by Hugh Rudnick, Alejandro Arnau, Sebastian Mocarquer, and Efrain Voscoboinik

18 Pages·2007·0.84 MB·English

by Hugh Rudnick,
Alejandro Arnau,
Sebastian Mocarquer,
and Efrain Voscoboinik
50 IEEEpower & energy magazine 1540-7977/07/$25.00©2007 IEEE july/august 2007
E
ELECTRICITY DISTRIBUTION COMPANIES, BEING NETWORK INDUSTRIES, AIM
to transport and distribute electric power from specific points in high- or medium-voltage lines
to end consumers at appropriate voltage levels for industrial and residential use. This activity is
organized in public service utilities that obtain power supply through contracts with generators.
During the last two decades,many countries and geographical areas of the world have made
drastic transformations in their electrical sectors,both in terms of segmentation and privatization
of state monopolies. Because of these transformations, a major change in the role of the state
has been witnessed. The state has transformed itself from a producer and enterprise-owner agent
into an agent that regulates those stages of the electrical sector that become natural monopolies,
such as electricity distribution. The challenge is to stimulate an efficient service in distribution,
similar to that which would be achieved in a competitive environment.
The characteristics of the distribution activity vary from region to region, depending on the
nature of the demand. In Latin America,the main challenge in distribution is one of large growths
of demand,values around 6% to 8% being common in the region,requiring doubling of capacity
every ten years. This,coupled in some countries to the need to extend networks to increase elec-
trification levels, imposes significant challenges to distribution network expansion, different to
those faced in North Amer-
ica and Europe. Thus, the
need to stimulate efficiency Incentive Price Regulation
becomes of paramount
importance, particularly at Stimulates Efficiency in
the time of privatization of
the previously state-owned Electricity Distribution
companies.
To regulate electrical in Latin America
distribution and stimu-
late efficiency, most
Latin-American
countries that
have started this
transformation have adopted an incentive regulation approach, using the concept of
efficient companies that are adapted to demand and that operate under optimal invest-
ment and operations plans. Under this scheme,to force companies to be efficient,the regu-
lator fixes prices according to efficient costs, not necessarily considering actual companies.
The actual company will get a normal profitability only if it is capable of emulating the effi-
cient performance, reducing its operating and investment expenditure, thus minimizing the
©CARTESIA& STOCKBYTE
present value of its costs. In general,this regulation has implied a reduction trend in distribu-
tion tariffs.
This article assesses the 20-year experience in Latin America in applying incentive price reg-
ulation to its distribution companies.
Distribution in Latin America
The development and typology of distribution networks in Latin America was conditioned by
the historical context in which they were built. In particular,the strategy and technology used to
develop the networks is related to the origin of the concessionaire who started the distribution
july/august 2007 IEEEpower & energy magazine 51
In Latin America, because of consumption and development levels
there is a greater development of low-voltage networks compared to
Europe and the United States.
service,which could be either North American or European. and they are allowed to operate as a natural monopoly.
Countries such as Colombia and Brazil, among others, were Under monopolistic conditions,consumers have no possi-
directly influenced by the United States on account of their bilities to choose,and that makes it necessary to regulate the
commercial relationships with this country at the beginning service in order to prevent unreasonable practices (poor qual-
of the century. Their electric power distribution networks ity,low coverage,high prices). For that purpose,the regulator
show the U.S. topology and distribution, characterized by a establishes the rights and obligations of distribution compa-
medium-voltage network, small transformation centers close nies, assigning concession zones to install, operate, and
to the final user, and a small low-voltage network. On the exploit public service distribution networks. Likewise, the
other hand, countries such as Argentina, Peru, Uruguay, and regulator establishes price levels and creates incentives that
Chile were influenced by Germany, France, and England, allow management improvement since there is no market
and,therefore,their networks are of the European type,with competition to promote them.
