Colombia - Mesitas Hydroelectric Power Project

Document of The World Bank FILE COPY FOR OFFICIAL 165E ONLY Report No. 2078a-CO STAFF APPRAISAL REPORT COLOMBIA MESITAS HYDROELECTRIC POWER PROJECT November 2, 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$) Col$36.32 (6-30-77) = US$1 Col$1,000 - US$27.53 (6-30-77) WEIGHTS AND MEASURES 1 meter (m) 2 3.281 feet (ft) 2 1 square kilometer (km ) = 0.386 square mile (mi ) 1 cubic meter (m3) 35.315 cubic feet (ft3) = 264.2 U.S. gallons (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 Megawat (MW) = 1,000 kW (103 kW = 109 W) 1 Gigawatt (GW) 1,000 MW (10 kW = 10 W) 1Akilowatt-hour (kWh) = 1,000 Watt-hours (103 Wh) = 830.3 kilocalories (kcal) 1 Gigawatt-hour (GWh) = 1,000,000 kWh (106 kWh) GLOSSARY OF ABBREVIATIONS CHEC = Central Hidroelectrica de Caldas CHIDRAL Central Hidroelectrica del Rio Anchicaya S.A. CORELCA = Corporacion Electrica de la Costa Atlantica CVC - Corporacion Autonoma Regional del Valle del Rio Cauca EAAB = Empresa de Acueductos y Alcantarillados de Bogota EEEB = Empresa de Energia Electrica de Bogota EMCALI Empresas Municipales de Cali EPM = Empresas-Publicas de Medellin GDP = Gross Domestic Product ICEL - Instituto Colombiano de Energia Electrica IDB = Inter-American Development Bank ISA Interconexion Electrica S.A. NPD = National Planning Department Fiscal Year = Calendar Year  COLOMBIA FOR OFFICIAL USE ONLY MESITAS HYDROELECTRIC POWER PROJECT TABLE OF CONTENTS PaRe No. 1. THE SECTOR ......*e**. ************......I.............. Energy Resources ....... ................so 1 Sector Organization .....2......... ...... ... 2 Planning and Regulation ......................... 3 World Bank Participation in the Sector .......... 4 Power Market and Supply ......................... 5 Rural Electrification ... ........................ 5 Sector Investment Program and Studies ........... 6 Finances and Tariffs ..... ... .o.o. ... . . . ... . . . . . . . . . 7 Constraints on Sector Development ............... 8 Attachment 1.1 - IBRD Power Loans .......... 10 2. THE BORROWER .... ................. ...... 11 General Description .......... ...*.*....*. ... ...... 11 Prior Bank Lending ..... .......... ................. 11 Organization and Administration ..... ............. 12 Employment and Training ......................... 12 Accounting and Auditing ......................... 13 Billing and Collections ......................... 13 Insurance o..o ............................. oo...o... 13 Attachment 2.1 - Organizational Chart ..s.... 14 3. THE POWER MARKET ..o ..... .... .o.ooo ...... 15 Historic ..o .... .... 15 Interconnected System Forecasts ................ so. 16 supply ... . ...................................... 16 EEEB Forecast .... ... .... .......................... 17 Attachment 3.1 - Electricity Supply and Consumption Projections . 19 4. THE PROGRAM AND PROJECT .... ...... .. . ....... ..... ..... 20 The National Program . . . . . . . . . ... . . ... . ... ... .... .o. . . 20 EEEB's Program . ................................. 21 The Project. .................... . 21 Mesitas Details ................................ 21 Sesquile Details . ............. . . . . ... 23 Estimated Project Cost ..................... 24 Project Financing ....... . . . . . . . . .......... . 25 Engineering and Administration ............. 26 Construction Schedule . .......o o..... o....... 27 Procurement .... ..o... o. . .... s ... *....... ..... 27 Disbursements .. ...... . . . . . . . . . . . . . ........ .. . 28 Environmental Aspects ....... ..... 28 This report was prepared by Messrs. E. Arnold, P. Bowron, F. Garza, and C. Warren on the basis of an appraisal conducted in Colombia in December 1977 and a follow-up mission in January 1978. 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.  TABLE OF CONTENTS (Continued) Page No. 4. THE PROGRAM AND PROJECT (Continued) Risks ........................................... 28 Attachment 4.1 - Mesitas Project Cost Estimates .... ........... 30 Attachment 4.2 - Construction and Implementation Schedule, Key Dates ............... 31 Attachment 4.3 - Loan Disbursement Schedule. 32 5. FINANCE . ............................................. 33 Past Performance and Current Financial Position . 33 Rate Base .... ................................... 33 Tariff Structure ....... ......................... 34 Financing Plan .................................. 36 Future Finances ....... .......................... 38 Performance Indicators and Financial Reporting .. 40 Attachment 5.1 - Income Statements 1975-1984 41 Attachment 5.2 - Sources and Applications of Funds 1975-1984 .... ..... 42 Attachment 5.3 - Balance Sheets 1975-1984 43 Attachment 5.4 - Forecast Performance Indicators .... .......... 44 6. ECONOMIC ANALYSIS ...... .............................. 45 Least Cost Justification .......... .. ............ 45 Internal Rate of Return ..... .................... 