DEREGULATION AND RESTRUCTURING OF THE ELECTRIC POWER...

Hugh RudnickIEEE Engineering Management Society

Deregulation of the Electrical Industry Mini-ConferenceSan Juan, Puerto Rico, May 5, 1999

DEREGULATION ANDDEREGULATION ANDRESTRUCTURING OF THERESTRUCTURING OF THE

ELECTRIC POWER SECTORELECTRIC POWER SECTORIN LATINAMERICAIN LATINAMERICA

Pontificia Universidad Católica de ChileDepartamento de Ingeniería Eléctrica

Structure of the presentation

Latinamerican power sectorPower market reformMarket design - generation, transmission., distributionSuccessesProblems and challenges

LATINAMERICALATINAMERICA a region in transition a region in transition

* Growing tendency to open economies and democratic governments

* End of the debt crisis

* Economic reforms - market economies encourage economic growth

* Geopolitics reasons increase worldwide interest in the region

* Regional commercial agreements (MERCOSUR, NAFTA) creating new conditions for economic development

COLOMBIA1994

PERU1993

BOLIVIA1994

CHILE1982

ARGENTINA1992

BRAZIL1998

Pioneering regulatory changes in the electrical sector

MEXICO1999

CENTRAL AMERICA & PANAMA1997-9

90% and above

70-90%

50-70%

below 50%

Latinamerican electrification, 1997

MarketLine, 1998

30% 35% 40% 45% 50% 55% 60% 65% 70%Load factor

Brazil

Mexico

ArgentinaColombia

ChilePeru

0

50

100

150

200

250

300

350

Gen

erat

ion

(TW

h)

Hydro

Other

Thermal

Electricity generation by type, 1997

MarketLine, 1998

GDP vs. electricity demandGDP vs. electricity demand

United States

FranceGermany

JapanAustralia

Singapore

ItalyUnited KingdomHong Kong

SpainTaiwan

GreecePortugal

S. Korea

Venezuela

PeruMexico

BrazilArgentina

Chile0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

0 5.000 10.000 15.000 20.000 25.000

GDP per capita (US$)

KWh per capita

Argentina

BoliviaBrazil

Chile

Peru

2%

4%

6%

8%

10%

12%

14%

0% 1% 2% 3% 4% 5% 6% 7% 8%

Growth in GDP

Growth in electricity demand

Growth in electricity production versus growth in GDP, 1990-97MarketLine, 1998

ELECTRICITYINFRASTRUCTUREin Latinamerica

Replacement cost of the existentinfrastructure-aprox. US$500000 millions (aprox. installed capacity 166 GW)

New investment needs in the next10 years-aprox. US$28000 millions a yearduring first decade of the nextcentury

ELECTRICAL SECTOR- historical development in Latinamerica

Initial private developments - insufficiencies

Government action (Endesa, Electroperú, Ende, Eletrobras, ISA, Edelca, CFE)

Limited private participation

Diverse regulatory arrangements

ELECTRICAL SECTOR- main problems in Latinamerica

Management problemsInfrastructure deteriorationGrowth of electric energy demand without efficient useInefficiency in production & useHigh levels of lossesFinancial & economic crisisTariffs problems and cross subsidiesOverstaffing Environmental restrictions


Latinamerican power sectorPower market reformMarket design - generation, transmission., distributionSuccessesProblems and challenges

Drivers of deregulation and privatization

- indicated problems- not necessarily search for price reductions - political reasons - open market ideology- fiscal deficit and need to sell State assets

International “trend” -World Bank initiatives

-not technological changes

-Establish economic efficiency conditions in the energy sector Develop lowest cost energy resources Achieve adequate security and availability of energy supply Efficiency in the use of different energy resources

COMPETITIVE MARKET

- Subsidiary role of the government State does not act if there are private third parties that do it At most, regulate monopolies and do indicative planning

PRIVATIZATION

ECONOMIC - TECHNICAL BASES FOR DEREGULATION

A global energy strategy to achieve maximum social wealth

Change of Paradigm - Unbundling

Generation

Transport

Distribution

Customer

Vertical integratedSystem Organization

IPP

Competition

Competition

Broker

Service-Offer

Broker

Customer Customer Customer

Generation

Transport

Distribution

UnbundledSystem Organization

GRIDCOPOOLCO

FUELCO

PLANTCO

SELLCO

FUELCO

PLANTCO

SELLCO

BROKECO

BUYCO

LINECO

BROKECO

BUYCO

LINECO

RETAILCO

CUST.