transformers with greater capacity and low-voltage three- In this manner, the primary goal of any regulatory
phase distribution networks. scheme is to provide the appropriate incentives to companies
Optimum economic performance in 60-Hz-frequencies is to force them to be efficient and through adequate price sig-
found in low-power transformers. This has allowed for the nals to make them to be able to transfer, in the long term,
development of networks of the U.S. type; i.e.,distribution in part of their benefits to the users given their efficient invest-
medium voltage with small transformers near the customer. ment and operating policies. These incentives will be avail-
For 50 Hz,optimum performance is produced in transformers able for the companies only if the regulator can show a
with greater power,which justifies the use of European-type certain level of commitment and stability. This commitment
networks. and stability results from ensuring the regulator follows cer-
In Latin America, because of consumption and develop- tain general principles on transparency, efficiency, stability,
ment levels in general,there is a greater development of low- and straightforwardness.
voltage networks compared to Europe and the United States. Based on these principles, the regulation of natural
For similar reasons,the percentage of underground networks monopolies is made through different approaches.
is also lower compared to the abovementioned countries. In
fact, the development of underground networks is more Challenges of Distribution Regulation
related to the compliance with city-planning regulations Regarding costs associated with the activity that is intended
(e.g., to preserve the cultural heritage) than to the electric to be remunerated, they are associated to the network
service regulation. exploitation, maintenance, and expansion components. They
can be grouped into the items indicated in Figure 1, within
Distribution Activity what is named the value-added distribution. Each one of
The distribution activity is characterized by the constant invest- these costs is indistinctly affected by climatic, geographical,
ments needed to render good services and to achieve the vari- and demographic factors that are external to the companies.
ous scale economies that can be attained by companies when This reveals that tariff regulation is a very complex and
developing their facilities and their management and operation. demanding process,considering:
Although economies of scale add up to efficiency, they also ✔ the need to adequately identify and value the different
make the revenues generated through a marginal cost tariff not components
to be enough to cover these companies’total costs. Likewise, ✔ the need to fairly and transparently weight the influ-
the strong interdependence of investments and the long capital- ence of factors such as network type (rural or urban),
recovery period give origin to a costs function that is clearly overhead or underground lines,and the type and densi-
under-additive for the relevant demand range. This makes one ty of consumption present in the company’s activity
conclude that it is more socially efficient to have a single com- ✔ the convenience of emitting signals to encourage the
pany instead of several companies operating in a same geo- adoption of more efficient behaviors by the companies
graphical area. In this manner, and as it is a matter of performing in the concession areas.
guaranteeing maximum coverage,with the highest quality and These challenges have been treated differently in regula-
least price possible,single distribution companies are justified tions,with some using rate of return and price cap methods,
52 IEEEpower & energy magazine july/august 2007
The tariff scheme in itself is an incentive for efficiency,
since it acknowledges the efficiency values the distributor
should operate with ex-ante the rendering of the service.
while others adopted a benchmark scheme,using the concept tariff is the sum of the VAD (distribution added value, in its
of direct comparison with an efficient company. All methods Spanish acronym for Valor Agregado de Distribución) and a
serve the same final objective, but the context in which they quasi-perfect pass-through of the purchase cost of energy and
were created was different, making them more suitable than power in the wholesale electricity market.
others depending on the general environment of the country. The tariff scheme in itself is an incentive for efficiency,
Many regulatory schemes use comparison procedures or since it acknowledges the efficiency values the distributor
benchmarking as a methodology. In incentive regulation,effi- should operate with ex-ante the rendering of the service. The
ciency is measured against a previous benchmark and the distributor will obtain the expected profitability for its
results deliver the information required to compare the com- investors only if it adjusts its costs to the acknowledged val-
panies’operation and allow the identification of the actions ues. The system transfers risk decisions to the provider since
required to drive efficiency improvements. mistakes in deciding investments, expenses, indebtedness
strategies, or technological adjustments will be ultimately
Different Regulatory Models paid by the investor,who will receive less profits for the capi-
There have been different regulatory models used in Latin tal invested in the activity.