45 Attachment 6.1 - Energy Sales and Fuel Savings Attributable to Project ......... . . ..... .. 47 Attachment 6.2 - Internal Rate of Return Calculation: Main Assumptions ............ . 48 Attachment 6.3 - Project Cost and Benefit Streams for Internal Rate of Return Calculation ... 49 Attachment 6.4 - Rate of Return Sensitivity Analysis .............. .. 50 7. AGREEMENTS REACHED AND RECOMMENDATION ............. ... 51 ANNEX Contents of Project File .......................... 53 MAP IBRD 13429 - Mesitas Project Location and General Layout  1. THE SECTOR 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 250,000 or more GWh of annual energy capability. 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 prospects 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 to deal with this problem and to develop alternative energy sources. In the case of coal, there have been various obstacles to more 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. With respect to natural gas, a previous decline in known reserves and output has been dramatically reversed with the discovery of large deposits in the Atlantic Coast region. 1.02 Production 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. In contrast to the declining energy production, domestic consumption grew 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. 1.03 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. In order to expand potentially viable mines, a well-coordinated Government program is needed to provide a more rational price structure and to improve mine safety, credit facilities and support for marketing and infrastructure. Such a program would need substantial technical and capital assistance from abroad. 1.04 In the petroleum sector, the Government has taken action to stimulate investment in exploration and field development, which had declined after 1971 because of unrealistically low prices applied in domestic sales. The Government is encouraging foreign participation in exploration and development on the basis of association contracts with ECOPETROL (the Government oil agency).  - 2 - 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 there has been a significant upturn in exploration. 1.05 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. Sector Organization 1.06 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 the Central System, covering the interior and the Pacific coast, and the Atlantic (or Northern) System covering the northern part of the country. The proposed Mesitas Hydro Project, and the San Carlos Hydro Project for which the Bank approved a loan of US$126 million on May 30, 1978, will be located in the Central System. The 500-kV Interconnection Project for which the Bank approved a loan of US$50 million also on May 30, 1978, will intercon- nect the Central and Atlantic systems. 1.07 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 - the proposed borrower for the Mesitas Project), 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, Interconexion Electrica S.A. (ISA), whose shareholders are EEEB, EPM, and the three nationally owned companies ICEL, CVC and CORELCA, which together own 50% of ISA's shares. 1/ In most cases the ownership of these subsidiaries is shared with local governments.  - 3 - Colombia has a number of public entities known as Regional Autonomous Corporations, of which CVC is the largest, with a range of functions related to development of the regions under their jurisdiction, including legal capacity to generate, transmit and distribute electricity. 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 auton- omous municipal governments. CVC reports to the National Planning Department (NPD) as do other regional development corporations, which may, as already noted, undertake power projects. Planning and Regulation 1.08 Through its Electric Energy Division, the Ministry of Mines and Energy is charged with formulating a national policy for the generation, transomission and distribution of electricity. This division, which is being organized, was also given the responsibility for coordinating and supervising power sector planning. In defining investment priorities, the Ministry of Mines and Energy shares responsibility with the NPD. 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. 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. Although the Government cannot enforce its policies directly on the municipally controlled power companies, a mechanism for reaching agreement on major issues affecting the sector is provided by ISA, in which the Government has a major if not controlling interest. 1.09 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 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 were reluctant to reduce their independent roles in generation expansion and experienced severe financial constraints which reduced the availability of funds to ISA. Decisions on system expansion 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, execution and operation of the national grid and resisted proposals that would weaken ISA. Because of the time required by the share- holders to arrive at decisions on these fundamental issues, Bank consideration of the San Carlos I and 500-kV Interconnection Projects suffered considerable delays. The start of the appraisal of the Mesitas Project was held up until December 1977 until the critical points at issue had been resolved.  