 248.5 12.1 Total Government Contributions 18140 412.8 20.0 Borrowings: Proposed IBRD San Carlos loan 6/ 5045 115.5 5.6 Other loans re:Lated to San Carlos 4663 109.8 5.4 Existing loans 3184 81.1 3.9 Future loans 28124 594.5 28.9 Total Borrow:ings 41016 900.9 43.8 TOTAL 93472 2060.7 100.0 1/ T'hese figures differ from those in 4.08 because they exclude expenditures prior to 1978 and relatively small payments to be made in 1983. 2/ These figures differ from those shown in 5.09 because they exclude expenditures prior to 1978. 3/ Excludes interest capitalized and MCol$1879 of interest on bonds which would be reinvested by shareholders (also deducted from shareholders contributions). 4/ Includes capital and bond contributions. 5/ Contributions to CORELCA and ICEL to cover their contributions to ISA (capital and bonds). 6/ An additional MUS$10.5 would be disbursed in 1983.  - 41 - 6.08 During the period, ISA's net internal cash generation represents 9.5% of the investment program. This is low, but acceptable when viewed in conjunction with the shareholders' contribution of 26.7% towards ISA's expan- sion program. The latter represents an important consumers' contribution of the main cities of Bogota, Medellin and Cali through EEEB, EPM and CVC. The annual amounts contributed (in the form of equity and bonds) by each shareholder are shown in Annex 6.2. Since ISA will not be in a position to pay cash dividends to its shareholders and would have to borrow to service its bonds, the shareholders agreed to reinvest any dividend (or debt service on ISA bonds) during the construction period of the San Carlos I Project. Financing of interest during construction on the proposed Bank loan for the San Carlos I Project is recommended in view ot the heavy strain imposed on ISA by its large construction program, the cost of which is far in excess of the capacity of its existing assets to generate revenues. 6.09 In line with ISA's bylaws, the financing plan assumes that borrowings would cover most of the foreign cost of San Carlos I (4.12). The terms assumed are as follows: (a) Proposed IBRD loan: interest 7.5%, maturity 17 years, including four years of grace; (b) IDB loan: interest 8.0%, maturity 20 years, including 5-1/2 years of grace; and (c) Supplier's credits: interest 8.5%, maturity 10 years, including two years of grace. The effectiveness of the Bank loan for the Interconnection Project would be conditional on receipt of evidence that ISA has complied with the conditions precedent to the first disbursement of the IDB loan and has made satisfactory arrangements for the balance of the foreign exchange requirements. 6.10 The shareholders would cover the portion of the foreign cost of San Carlos I not covered by the above financing, as well as local costs which exceed ISA's net internal cash generation, in the following proportions: EEEB, 19%; EPM, 22%; CVC, 16%; ICEL, 30% and CORELCA, 13%. At least 60% of these contributions would be in the form of equity. 6.11 The Government has agreed to finance the full cost of the 500-kV Interconnection Project. It expects to cover substantially all foreign costs with borrowed funds, including the proceeds of the proposed Bank and KfW loans and of supplier' credits (5.12). Effectiveness of the proposed Bank loan would be conditional on satisfactory arrangements having been made to finance the project's foreign exchange costs. 1/ In additional shares of ISA's stock (or additional bonds).  - 42 - Future Finances 6.12 ISA's forecast income statements 1978-84 (See Attachment 6/1 to this chapter, page 47) are based on the assumption that starting in 1978 ISA will operate on a sound commercial basis ensuring an adequate rate of return. ISA's sales are based on a program simulating the operation of the inter- connected system under average conditions of hydrology. The supply of secondary hydroenergy, therefore, has not been taken into account which, under favorable hydrological conditions can be of major importance in substituting thermal generation, particularly in the CORELCA system, once the 500-kV Interconnection Project has been completed. The forecasts are based on purchase of all of ISA's output: by the shareholders as provided by a recently negotiated sales agreement. The shareholders have agreed to perform their obligations under this agreement, which specifies the amounts of capacity and energy to be purchased in each hydro year by each shareholder, until the expected entry into operation of Chivor II in 1980. At that time the agreement is expected to be modified to cover forecast sales through the commissioning of San Carlos I in 1983. The effectiveness of this sales agreement would be a condition of effectiveness of the proposed San Carlos I loan. 6.13 ISA agreed to charge tariffs which would enable it to achieve a rate of return on its revalued assets (excluding the 500-kV Interconnection) of not less than 5.5% in 1978, 8% in 1979, 9% in 1980 and 11% in 1981. These targets would result in ISA achieving an average 9% rate of return for 1978-81. The 9% rate of return target would be maintained for 1982 and subsequent years. 