Colombia - Energy Sector Technical Assistance Project

Documet of The World Bank Report No. T-6469-Co TECHNICAL ANNEX COLOMBIA ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT NOVEMBER 17, 1994  CURRENCY EQUIVALENT (as of November 1994) Exchange rate used in this study: US$ I = 840 Pesos FISCAL YEAR OF GOVERNMENT OF COLOMBIA January 1 - December 31 ENERGY CONVERSION FACTORS 1 TOE = 7.3 bbl I MTOE = 12.4 TWh (heat content equivalent) I kcal 3.968 Btu I CF of gas = 000 Btu 1 kWh = 860 kcal 1 m3 gas = 9000 kcal  ACRONYMS ACLEM Colombian Association of Electrical and Mechanical Engineers ANDI Asociaci6n Nacional de Industriales BOO Build, Own, Operate CARBOCOL Carbones de Colombia SCI Colombian Association of Engineers CNE National Energy Commission (Comisi6n Nacional de Energia) COLGAS Compaflia Colombiana de Gas CONPES Consejo Nacional de Politica Econ6mica y Social CORELCA Corporaci6n Electrica de la Costa Atlantica CVC Corporaci6n Aut6noma del Valle del Cauca DANE 'Departamento Administrativo Nacional de Estadistica DNP National Planning Department (Departamento Nacional de Planeaci6n) DSM Demand-side Management ECOPETROL Empresa Colombiana de Petr6leos EEB Empresa de Energia de Bogota EEC European Economic Community EMCALI Empresas Municipales de Cali EPM Empresas Publicas de Medellin ESMAP Energy Sector Management Assistance Program FEN Financiera Energetica Nacional INEA Instituto Nacional de Energias Alternas IBRD International Bank for Reconstruction and Development ICEL Instituto Colombiano de Electrificaci6n ICONTEC Instituto Colombiano de Normas Tecnicas IDB Interamerican Development Bank IFC International Finance Corporation (World Bank Group) ISA Interconexi6n Electrica S.A. JNT Junta Nacional de Tarifas de Servicios Publicos MHCP Ministry of Finance and Public Credit MIS Management Information System MME Ministry of Mines and Energy OED Operations Evaluation Department, World Bank OLADE Latin American Energy Organization PCR Project Completion Report PROMIGAS Promotora de la Incorporaci6n de Gasoductos de la Costa Atlantica SIC Superintendencia de Industria y Comercio SIE Energy Information System TA Technical Assistance TERPEL Terminales de Distribuci6n de Derivados de Petr6leo Ltda. UNDP United Nations Development Program USAID US Agency for International Development  ABBREVIATIONS $ Colombian Pesos bbl Barrel Bpd Barrels per day BTU British Thermal Unit cal Calorie CF Cubic foot CFd Cubic feet per day CIF Cost, Insurance and Freight CNG Compressed natural gas DSM Demand side management gal US gallon GDP Gross domestic product GWh Gigawatt-hour (109 Wh) IRR Internal rate of return kCF Thousand cubic feet kW Kilowatt J Joule LPG Liquid petroleum gas I Liter MBTU Million BTU MCF Million cubic feet MUSs Million US$ MW Megawatt (106 W) NPV Net present value TJ TeraJoule (1012 j) TOE Ton of oil equivale t. TCF Tera cubic feet (10o)  COLOMBIA ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT Technical Annexes DETAILED PROJECT DESCRIPTION ......................................................................................1 MODULE 1: REGULATION, PRICING AND ENERGY POLICY ............................... .....................................4 Assistance to the Energy Regulatory Commission ..................................................................................... 5 Assistance to the Energy Policy Unit (EPU) ......................................................................................8 MODULE 2: POWER SECTOR ASSISTANCE ..................................................... ................................ 10 Assistance in Divestment: Power Generation and Distribution ..................................................................................... 11 Assistance in Attracting New Investment ..................................................................................... 13 Assistance to the Grid Operator ..................................................................................... 14 MODULE 3: GAS SECTOR ASSISTANCE ..................................................................................... 15 MODULE 4: ENVIRONMENT ..................................................................................... 16 Sectoral Enviromnental Assessments (SEAs) ..................................................................................... 17 Project Environmental Assessments(PEAs) ..................................................................................... 18 MODULE 5: ENERGY DEMAND MANAGEMENT AND SAFETY ENHANCEMENT ................................ 19 Demand Side M anagement (DSM ) Strategy ..................................................................................... 20 Promotion of the Safe and Efficient use of Gas ..................................................................................... 20 Overall Technical Assistance Project Implementation ..................................................................................... 21 ANNEX 1 ..................................................................................... 22 COLOMBIA: LESSONS FROM THE BANK EXPERIENCE IN THE POWER SECTOR .......... ................ 22 Bank Experience ..................................................................................... 22 Main Issues and Ways to Tackle them ..................................................................................... 24 Sector Specific Recommendations ..................................................................................... 25 ANNEX2 ..................................................................................... 27 OPERATIONAL GUIDELINES FOR TECHNICAL ASSISTANCE LOAN ..................................................... 27 ANNEX3 ..................................................................................... 28 LOAN ADMINISTRATION AGREEMENT BETWEEN THE GOVERNMENT OF COLOMBIA AND UNDP ..................................................................................... 28 ANNEX4 ...................................................................... 31  I  DETAILED PROJECT DESCRIPTION Background I . Colombia's energy sector is complex and involves a large number of public and private institutions in the power, hydrocarbons and coal subsectors. The power subsector includes over thirty operating enterprises which are overwhelmingly within the public sector; these companies are mostly owned by the National Government through the Ministry of Finance, with the exception of three major municipal companies (Bogota, Medellin, and Call). The hydrocarbons subsector is commanded by the state oil company, ECOPETROL, with private sector participation in crude production and distribution of oil products and gas. The coal subsector can be roughly broken up into export-oriented suppliers where the state coal company, CARBOCOL, either operates in association with private companies or manages coal mining contracts, and internal market suppliers where numerous small mining enterprises deliver coal to industry and power plants. The Ministry of Mines and Energy (MMvIE) is in charge of overall energy sector policy; the Minister presides over the Boards of the major power sector companies controlled by the National Government, as well as the Boards of ECOPETROL and CARBOCOL. Formulation of power and gas regulation is responsibility of the Energy Regulatory Commission (Comisi6n de Rgulaci6n de Energia y Gas), and its enforcement is entrusted to the Superintendency of Public Services (Superintendencia de Servicios Puiblicos). Finally, the Energy Finance Corporation (FEN), also state-owned, operates as the sector's financial arm by providing credit, mainly to power sector enterprises. 2. The power subsector is emerging from a decade of financial crisis as well as a severe supply emergency in 1992; it has not been successful in maintaining continuity of supply to its customers and has failed to achieve financial self-reliance. Deep flaws in its institutional and regulatory framework are reflected in a history of overspending and massive underpricing. The gas subsector exhibits a picture of underdevelopment: although major finds were made in the early 70s, deliveries of natural gas have been limited principally to the Atlantic Coast region (where the vast majority of current demand is located); there is no country-wide pipeline network and the major cities of Medellin and Cali have lacked natural gas supplies (Bogota has only recently been supplied with it from local sources). The oil sector exhibits extremely high profits due to rents received from crude production but its vertical integration raises questions as to whether its efficiency could be increased. The state coal company has run into serious financial problems due to high sunk costs in the Cerrejon mine and lower than expected prices on the international market. 3. Sector Strategy. The Government's proposed strategy regarding public sector enterprises has been to reduce its presence through divestment and reliance on market forces. In the energy sector the state cannot withdraw completely because of potentially costly market failures due to: (a) economic rents from natural resources such as oil, gas, coal and, to a lesser extent, the hydroelectric potential; (b) the importance to society and the economy of a secure power supply; (c) monopoly characteristics of transmission and distribution of electricity and natural gas; and (d) environmental degradation resulting from energy-related activities. Addressing these policy problems in Colombia is particularly complex due to the country's large and diverse endowment of energy resources.  - 2 - 4. The Government's proposed energy sector strategy seeks to ensure a reliable and efficient supply supported by an economic pricing policy and private sector participation. The approach to the sources of market failure will consist of using regulatory instruments applied within an industry operated by private entrepreneurs. The Government intends to: (a) reduce tariff distortions and create a transparent mechanism of targeted subsidies as established in the Constitution; (b) stimulate a rational and economic use of fuels; and (c) create the necessary institutions (including commercial regulations and pricing procedures) for introducing efficiency incentives into the energy sector. 5. Implementation of this strategy has proceeded by addressing the power sector, where government failure has been most prominent, followed by the natural gas subsector due to its linkages with the former: power supplies are to rely on natural gas for near term generation projects, whereas the feasibility of economically distributing gas to major urban communities will depend on having a large base consumption from power plants. Oil and coal sector institutional issues have not been addressed as yet, since they are perceived as less pressing due to the profits of the former and the sunk cost characteristics of the latter's problems. 