America in applying incentive price regulation to its distribu- With reference to the use of resources,it is a model based
tion companies. Table 1summarizes different approaches that on economic signals,where decisions are taken by agents; by
are briefly described afterwards for sample countries. means of their tariffs, distributors inform consumers on the
efficiency cost of each consumption alternative and they, in
Argentina their capacity as demand makers,decide on the use and allo-
The revenue-cap and price-cap tariff scheme in Argentina is cation of resources.
based on enough revenues to render an efficient service,and Large users freely agree on the price of their contracts
it determines the tariff value for each supply category. The with generators or brokers. Regarding the use of networks,if
Distribution Value Added
Fixed Costs Investment Costs, Operation and Maintenance Distribution Losses
Capital Operational Technical Other
• Meter Reading Costs Costs Losses Losses
• Billing
• Distribution of Bills
• Accounting Related to • Storage
Client • Workshops
• Bill Follow Up HV LV • Labs and Tools
• Client Relation High Voltage Low Voltage • Operational Engineering
• Other Fixed Costs • Feeders • Distribution • Transport
Related to Client • Control Substations • Security
Equipment • Low Voltage • Rent, Insurance
• Protection Networks • Network Maintenance and
Equipment • Protection Operation
Equipment • Patents and Property Taxes
figure 1.Cost components of the distribution activity.
july/august 2007 IEEEpower & energy magazine 53
Peru Natural monopoly. Yardstickcompetition with cap in tariffstructure. Free access. Area exclusivity. Final con-cessions without time limita-tions. They terminate byexpiration or waiver. Disput-ability in expansion areas issolved by means of auctions. Disputable regarding theunregulated user market(consumptions above 1 MW). Obligation to render service withinthe concession area and up to100 m of the electric powerline, to whoever requests it.There are refundablecontributions to new suppliesand expansions. There is no concept of broker. Thetrading market has notdeveloped. No subsidies are expected forexpansion. There are refundablecontributions from public andprivate institutions forelectrification in favor of users.There is a Rural ElectrificationAct, which has not beenregulated yet. It is calculated by means of theVNR of the network economi-cally adapted to demand inorder to render the service atminimum cost. Capital base isreviewed every four years.
Latin America. Columbia Price cap. Free access. There are no concessions orfranchises. There is noexclusivity. There may beparallel networks in the samearea. There are no explicit barriersbut the user must pay for themetering costs. The distributor is not obliged tomake expansions if they arenot profitable; that is, it isonly obliged if the expansionis remunerated by the tariff. The concept of broker exists. The government guarantees theimplementation of projectsconsidered in the investmentplan that are not profitablefor investors. These projectsare financed by the RuralElectrification Support Fund. VNR according to the electricand nonelectric assetinventory. Nonelectric assetsare limited to 4.1% of theVNR annuity.
n
ry models for distribution i Chile Natural monopoly. Yardstickcompetition with cap intariff structure. Free access. Area exclusivity. Finalconcessions without timelimitations. Disputable regarding theunregulated user market forconsumptions above 2 MW.Consumptions of clientsbetween 0.5 and 2 MW candecide between theregulated tariff orunregulated market. Obligation to render servicewithin the concession areato whoever requests it. Thereare refundable contributionsto new supplies andexpansions. There is no legal concept ofbroker. The trading market istaken by generators. No subsidies are expected forexpansion. There are ruralelectrification governmentprograms. It is calculated by means of theVNR of the networkeconomically adapted todemand in order to renderthe service at minimum cost.Capital base is reviewedevery four years.
o
1.Different incentive regulat Bolivia Natural monopoly. Price capwith prefixed tariff structure.Free access. There is no disputability in thedistribution market. Contractsare awarded on anexclusivity basis for a 40-yearperiod. Disputable regarding theunregulated user market(consumptions above 1 MW). There is no separationof the metering and reading ofthe service. Unregulated usersmust adapt their meteringconditions. Obligation to render service toregulated users within theconcession and supply area. The concept of broker does notexist. The executive power, by means ofthe National Fund for RegionalDevelopment, allocates internaland external financingresources. No refundablecontributions are contemplated.Users are responsible for theexpansions they cause. Assets designated to theconcession, equal to the valueof the fixed net asset plus thenet labor capital, less the valueof long-term liabilitiesassociated to fixed assets. It isfixed every four years.
