Colombia - Energy Technical Assistance

 ICRR 11320 Report Number : ICRR11320 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 08/15/2002 PROJ ID : P006893 Appraisal Actual Project Name : Energy Technical Project Costs 12.40 12.07 Assistance US$M ) (US$M) Country : Colombia Loan/ US$M ) 11.0 Loan /Credit (US$M) 10.85 Sector (s): Board: EMT - Central Cofinancing government administration US$M ) (US$M) (65%), Power (30%), Oil and gas (5%) L/C Number : L3827 Board Approval 94 FY) (FY) Partners involved : Closing Date 12/31/1999 12/31/2001 Prepared by : Reviewed by : Group Manager : Group : Alvaro J. Fernando Manibog Alain A. Barbu OEDST Covarrubias 2. Project Objectives and Components a. Objectives The objectives of the project were to: (i) implement regulatory reforms for the power and gas sub-sectors by strengthening the newly created entities in charge of regulation and energy policy formulation and implementation, in order to help them build experience and thereby increase chances of performing efficiently; (ii) implement strategies specifically designed for the energy sector, respecting environmental concerns and constraints and attracting private investment in the sector; and (iii) develop a demand-side management (DSM) strategy and assist in its implementation. b. Components The project was originally designed around five components: (i) Overall Regulation, Pricing and Energy Policy: assistance to the Energy and Gas Regulatory Commission and to the Energy Policy Unit for developing a competitive industry, disseminating information regarding utilities’ performance, protecting users, pricing services efficiently, controlling and focusing allocation of subsidies to the poor, and structuring energy strategies taking into account environmental and socioeconomic constraints; (ii) Specific Power Sector Assistance: hiring of engineering and investment banking assistance and privatization experts to help mobilize private capital (both domestic and foreign) for new power generation and distribution projects, divestment of existing public-sector controlled power plants, corporatization and privatization of utilities, and creation of the new grid company (ISA-Transmission) to facilitate competition among electricity generators; (iii) Specific Gas Sector Assistance: assistance in developing a new industry structure and regulation for the natural gas market incorporating private sector participation and competition; assistance to the Government in attracting private companies to the sector; (iv) Environment: assistance in executing sector environmental assessments together with project environmental assessments, formulating energy sector environmental regulations and guidelines, and promoting user awareness and participation in the definition of energy sector projects; and (v) Energy Demand Management and Safety Enhancement: development of a demand-side management (DSM) strategy for efficient energy use; assistance in devising mechanisms for disseminating information to help users in making fuel and equipment choices. In 1999 the project components were revised in order to emphasize market-based policies through the implementation of a price efficiency and regulatory reform. Thus, upon request of the Bank, the Inter-American Development Bank (IDB) undertook the public energy efficiency programs comprising Energy Demand and Safety Enhancement. It was considered that market-based policies combined with public energy management programs will improve energy sector efficiency. c. Comments on Project Cost, Financing and Dates The project was completed with a delay of 2 years at an estimated cost of US$12.07 million or 2.7 percent below the US$12.40 million appraisal estimate. The Bank loan financed consulting services, training and workshops (US$9.45 million), support to the Project Coordination Unit and fees of the UNDP administrative services (US$0.74 million), and goods such as computer, communications and ancillary equipment for the electricity dispatch center and information systems (US$0.66 million) totaling 90 percent of project cost (US$10.85 million). The Government financed part of the regulation, pricing and energy policy component (US$1.22 million). The Bank loan was closed on December 31, 2001 following an extension of the loan closing date by 2 years. 3. Achievement of Relevant Objectives: The project objectives were substantially achieved. All of the expected regulatory results were attained, partial privatization of the power sector was accomplished, the gas industry was developed, and the environmental studies were completed. This is demonstrated by the following: (a) the wholesale market for power was established; it is in operation including competitive bidding procedures; (b) a substantial amount of generating capacity and part of electricity distribution were privatized; (c) the Interconexión Eléctrica , a large state-owned enterprise, was split into two companies, one for transmission (ISA) and other for generation (ISAGEN); (d) the gas pipeline infrastructure was created, owned and operated by private sector companies; (e) gas industry regulations have been put in place; and (f) environmental legislation and codes for the energy sector were prepared. An independent Energy and Gas Regulatory Commission (CREG) is supporting the edifice of the structural reform of the energy sector. CREG has been the principal beneficiary of the project. 