6. The Bank's strategy has been to: (a) assist in building institutions to introduce market incentives in the energy sector; (b) support policies in order to ensure the economic supply of electricity and gas with due consideration to environmental constraints; (c) promote institutional options which confine the Government's role, as far as possible, to that of regulator and policy maker; (d) advise the reduction of public resources in the sector by attracting private capital; (e) analyze alternatives to rehabilitate the power sector's finances and improve resource allocation through correct price signals and focused subsidies for the poor; (f) promote channels for users and stakeholders to voice their opinions in sectoral matters that affect them; and (g) recommend the efficient use of energy by expanding supplies of natural gas and rational energy use. This strategy addresses the main issues raised in two recent Bank energy policy papers' and in the LAC Gas Sector Strategy.2 7. The Technical Assistance project has been oriented towards providing support to the Government in the implementation of sector reforms, and it therefore concentrates on power and natural gas where there is evidence that the Government has committed itself by clearly defining its role and that of the private sector, by articulating a well-defined strategy and by initiating implementation actions. Concerning the electricity industry, it is vital to maintain the impetus of institutional reform already under way and, in relation to the emerging natural gas sector, assistance in setting up adequate organizations will be critical for its efficient development. The project will also assist the Government in defining an overall strategy involving other energy sectors, in identifying the scope of required reforms and in developing an implementation plan. 8. Institutional Reform. Institutional change has been taking place since 1991. A new Electricity Law and a Public Domiciliary Services law were promulgated in July, 1994. An Energy Regulatory Commission has been created to develop the regulatory controls in the electricity and gas sectors, with power to prepare rules and issue specific resolutions concerning economic World Bank Policy Papers, The World Bank's Role in the Electric Power Sector and Energy. Efficiency and Conservation in the Develoving World (1993). 2 Tle World Bank Strate2zv for the Natural Gas Sector in LAC (1991).  - 3 - regulation (pricing mechanisms, restriction on anticompetitive behavior), technical regulation and customer service regulation. At the same time an Energy Policy Unit within MME has been created to ensure that economic, environmental, and social costs are taken into account by producers and consumers. A Superintendency of Public Services will replace the Ministry of Development in enforcing the regulatory controls developed by the Energy Regulatory Commission. 9. The Government's proposed power subsector institutional reforms3 include: (a) fostering efficiency through competition together with a strong, transparent and independent regulatory framework; (b) an institutional restructuring involving the separation of national transmission from generation and the corporatization of existing state power companies by ultimately transforming them into joint stock corporations; (c) completing the financial restructuring and rehabilitation of the subsector through tariff and subsidy reforms; and (d) promoting the participation of private sector capital in new projects as well as divesting itself of existing power plants and utilities. 10. The implementation of these reforms is under way: Coopers & Lybrand, a consulting firm, was and is assisting the Energy Regulatory Commission in its initial setup phase; private sector participation has been promoted through: (a) the installation of 95 MW (Mamonal) of private generation in an industrial complex in Cartagena; (b) a 150 MW BOO contract awarded through international competitive bidding (ICB) to Sevillana de Electricidad, a Spanish utility (both of these projects are already in operation); (c) a 880 MW BOO contract (ICB) in Barranquilla awarded to a consortium led by ABB and currently being negotiated; (d) the award of a 150 MW ICB project awarded to ENRON (Termovalle); and (e) invitation to pre-qualification for a 300 MW BOO thermal plant on the Atlantic Coast (La Loma). The generation capacity of these plants totals 1575 MW, which represents 16% of the total installed capacity in Colombia. These developments are to be followed shortly by the organization of the open access network operated by an independent transmission company. These achievements should be seen as the consequence of the effort that went into devising the sector's reforms. The TA project will support the restructuring program which will require greater funds given the increasing complexity of the tasks which lie ahead. 11. The gas sector's basic institutional framework will be promulgated in 1994; the corresponding groundwork has been developed by Coopers & Lybrand. The Bank has supported these implementation efforts by financing consultants' work through the Japanese Grant Facility and the Public Sector Reform Loan. However, much remains to be done: the Policy Unit requires support for discharging its functions effectively; the structure of the natural gas industry must be decided and the necessary institutions must be developed; power sector plans related to divestment have yet to materialize and many regulations and market structure alternatives have yet to be implemented. 12. Project Objectives. The proposed TA project provides a direct application of the country assistance strategy by preserving the momentum gained over the immediate past regarding institutional reform by passing from the study and design stages to the more resource-intensive phase of recommended actions. The objectives of the project are: (a) to implement regulatory reforms by strengthening the newly created entities in charge of regulation and energy policy 3December, 1992 letter from the Minister of Mines and Energy (reproduced in Annex 4).  - 4 - formulation and implementation for the power and gas sub-sectors in order to help them build experience and thereby increase their chances of performing efficiently; (b) to implement strategies specifically designed for the energy sector, respecting environmental concerns and constraints and attracting private investment in the sector; and (c) to develop a demand-side management strategy and assist in its implementation. 13. Objectives specific to the power sub-sector are to achieve the divestment of state-owned assets or enterprises, to attract new private investments for system expansion, and to execute the institutional reforms required for putting in place a fully competitive market at the generation level. Objectives specific to the gas sub-sectors are to assist in developing the industry's structure and regulations for building up a gas market, and to assist in setting up the required organizations. The environmental care objective is to develop a consistent set of environmental guidelines for energy sector development. Demand-side management objectives are to develop standards and guidelines for efficient energy use and to disseminate them among consumers and industries. 14. Project Description. The Technical Assistance project seeks to facilitate and speed up the transition from a publicly-owned sector organization to one with private participation. Comprehensive institutional and policy reforms in infrastructure may require many years to design and implement, even in developed countries. The process is necessarily iterative and progressive. It is therefore necessary for Bank assistance to be of sufficient duration and with sufficient leverage to provide consistent, sustained support to the varying needs at different stages during this process. In order to ensure a successful transfer of knowledge, the project will inevitably have to span a significant period of time (estimated to be around 4 to 5 years); otherwise, given the volatility of institutional memory, the resources are likely to be lost. 15. The outputs of the project are summarized in the Action Plan matrix (Annex 4). Monitoring of project progress will involve both a control of technical assistance output through progress reports and review meetings with consultants, and a control of timely implementation actions by the Government. The recipients of technical assistance will be the institutions involved in sectoral reforms, namely the Ministry of Finance, the Ministry of Mines and Energy (in particular its Energy Policy Unit), ISA (the interconnection company) and the Energy Regulatory Commission; this list could be extended to other institutions, such as the Superintendency of Public Services, insofar as energy matters are concerned. 16. Project Components. The elements of the TA have been organized into five modules, corresponding to: (a) overall regulation, pricing and policy activities; (b) specific power sector tasks; (c) gas sector activities; (d) environmental matters; and (e) energy demand management and safety enhancement. Each of the following sections provides sector-specific background and a detailed description of each component within the project including its recipient, its objectives and scope, and the proposed organization for implementation. MODULE 1: REGULATION, PRICING AND ENERGY POLICY 17. The predominantly public-sector ownership of energy resources has precluded economic regulation regarding the supply of electricity or natural gas. If these sectors are to accept private  -5- sector participation, regulation becomes practically indispensable due to Irarket failures stemming from natural monopoly characteristics. Similarly, sector planning has been concentrated within government-owned operating organizations; with private sector participation, centralized and compulsory planning has been replaced by indicative planning and responsibility for this function has been vested in an Energy Policy Unit in MME. 18. The organization of the Energy Regulatory Commission is currently under way, particularly insofar as power sector regulations are concerned; the Policy Unit is being organized but its resources, originating within Mme's budget, are insufficient and need to be supplemented. Other institutional developments taking place concern the Electricity Law and the Domiciliary Public Services Law which will provide the basic framework for policy implementation. 19. The assistance envisaged in this module will be addressed principally to the Energy Regulatory Commission and to the Policy Unit of MIME. Project components for these institutions span both the power and natural gas subsectors: (a) Assistance to the Energy Regulatory Commission in power subsector matters, which is required beyond the design phase (currently being completed with Coopers & Lybrand) for establishing the operational procedures for price setting and regulatory reviews of the Commission; (b) Assistance to the Policy Unit in: (i) supporting MME for overall energy policy and strategy formulation; (ii) coordinating the power sector's indicative expansion plan; (iii) providing information to private investors and MIME with respect to future investment prospects; (iv) developing policies for rural electrification and energy supply to isolated communities; and (v) developing expertise for drawing up a natural gas expansion plan; (c) Assistance to the Energy Regulatory Commission in developing a statute for Natural Gas, together with the sector's regulations, using a similar approach to that of the power subsector, thereby keeping pace with the evolution of the natural gas infrastructure; (d) Assistance to both the Regulatory Commission and the Policy Unit in developing guidelines for environment protection (as described further on in the Environment Module section). Assistance to the Energy Regulatory Commission 20. Background. The Energy Regulatory Commission was established by the Electricity Law of July, 1994, and its mandate includes the following functions: (a) regulating activities in the energy sector in order to promote an efficient supply; (b) fostering competition and preventing anticompetitive or monopolistic behavior; (c) establishing mechanisms to calculate tariffs for regulated public services in the energy sector, including transmission charges; (d) developing administrative and financial performance indicators for monitoring enterprise management; (e)  - 6 - reviewing and modifying the Operations Code for the interconnected system; and (f) protecting consumers and monitoring the quality of service delivered by power and gas enterprises. 