RETAILCO

CUST.

GENER. T

RANS.

COMPETITIVE MARKET MODEL

DISTR.

ELECTRICITY MARKET REFORMS

electric power systemelectric market

customer client

protection of the public company providingelectricity service at a given cost

competition among firms that offer aproduct (a commodity) at resultant prices

Change of Paradigm

Present

Costs

Vertically integrated areas

Cost - Minimization

Clear mathematical solution

Coverage of the costs

Monopoly

Uniform product

Average Prices

Subsidies

Obligation to serve

Future

Price

Unbundling: Generation, Transport, Distribution

Profit - Maximization

Many business strategies

Market price, result of competition

Competition

Many products

Flexible prices, online offers

No Subsidies

Unserved energy if it is economical


*wholesale market deregulation (unregulated prices for large consumers)

*competition at generation level with centralized generation dispatch

*short term marginal cost based schemes


*regulation in transmission and distribution

*transmission open access regulation, base for competition, global allocation of network costs,special pricing given economies of scale

*competition by comparison in distribution (yard stick competition, price cap)


Latinamerican power sectorPower market reformMarket design - generation, transmission, distributionSuccessesProblems and challenges

-diverse generation resources -technological restrictions for electricity storage

- stochastic hydroelectric resources-there are no scale economies

CHARACTERISTICS OF GENERATION

CHARACTERISTICS OF GENERATION

Generation technology ¢US$/kWh

Hydro storage plant 1.87Run of river hydro 2.01Combined cycle gas 2.08Steam coal 3.60Diesel turbine 6.71

Average costs of generation alternativesAverage costs of generation alternatives

NO SCALE ECONOMIES INGENERATION

- COMPETITION AS THE DRIVING FORCE- reduce entry barriers - free entrance to the sector- hydroelectric projects - concession for water use- open access to the transmission system- no obligation to serve (market action)- obligation to coordinate

Price system (Chile, Argentina, Perú, Bolivia)

-spot prices for exchanges at wholesale market (MgC)-regulated prices for small final consumers (proj. MgC)-unregulated prices for large consumers

PRICING MICROECONOMIC PRINCIPLES

Under optimum conditions

Income obtained from selling all energy at theshort term marginal cost , plus income obtainedfrom selling capacity at the development cost ofpeaking units , are equal to the cost of capital plustotal generation operation costs

ELECTRICITY MARKET

Electric products

EnergyCapacity

Reactive powerFrequency regulationSpinning reserveCold reserve

Organizational Framework for Competition

System Structures for Deregulated Markets

Bilateral Model + ISO

ISO

Supplier Customer

Bilateral Model

Transport

Coordination

Pool Model

Pool/ISO: Money

: Power, Energy

: System operator Function

Supplier

Supplier

Supplier

Customer

Customer

Customer

Customer

Supplier

Supplier

Transport

Transport

Transport

Transport

Customer

Poolco model

POOLCOReliabilitySecurityImportsCongestionDispatchMarket priceInvoicingPlanningNetwork control

Ancillary services markets

Distributioncompanies

Marketprices

Unregulatedfinal consumer

Transmision

Marketeers

Transmissiontarifs

Generation

Supply

Demand Sale

Demand

Market agents

Dispatchoperation

Generators

Transmissors

Distribuitors

Largeusers

RegulatorGovernment

Environmentalbodies

Local governments

Smallusers

Antitrust bodies

ARGENTINAWHOLESALE ELECTRICAL MARKET

(MEM)

INDEPENDENT POWERPRODUCERS

NATIONAL GOVERNMENT'S GENERATORS

BINATIONAL GENERATORS

INTERNATIONAL INTERCONNECTIONS

(Exports)