table Argentina Natural monopoly. Price cap withprefixed tariff structure. Freeaccess. Concessions (between 35 and 99years) with area exclusivitythat can be eliminated bytechnological innovation.Competition for the marketevery 15 years. Disputable regarding theunregulated user market(consumptions above 30 kW).Increase in disputability due todecrease in requirements tobecome an unregulated user.There is no separation of themetering and reading of theservice, except for users over 1MW (real-time metering). Full obligation to place networksat the disposal of all demandwithin the concession andsupply areas for regulated users.Network expansion iscontemplated unto a certaindistance, as well as expansionwith refundable contributionsto users when this distance isexceeded. Existence of the concept ofbroker, independent of distribu-tion and without the capacityto serve captive users. There arebrokers operating with littlevolume at the moment. There are funds for rural orunprofitable electrification. It is not regulated but is discussedfor each case. In distributionthere is a tendency to use theVNR of efficient facilities.There is some discussion overthis. Review every five years.
k
or
Type of Regulation Disputability of the NetwMarket Disputabilityof theTradingMarket SuppyObligation Existence ofthe LegalConcept ofBroker Subsidies forExpansion Capital Baseand CapitalReturn
54 IEEEpower & energy magazine july/august 2007
12% over capital base.Profitability of the group ofconcessionaires should bebetween 8% and 16%. Evaluation by VNR. Assetscorresponding to a networktechnically and economicallyadapted to demand will beacknowledged. The regulatorwill fix typical areas andcalculate their VAD. Studies arecarried out for each typical areaand they correspond to modelcompanies. Standard O&M, A&G, andcommercialization costs willbe acknowledged as well as apercentage of technical andnontechnical losses. They are determined every fouryears and correspond to modelcompanies for each typicalarea. The VAD incorporates anacknowledged level oftechnical and nontechnicallosses. Every four years, valuesare adjusted according totechnological advances and tomanagement results in theprevious tariff period. They arethe government's politicaldecision. Fixing anacknowledged level works asan incentive to reduce them. Tariffs are applied in localcurrency and are adjusted byvariations in consumerinflation indexes, export duty,exchange rate, salaries, andprice of copper. Through auctions up to 25% ofpeak demand; the rest must beguaranteed by contracts withgeneration companies.Imbalances are negotiated onthe spot market. (continued)
14.06% over the replacementvalue of the assets for levelIV and 16.06% for levels I, II,and III. Evaluation by VNR or CIP (butonly in LV and when themarginal cost exceeds theaverage cost). O&M and A&G costs and apercentage of losses byvoltage level will beacknowledged. They are determined as apercentage of thereplacement value of electricassets: 2% for levels III andIV, 4% for level II, and forlevel I there is a costingprocess per activity. For each voltage level there isan acknowledged percentagefor nontechnical losses. Forlevel I it was 1.68% in 2003and 0.67% in 2007. Tariffs are applied in localcurrency and are adjusted byvariations in inflationindexes, exchange rate. At first there was the obligation tocontract at 80%, which grad-ually decreased. Currently,there is a contracting proce-dure for the regulated market.
every four years. 10% over capital base.Profitability of the industry as awhole should be between 6%and 14%. Evaluation by VNR. Assetscorresponding to a networktechnically and economicallyadapted to demand will beacknowledged. The regulatorwill define typical areas andcalculate their VAD. Studies arecarried out for each typical areaand they correspond to modelcompanies. Standard operation, maintenance,administrative, andcommercialization costs willbe acknowledged as well as apercentage of technical andnontechnical losses. They are determined every four years and correspond tomodel companies for eachtypical area. The VAD determination processincorporates the level oftechnical and nontechnicallosses. Tariffs are applied in localcurrency and are adjusted byvariations in: local consumerinflation index, importedgoods index, and industrialprice index. Distributors are required tomaintain three years ofcontracts at all times. Recentchanges in wholesale marketsintroduced auctions forregulated consumptions.
fixed every four years. Determination of capital cost bybenchmarking. It isdetermined on the basis of theaverage return rate of the last 3years in American utilities. Studies ordered by the companyto specialized consultants,pre-qualified by the regulator,who will prepare the terms ofreference and will receive thestudies. Investment plans areanalyzed on a case-by-casebasis. Consumers costs, taxes, operationcosts, maintenance costs,administration and generalcosts, financial costs, and othercosts related to supply. Case by case, considering theexpected growth of demand,expansion plans, andoperation indicators, and thatof unit costs defined for afour-year period. A technical loss coefficient isacknowledged, inaccordance with theconcession area and networkcharacteristics. It is usually<10%. In addition, a lossreduction factor is applied bymeans of a monthlyefficiency factor. Different X factors for each typeof costs: losses, O&M, A&G,commercial. Cap prices areadjusted by variations inconsumer inflation indexes,tariff rates, exchange rate. They must have valid contractswith generation companiesguaranteeing to cover 80% oftheir peak demand for aminimum three-year period.There are no incentives tocontract due to the acknow-ledged transfer price scheme.