21. The Role of the Regulatory Commission will be complemented by the Superintendency of Public Services who is in charge of enforcing regulations and supervising utility performance regarding service quality. 22. Electricity. Some of these functions are being analyzed for the power sector by Coopers & Lybrand. Their consulting activities have been focused principally on organizing a wholesale market for electricity, defining the overall regulatory controls and addressing pricing problems both at the wholesale and retail levels. 23. The Regulatory Commission will continue to promote the pricing adjustment policies which have been implemented in the last few years. Electricity tariffs have been continuously revised in order to reach economic cost levels and eliminate price distortions within consumer sectors; the following table summarizes average tariff levels as a percentage of economic costs during 1991-1993 as well as the target levels for 1994-1997: YEAR 1991 1992 1993 1994 1995 1996 1997 Percent of Economic Cost 72.7 70.9 83.0 87.0 92.7 97.7 100 24. Gas. There exists no gas-specific legislation in Colombia; gas-related activities in exploration, development, transportation and distribution are guided, by analogy, by the Petroleum Code. Recognizing the need to put in place a regulatory regime the Government has hired Coopers & Lybrand (with Japanese Grant Facility funds) to assist in the drafting of a statute that would establish the basic principles for the functioning of the gas sector. The corresponding decree is expected to be promulgated in 1995. However, extensive work will be needed to: (a) prepare the subsidiary legislation, rules and regulations required to complete and enforce the institutional and regulatory framework to be defined in a Gas Decree or in a Gas Law; (b) set up and make operational a gas trading and transportation enterprise (particularly in the areas of contract development and pricing policies, including use of system transportation charges); (c) define the conditions for the participation of the private sector in the construction of pipelines under BOO and BOT schemes; and (d) train staff within the Energy Regulatory Commission and the Energy Policy Unit to deal with gas-related matters. 25. Natural gas costs are on the order of $1 per million Btu (Mbtu) at the wellhead; wholesale and retail costs vary considerably according to location; for example, they are on the order of $1. 8/Mbtu for wholesale deliveries and $3.8/Mbtu for retail delivery in Bogota compared to values which are expected to be 27% higher in Cali once the pipelines are put in place. Prices are set by MME and exhibit wide ranges of variation from one market to another which reflect the fragmented nature of the industry. With the development of new trunk pipelines and the interconnection of producing fields, bulk prices should become more uniform and a pricing policy will have to be developed to address the issues which will arise in the context of an integrated gas industry structure.  -7- 26. Objectives and Scope. The TA to the Commission is conceived to extend beyond the Coopers & Lybrand contract in order to guide the Commission in its initial phases of operation thus ensuring that decisions are in accordance with power and gas sector policies, thereby building up a consistent body of regulatory precedents. The TA will also cover those areas which have not been addressed in the initial phases. 27. For the power sector the project will provide assistance, including training, in the following areas: (a) Price Regulation: advice on rate schedule modifications, computer modeling for tariff calculations and financial evaluations, as well as the resolution of conflicts at the wholesale market level; (b) Consumer Protection: this regulatory area has no precedents in Colombia and the project would assist in establishing service standards, developing service quality monitoring methods for distribution enterprises, organizing procedures for responding to consumer complaints, and disseminating information to consumers concerning utilities' performance; (c) Technical Matters: support on matters such as the value of lost load, cost analyses, financial analyses, codes and norms for distribution concessionaires, network charges, and recommendations relative to the modifications of the interconnected system's operations agreement; technical assistance will be provided in the form of advisory services concerning specific areas; (d) Environmental Matters: support to review and consolidate energy related regulations into a consistent framework (see Environment module). 28. Coopers & Lybrand is developing the regulatory principles that will integrate the new natural gas statute, including pricing structures, mechanisms for pricing adjustment over time, guidance on key contents of licenses, and a network code. The TA would provide guidance on the scope of specific regulations and use of the pipeline network in areas such as: (a) Comprehensive models for trading licenses, and contracts for purchase, sale and transportation of gas; (b) The execution of cost studies and financial analyses necessary for establishing price levels for regulated consumers and setting use-of-system charges; (c) Identifying the conditions that will govern the general terms and conditions to be observed by users of the transportation system (e.g. gas quality specification, entry pressure, measurement standards, priority rules in the event of capacity limitation, daily gas dispatch, methods of accounting, billing and settlement arrangements, etc.); (d) Specifying the accounting arrangements for gas utilities.  - 8 - 29. Finally, the assistance to the Energy Regulatory Commission will provide advice relative to decision making procedures, in matters such as instituting regulatory proceedings (e.g. whether or not to institute public hearings or to rely on more customary procedures), as well as defining the legal characteristics of regulatory decisions (Ministerial Decrees or possible altematives). Some of these basic issues should be decided within the current consulting project and the TA would provide additional support on unresolved questions. 30. Results. The TA will help develop a body of regulatory principles and precedents for the power sector. This should result in achieving a Regulatory Commission that can command the energy sector's respect insofar as sound economic decisions are concemed, thereby providing the private sector with visible assurance that power sector investments will not be subject to arbitrary rules. The TA will also help develop the bulk of enabling legislation to make effective the provisions of the natural gas statute under preparation. It will also provide training for the Energy Regulatory Commission staff in matters related to the gas subsector. 31. Implementation and Monitoring. The assistance will be carried out through specialized consulting services. Monitoring project results will vary according to the type of product (e.g. computer models vs. training); given the difficulty associated with monitoring training components and the performance of a regulatory entity, an annual performance audit by an independent expert will evaluate the project's progress, particularly regarding the functioning of the Regulatory Commission. Assistance to the Energy Policy Unit (EPU) 32. Background. The Policy Unit has been visualized as a relatively small group of skilled staff who would supervise the execution of strategic planning studies which would be contracted either to sector enterprises (such as ISA in the power sector) or consulting companies and would advise the Ministry on energy strategy and policy. Its function regarding the energy sector consists of acting as a provider of information in order to enable public and private entities to make appropriate economic decisions. This function is particularly relevant in Colombia because of the high cost of obtaining information due to a complex energy sector with multiple and abundant energy sources and interfuel substitution possibilities. The project will support MMNE in setting up the Policy Unit in order to fulfill its functions efficiently. Issues to be addressed include: (a) Defining the role of Government in ensuring energy supplies and electricity in particular; (b) Defining the procedures to be followed for structuring a National Energy Strategy together with indicative expansion plans for power and gas; (c) Defining planning criteria for addressing risk-associated issues; (d) Providing information to developers regarding the recommendations resulting from the power subsector indicative plan and defining the scope of Government action  regarding the response of power utilities and private sector enterprises to generation plant installation in order to ensure reliable supplies; (e) Addressing development and social-related issues such as coverage extension policies, rural electrification and power supplies to isolated communities; (f) Addressing the question of the institutional structure of the oil subsector and possible restructuring requirements; (g) Developing expertise in order to formulate a gas sector expansion plan; (h) Introducing the environmental dimension into sector planning; (i) Procedures to be followed for involving users and other stakeholders in decisions regarding energy sector projects. 33. Objectives and Scope. TA assistance to the Policy Unit would be oriented towards addressing the above issues. The ultimate objective of the proposed assistance is to organize the unit and provide staff training in order to efficiently fulfill its responsibilities in response to sector developments. It would consist of the following major tasks: (a) Assessment of Policy Unit staffing requirements and human resources in regard to its responsibilities; (b) Assessment of infrastructure requirements (e.g. computer and communications resources); (c) Defining the scope for execution of specific projects (e.g. pre-feasibility and feasibility studies) to support the expansion plan and their budgetary requirements; (d) Defining principles for structuring the indicative power sector expansion plan; (e) Defining similar procedures for the gas sector; (f) Building in environmental constraints, costs and tradeoffs into both the power sector and gas sector development plans; (g) Assisting in the development of a National Energy Strategy; (h) Assessing alternative structures for the oil subsector; (i) Addressing other policy areas, such as distribution and electrification plans. 