6.14 The charges for the 500-kV Interconnection would be set to achieve a gradually increasing rate of return on revalued assets between the years of initial operation (1982-84) and full loading of the line in 1987. Based on transfer of 30% of the value of the facilities to ISA's plant in operation in each of 1982-83 and the balance in 1984, the return would average at least 2.5% in this period. It would be not less than 4% in 1985, 6% in 1986 and 9% in 1987 and subsequent years. 6.15 As can be seen from Attachment 6/3 (page 49), ISA faces extremely heavy debt service obligations, which, despite its satisfactory forecast finan- cial performance, are expected to increase at a faster rate than internal cash generation. Unless ISA is able to secure financing of interest during con- struction for projects subsequent to San Carlos I, the margin between gross internal cash generation and debt service would be inadequate starting in 1980, even after taking into account the fact that ISA's shareholders have agreed to reinvest debt service on ISA's bonds during the construction period of San Carlos I. ISA and its shareholders agreed to prepare and present to the Bank no later than December 31, 1978 a review of ISA's finances covering the period 1979-85 which would include proposals for achieving an annual coverage of ISA's debt service of at least 1.5 times in the period, thus providing an adequate margin of safety for any borrowings which ISA might have to incur to meet con- tingencies. The shareholders agreed to reinvest ISA dividends (or debt service on ISA bonds) in any year in which ISA fails to meet the 1.5 test. In addition,  - 43 - the shareholders would guarantee principal and interest on the proposed San Carlos I loan in proportion to their shareholding. The shareholders also agreed to provide any funds required by ISA to cover debt service. 6.16 In addition to the general restriction of future major generating projects described in 1.25, ISA agreed to seek the Bank's concurrence, until the Projects are completed, before undertaking any project costing in excess of 2.5% of the value of its net fixed assets in operation. To ensure sound financing of its future expansion, ISA agreed to seek the Bank's concurrence before contracting any long term debt unless internal cash generation is more than 1.5 times its maximum future debt service requirement (excluding interest on bonds held by its shareholders and interest during construction financed by loans). Financial Outlook of ISA's Shareholders 6.17 To assure that the shareholders will be able to meet their obliga- tions to ISA on account of capital contributions, bond subscriptions and payments for the purchased energy, the financial situation of EEEB, EPM, CVC and CORELCA over the project construction period has been reviewed (Annexes 6.5-6.8). ICEL's obligations will continue to be covered with Government contributions from the national budget. Because of the importance of shareholders contributions to the project financing plan, the shareholders agreed that they would not transfer any assets or take any other action which would interfere with compliance with their obligations to ISA. 6.18 The financial projections of EEEB, EPM, CVC and CORELCA assume a rate increase program, based on the requirements and possibilities of each utility. The necessary rate increases for 1978 (based on presently forecast inflation rates) have been approved by each shareholder. These increases (and longer-term performance targets for 1979 onward) have been translated into estimated rates of return based on revalued assets. EEEB 6.19 Despite the decline in real terms of its rates through 1976 and a relatively low rate of return on revalued assets (estimated to have averaged 6.6% in 1976-77) EEEB has been able to meet its obligations to ISA and to make a reasonable contribution to its investment program. The utility has operated under extremely favorable technical conditions, serving a highly concentrated urban market with very low-cost generation and transmission facilities. It has also benefited from prudent financial policies, relying largely on long-term financing from the Bank, IDB and suppliers. 