Not expressly defined.Reasonable capital cost. Thereis a tendency to useWACC/CAPM. Evaluation of each case bymeans of studies by theregulator and the company.VNR or average incrementalcost (CIP) methods are used.Acknowledged investmentsare those resulting fromspecific studies. They are notreviewed ex post. O&M, A&G, and trading costs(no margin for purchase in theWEM), nontransferable taxes,and technical andnontechnical losses areefficiently acknowledgeddepending on the case. Not expressly defined. In general,it is considered in abenchmarking as a percentageof investment or in a certainmodel company. They are reviewed in every tariffreview, and those that remainconstant during the tariff periodare acknowledged. Anacknowledged loss coefficient,also working as an incentive toreduce them, is allocated. Insome cases, nontechnical lossesare acknowledged. Agreementwith the government to treatrobbery. They are valued attransfer price. Remuneration is calculated indollars. It is adjusted byweighted American CPI/PPIAverage. There is no current Xfactor. It is not mandatory although thesupplier's responsibility isultimately the contractingsignal.
Return RateOver Capital Evaluation ofCapital Costs AcknowledgedOperationCosts Evauation ofOperationCosts Treatment ofLosses IntrareviewPeriod VADAdjustment Obligation toContract inthe WholesaleMarket
july/august 2007 IEEEpower & energy magazine 55
Peru Node prices are acknowledged.They result from a 48-monthprojection and must be +/-10% of the average price ofenergy agreed with unregu-lated users. Otherwise, theyare adjusted.Tariff options in LV and MVrestricted to meteringconditions and voltagelevels. There is a tariff chartfor each typical area withineach company. Prepaymentis a tariff option.As a rule, they do not exist. In general, it is neutral. Regulated tolls for free users. Concessionaires are obliged toguarantee the quality fixedunder contract. There is atechnical regulation(subsequent to the law andthe concession contracts) tocontrol product, service,commercial, and publiclighting quality. Compensations to users on thebasis of NSE and thedifference between rationingcost and tariff. Every 4 years.
merica (continued). Columbia According to distributor'saverage purchases [bothforward (transparence andfree competition) and spot]and to the average price inthe Colombian market. Postage-stamp tariffs by voltagelevel. Tariffs affected by factordestined to subsidize low-income consumers.Maximum 20% cost forservice rendering.Not entirely neutral. May createlosses or premiums. Regulated tolls for all users (freeand captive). Quality regulations were issuedsubsequent to tariff sanctionto control product and servicequality. There are compensa-tions for users, and qualitygoals are currently beingreviewed. NSE resulting from themeasured indexes isappraised. Every four years.
A
els for distribution in Latin Chile Node prices are acknowledged.They result fromcombination of a 48-monthprojection and auctions forregulated consumptions. Tariff options in LV and MVrestricted to meteringconditions and voltagelevels. There is a tariff chartfor each typical area withineach company. As a rule, they do not exist. Neutral. Tolls are calculated so theyproduce neutrality indistributor's remunerationand are set by regulator. Concessionaires are obliged toguarantee quality andreliability determined inbylaws, which is supervised byElectricity Superintendence Penalties can be imposed byElectricity Superintendenceand consumers compensatedif quality and reliabilitymeasured indexes do notmeet standards required. Every four years.
d
o
ent incentive regulatory m Bolivia It is based on the differentenergy and power prices inthe node allocated to eachdistributor, with a projectionof demand for the following48 months. Prefixed tariffs (no tariff options)by maximum demand andvoltage and usage levels(only in LV). There are tariffsfor usage in small demandsand irrigation. The regulation scheme does notshow crossed subsidies. But,in fact, there are some incertain cases. According to the regulation, itis neutral although there areactually cases where it is not. There is a mechanism todetermine the toll. It isadjusted by indexation tomaintain remuneration inreal terms. Product, service, andcommercial quality arecontrolled. Four stages ofincreasing requirements. Penalties on the basis of NSEaccording to the indicatorsin each stage and type. Themaximum remunerationreduction must be 10% ofthe annual turnover. Every four years.