34. Results. The TA will seek to develop a skilled Policy Unit which can effectively coordinate and evaluate the execution of power sector plans, provide information to the Energy  - 10- Regulatory Commission and serve as a source of high-level support to the Ministry of Mines and Energy for strategy and policy formulation. The recipient will be responsible for putting in place the TA recommendations. The TA will extend over the period of initial operations of the Unit in order to provide on the job training and thereby ensure that it will function effectively. 35. Implementation and Monitoring. Technical assistance will be provided by a resident individual consultant, an international expert with ample experience in managing and organizing advisory government institutions in the energy field, supplemented with specialized support in specific subjects. Consulting firms will provide support in developing the energy strategy and a training program will be designed for the Unit's staff. MME will be responsible for the implementation of project recommendations, such as creating the requisite positions with the corresponding budgetary appropriations and hiring the required personnel. Project monitoring will take place: (a) through periodical reports from the energy expert; and (b) through an annual audit similar to the Energy Regulatory Commission audit. MODULE 2: POWER SECTOR ASSISTANCE 36. The technical assistance to the power sector has been conceived as a complement to the on-going institutional reform plan. Implementation has proceeded on several fronts: (a) In 1991 and 1992 the Government initiated a financial rehabilitation of the power sector through a number of debt/equity swaps and debt rescheduling operations; (b) Actions on the price front have consisted of a 14% average tariff increase in real terms between 1991 and 1993, and the approval for targeting subsidies exclusively to the lowest income consumers and reducing them drastically for all others; (c) The new Electricity Law, which sets the legal framework for the power and the gas sector reform was promulgated. 37. Within the power subsector, the project consists of the following components: (a) implementing sector strategies and policies, particularly the divestment of state-owned assets; (b) completing the legal and regulatory reform of the energy sector; and (c) providing assistance in the process of attracting private sector capital (both domestic and foreign) for new investments. The components can be broadly classified into the following categories: (a) Assistance to the Energy Regulatory Commission as described in the previous section; (b) Assistance to the Ministry of Finance in the procedure of divestment of government- owned assets;  - 11 - (c) Assistance to MI/Ministry of Finance/DNP and sector enterprises in establishing the conditions for attracting new investments in power subsector generation and distribution; (d) Assistance in organizing a National Grid Company (ISA-Transmission) with the exclusive function of operating and developing the national transmission network, as well as acting as a clearing house for commercial transactions within the electricity market, (e) Assistance in organizing the operating mode of the National Grid Company and developing software tools required under new commercial procedures. The following sections describe each component separately. Assistance in Divestment: Power Generation and Distribution 38. Background. As part of the financial rehabilitation of the sector, the Government has become the principal shareholder in a number of enterprises; in accordance with the strategy for the power sector, the Government has planned to sell shares of power utilities to the private sector. The initial targets are electricity distribution companies which represent, in general, the weakest link in the power generation-transmission-distribution chain. The recipient of this TA component would be the Ministry of Finance as major shareholder in the targeted power companies, and the Minister of Mines and Energy. 39. Objectives and Scope. The Government's objective in involving the private sector in the power sector is to strengthen management and improve efficiency of power utilities, as well as limiting its own exposure in terms of guarantees. The rationale for providing technical assistance for these projects lies in the difficulties associated with obtaining financially attractive proposals; an approach based upon an outright sale is unlikely to elicit a reasonable response given the lack of information and experience in Colombia related to these operations. Consequently, the assistance will focus on developing viable alternatives (e.g. the issue of bonds convertible to shares or leasing), which may vary from one project to another (depending on plant type, size, age, fuel procurement and transmission connections), in order to accomplish the Government's objectives. The assistance will be oriented towards providing potential bidders with as much information as possible in order for them to prepare proposals on the basis of reasonable risk assessments based upon project characteristics, the legal framework and available guarantees. Nevertheless, the guiding principles will be "transparency", simplicity, and maximization of long term economic benefit to Colombia. 40. The proposed technical assistance would consist of: (a) providing the Ministry of Finance with options for divestment of power utilities; (b) marketing and promoting the project according to the preferred option; (c) assisting the recipient in the bidding process; and (d) providing advisory services in negotiation of successful bids and contract design. The assistance would involve the following tasks:  - 12 - (a) Analyzing the conditions of power utilities and preparing divestment options; (b) Preparing a project brochure; (c) Identifying potential investors and promoting the project among them; (d) Preparing invitations to bid; (e) Performing a preliminary screening of proponents; (f) Preparing procedures for bid evaluation; (g) Analyzing financing altematives proposed by bidders; (h) Bid analysis and recommendations; (i) Assistance in contract negotiation and contract design; (j) Procedures for monitoring contract performance. 41. Results. This component of the project should materialize in the effective divestment of power utilities. The major milestones to be achieved for each sub-project, which are the major responsibility of the recipient, consist of: (a) Hiring of TA consultant services; (b) Design of strategy for sale of shares of selected power utilities; (c) Distribution of invitations to bid; (d) Sale of shares; 42. Implementation and Monitoring. The assistance will be carried out by teams of specialists. Each subcontract will be awarded to a single consortium of intemational/national consultants on the basis of their technical proposals. General terms of reference for the hiring of consultants have been prepared; the detailed terms of reference for each project and the evaluation of proposals will be carried out by the project coordinating unit together with the TA recipient's staff and extemal advisory assistance. Project results will be monitored and evaluated according to the success in divesting the assets.  - 13 - Assistance in Attracting New Investment 43. Background. The new power sector strategy envisages that generation should expand according to an indicative plan that will provide information to potential investors, as opposed to a compulsory one. It is also envisaged that all additional thermal plants will be in the private sector. Consequently, it is expected that companies will develop new generation plants according to their needs and will bear the responsibility for these investments. In accordance with the strategy independent power producers will own, in the next four to five years a total of 1575 MW 44. Most of the current developments (with the exception of the Mamonal plant owned by PROELECTRICA and the Termovalle one owned by a consortium led by ENRON) have relied heavily on attracting investors by providing government guarantees to the private contractor ensuring its cash flow. This stage should be considered as an intermediate step while the private sector builds up experience working within the new institutional framework of the power sector. Once confidence is established a full market operation will be reached where power producers can enter the generation business without government support. 45. Objectives and Scope. The recipients of the TA would consist of MME and the power companies interested in signing long-term power purchase agreements with independent power producers. The ultimate objective of this TA component is to assist the Government in reducing its exposure in the electricity generation business by attracting private investors. The major tasks (which may vary in scope from one sub-project to another) envisioned for this component consist of: (a) Developing prefeasibility or feasibility studies for selected candidate plants; (b) Assisting the recipient in the preparation of tenders for soliciting private sector participation; (c) Advisory services in the negotiation of successful bids and contract development. 46. Results. This component of the project should materialize in awarding the building and operation of power plants to successful bidders. The major milestones to be achieved for each sub- project, which are the major responsibility of the recipient, consist of: (a) Hiring of TA consultant services; (b) Approval of bidding documents; (c) Distribution of invitations to bid; (d) Bid award; (e) Completion of BOO (or similar) contracts.  - 14 - 47. Implementation and Monitoring. The assistance will be carried out by teams of specialists. Each subcontract will be awarded to a single consortium of international/national consultants on the basis of their technical proposals. General terms of reference for hiring consultants have been prepared; the detailed terms of reference for each sub-project and the evaluation of proposals will be carried out by the project coordinating unit together with the TA recipient's staff and external advisory assistance. Project execution will be monitored according to its success in attracting private investors and executing the projects. Assistance to the Grid Operator 48. Background. National transmission is currently the responsibility of ISA (which also owns a major portion of system generation) and other utilities which own trunk lines. The Government is at present the major shareholder in the company and it intends to separate the generation and transmission businesses into different corporations. Dispatch procedures and software were developed during 1980-1986 and will require substantial modifications under the new sectoral structure. 49. Objectives and Scope. The TA seeks to provide advisory services in the process of reorganizing ISA into separate corporations. Financial, accounting and personnel aspects of the transition to these new corporations are important areas where advice will be given. The ultimate objective consists of organizing a separate network operator entity which can efficiently fulfill functions of system dispatch under the new wholesale market rules, transactions clearing, system security, transmission maintenance and, possibly, support for the MME Policy Unit. The activities envisaged for this component consist of: (a) Procedures for the corporate separation of ISA in transmission and generation, and organization of the new enterprises; (b) Advice during the separation process; (c) Modification of dispatch rules and clearing house functions according to the procedures and Grid Code recently developed within the Energy Regulatory Commission consultancy contract; (d) Specification, development and testing of the settlement software; training of ISA's personnel on the use of economical load dispatch and financial settlement models; (e) Development of information systems for dispatch and settlement. 