6.20 EEEB's low rates appear to have reduced its capacity to invest adequately in distribution. Faced with the need to generate substantial resources for distribution expansion and to carry out the Mesitas hydroelectric project, EEEB has been implementing substantial rate increases. These increases would amount to 46% in real terms over the period 1977-80, based on the current forecasts of inflation. As a result, EEEB's rate of return on revalued assets would improve to 7.8% in 1978 and 11.6% in 1979. Over the period covered by the approved rate increase program (through 1980), EEEB's rate of return would average 12%, and EEEB has agreed to achieve this target. The projections in  - 44 - Annex 6.5 assume that rates would subsequently be kept constant in real terms. EEEB's financial performance would be very satisfactory: debt service coverage would be ample and a very substantial proportion of investment requirements (including contributions to ISA) would be financed by net internal cash genera- tion. 6.21 The main uncertainty underlying EEEB's financial projections relates to the substantial borrowings it will have to undertake in support of its investment program. The largest item in EEEB's construction program, Mesitas, has been appraised with a view to a possible Bank loan. Bank financing is also under consideration for EEEB's distribution investments. It is expected that EEEB would be able to attract sizeable commercial and supplier financing, partly as a consequence of the proposed Bank loans. EPM 6.22 EPM's financial situation was very difficult in 1974 and 1975; it improved in 1976 and 1977, as result of rate increases approved following lengthy discussions with the Bank. EPM experienced cash shortages during 1974-75, which led to difficulties in timely payment to ISA and delays in the Guatape II project. These financial problems were the direct consequence of an inappropriate tariff policy adopted by EPM's previous Board. The new Board (composed mainly of industrialists) and management are acting to reverse this situation. 6.23 EPM's financial projections (Annex 6.6) are based on a monthly increase of 2.2% starting in January 1978, which would produce a rate increase in real terms of 4.7% in 1978. Application of the proposed rate increase was initiated on schedule. If continued, it will improve EPM's financial situation in 1978 and 1979. However, EPM's rate of return on revalued assets will decline from 10% in 1977 to 7% in 1978 and fall further in 1979 as result of (a) the addition of Guatape II to the rate base in 1978 (40% of the plant cost) and 1979 (the remaining 60%), representing a 40% increase in total assets; and (b) in these same years EPM will store water in the Santa Rita reservoir in order to provide a back-up to the interconnected system in 1980/1981, when the reserves may be critically low. If instead, the Santa Rita reservoir operation were based on EPM's own requirements (independently of optimal interconnected system operations) the amounts of power purchased from ISA would be considerably lower with consequent reduction in operating costs. If the energy purchases were excluded from operating costs in 1979, EPM would achieve a 9% rate of return in this year. Based on these considera- tions EPM's rates of return in 1978 and 1979 are considered acceptable. To achieve a rate of return of 6% in 1979 an additional rate increase of about 11% on average (in addition to the 2.2% monthly increase) would be necessary, if the current inflation forecast proves correct. EPM agreed to apply the rate increases needed to achieve at least the following rates of return on revalued assets: 7% in 1978, 6% in 1979, and 9% in 1980 and later years. o.24 As can be observed in Annex 6.6, attainment of these targets would enable EPM to cover a very substantial proportion of its financial requirements (including its investments in ISA) from net internal cash generation, amounting  - 45 - to 34% in 1978 and increasing thereafter. EPM is reviewing its investment program for 1981-1984, which could result in somewhat higher investments, mainly in distribution. As a consequence, the proportion of the program financed by internal cash generation could be lower than shown in Annex 6.6, but is still expected to be satisfactory. Cvc 1/ 6.25 CVC's financial situation has been poor in the past because it charged inadequate bulk rates to its main