1.10 The solutions included agreements to adequate shareholder participa- tion in ISA by CORELCA, to programs of substantial increases in tariffs which are being implemented, to adequate programs of investment contributions to ISA by its shareholders, and to amendments to various provisions in ISA's bylaws which should help strengthen ISA's financial position. In addition, revisions have been introduced into ISA's 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, together currently accounting for less than 5% of the country's total electric energy market (not including industrial self-producers), 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 partici- pation in its deliberations. World Bank Participation in the Sector 1.11 Since 1950, the Bank has made 20 loans to Colombia's power sector, totalling US$526 million (see Attachment 1.1) including the two loans approved on May 30, 1978. Sixteen loans have assisted the expansion of capacity in the systems of Bogota, Medellin, Cali, Cartagena, Bucaramanga, and Manizales. In addition, the Bank is currently supporting rural electrification under the Integrated Rural Development Project (1352-CO, 1977). The Bank's Operations Evaluation Department (OED) undertook a detailed review in 1971-72 of Bank lending in Colombia's power sector. 1/ OED concluded that the Bank's financing had been successful in assisting the power companies to develop hydroelectric plants at lower unit cost than they otherwise would have been able to do. This permitted greater urban coverage as well as cheaper and more reliable electricity supply to industry. OED also commended Bank efforts in the establishment of the central interconnected system which facilitated further power sector development. In addition, OED identified as important consider- ations for possible future loans in the Colombian power sector: the need to give greater attention to power distribution; the need for improvement of financial recording and financial planning capabilities; and the need to give more attention to public utility tariff structures. The first and third of these three points are addressed under the San Carlos loan (paragraphs 1.20 and 1.24). The proposed Mesitas loan addresses the second and third points (paragraphs 2.07 and 5.10). 1/ "Operations Evaluation Report: Electric Power" (Report No. Z-17, dated March 10, 1972) and "Bank Operations in Colombia - An Evaluation" (Report No. Z-18, dated May 25, 1972).  -D- Power Market and Supply 1.12 Electricity generation in Colombia expanded by an average of 9.7%/a over the period 1960-70. The rate of expansion then decreased to about 8.6% on average until the end of 1976 due to the slackening in industrial growth after 1974 (growth in industrial consumption decreased to 7.4%/a compared with 9.5%/a during cne sixties). Present per capita electricity generation is estimated at 600 kWh, which is below the average for Latin America. Installed capacity at the end of 1976 was 3,300 MW, including that of self-producers. Hydro stations accounted for 68% of total energy generation. 1.13 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 electricity service to approximately 85% of its urban population. However, only 16% of rural families had service in 1974. Of the electrified municipalities, 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 inadequate maintenance. 1.14 Residential consumers accounted for the largest share of electricity sales by the major utilities in 1976, followed by industrial consumers: Sales Subscribers 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 1.15 Public utilities accounted for 93% of total electricity supply; the rest was provided by self-suppliers. EEEB generated 26% of the total supply, 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. Rural Electrification 1.16 Most of the country's rural villages with electricity service are close to urban centers. In 1974 only 16% of the small town and isolated rural households had electricity service (paragraph 1.13). It is estimated that the cost of a rural electrification network for the country as a wnole would be  - 6 - about US$500 per household, and that over a period 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 US$120 million. 1.17 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 Development 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 1.18 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 partly 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 and its shareholders by December 31, 1979 would provide such information (paragraph 1.20). 