50. Results. Two types of results will gauge the progress of this component: (a) The effective and satisfactory separation of generation and transmission;  - 15 - (b) The efficient operation of the grid operator with respect to system dispatch and transactions clearing. 51. Implementation and Monitoring. The TA will be executed mainly through large international consulting firms associated with local consultants. The project will be monitored on the basis of its success in achieving the results listed in the previous paragraph. MODULE 3: GAS SECTOR ASSISTANCE 52. Background. Current natural gas consumption is 400 million cubic feet per day concentrated mainly in the Atlantic Coast and Santander regions. The gas is used primarily for electricity generation and industrial heat, with a relatively small residential and commercial market. Because of the limited size of the gas industry and the dispersion of producing gas fields, there is no integrated national pipeline network. 53. Gas development is currently a responsibility of ECOPETROL, the state oil company. The interests of this enterprise have naturally been oriented towards crude production and refining activities where it derives most of its income. This situation is likely to become more pronounced with the recent discovery of large oil fields. The consultants who are analyzing the gas sector's structure have proposed the creation of a gas-dedicated company similar to the grid operator in the electricity subsector; the government is examining this proposal and intends to organize it with private capital participation. 54. In December 1991 the Government designed a program to substitute gas for more costly fuels, in particular electricity, which is used extensively for domestic uses. In March, 1993, prompted in good measure by the large gas discoveries in the Cusiana oil field, the Government decided to accelerate the implementation of the gas program and approved the National Gas Plan setting a number of objectives and preliminary proposals, including: (a) The use of private capital in the construction of new trunk lines on a build-own- operate (BOO) and build-operate-transfer (BOT) basis; (b) Deregulation of gas prices for large consumers (power generation and large industry); (c) Protecting the interests of smaller consumers and promoting substitution of gas for electricity; (d) Encouraging competition in gas supply, where appropriate, by providing gas producers with access to pipeline networks. 55. The plan envisages investing US$ 550 million in the 1994-1998 period in construction of gas pipelines and the creation (with private sector participation) of a mixed capital enterprise in charge of gas transportation and promoting the development of new gas pipelines. The long-run plans of the Government contemplate an ambitious investment program of up to $3 billion by 2020.  - 16 - A major initial step in the implementation of the Government's policy was taken in late 1993 with the award by ECOPETROL of a BOO contract for the principal trunk pipeline connecting the Atlantic fields to the central region fields. 56. Components of Gas Sector Technical Assistance. The most important component of the assistance to the gas sector is directed towards implementing the new institutional framework through the Energy Regulatory Commission and the Policy Unit (see Module 1) in order to accomplish the objectives stated above. Specific Gas Industry components responding to the strategy of minimizing Government's involvement and encouraging development with private sector participation will be included: (a) to develop a plan for the implementation of a new gas industry structure with private sector participation; (b) to advise the Government on negotiations with the private sector to set up a new mixed-capital gas company(ies). 57. Objectives and Scope. The objectives of this component are: (a) to improve the operations of the gas sector and promote natural gas use; (b) to render gas pipeline investments viable; and (c) to create a large gas market with private sector participation. The Technical Assistance will support the development of a plan for the implementation of a new gas industry structure, and assistance to the Government on negotiations with private companies involved in setting up new enterprises in this subsector. 58. Implementation. Legal and commercial advice to the Government regarding negotiations with the private sector will be provided by lawyers and a merchant bank with international experience. The Ministry of Mines and Energy will be responsible for the supervision of the consultants' work MODULE 4: ENVIRONMENT 59. The energy sector has become aware of the importance of environmental issues, and the power sector organized a Power Sector Environmental Committee with an executive branch at the vice-presidential level within ISA, the interconnection enterprise. Power sector project analysis is now routinely complemented with an environmental impact assessment encompassing both physical and social consequences. A Power Sector Environmental Assessment, financed by ISA and supervised by the Bank, was completed and delivered its conclusions and recommendations by mid 1994. It is worthwhile noting that there has been considerable receptivity to these considerations and that, as a consequence, a number of projects have undergone design modifications. 60. The Government has recently organized a Ministry of the Environment which will also address energy-related problems. The Technical Assistance project will assist in the construction of a consistent set of guidelines, which will constitute an appropriate base for future sectoral environmental regulations.  - 17 - 61. Environmental Assistance Components. The size and scope of physical and regulatory components contained in both the power sector and the gas sector plans require two kinds of environmnental analyses: (a) Sectoral environmental assessments (SEA) for the purpose of establishing environmental guidelines to address a sectoral environmental plan, and regulatory/institutional measures, particularly taking into account the role of the private sector; (b) Specific environmental assessments dealing with selected new private sector projects. Sectoral Environmental Assessments (SEAs) 62. Background. The set of proposed assessments would encompass the energy sector as a whole, but would include differences in emphasis according to the stage of development of power and gas, and could also extend to the coal subsector. The assistance would capitalize on the experience gained by the Power Sector Environmental Assessment and would translate it into guidelines for monitoring both existing energy projects and future developments. 63. Objectives and Scope. The Government's objective in developing environmental regulations is to comply with the 1991 Constitution, which explicitly mandates the protection of the environment as well as the socioeconomic heritage and the well-being of indigenous groups. The SEAs would: (a) Identify the main environmental problems caused by energy projects; (b) Develop environmental operating guidelines for planning purposes; (c) Develop standard relocation procedures and guidelines; (d) Develop methodologies for costing environmental and socioeconomic consequences of energy projects and integrating them with project analysis; (e) Develop procedures to involve users and communities affected by energy sector projects in the corresponding decisions; (f) Disseminate the relevant policies, guidelines, regulations and codes through workshops and seminars to the concerned industries and government departments in order to stimulate awareness with respect to environmental issues. The results of the SEAs would be used as the basis for promulgating and publishing energy sector environmental codes.  - 18 - 64. The recipients of this TA component would be the Energy Regulatory Commission and the Energy Policy Unit as well as the subsectors' environmental organizations (e.g. Power Sector Environmental Committee, ISA Environmental Office). It is worthwhile noting that the Assessment should take an integrated approach: the impacts of developing power, coal and gas should be analyzed simultaneously. The project will include a training component oriented towards developing key environmental management skills. These include: environmental impact assessments and environmental auditing; data base development and management; development of environmental information systems and library services; and development of environmental education and awareness programs. 65. Results. The SEA would provide a common reference for: (a) development and publication of an energy sector environmental policy and an environmental action plan; (b) enforcing environmental norms concerning all activities related to the production of electricity and natural gas, and to their transmission and distribution to final consumers; (c) publication of guidelines for the energy sector in respect of solid waste disposal, liquid effluent and air emission control, and post-closure redemption. The training component will result in increased awareness at the sector level and better decision making capabilities in environmental management and planning. Project Environmental Assessments(PEAs) 66. This component will be oriented towards financing the execution of specific assessments related to projects at the feasibility and prefeasibility level; it will also seek to identify remedial measures in the existing system in order to comply with the regulations developed as part of the SEA. In particular, it should extend to those power plants being proposed for divestment as well as those which are identified in the power and gas sector expansion plans. 67. Objectives and Scope. The project environmental assessments will identify the effects of selected projects together with the required remedial measures and their cost in order to include them in the evaluation of expansion plans and to provide prospective investors with a realistic estimate of costs they will have to incur. The scope of the required analyses varies from one project to another, and a rough classification would include the following items: (a) Existing hydro plants: requirements for watershed conservation, water quality control and non-energy uses (irrigation, fishery requirements and drinking water), risks for downstream settlers; (b) Future hydro plants: watershed conservation, water quality control, biomass disposal consequences, socioeconomic effects, archaeological, historical and cultural site conservation, wildlife conservation, population relocation alternatives and costs, construction consequences on local residents; (c) Thermal plants: air emissions; wastewater discharges, solid waste generation, storage, transportation, and disposal, cooling water requirements and management;  - 19 - (d) Transmission lines: consequences of clearance requirements on wildlife, farming communities, populated centers and archeological sites; (e) Gas pipelines: consequences on land use, fragile ecosystems, socioeconomic effects (indigenous peoples and other ethnic groups affected by the project), archeological sites; safety (prevention of leaks, spills, corrosion); (f) Coal mines: land use consequences, transportation requirements, wildlife conservation, underground mine safety, air emissions, water discharges, solid waste disposal, socioeconomic impacts on communities living around the mines. 