r
e
table 1.Diff Argentina The seasonal market price isacknowledged, this is aquarterly projection, it is amarket with a stabilizationfund that minimizes volatility.It is adjusted quarterly. Prefixed tariffs (no tariffoptions) by voltage andusage level (only in LV).Adequate price signals. As a rule, they do not exist.There have been, however,gradual eliminationmechanisms. As a rule, it should be neutralbut deficiencies in the tariffparameters do not generatethe desired neutrality. There are regulated caps. Ingeneral, they produceneutrality in the distributor'sremuneration. There is aterritorial jurisdiction conflict. Stages, each with greaterrequirements. Product,service, and commercialquality are controlled. Nonsupplied energy (NSE)resulting from the measuredindexes is valued. Every five years.
AcknowledgedTransferPrices Type of TariffStructure Existance ofCrossedSubsidies Neutrality in theTransfer ofSupply Costs Tolls forUnregulatedUsers Ttype of Control Penalty Scheme Tariff Period
56 IEEEpower & energy magazine july/august 2007
In Chile, the regulated distribution price corresponds
to the mean added value of the activity determined
from model firms operating in the country.
they do not agree with the transporter or distributor,a regu- reduction indexes.”X factors for energy and demand losses
lated tariff is applied,which must coincide with the VAD. are calculated independently. Changes in the efficiency to
Another issue,of a circumstantial nature and exogenous to manage other supplies different from capital are reflected
electric power regulation,is that originated by the passing of in calculation formulas through X factors called “cost
the Emergency Act (Law No. 25561) dated 9 January 2002, reduction indexes.” Factors for distribution, consumption,
which abandoned the convertibility system in force in the and administrative and general expenses (A&G) are calcu-
country since 1991 and unilaterally decided to implement a lated independently.
substantial modification of certain basic conditions in conces- The RPT establishes that tariff bases must be calculated
sion contracts. All these measures have had a negative impact by using the projected average cost of the service during the
on the electric power industry in general and on the compa- four years of the planning study. These cost projections must
nies’profitability. be approved by the Superintendence through resolutions.
For cost projections for the four-year period,the Superin-
Bolivia tendence will establish a set of indicators relating costs to
Under the local regulations, maximum distribution prices are other parameters such as:asset value,number of clients,ener-
fixed according to the average distribution cost and,taking into gy sales,length of lines,etc. Such indicators will mark levels
account operation and unit-cost indicators,the evolution of the of efficiency that include the analysis of the fulfillment of the
assets designated for concession, taxes, and enhancements in indicators in the previous period,and which cannot be lower
the distribution company’s efficiency. Base tariffs are deter- than those resulting from the actual operation of the company
mined by considering average values representing supply costs in such period.
for a period of four years and a profit margin on equity defined
by law. Intratariff period indexation formulas basically reflect Chile
the retail inflation indicator and the efficiency indicators. In Chile, distribution networks are those whose voltage is
Regulation is completed with a series of resolutions by the under 23 kV.
regulator, which establishes methodological guidelines to The regulated distribution price corresponds to the mean
define detailed review parameters. It is important to mention added value by this activity determined from model firms
that when Bolivia’s regulation fixes the capital cost rate in operating in the country. The final price paid by a regulated
tariff reviews,it makes a difference between an owner’s capi- consumer integrates the regulated generation-transmission
tal (equity) and a third-party’s capital,with regulatory differ- price,with which the generators supply the distributing firms
ences in the manner of estimating each rate. and an added value for the distribution service.