MEM

DISTRIBUTORS

LARGE CONSUMERS

INTERNATIONAL INTERCONNECTIONS

(Imports)

SUPPLY(sellers)

DEMAND(buyers)

TRANSPORTATION

CONTRACTSALES

PRODUCTION

BUY

DEFICITCOMPANY

PRODUCTION

CONTRACTSALES

SELL

SURPLUSCOMPANY

TRANSFERS AMONG GENERATORS



Economies of interconnected systemsBase for competitionNeed to remunerate large investmentsSignificative economies of scale (lines, transformers)

CHARACTERISTICS OF TRANSMISSION

TRANSMISSIONeconomies of scale

0

20

40

60

80

100

120

110 154 154 154 154 220 220 220 220 220 220 220 220 500 kV

US$/MVA/km

Transmission lines in Chile

significant economies of scale

regulation of tariff

natural monopoly

need for regulation

need for open access = base for competition

LINE OF THINKING

OPEN ACCESS AS CENTRAL CONCEPT

- required concession for transmission systems- open access when available capacity- single transmission company

Two part price scheme(Argentina, Chile, Perú, Bolivia) - marginal loss income - additional toll (peaje)

~

~

~Price

PriceiPricej

EjEi

m

SPATIAL NODAL PRICES

Generation costs, losses, restrictions, non supply cost

~

~

~

Basictoll

Area of influence- toll paid per use of system

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Peak block Single bus Block single bus Block variable bus

Method

Pay

men

ts [%

]

A PC/PD

A A

A G

G G

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Peak block Single bus Block single bus Block variable bus

Method

Pay

men

ts [%

]

A PC/PD

A A

A G

G G

Generators

Consumers



develops in geographical compartmentseconomies of scope and density

duplication of costs with network superpositionlarge number of small users with large elasticity

development of geographic monopolies (franchised monopolies)

need for regulation

opportunities for network standardizationand incentives for cost reduction

CHARACTERISTICS OF DISTRIBUTION

distribution costs

0

2000

4000

6000

8000

10000

12000

14000

Area 1A Area 1S Area 2 Area 3 Area 4

[$/K

W]

CDAT CDBT

Regulatory concepts- monopolistic franchised activity- distribution as public service- concession required to use public and private spaces- only concessionaries distribute (legal monopoly)- obligation to serve (only ones in electricity path)- quality of service regulated

Price system- regulated distribution prices- “pseudo competition” based on benchmark regulation (model company or price cap)

Alternative Pricing Schemes

• COST-OF-SERVICE REGULATION (rate or return or costplus)

– prices track costs– no profit incentives for efficient cost reduction

• INCENTIVE or BENCHMARK REGULATION*Regulation by efficiency level (price cap; decreasingprices)*Competition by comparison or relative performanceevaluation (yard stick competition)

INCREASING DEREGULATION

“LARGE” DEREGULATED CONSUMERS

CHILE 2000 kWPERU 1000 kWARGENTINA 100 kW

0 kW (2000)



PERU- ELECTRICITY COVERAGE

Ene-9

4

Jun-9

4

Ene-9

5

Jun-9

5

Dic-9

5

Jun-9

6

83% 83%

86%87%

90% 90%

75%

80%

85%

90%39% 42% 46% 50% 54%

0%

20%

40%

60%

1987

1992

1993

1994

1995

National Edelnor- Lima

6,6496,609

8,52110,022

10,62711,277 11,783

12,898

2,980 2,833 2,445 2,347 2,088 1,970 1,998 1,692

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

89 90 91 92 93 94 95 96

N° Employees

Production (GWh)

ENDESA productivity increase:production (GWh) versus number of employees in Chile

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1988 1989 1990 1991 1992 1993 1994

Average time for emergency service

Hrs.