68. Component Projects. The following is a non-exhaustive list of existing projects and future developments which are likely to require an environmental assessment: (a) Combined cycle power plants projected for installation in the Valle and Atlantic Coast regions; (b) Future coal plants, starting with the 300 MW station to be installed on the Atlantic Coast; (c) Future gas pipelines (Guajira-Barranca trunk pipeline and the regional subsystems); (d) Transmission lines required for reinforcement of the interconnected network. 69. Implementation and Monitoring. The PEAs will be developed by teams of experienced consultants supplemented by specialized advisors. The training component will include the participation of energy sector staff in short courses and seminars organized with consultant teams. Project monitoring will take place through an evaluation of the SEAs and the PEAs by experienced environmental consultants. MODULE 5: ENERGY DEMAND MANAGEMENT AND SAFETY ENHANCEMENT 70. Background. The World Bank/UNDP Energy Sector Management Assistance Program (ESMAP) conducted a study in 1991-1992 on energy use in the residential, commercial and public sectors4. The study emphasizes, in particular, the electricity-intensive household consumption in Colombia: whereas other higher income Latin American countries such as Argentina, Brazil and Mexico exhibit an average domestic consumption in the range of 130 to 150 kWh/month, Colombia shows an average of 230 kWh/month. This has led to an atypically high residential sector share in total sales (around 50%) which reflects uneconomic electricity use caused by low prices and constraints on the supply of substitute fuels. 71. This module is a complement to the energy pricing component and is aimed at providing information to energy consumers so that they may make more informed decisions on its use. Even 4Draft Report- "Energv Efficiency for the Residential, Commercial and Public Sectors", ESMAP, June 1993  - 20 - though the adjustment of power and gas prices to cost related levels will stimulate a more rational use of energy, there will still be a need to provide information on the most efficient ways to use energy both for industry and for households. 72. This Technical Assistance will focus on: (a) the development of a demand side management strategy; and (b) the promotion of safe and efficient gas use. The Government of Colombia also attaches a high priority to the development of a national strategy for the rational and efficient use of energy. The Alternative Energy National Institute (INEA) of the Ministry of Mines and Energy requires clear guidance to develop its mandate. This TA will provide the MME with a demand side management strategy that INEA, and other institutions in the energy sector, will implement. 73. In the electricity sector, satisfactory standards and acceptable processes for certification of end-use equipment are already in place, whereas the development of the gas industry in Colombia is at an incipient stage and therefore standards, codes and operational procedures require upgrading to acceptable levels. ICONTEC, the national institute for standards and norms, has been addressing these issues in a limited way. It is providing certification of equipment but additional resources are required to speed up the process of upgrading gas related standards and codes. Demand Side Management (DSM) Strategy 74. Background. The DSM strategy will be a complement to the pricing and regulatory reform efforts to implement a coherent energy sector policy. This project component will study consumer characteristics and behavior to identify main causes for market failure, such as lack of consumer information, and support the development of an energy demand management strategy to induce the rational use of energy. 75. Objectives and Scope. The key objectives of the DSM strategy will be: (a) the rational utilization of energy sources; and (b) efficient resource and investment allocation. The work will include the updating of information on consumer profiles and behavior as well as consumer equipment, and the evaluation of potential savings and the prioritization of areas for action. The preparation of a DSM strategy presupposes the implementation of an efficient energy pricing policy. 76. Implementation. Consultants' services will be required for assisting in drawing up the DSM strategy and for developing a prioritized action plan. The MME, through LNEA, will be responsible for the supervision and monitoring of the consultants' work and for carrying out the implementation plan. Promotion of the Safe and Efricient use of Gas 77. Background. A system that will ensure the safe and efficient use of gas is a pre-requisite for the orderly development of this sector. Appropriate standards and codes are essential building blocks of this development. The Colombian gas industry has been making use of standards applied in developing countries on a case by case basis. There is, however, a need for reviewing, updating  - 21 - and consolidating the set of standards and codes appropriate to the country's environment, that should be followed by all the players in the sector for an integrated and efficient development. 78. Objectives and Scope. The specific objectives of this TA are to review and formulate for the gas sector: (a) standards for materials and equipment; (b) design parameters, installation and operational procedures; and (c) standards for gas quality and supply, using international gas standards and codes as the basis. Local and foreign consultants will be required to review the existing standards and codes, identify the standards which are missing or which need updating, draft the necessary versions and obtain their approval by the appropriate authority. 79. Implementation and Monitoring. This project component will be developed in cooperation with the local gas industry. The Ministry of Mines and Energy will be responsible for the supervision and monitoring of the consultants work. Overall Technical Assistance Project Implementation. 80. The project will be carried out by an Executing Unit attached to the Energy Policy Unit of the MIME and will be guided by a Coordinating Group in charge of overall orientation. A full-time project coordinator will be in charge of the executing unit and will be assisted by consultants hired to do specific tasks as required. The Coordinating Group will be integrated by representatives from the National Planning Department, the Ministry of Mines and Energy, and the Energy Regulatory Commission. 81. Bank staff will hold a project launch workshop in Colombia shortly after the loan signing in order to review needed startup actions. The project will be supervised by Bank staff through receipt and review of the Annual Implementation Programs, monitoring of Semi-Annual Implementation Reports and regular supervision missions. In the case of the Energy Regulatory Commission, in addition to Bank supervision, independent experts will be hired to perform an annual broad audit of the its activities. A midterm review of the project to assess progress of major reforms and institutional buildup pursued under the project and to determine the need for adjustments will be held before October 31, 1997. Inputs needed to supervise the project are esimated to total about 12 staff-weeks per year during the first two years and 10 staff-weeks per year subsequently. Supervision will require the involvement of Bank specialists in environrnent, energy regulation, energy economics, power, natural gas, privatization, as well as outside expertise in power and gas regulation.  - 22 - ANNEX 1 COLOMBIA: LESSONS FROM THE BANK EXPERIENCE IN THE POWER SECTOR' Bank Experience I. Since 1950, the Bank has made 31 loans to the Colombian power sector totaling US$ 2.2 billion. However, the bulk of Bank lending, US$ 1.94 billion, through 15 loans, was made during 1970-87. Thirteen operations were Specific Investment Loans (SILs), one Financial Intermediary Loan (FIL) and one Sector Adjustment Loan (SECAL). About 58% (US$ 1.13 billion) were granted directly to the two largest municipal power companies in Bogota (EEB) and Medellin (EPM) through eight operations. During this period, EEB has been by far the largest borrower of Bank funds with four loans totaling US$ 701m. Four loans for US$ 430.5m were made to EPM. The national generation and transmission interconnection company (ISA) also received four loans totaling US$ 300m. 2. Through the Government one loan was made to Financiera Electrica National (FEN) for relending to municipal and Government-owned power companies; and one SECAL for US$ 300m intermediated by FEN. Over the same period the Inter American Development Bank (IDB) also lent just over US$ 1.9 billion to the Colombian power sector. In less than 20 years, the World Bank and the IDB each lent nearly $2 billion for electric power in Colombia - a very high lending level for one sector in a country of 30 million people. After 1970, institutional, financial and operational efficiency achievements in the power sector fell short of forecasts, and by the mid- 1980s, the sector was in financial crisis. The large investments made in power depended heavily on government transfers and on external borrowing, and were a major cause of fiscal deficits and balance of payments problems. 3. At the request of the Colombian government, OED reviewed the World Bank's lending through this period of rapid power generation expansion and financial crisis. The study benefited from the active support of the Colombian power authorities. The government followed up with a two-day seminar, in which OED and other Bank staff participated, to discuss the results of the study and the reform of the sector. 4. The study found the analytical basis for the lending program weak, and notes that the Bank did not insist forcefully enough upon the policies and conditions needed to make the sector profitable. The sector's development was still hampered by the same basic problems as 20 years ago. Its claims on fiscal resources and its external debt had become so large that these problems needed urgent resolution. In particular, decisions were needed on how the sector was to be financed in future. This report made recommendations on sector regulation, management, resource mobilization, investment strategy, and financing. 5. Why did the Bank lend so much for power in Colombia? The goals mainly related to sector policy, and the rationalization of the sector's development. But the policy goals seem at times to have been given a smaller priority than the implementation of an ambitious lending program Extract from OED Report, Colombia - The Power Sector and the World Bank. 197(G-1987. No. 8893  - 23 - ANNEX I since the power sector required large investments with the growing demand, providing a natural area where Bank lending was requested. Economic and sector work for power in Colombia did not match the volume of lending. This Bank experience emphasizes the crucial need for thorough power sector work and strategic thinking. At important points in the review period, lack of analysis negatively affected lending, and so did the lack of a shared vision by the Bank, Government and sector representatives. 