1.19 The program of investments in generation and transmission includes, in addition to the projects already decided upon by the Government and ISA's shareholders, the start of construction of projects that will form part of the 1984-90 expansion program. ISA has 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. The study was undertaken by ISA in view of the delays encountered in the execution of a more comprehensive study (1.25) which the Government decided to carry out when the Bank made its loan for the Guatape II project in 1973 (874-CO). ISA is cooperating in the comprehensive survey of hydro resources included in the study, and a long-term expansion program based on the survey's findings is expected to be available in mid-1979. The Government agreed under the San Carlos Loan to present this portion of the study to the Bank for review not later than September 30, 1979. 1.20 In order to improve the allocation of resources between the various categories of investment which the power sector will have to carry out, ISA arid its shareholders agreed under the San Carlos loan 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 would consolidate the programs for generation and transmission. Similarly, ISA's shareholders have agreed to prepare and present under coordination of the Ministry of Mines and Energy, to the Government and the Bank for comments by December 31, 1979, a Sector Development Master Plan for Distribution for the period 1980-2000. This plan 1/ Programa de Expansion del Sistema Interconectado Periodo 1984-1988 (ISA, Junio 1977).  - 7 - would consolidate, as part of ISA's Master Plan, all existing and future programs for distribution; it would cover the period 1980-85 in detail. The Master Plan would 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. 1.21 To ensure that only sound projects are undertaken, assuiances were obtained in connection with the San Carlos loan that ISA and its shareholders would not undertake construction of any generating plant or combination of plants of more than 200 MW (ISA) and 100 MW (shareholders) capacity prior to completion of the San Carlos I Project unless satisfactory evidence has been presented to the Bank that it is economically justified as part of ISA's national power expansion program and that adequate financing is available to carry it out without negatively affecting such company's financial condition or its obligations under the San Carlos I Project. Finances and Tariffs 1.22 Except for EEEB and EPM, which have histories of adequate cash generation, the power sector has relied heavily on borrowings and budgetary contributions to finance its investments. EEEB and EPM operate low-cost systems and cover the most affluent markets in the country; they have, there- fore, been able to finance their investments with an appropriate balance of borrowings and cash generation while charging relatively low rates. Because there has been no mechanism to obtain financial transfers within the sector from the more affluent areas to the less affluent, 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. 1.23 Rate adjustments lagged considerably behind yearly inflation over most of the period 1971-76, during which average rates increased by about 13%/a while inflation averaged 19%. The 1976 average revenue - at prices of 1970 - was equivalent to only Col$0.147/kWh (73% of the 1970 average revenue of Col$0.202/kWh). The positive trend in rate setting which began in 1975, is expected to continue with gradual increases in real terms. 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. As may be seen in Chapter 5, EEEB's own rate policy is consistent with this. 1.24 Although EEEB's current tariff program should bring Bogota's average tariff up to a satisfactory level during the next two years, this in itself would not redress the serious imbalance within the tariff structure. 1/ The greatest imbalance results from the low level of residential rates in relation to industrial and commercial charges (paragraph 5.08), which is typical of the pattern throughout Colombia and not just in Bogota. The present tariff struc- ture, by concentrating the burden of meeting system revenue requirements 1/ OED Report No. Z-17, pages 59-63 (paragraph 1.11) contains an analysis of tariff structure problems in Bogota.  - 8 - on industrial consumers, could encourage EEEB's residential customers to consume more electricity in the long run than they would if charged the full cost of service, which in turn could lead to inefficient allocation of national resources. To address the problem, ISA's shareholders have agreed under the San Carlos loan to carry out, coordinated by the Ministry of Mines and Energy, a study of the cost of service to final consumers and its implications for 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. EEEB has agreed to establish a program of tariff structure revisions as a result of this process (paragraph 5.10), and it is expected that in due course the other shareholders will do so as well. Constraints on Sector Development 1.25 - 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 less than satisfactory performance of the sector in making rational use of Colombia's abundant hydroelectric resources. Because of the regionalized nature of the sector, reflecting the political and economic decentralization of Colombia, there were difficulties in coordinating investment allocation and insufficient technical cooperation; decisions were made on a local basis without due regard to overall country planning for power development. The lags in resolving these problems resulted in uneconomic use of fuel by companies unable to share in receiving lower cost energy potentially available from hydro sources elsewhere in the country, and caused recurring power shortages despite the large expan- sions in capacity which were taking place. The occurrence of temporary shortages is expected to persist into the early eighties, and will be solved only provided the agreed development program is implemented expeditiously (the latter in turn now 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 loan for the Guatape II Project, 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 agreed under the San Carlos loan agreement to present this report to the Bank by November 30, 1978. The second group of consultants is working with ISA on a hydro survey and long-term expansion plan, which the Government agreed to present to the Bank by September 30, 1979. 1.26 The Government has taken a number of positive measures to address the sector's institutional constraints. In 1975 it eliminated the jurisdic- tional 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, which in future will be responsible basically for electricity development in rural and semi-rural  - 9 - areas, where the Government will continue to subsidize the service since it cannot be financially self-supporting in those areas. 1/ In order to remedy the problems that exist between the generating and distributing 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 will be to consolidate that region's electricity sector in a single enterprise. With the incorporation of CORELCA into ISA, most of the sector is represented directly or indirectly 1/ in ISA's Board, and a better coordination of power sector planning in Colombia will now be possible. ISA's effectiveness in achieving this coordination, however, will depend on its ability to sustain the consensus developed over the past two years among its shareholders. 1/ The sector's organization has to date precluded the usual practice of deriving resources from well-developed urban markets to support service in rural areas (paragraph 1.22). 2/ Through ICEL, CORELCA and CVC (paragraph 1.07).  - 10 - Attachment 1.1 COLOMBIA MESITAS HYDROELECTRIC POWER PROJECT Empresa de Energia Electrica de Bogota IBRD Power Loans Loan No. and Date of Loan Amount Borrower Agreement Project Description (US$M) ISA 575-CO 1968 Central System Interconnection (230 kV transmission lines and substations) 18.00 681-CO 1970 Chivor I project (4 x 125 MW hydro) 52.30 1582-CO 1978 San Carlos I project (4 x 155 MW hydro) 126.00 1583-CO 1978 Central System/CORELCA Interconnection project (500 kV transmission lines and substations) a/ 50.00 EEEB 246-CO 1960 Laguneta unit 4 (1 x 18.0 MW hydro) Salto II units I and 2 (2 x 33.0 MW hydro) Zipaquira unit 1 (1 x 33.0 MW thermal) 17.60 313-CO 1962 Zipaquira unit 2 (1 x 37.5 MW thermal) El Colegio units 1, 2, and 3 (3 x 50.0 MW hydro) 50.00 537-CO 1968 El Colegio units 4, 5, and 6 (3 x 50.0 MW hydro) Canoas project (1 x 50.0 MW hydro) 18.00 EPM 225-CO 1959 Troneras unit 1 (1 x 18.0 MW hydro) Guadalupe III units 1 and 2 (2 x 45.0 MW hydro) 12.00 282-CO 1961 Troneras unit 2 (1 x 18.0 MW hydro) Guadalupe III units 3, 4, and 5 (3 x 45.0 MW hydro) 22.00 369-CO 1964 Guatape I units 1 and 2 (2 x 66.0 MW hydro)b/ 45.00 874-CO 1973 Guatape II units 1, 2, 3, and 4 (4 x 70 MW hydro) 56.00 CVC/CHIDRAL 38-CO 1950 Anchicaya units 1 and 2 (2 x 12.0 MW hydro) 3.53 113-CO 1955 Anchicaya unit 3 (1 x 20.0 MW hydro) Yumbo unit 1 (1 x 10.0 MW thermal) 4.50 215-CO 1958 Yumbo unit 2 (1 x 10.0 MW thermal) 2.80 255-CO 1960 Yumbo unit 3 (1 x 33.0 MW thermal) Calima units 1 and 2 (2 x 30.0 MW hydro) 25.00 339-CO 1963 Calima units 3 and 4 (2 x 30.0 MW hydro) 8.80 CHEC 39-CO 1950 La Insula units 1 and 2 (2 x 10.0 MW hydro) 2.60 217-CO 1959 La Esmeralda units 1 and 2 (2 x 13.3 MW hydro) 4.60 LEBRIJA 54-CO 1951 Palmas units 1 and 2 (2 x 4.4 MW hydro) 2.40 ELECTRIBOL 347-CO 1963 Cospique units 2 and 3 (2 x 12.5 MW thermal) 5.00 a/ Government is borrower. ISA will construct, operate, and own all facilities. b/ Subsequently increased to 4 x 70 MW.  - 11 - 2. THE BORROWER General Description 2.01 The proposed borrower for the Mesitas Project, Empresa de Energia Electrica de Bogota (EEEB), is an autonomous company owned by the Municipality of the Special District of Bogota. It was established by private Colombian interests and has operated the city's electric service for the past 77 years, since 1951 under municipal ownership. It has an installed capacity of 689 MW, 553 MW of which is hydro and the balance coal-fired thermal. It currently serves approximately 505,000 subscribers. Prior Bank Lending 2.02 The Bank has made three loans totaling US$85.6 million to EEEB, 246-CO in January 1960, 313-CO in May 1962, and 537-CO in June 1968. The first two loans helped finance hydro and thermal generating plant additions of 305 MW, including the Sesquile Dam for the Guatavita Reservoir (paragraph 4.07), and transmission line and distribution system extensions. The third loan, US$18.0 million, helped finance the completion of the El Colegio 1/ hydroelectric plant of three 50 MW units and associated substations; construc- tion of the Canoas hydroelectric plant of one 50 MW unit; another expansion of the transmission and distribution systems; and engineering services. Works financed by the first two loans were completed successfully although with a delay of about a year and a half in the second project because of problems encountered in tunnel construction. Completion of works under the third loan was delayed by a variety of problems including delays in final engineering, heavy rains, unstable penstock foundations, excessive vibration, cavitation, and pressure fluctuations in one of penstocks, and delays in transmission system bid tendering and evaluation, manufacturing, and land acquisition. All works were, however, completed successfully and at a cost increase of only 12.5% over the appraisal estimate. Most of the increase was in local currency costs borne by EEEB. Valuable experience for future construction work was gained in addressing the second and third projects' problems with the geolo- gical conditions in the area (paragraph 4.23). The Mesitas tunnels and penstocks have been designed to avoid or minimize such problems to the extent possible. 2.03 EEEB has complied with covenants established in the last loan agreement, and the company's financial situation has proved to be better than that of other public utilities in Colombia. The Bank's June 1977 Project Performance Audit Report for the loan concluded that EEEB's success in this respect could be attributed to "better management, length of continuous service of the same company executives, a less politicized board of directors, a tariff policy which though less than satisfactory resulted in more effective generation of internal resources, and provision 1/ Since renamed Dario Valencia.  - 12 - of a single service to a large and dense market." These judgements may be reaffirmed today with the exception that a greater number of senior management changes have been made bringing new people into the company during the past two years than had occurred in earlier years (paragraph 2.05). Organization and Administration 2.04 EEEB is administered by a seven-member Board of Directors and a General Manager appointed by the Board. The General Manager is responsible for day-to-day operations and is assisted by four Assistant Managers heading, respectively, the administrative, financial, technical and operations branches of the organization (Attachment 2.1). The Board of Directors is headed by the Mayor of Bogota, and consists, in addition, of two members elected by the Municipal Council, three members chosen by the Council from lists submitted by associations representative of banks, commerce, and industry in Bogota, and one member chosen by the President of Colombia. This composition was worked out in connection with the Bank's initial loan to EEEB (246-CO) and has generally proven to be satisfactory. 2.05 Although EEEB has had a history of stable and competent management during most of its association with the Bank, turnover in its senior management increased during the past two years resulting in a significant reduction in the number of experienced senior officers. This has been most pronounced in the company's financial staff. Although day-to-day accounting operations continue to function satisfactorily, the company is not adequately equipped to handle its rapidly expanding financial planning and debt management require- ments. Consequently, EEEB has agreed to strengthen its senior financial staff during the next two years (paragraph 2.07). Employment and Training 2.06 EEEB had 2,225 employees at the end of 1977, including a technical staff of 102, an administrative staff of 601, and 1,522 operations personnel. The history of the company's staff growth over the past ten years in relation to the number of customers served and energy sold is summarized below. The figures show an improving trend and compare favorably with those of electric utilities which serve similar markets. Number of No. Customers Annual Sales (MWh) /a Employees per Employee per Employee 1968 1422 174 1021 1971 1520 198 1317 1974 1896 213 1359 1977 "2225 216 1587 /a Includes bulk sales to other utilities. The number of EEEB's employees is projected to grow at an average of about 5.5% per year through 1982 when Mesitas will be in service. The trends of improving ratios of the numbers of customers to employees and of the annual sales of MWh per employee are also expected to continue (Attachment 5.4).  - 13 - 2.07 Over 20 staff years of formal instruction per year are received by EEEB's technical and operations personnel in technical schools and from equipment suppliers. However, since little formal training is given to the Company's financial staff, and because of the need for strengthening of its financial management, EEEB has agreed to employ by January 31, 1979 a senior financial advisor with qualifications, experience, and terms and conditions of employment acceptable to the Bank, and to carry out a training program for key members of its financial staff. Accounting and Auditing 2.08 EEEB's data processing and accounting are satisfactory. Internal auditing is carried out by a separate department under a General Auditor responsible to the Board of Directors and appointed by the Mayor of Bogota. Independent auditing of EEEB was carried out by an external auditor acceptable to the Bank until 1977, at which time the function was taken over by the Office of the Comptroller of Bogota. Because this does not satisfy the Bank's requirements, EEEB has agreed that an independent auditor acceptable to the Bank will also continue to be used, and that audited financial statements, together with a detailed auditor's report, will be submitted to the Bank within four months of the end of each financial year. Billing and Collections 2.09 Meters are read and bills mailed on a bi-monthly basis. Payment must be made in person at various company offices and Banks located throughout the city. EEEB has considered adding a payment by mail option, and rejected it on reliability grounds. While accounts receivable for electricity oper- ations grew substantially as a percentage of total annual operating revenue during the past ten years through 1976, reaching 27% in that year, they declined to 24% in 1977. EEEB has agreed to reduce them to no more than 20% of annual sales by December 31, 1978, and to no more than 19%, 18%, and 17%, respectively, in each of the following years through 1981 (Attachment 5.4). Insurance 2.10 EEEB's insurance program provides coverage of major operating facilities against fire and lightning damage. Somewhat broader coverage has been obtained for warehouses, offices, and vehicles. EEEB has insurance against earthquake damage to its main warehouse and office buildings, but earthquake coverage for the operating plants is not available. EEEB plans to continue its program, and has required that its contractors obtain appropriate coverage for works in progress under the Mesitas Project.  - 14 - COLOMBIA EMPRESA DE ENERGIA ELECTRICA DE BOGOTA Attachment 2.1 Organization Chart ORG AN IZATh 0 N R AND ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~PANN METHODSLEA ADVISORS | l I l ~~~~~~~~~~~~~~~ENGINEERING _ ADMINISTRATION | _ FINANCE _ _ PROJECTS Fi..'ei.1 ~~~~~~~~~~~~Techni-ol j ~~~~~~~~~~~prtonas &Peslann] | Generationi |-and; Generation _~~~~~~~~~~~~~~~~~~Tos Budgeon PI-_i~i ir o q Researct-i l -| Supervision l -| Sicst FRecords and f I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~letiicto _ . Precurement | Transmis~~~~~~~~~~~~~~~~~~~~~~~Dsion Tasotto CoEresondenWr _ee a 189L7 1~~~~~~~~~~~~~~~~~~~~~~~~~~V.l BeI 186  - 15 - 3. THE POWER MARKET Historic 3.01 In 1976 electricity requirements in Colombia totalled approximately 14,600 GWh. The Central Market (comprising areas on the Pacific -oast and the interior served mainly by EEEB, EPM, CVC-CHIDRAL and ICEL-CHEC) accounted for about 76% of the total, the Atlantic Coast Market (CORELCA) for about 14%, and numerous isolated electricity companies for about 3%. The remainder of 1% was generated by industrial plants for their own purposes. 3.02 The 1972-76 market statistics for ISA's shareholders are summarized below. Average Annual growth 1972 1976 % Gross Generation (GWh) 8,868 13,087 10.2 Maximum demand (MW) 1,740 2,478 9.0 Total sales (GWh) 7,405 10,542 9.2 of which percentages: Residential 41% 42% 9.8 Industrial 35% 35% 8.8 Commercial 13% 13% 10.2 Other 11% 10% 7.5 Unaccounted percentage of Gross Generation /1 16.5% 19.4% 14.8 /1 Energy unaccounted for includes pumping energy, station use, trans- mission/distribution losses, and theft. Its disproportionate growth during 1972-76 may be explained in part by rapid expansion in urban networks and increased theft; it is excessive and will be the subject of special investigation by ISA, as agreed in connection with the San Carlos loan. During 1973-76, gross electricity production increased at an annual average rate of about 10.2% compared with GNP growth of about 6%. Sales increased at about 9.2% annually, varying from a low of 6.1% for the CVC-CHIDRAL system to a high of 11.7% for ICEL's system. EEEB's sales increased at an average rate of 10.8% annually. The percentage of total sales represented by each of the various major consumer categories (i.e., Residential, Industrial) remained virtually unchanged throughout the period.  - 16 - Interconnected System Forecasts 3.03 The projected demand and energy requirements shown below are based on EEEB's and ISA's analysis of past trends and on a study of the correlation between power sector growth and growth of GNP. Gross energy requirements in the interconnected system are expected to increase at an average annual rate of about 10.6% during the next eight years, and EEEB's requirements at an average of approximately 11.1% per year. Coincident Year EEEB EPM CVC ICEL CORELCA TOTAL Maximum Demand -------------------(GWh)---------------------- (MW) 1977 3,953 3,514 2,126 2,971 2,076 14,640 2,816 1980 5,300 5,072 2,690 4,590 2,814 20,466 3,809 1983 7,190 6,314 3,402 6,022 4,224 27,152 4,987 1985 8,815 7,337 3,979 7,164 5,030 32,325 5,885 Supply 3.04 To meet forecast requirements for the national interconnected system by 1985, about 3,270 MW in new effective generating capacity, including the proposed Mesitas Project, will be added to the 3,751 MW (effective) installed at the end of 1977. 1977-85 energy and capacity balances are summarized below: Requirements 1977 1980 1983 1985 Maximum Demand (MW) 2,816 3,809 4,987 5,885 Gross Generation (GWh) 14,640 20,466 27,152 32,325 Planned Effective Capacity (MW) a/ 3,751 4,593 6,119 7,019 % Hydro 71 74 78 81 % Thermal 29 26 22 19 Capacity Margin (%) Central System 24 18 - - CORELCA System 31 10 - - Interconnected System b/ - - 18 16 Generation (GWh) 14,640 20,466 27,152 32,325 % Hydro 72 74 74 77 % Thermal 28 26 26 23 a/ Assuming average hydrological conditions. b/ CORELCA will be connected to the Central System beginning in 1981.  Even with the planned plant construction, however, capacity margins will be low through 1985. Given the preponderance of hydro capacity in the system, total effective capacity could be reduced by as much as 20% during dry years due to the lower water head above the turbines. It is therefore possible that load shedding could occur during times of peak usage. EEEB Forecast 3.05 Gross energy and capacity requirements for EEEB through 1982, the first year of Mesitas operation, are shown in Attachment 3.1. EEEB plans to invest approximately US$280 million equivalent for expansion of its distribu- tion system during 1978-82. Total customers served would increase from 481,700 in 1977 to approximately 752,200 in 1982. Of the 270,500 new connec- tions, 235,300 would be residential, including over 40,000 in the lowest consumption category (those consuming less than 100 kWh/month). Engineering planning for distribution expansion is underway, and the Bank is considering the possibility of future lending operations with EEEB in this area. 3.06 Until Mesitas becomes available in 1982, Bogota's growing energy requirements will be filled by, first, an increase in the supply from ISA and, second, increased generation in EEEB's existing hydro plants as additional water becomes available in 1980 from the Chingaza diversion (paragraph 4.04). In 1982 after the commissioning of Mesitas, EEEB's need for energy from ISA will be reduced slightly, and EEEB will become almost self- sufficient in satisfying its own peak demand for power. Further growth from 1982 will, however, be entirely dependent on increases in both energy and power supplied by ISA, since Mesitas will be fully used as soon as it enters into service in 1982. 3.07 The distribution of projected sales between the different categories of consumers in EEEB's market, as shown in Attachment 3.1, is summarized below in comparison with figures from the past five years. The most prominent feature of the projections is the substantially larger growth expected in residential consumption than in the other sectors, continuing the trend of the past five years. Growth during Period (%) 1973 1977 1978 1982 1973-77 1978-82 Sales (GWh) a! 2183 3174 3578 5446 45.4 52.2 ---------- % of sales --------- Residential 35.8 39.0 39.6 42.9 58.2 65.2 Commercial 16.8 18.6 17.2 16.4 60.5 45.3 Industrial 34.0 31.3 31.8 30.3 34.1 44.8 Government 13.4 11.1 11.4 10.4 20.7 38.2 a/ Excluding sales to other utilities.  - 18 - 3.08 As can be seen in Attachment 3.1, EEEB expects losses and theft as a percentage of power delivered to EEEB's system (including station use), to increase from 14.5% in 1977 to 15.8% in 1978 as a result of the large tariff increases and increases in connection charges being put into effect, and to decline thereafter to 14.6% by 1982.  -19- COLOMBIA Attachment 3.1 MESITAS HYDROELECTRIC POWER PROJECT Empesa de Energia Electrica de Bogota Electricity Supply and Consumption Projections -----1977 ------ ----1978----- -----1979----- 1980