CHILE- PRODUCTIVITY INCREASES AT DISTRIBUTION COMPANY CHILECTRA

19,818,8

16,1

13,6 13,312,0

10,69,3

%

26,0

21,9

19,0

16,2

9,3

17,4

12,5

1987 1988 1989 1990 1991 1992 1993 1994 19950

5

10

15

20

25

30

1987 1988 1989 1990 1991 1992 1993 1994

Chilectra(Santiago)

Edesur(Buenos Aires)

EdelnorEdelnor(Lima)(Lima)

Losses (technical and non technical)

Non served energy January 88 - Dec 95 (GWh) - Argentina

WHOLESALE ARGENTINE MARKETAVERAGE MONTHLY PRICE

0

10

20

30

40

50

60

70

80

jan-

92

apr-

92

Jul-9

2

Oct

-92

jan-

93

apr-

93

Jul-9

3

Oct

-93

jan-

94

apr-

94

Jul-9

4

Oct

-94

jan-

95

apr-

95

Jul-9

5

Oct

-95

jan-

96

$/M

Wh

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

1992 1996

FIRM 1FIRM 2REGULATORRESULT

HIGH VOLTAGE DISTRIBUTION ADDED VALUE

Price evolution in Peru

Investment in the Chilean Central System

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

1.997 1.998 1.999 2.000 2.001 2.002 2.003 2.004 2.005 2.006

YEAR

DE

MA

ND

(M

W)

DEMAND SUPPLY

PANGUE

LOMA ALTASES

PETROPOWERNEHUENCO

PEUCHENMAMPIL

SAN ISIDRORUCUE

CORTADERAL

RALCOTHERM. 332,4

THERM. 332,42 X THERM.

332,4

FOREIGN INVESTMENT:CASE OF ENDESA CHILE

1. Acquisition of 24.01% of the power station Costanera

US$ 46.00 millions 1992 Argentina2. Acquisition of 5,61% of the electric distribution firm EDELSUR

US$ 56.21 millions 1992 Argentina3. Acquisition of 37,29% of the Hydroelectric Chocón

US$ 165.30 millions 1993 Argentina4. Investment in the power station Buenos Aires owned by Costanera

US$ 91.00 millions 1995 Argentina5. Acquisition of 25,8% of the electric generation firm EDEGEL

US$ 204.50 millions 1995 Perú6. Acquisition of 74,75% of Hydroelectric Betania

US$ 301.00 millions 1996 Colombia

Inv e stm e nt a bro a d

0

50000

100000

150000

200000

E M E L SA C H IL GE N E R E N D E SA C H IL Q U IN T A

Inves

tmen

t in M

M$

1996

1997

ENERGY GENERATION OF ENDESA(Millions of kWh)

0

5000

10000

15000

20000

25000

30000

1992 1993 1994 1995 1996

ColombiaPerúArgentinaChile

(*): Include “filiales” and “coligadas” that Endesa operates.

47%47%

0%

5%

10%

15%

20%

25%

30%

35%

1992 1993 1994 1995

Endesa Chilgener Chilquinta Chilectra

Rate of Return (Profits/Capital Stock)

CHILE

ARGENTINA

BOLIVIA

BRAZIL

URUGUAY

PARAGUAY

MERCOSUR market12 million km2

200 million people

Economic integration in South Americaleading to energy integration

-natural gas exchanges-electricity exchanges

FutureGasoductNetwork

inSouth America

Revista CIER, año V, Nº17, setiembre 1996

Electricity

Natural Gas

CHILEAN - ARGENTINEAN EXAMPLES

Natural Gas

The Gasoducts

War1994-97

The GasoductElectric

War1996-99

CHILE ARGENTINA



Generation-pool governance problems-spot price calculations-capacity price calculation-reliability control-market power

Problems and Failures

Transmission-problems with allocation of open access payments-lack of expansion signals-congestion

Distribution-conflicts with tariff calculations-quality of service-penalties for not complying

Worldwide Deregulation Processes

1992

1994

1993

1991

1991

1999

>1992

1987

1996

1995

1994

1994

1995

1995

EU

19951989

1996

1995

1998

1982

existing deregulated market structuresrestructuring process with dere-gulated market conditionsrestructuring approacheswith open market conditions

1999

Hugh RudnickProfessor

Department of Electrical EngineeringPontificia Universidad Católica de Chile

Santiago, Chile

Email [email protected]://www.ing.puc.cl/power/

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