6. Bank lending supported the following endeavors with generally limited success: (a) nationwide master plan for energy/power development - plan preparation was drastically curtailed, to accommodate regional interests early in the process; (b) least-cost planning for generation and transmission systems - outcome was much influenced by non-economic factors, but too little attention to risk factors and sensitivity analysis tilted the investment selection in favor of inflexible projects with long lead times and high front-end capital expenditures, and with the recession of the early 1980s, resulted in over-capacity by the mid-1980s; (c) reduction of system losses - overall system losses grew rapidly from 1978 onwards; by 1987 they were about 25 percent of net power generated; (d) marginal cost pricing - ultimately borrowers accepted the principle, but average tariff levels stayed very low and tariff distortions worsened; (e) better self-financing - after 1977 sector revenues never contributed more than about 5 percent of investment (a recommended range would be 30 - 50 percent; (f) reduced dependence on official borrowing - not achieved. The World Bank and IDB provided 80 percent of external borrowing for power in 1980-87; (g) balanced investment program - investments stayed skewed toward hydro as opposed to thermal power generation, and toward generation and transmission, at the expense of distribution; and (h) presentation of unified sector data - unified data presentation, compatible financial accounting, across utilities, not achieved; arriving at an overall view of sector finances was still very difficult at the end of this period. 7. To sum up, Colombia's power entities over the years achieved a high level of technical expertise. At issue was a more enabling framework in areas of policy formulation and organization. Though the Bank helped the sector to achieve substantial expansion of coverage, most of the problems noted in those areas by OED evaluation studies of 20 years ago were not resolved during 1970-1987: (a) Grossly inadequate local resource mobilization; (b) Poor financial performance; (c) Unbalanced investment program; (d) Investment selection procedures that may lead to sub-optimal projects; (e) Cumbersome institutional structure and weak regulatory framework.  - 24 - ANNEX I Main Issues and Ways to Tackle them 8. The Colombian power sector has urgently needed to solve certain fundamental long-term issues which have been at the root of most others. It has also needed to solve critical short-term sector financial problems. The following actions provide the basics for solving the long term issues: (a) Defining a sector strategy based on a set of specific sector objectives in line with wider energy sector objectives, which, in turn, should be properly embedded in Government's macroeconomic policies; defining a corresponding regulatory and institutional framework, with clear principles and 'rules of the game'. (b) Establishing a strong regulatory body. This will always be required independently of whether the specific sector objectives imply development toward overall centralization (highly unlikely in the Colombian context) or toward a set of central and regional utilities with substantial autonomy, or even toward various degrees of privatization. (c) Supporting a thorough rethinking of the functions ISA has to fulfill and of a proper framework in which these functions should be discharged. While ISA's setup, as conceived in 1968 on the basis of a compromise, and as subsequently adjusted, provided for a long time a reasonable framework, it ran its course in the next 20 years. (d) Defining a new sector structure based on a consensual process among all the partners. The Bank's role would be to induce the partners to discuss candidly sector issues, in particular, the politically sensitive sector structure, the role of Government in the sector, as well as the array of possible solutions. The Bank could also be of help to the Government and the entities involved in the sector arrive at the positions from which decisions would be made. It should then be willing to accompany them on the arduous and long path of implementation. Based on its review, OED recommends that Bank lending should: (i) consistently take the sector approach; (ii) avoid the pervasive, at times utterly unrealistic optimism, that has characterized several of the OED-reviewed operations; and (iii) insist on action by Government and the sector each time before it submits an operation for Board presentation. 9. The Bank has also needed to come to grips with the requirement to reconcile the expected centralized responsibilities of regulatory authorities with the essentially decentralized structure of the utility companies, and to the need to restructure and redefine the role of ISA. An open approach was seen by OED as of help to the Bank in its dealings with the Colombian power sector. It would also help mobilize the strengths of strong Colombian regionalism to the advantage of sector development.  - 25 - ANNEX I Sector Specific Recommendations 10. OED suggested a series of more specific recommendations set forth below: (a) Institutional Framework. Once the specific sector objectives are defined, Government would have to: define and implement the strategy according to which the sector decides to meet demand; set the ground rules for using national resources in the power sector; clarify the basic rules of commercial operation of the utilities; define, in general terms, the type of operations that Government would subsidize; spell out the principles of setting electricity bulk and retail tariffs, and their relation to economic costs, as well as the measure of cross-subsidies between consumer categories that would be tolerated; there should be no cross subsidies across markets; and to the extent that the Government needs to provide tariff subsidies on equity ground or market structure (poor rural areas) the subsidies should be explicit and the onus should be on the Government to directly compensate the affected utility. (b) Regulatory Framework. The responsible entity should, in general, translate Government objectives and policies into sector rules, and monitor sector compliance with them. (c) Re-alignment and Concentration of Utilities. This action would represent a substantial step towards increased efficiency in the sector and the Bank should induce the sector to define as soon as possible its feasibility. (d) ISA's Structure and role. The Bank, as ISA's main sponsor, should assist Government and the sector in re-examining ISA's structure and role, taking into account that ISA should preserve its practical approach to planning, and shield planning from political influence before the start of the decision making process proper. (e) Tariffs. Beyond the suggestions above, the Bank should: continue to support a strong tariff regulatory body and further improvements to the present tariff rules; insist on substantial tariff action toward economic pricing of electricity, both at the retail and bulk levels, each time before it submits a new operation for Board approval; systematically assess the economic and financial suitability of tariff levels; and emphasize the role of the bulk tariff as a key factor in the pricing of electricity. (f) Finances. Utilities and sector finances need to be turned around on the basis of the new institutional setup. Once basic principles are agreed, their application will include a financial component that, in several steps, will allow the utilities to re- establish their cash generation capacity, strengthen their capitalization, bring receivables to acceptable levels, and thus allow the companies to operate in an accountable environment. To support this development, the sector should achieve reasonable uniformity in sector accounts and statistics to enable preparation of  - 26 - ANNEX I meaningful consolidation of utilities' finances, and monitor their regulatory commitments. (g) Investment Program. The sector would need a more balanced investment program with a proper share for sub-transmission and distribution. It would have to address the shortcomings of planning and decision making through a more realistic time and cost scheduling of projects and a bolder approach to sensitivity and risk analysis.  - 27 - ANNEX 2 OPERATIONAL GUIDELINES FOR TECHNICAL ASSISTANCE LOAN 1. Preparation of Terms of Reference The implementing agencies (i.e., DNP entities and autonomous agencies, as appropriate) prepare final TORs (based on draft TORs already prepared for this project ), with assistance of the Bank when requested. Final TORs are submitted to the project Coordinating Unit Manager for approval and to the Bank for no-objection prior to issuing to consultants. 2. Creation of Short List for Recruitment of a Firm. The implementing agencies prepare an initial list for review/approval by the Executing Unit manager. The short list will be submitted to the Bank for no-objection. 3. Selection of Individual Consultants The implementing agencies make an initial selection, but send the curriculum vitae (with a brief justification of the fee) to the Executing Unit manager for approval and to the Bank for no-objection. 4. Evaluation of Proposals. The implementing agencies evaluate proposals and select the winning firm. Before notifying the firms, the selection committees will send the evaluation report and winning proposal to the Executing Unit manager for approval and to the Bank for no-objection. 5. Supervision of Consultants. Supervision is the responsibility of the implementing agencies. Program reports on technical assistance will be submitted to the Executing Unit manager, UNDP, and the Bank. 6. Disbursement. Payments corresponding to consultant services and purchase goods will be made through UNDP. 7. Audit. An annual audit of the Project accounts will be undertaken by independent auditors acceptable to the Bank, and submitted to the Bank.  - 28 - ANNEX 3 LOAN ADMINISTRATION AGREEMENT BETWEEN THE GOVERNMENT OF COLOMBIA AND UNDP I The agency in charge of the execution of the project will be an unit attached to the Planning Policy Unit of the Ministry of Mines and Energy. UNDP will be in charge of the project administration as agreed between DNP and UNDP in a letter of agreement. 