customer, EMCALI. Its 1976-77 rate of return on revalued assets averaged less than 3% and it failed to generate sufficient funds internally to cover its debt service in the latter year (Annex 6.7). However, CVC has initiated a program of rate increases which should lead to a considerable improvement in its finances. These increases (equivalent in real terms to 12.2% in 1977-78), would allow CVC to achieve a 5% rate of return in 1978 and to finance 25% of its investment requirements from internal resources. Performance would improve further in 1979-80, when the rate of return would average 9%. Debt service coverage would also be satisfactory, rising from 1.3 times in 1977 to 1.7 times in the following year and remaining above that level thereafter. CVC agreed to charge rates as required to achieve a rate of return on its revalued assets of 5% in 1978 and 9% thereafter. 6.26 The main item in CVC's investment program is the Salvajina Multi- purpose Project (4.02) which the IDB and the Japanese Government have been requested to finance. CVC would require Government contributions of MCol$ 600 to undertake Salvajina. ICEL 6.27 ICEL functions essentially as a holding company for eleven local power utilities (2.15). It does not have any revenues of its own and its expenses, debt service and investments (including its contributions to ISA) are covered with Government budgetary appropriations. ICEL's largest subsidiaries are currently applying monthly tariff increases similar to those approved by other utilities. CORELCA 6.28 CORELCA's system depends entirely on thermal generation. The Govern- ment provides a heavy subsidy to CORELCA in the form of low oil prices. Despite this subsidy, the utility's operating costs are substantially higher than those of other bulk suppliers in Colombia, which generate most of their power in hydroelectric plants. These costs have not been adequately reflected in CORELCA's rates, and its financial performances has been poor. CORELCA's 1/ This section and Annex 6.7 cover the financial projections of CVC and CHIDRAL's power generation and transmission activities, which include the Yumbo coal mine. Other CVC activities (2.14) are excluded.  - 46 - rate of return, on revalued assets averaged 4% in 1976-77 and it relied on Government contributions and borrowings to finance its entire investment program and part of its debt service. CORELCA has recently started to convert its thermal plants to burn natural gas (which is available in very large quantities in its service area); this should result in some reduction in the adverse economic impact of the Government's fuel subsidy. Over the longer term, however, the subsidy will have to be eliminated to encourage a rational use of energy resources. 6.29 The imeasures agreed under the proposed loans would lead to a gradual increase in CORELCA's fuel costs, accompanied by sizeable rate increases to offset these higher costs and improve the utility's financial performance. Except in 1978 and 1981, CORELCA's internal cash generation would cover debt service; the utility would gradually reduce its dependence on Government contributions after 1982. Because of the size of its investment requirements (arising from the planned development of thermal generation based on the E:L Cerrejon steam-coal deposits) CORELCA will require sizeable support from the Government through the latter year (Annex 6.8). CORELCA agreed to charge rates as required to achieve rates of return on its revalued assets of 4% in 1978, 5% in 1979-80, 6% in 1981, 7% in 1982 and 9% thereafter. The Government agreed that beginning in 1978 it would gradually increase prices for the fuel purchased by CORELCA so that by the scheduled commissioning of the 500-kV IrnterconnectiorL (1982) it would be more costly for CORELCA to generate electricity irn its own thermal plants than to purchase it from ISA. Performance Indicators and Reporting 6.30 Over the project implementation period, ISA is expected to generate an. increasing share of the power sold by its shareholders and to achieve generally satisfactory financial performance. Based on their projected financial data, ISA's shareholders with the exception of ICEL and CORELCA would achieve satisfactory levels of debt service coverage. ISA and the shareholders would finance a high proportion of their investments with funds derived from consumer charges. The expected performance of ISA and the shareholders is reflected in the forecast indicators in Annex 6.9, which would be used as a basis for monitoring performance during project execution. 