4. Significant Outcomes/Impacts: Prices and costs of electricity have been aligned and decreased for industrial and commercial users. A decrease of prices in the wholesale power market has produced a decrease of prices in both the un-regulated and regulated industrial and commercial tariffs. The average un-regulated high voltage industrial tariff decreased from around 6.0 UScents/kWh in 1995 to 4.3 UScents/kWh in 2000. The average un-regulated commercial tariff has decreased from 6.0 UScents/kWh in 1996 to 4.6 UScents/kWh in 2000. The regulated industrial and commercial tariffs decreased from 9.7 US$/kWh and 12.2 UScents/kWh respectively in 1996 to 7.1 UScents/kWh and 8.3 UScents/kWh in 2000. However, residential tariffs have remained at 5.7 UScents/kWh. The generators and distributors of electricity defend their interest vis-à-vis the CREG through the Association of Generators (ACOLGEN) and the Association of Distributors (ACODIS). A large number of state-owned enterprises were divested and privatized. These include the Energy Enterprise of Bogotá (EEB), Chivor, Betania, Tasajero and Termocartagena power stations, and seven distribution companies on the Atlantic Coast. These comprise an aggregate of 12 power generating plants totaling a capacity of about 2,700 MW or 60 percent of the installed capacity of the country. About 50 percent of electricity distribution was privatized. A network of new gas pipelines owned by private regional distribution companies is now linking the principal gas fields of the Atlantic Coast with the main cities of the interior including Bogotá, Medellín and Cali. It is now serving about 2.2 million gas users (up from 0.9 million in 1995). CREG and UPME have been established as credible well-functioning teams performing in a competent manner. Both institutions are regarded as serious organizations capable of exercising a major influence on the development of the power and gas sub-sectors. 5. Significant Shortcomings (including non-compliance with safeguard policies): Due to lack of political will of the Government, privatization of electricity distribution companies was only partial. The regulated tariffs for electric service to residential customers continue to be much lower than the industrial and commercial tariffs. It is an indicator that residential tariffs are highly subsidized. The project design did not include support to the Superintendence of Public Services (SSP) because it did not exist at time of project appraisal. As a result, a weak SSP established later did not have the capacity to be proactive in obtaining technical assistance from the project. In fact CREG, the Mining and Energy Planning Unit (UPME) and the Ministry of Mines and Energy (MME), through a strong advisory support, had more influence in the selection of studies made by the Project Coordinating Unit. Thus, the SSP has not been in a position to fully play its role as a watchdog of the quality of service provided to the consumers of electricity, gas and water. Although US$1.5 million were spent in carrying out two major studies, CREG did not succeed in introducing network charges in case the power system operates under grid constraints, and putting in place a futures market as recommended by those two studies. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: High High The project contributed shaping and establishing CREG and UPME as two solid, independent and competent institutions of the energy sector. Sustainability : Highly Likely Highly Likely Barring unlikely extreme political shifts, it is highly unlikely that private-owned enterprises in the energy sector be reverted to state-owned. Also, CREG’s operational independence is assured by five commissioners appointed by the President, which cannot be dismissed, and by an operational budget financed with up to 1% of the operational budget of the regulated entities – as mandated by law. Although UPME derives the financing of its operational expenses from large state energy and mining companies (mainly ECOPETROL and ISA), it is unlikely that it will not continue to perform its normative functions. Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE: NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. 7. Lessons of Broad Applicability: 8. Assessment Recommended? Yes No 9. Comments on Quality of ICR: The ICR complies satisfactorily with the Bank guidelines for the preparation of ICRs. It presents a very good description and evaluation of the project results. It would have been enriched by describing the achievements made by the IDB in implementing the Energy Demand Management and Safety Enhancement component and evaluating its impact on the improvement of energy sector efficiency (see last paragraph of Block 2 above).