2. For recruiting and managing consultants to be financed by the proceeds of the Loan, the division of responsibilities between DNP and UNDP will be as follows: DNP Repayment of principal amount, interest and other loan related charges Granting approval to the Loan Administration Agreement Compliance with Loan Conditionalities as specified in the Loan Agreement between the Bank and the Government of Colombia Project Coordinating Unit (DNP) Identification of consultants and preparation of short lists Drafting of terms of reference Preparation of letters of invitation for proposals Evaluation of proposals and selection Negotiation and signing of contracts Supervision of performance and review and acceptance of reports; preparation and filing of withdrawal applications Approve UNDP's selection of external auditors for accounts, certification and financial statements Supervision of funds allocation Submitting quarterly financial status reports to EXECUTING UNIT Obtaining the Bank's no- objection for consultant's short lists, terms of reference and contracts Compliance with budget norms outlined in the current budget law Establishment of a Budget Section to which DNP will assign disbursements of the World Bank loan Submitting disbursement information inmmediately after it becomes available. UNDP Administration of consultant's contracts including verification of payments, requests and payment to consultants Opening and maintaining separate accounts for receipt of projects and effectuating payments Preparation of financial statements Selection of outside auditors of UNDP's Project accounts and related records and statements Submission to EXECUTING UNIT of all information and supporting documentation necessary to enable EXECUTING UNIT to prepare appropriate withdrawal applications  -29- ANNEX3 Provision of EXECUTING UNIT with such other services incidental to the above as EXECUTING UNIT may reasonably request. In discharging the responsibilities set forth above, UNDP should act as agent and on behalf of DNP. 3. It is understood that UNDP, will make all payments required under contracts administered by it. It is further understood that, for this purpose, DNP should submit withdrawal applications to the World Bank on a monthly basis, except as the World Bank may otherwise require in accordance with the provisions of the Loan Agreement. 4. In payment of its services and expenses, UNDP will charge, and the Government will pay, an all-inclusive fee of 3.0% of the amount of payments made by UNDP. DNP should request the World Bank to make all disbursements from the Loan Account to the order of UNDP into the UNDP Contributions Account No.----------. 5. UNDP agrees to cooperate with DNP and the Government at large to enable them to comply with all requirements of the Loan Agreement, including the General Conditions. Without limitation upon the generality of the foregoing, UNDP should keep records and separate accounts and provide for the audit thereof in such manner as to enable the Goverrnment to comply with its obligations under the correspondent Section of the Loan Agreement and with the provisions of the disbursement letter.  -30 ANNEX 4 COLOMBIA ENERGY TECHNICAL ASSISTANCE LOAN Action Plan (Including Timetable and Implementation Indicators)  COLOMBIA ENERGY TECHNICAL ASSISTANCE LOAN Action Plan (Including Timetable and Implementation Indicators) Activity and Government Objectives 1 Activity Components Expected Results/Impacts Timing/ Responsible l__________________________________________ _ iTargets J Agency(ies) MODULE 1 - REGULATION, PRICING, AND ENERGY POLICY Regulatory Commission Assistance Overall objective: Strengthen the Hands-on training in application of regulatory principles; Competent team of regulatory experts Continuous Energy Regulatory Commission to assistance in initial regulatory implementation; ad-hoc activity assure competent regulation ("hot-line") assistance on debatable/complex decisions Equip the Regulatory Commnission Development of information systems for regulation Software developed and tested; system DEC 1997 with adequate analytical tools for implemented decision making; and avoid authority- undermining mistakes in initial Pricing studies (development models for cost estimation Electricity pricing formulae gazetted DEC 1995 Energy decisions and financial impact assessment) Gas pricing formulae gazetted DEC 1996 Regulatory Conmmssion Equip the Regulatory Commission Regulatory reviews (establish audit principles and First utility reviewed JAN 1997 with monitoring capability procedures) Adjust regulated energy prices to Development of transmission and distribution rules to Promulgation of power codes DEC 1995 economic levels ensure open access to the grid Promulgation of gas codes DEC 1996 Promote comnpetition Developnent of service standards and customer liaison Ancillary power regulatory procedures OCT 1996 procedures gazetted/disseminated  Activity and Government Objectives Activity Components Expected Results/Impacts Timing/ J Responsible l________________________________________ _ |Targets J Agency(ies) MODULE I - REGULATION, PRICING, AND ENERGY POLICY (continued) Set quality of service standards for Ancillary gas regulatory procedures OCT 1997 regulated activities gazetted/disseminated Energy Policy/Planning Unit Assistance Develop capability to formulate Assessment of Unit's role and requirements energy strategy and policy in a Work program ready DEC 1995 mixed public/private sector context Training of Unit staff in strategy and policy analysis Skilled team to address coordination of Continuous power/strategies and policy in support of MME activity Ministry of k Development of an overall Energy Strategy Comprehensive energy strategy published DEC 1995 Mines and Energy Development of energy information systems Software developed and tested; system DEC 1997 implemented; energy statistics published Coordination of energy subsector indicative plans Indicative plans published Annually MODULE 2 - POWER SECTOR ASSISTANCE' Assistance In Generation and Analysis of power utilities status and divestment options; Sale of assets and shares (utilities) JUN 1998 Ministry of Distribution Divestment sales promotion; tender documents preparation and bid Finance evaluation; assistance in contract negotiation Reduce Government's ownership Ministry of In power plants and distribution Mines and companies Energy See Module I for technical assistance on power regulation, pricing and energy policy.  Activity and Government Objectives Activity Components Expected Results/Impacts | Timing/ | Responsible ________________________l_____________________________________ _________________________________J Targets Agency(ies) MODULV 2 - POWER SECTOR ASSISTANCE2 Encourage private sector Power investment & management Utilities Assistance In Attracting Private Sector Investment In Future Plants Incorporate private sector interests in Prefeasibility/ feasibility studies, preparation of tender Award of contracts for new private plants JUN 1998 Ministry of new power plant, release documents and bid evaluation, assistance in negotiation (Total 400 MW) Finance Government from having to commit with private sector enterprise regarding Power Purchase resources to power sector and Fuel Purchase Agreements Ministry of Mines and Energy Power _____________________________________________________________________________________ _______ UtilUtiitie Assistance to Grid Operator Foster competition in the generation Separation of generation and transmission: design of new Creation of ISA-transmission DEC 1995 ISA market by creating an independent transmission company business structure; preparation of clearing house/ transmission network business plans Vertically .nanagement organization integrated Improving operating models according to competitive Satisfactory operation of dispatch and clearing DEC 1996 utilities generation procedures set out by the Energy Regulatory house functions under new operational rules Commission Assistance to vertically integrated utilities in setting Separate accounting systems implemented JUN 1996 separate accounts for electricity and transmission 2See Module I for technical assistance on power regulation, pricing and energy policy.  Activity and Governmuent Objectives Activity Components [ Expected Results/Impacts Timiing Responsible _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _TT a getss J A gge cyy iies MODULE 3 - GAS SECTOR ASSISTANCE Assistance in Organizing Natural Gas Develop plan for the implementation of a new gas Plan ready DEC 1996 Industry industry structure with private sector participation Ministry of [Module I covers requirements for technical assistance on Mines and gas regulation, pricing, and energy policy.] Energy Promote the economic development Advise the Government on negotiation with the private Company (ies) established DEC 1997 of the gas industry with private sector sector to set up new mixed gas company (ies) participation under a new institutional framework implemented with support firom Module I 3See Module I for technical assistance on gas regulation, pricing and energy policy, and Module 5 for promotion of efficient and safe gas use. X~  Activity and Govermment Objectives 1 Activity Components I Expected Results/Impacts | Timing/ Responsible I ___________________________________________________ I [ Targets A gency(ies) MODULE 4 - ENVIRONMENT Sectoral Environmental Assessment (SEA) Consolidate energy-related Development of energy sector environmental policy and Publication of an appropriate energy sector DEC 1996 environmental regulations, develop an enviromnental action plan enviromnental policy and of an environmental standards and incorporate into sector action plan regulation and planning Ministry of Support the implementation of the environmental action Strengthen utility environmental units Continuous Mines and Develop consensus on reasonable plan activity Energy standards for energy projects Development/review/enactment of natural gas and Publication of legislation and codes DEC 1997 electricity environmental enabling legislation and codes Development of energy sector operating guidelines for Publication of guidelines DEC 1997 Utilities solid waste disposal, liquid effluent control, air emissions control, and post-closure remediation Awareness workshops Upgrading of MME staff skills and improved local Continuous capabilities in enviromnental management and activity environmental planning Project Environmental Assessments Annually Ministry of Update information on specific Review environmental impact of projects in expansion Inputs to indicative energy expansion plans Mines and projects, analyze new ones plans DEC 1997 Energy Update assessments according to standards developed as Updated project environment assessment Continuous Utilities part of sector assessment activity Awareness workshops  Activity and Government Objectives Activity Components Expected Results/Impacts Timing/ 1 Responsible Targets _JAgency(ies) MODULE 4 - ENVIRONMENT Development and publication of an energy sector Upgrading of utility staff skills and improved local JUL 1998 environmental policy and an environmental action plan capabilities in environmental management and environmental planning S - ENERGY DEMAND MANAGEMENT AND SAFETY ENHANCEMENT4 Demand-side Management Strstegy Energy conservation Assist in the development of and energy demand-side A coherent strategy for energy demand-side Annually Ministry of management strategy: management and a prioritized action plan Mines and Rational utilization of energy sources Energy [This activity presupposes the implementation of an Efficient resource and investment efficient energy pricing policy. It will identify the causes allocation for market failure ( such as lack of consumer information) that are an obstacle to the efficient use of energy and develop a strategy to address these obstacles] Promotion of safe and efficient gas use Enhance consumer safedy Develop: standards for gas quality supply, standards for Gas quality supply standards published DEC 1997 materials and equipment; design parameters, installation Ministry of and operational procedures Mines and Support gas market development Materials and equipment standards published DEC 1998 Energy Reduce costs 4See Module I for technical assistance on energy pricing policy.