6.31 ISA and its shareholders agreed to report quarterly on their performance in mneeting the agreed revenue targets. In addition, ISA agreed to include in its quarterly reports on the progress of the two projects, deltailed information on its financial condition and the status of payments from the Government and the shareholders to ISA. These reports should enable ISA and the Bank to identify any deviations from the agreed financial performance early enough to permit timely corrective action.  -47 - I7ITECONIXI~ON ELECTRIbIA l.A. Attachmet 611 Actual and Estimated I-m- StatementsC1975-1984 ACTUA ___T_I__M A10 E12 TOTAL Nte -mr ecdln1 December 31 1975 i976 977 97 1979 0952 173A 2130 iT75 197 - 197784~ Emergy gales (35lh s 913.3 1140 7250 g ~~~~~~~~~~~~~~~~~~~~~~~~~see pace 3.04 fee hesie foe the forcat. The hy- fee -eee soles prier Hlyd,n 583 -1. 1999 29958 3951 -t15 3332 353 )81 34o79 ma 1977 esfee en -SeeY iTonar9 he figo- from 1977 mefe- so T~~~. -1 -~~~00 31. - - - 126 4z54 136 ___ 743 sole mess. ISA's pla-t. The theesa ..cergy -coId be sequte-d fees COtEIli Total _771-1 71-3 =~~~~~140 -190 -7397- 3081 '7735 '7935 _7 ~73 3o0 55529 daniog the fey ......esed sold so the ob-hoeIdee. Aver-g taiff per bkih (C1o19 Vldes ecege-1eitb at sf a bino..a no-d ....oa mee .cneIe roby 1. 15 0.24 o.46 0,.62 o. 66 o,P] 1.10 i.o6 0.22 L.11 - so pe-sided by the salesogoect Th-e1sc c/ - - - - - - 1.61 1.9 2290S - mlTherma eseey poe-hasd fre ISA would ho sold at. ehe ps-aho peiee, plns Op-aiting.. r -con iteontich-Sea les e/3. (ly3- n 01 2-oo4 525.8 1240 -3 19907 0370. 9 4036.n 480~3 Byjuo 0 7'7O9/~ -.j f.t. - ibilb..db T -1 - -~~~~~-- - .' - .3 -7. 19.0 376~7)7 8 -ld .ea ..e..svios ioe theesetIe teos deo sytes jAo lid ei y h Thermal - -~~~~~~~~~~~~~~~~~~, - - T cta n oh-orige /190 16 9. 70 8o 50 1 ~ hrhtsseeoie te t5Ai s tylsl b asd b,the ren coest lo-e -WYte Tycrarco 95~~~~~~~~~227 737 82.167 244O.7 (4779 1 -8 '007 107781-.0 607 300, T- 111 _.7 steengi 55 no f-pesee"eo.sie tee c50.s Opernticg rooto / 1981-4 and fee soss to the fCeme Itets siee sirs.) riocoictioc ~ ~ ~~~~~~~~- - 376 6Q50 76.3 1004. 110 9 1094 3 .00.6 270o10.6 fI/ The ajee pertissef tIres. .np...r. (-b- tns depeei-ties on peeha..edoos.egy) t,~~~~~~~~~P-i.ti.. - h~~~~~~~~~~~~~~~~~~~~~~~894 igb e-meeetta sith Scen isfli-tso The erf nt oese.... mces lteprerisoioo &' ~~~~~~~~~3.1 ~ 42 7 o.0 04 261.8- 38)I 1 4 o -4 63 4 1034.9 '0299 5 '2 .0 efil-eb t.he iefl-ei-m plna inrae t the n-eiseicaicg tis ef the Sloergy porho...ni fro ihomehoOde- 4 ,0.2 72p - 350 l.2 10 - 1463.7 f-cilitios to reflect the need to off see tcff to pe-ot thee. -tool ope-ntiog Co-tc _72577 =73q73 0 0 _5 _737 7 7 7757 1 1 14710 0 1761.8 2590q.- 0 p705.3 ISA~ so stright lime dopeeiani-oS. poete raesae od foe -ah nj-e Income before Ictereer Oo.s 04 0 091 120'.3 7034.3 'OQo 03',7 ~~~~~~~~~~~~~~~ ~ 38 eteetmeepenees; soso typical naloesoest civil eerie. of- geime1ratin..g plants 22k;11 11t. 2% loto... t eqipsot tOt; ohichhr-r-n...cbl- Ftignos thor e-lud depeet-iso c It-tnt Ictrreer p~~jibLo 0/ 320.0 510.7( 672.0 1225.8 1847.2 2330.7 39&198 6533.3 10079.1 14130.1 4d70f.2 cscin5The latter is included is depe-itios in Actt-h-s i/3. Les-oreropitclicro_ 287.3 466.-7 392.4 459.4 935.1 1848.3 2691.2 1.232.7 792.3.8 85. 88. Iroerree. qlncrand t opooctoora 7773 7377 37378 766.4 712.t~73T7 73337 7280.1 235.3 3371.3 13520.8 /8reins 1972 cc72 cct 1977.1977, hocAlt. sdghl tdde..Id y- at thet ews-price. nbagiio Not boone ~ ~ ~ ~ ~ ~ ' ~~( ~ ~ ~ ~ ~~ ~~ ecleted tm the crsnsoimsinsotseco. Per the period 1978-S--dO, ehse-emy salesF sod Pi.d197940 ,--g ..I. - 3oryectni inetccne before interest ~~~~~~~~~~~~~~8 esteprmioceisting plests.) After 1950. eurehases Cc for toi thorinSpl seerft-g980yp-h... t th- -g icnercticc - - 3~~~~ ~ ~~~~~~ ~~~~~09.7 7(2(. 7 0405.4. 01,613. 4715.4 ?669.7 E6961.7 9941. 1 286889i maclied tr Clotch th-eoj she S00-hf tos- -sstite 1roocMIoi Ot>1 07 149.' 10. 237.5 156.1 269.1 2'76,.3 241. ' 4.b 91. . oeecerbeicce nsecs bends. Pr deceil., 55 en6.0. ti-oooooo -- - - - - 233.4 139.2 174.7 284. 3 83-.6 0otnlTretdIrm 0029.2o 97393 164972 21112.5 4017.9 40853:3 -7-418.7 10 5 10.0 3114083.7 i] hemes hemfor icctrst ch-9me -a -n-ctmd -m olse dep-ciocimas. rele oecrrctlo3 - - ~~~~~~ ~ ~~~~~~~~ ~~6974.2 15170,.6 175905.5 24275 .64 133,6.1 -nol52.9 57630. 5 95703.6 ( / The -tot hose el e-timatd -ofcneoent --olnd --ete io mreds The fallosim ftgoe- ban been -tliotd foe 12/31/76 fol1r Toococmtocicc ~~~~~~ ~~~913 1306.1 19870.6 1621i.34 264i.7 2900.5 2990.2 'ony6. '1'5.1 ':2.1 loryt- co... icm - - --- - - 0638.8 8734.4 1