The Superintendence of Electricity of the Government of The regulation mechanism determines its distribution tar-
Bolivia has a regulatory system for electric power distributors iffs from the optimization of a real firm that serves as a refer-
that requires statistical cost analysis. The system is detailed in ence for the construction of a model firm, and such model
the price and tariff rules (RPT). firm is benchmarked with all the distribution concessionaire
Under the RPT,distributors must operate under price con- firms. Thus, this scheme corresponds to an incentive tariffs
trol schemes lasting four years. Four different types of refer- model of the yardstick competition type, where the relative
ence tariffs must be fixed: peak demand, off-peak demand, performance of the industry is assessed,assuring in theory a
energy, and customer services. These tariffs may vary with specific minimum return to those firms that have a perform-
high-,medium- and low-power consumers. The off-peak con- ance similar to the model firm.
sumption tariff covers the cost of electric power distribution A core element to determine distribution tariffs is the
and general and administrative costs. dimensioning of the model firm. In the international applica-
Maximum reference prices depend on base tariffs that are tion of the yardstick competition mechanism, the regulation
adjusted monthly by means of indexes. Indexation formulas of monopolistic activities is determined through the compari-
attempt to reflect variations in the price of supplies and in son of costs and performance of similar firms or mirror firms
operative efficiency. The impact of inflation is measured by or the reduced comparison of heterogeneous firms corrected
the consumer price index. for differences. In the Chilean distribution monopoly regula-
Efficiencies in electric power loss control are reflected tion model,there is a hybrid benchmarking scheme between
in calculation formulas through “X factors” called “loss different firms. On one hand, groups of firms of similar
july/august 2007 IEEEpower & energy magazine 57
In Columbia, efficient management focuses on investment
management, administrative costs, operation
and maintenance, and losses.
characteristics are compared,identified through typical areas, The components indicated are calculated for a specific
with a model firm. Then, the performance of heterogeneous number of typical distribution areas defined by the National
firms is compared in an integrated manner,with an assessment Energy Commission, with a previous consultation with the
of the global adequacy of the industry with a single standard. firms. The process to determine the VNR has the objective of
In the former case and through a theoretical model and calculating the “cost to renew all the works, facilities, and
through direct comparison, efforts are made to provide the physical goods dedicated to provide the distribution service in
efficiency signal of similar firms and in the latter case efforts the respective concessions.”The concept of VNR used by the
are made to produce a horizontal comparison that fits the theo- Chilean legislation to be applied to distribution activities has
retical model with the average reality of heterogeneous firms. been a hybrid between the substitution and replacements costs.
The electric legislation determines the distribution tariffs The law requires that when the model company is to be
based on the VAD value that is based in a model firm and that calculated,two independent studies must be done,one by the
considers the three main components that form part of the distribution company and a second one done by the National
distribution business cost:infrastructure and equipment costs, Energy Commission. The results of these two studies must be
energy and power losses, and operating expenses such as averaged considering a weight of two thirds for the govern-
administration, operation, and maintenance expenses. The ment and one third for the distribution company. Tariffs are
law groups them as follows: then cross checked so that the industry as a whole has prof-
✔ fixed costs for administration,invoicing,and user serv- itability between 6–14%.
ice expenses,independent from their consumption
✔ mean distribution losses in power and energy Colombia
✔ standard investment,maintenance,and operating costs In Colombia,distribution networks are those whose voltage is
associated to the distribution by unit of power sup- under 220 kV. There are no concessions or franchises. Distri-
plied. The annual investment costs will be calculated bution only includes the transmission of energy through the
considering the new replacement value (VNR, the network. Electric power distribution in Colombia is separated
Spanish acronym for Valor Nuevo de Reemplazo), the from the sale and purchase of energy, which are part of
facilities adapted to the demand, and a discount rate another activity (trading) together with metering, reading,
equal to a real 10% per year. billing, and collecting. Therefore, distribution is limited by
regulation to the “network business,”
whose remuneration is determined by the
Evolution of Annual Index of Energy Losses so-called “usage charges.” These “usage
charges”of the local or regional distribu-
30%
tion system are the regulated retribution
that the distribution companies receive to
25%
run their business. They consist of the
annual revenues for efficient operation,
%) 20%
x ( following the theoretical criterion of
de remuneration of the distribution activity
n 15%
s I presented above.
e
s Trading is a different business and is
os 10%
L open to free competition. There is com-
petition in the distribution business. Since
5%
there are no concessions or franchises,
there can be more than one distributor in
0%
1992 1993 1994 1995 1996 1997 1998 1999 each area (parallel networks). The dis-
Year tributor has no obligation to expand, but
it must grant free access to its networks
figure 2.Evolution of Edesur’s losses. in case it has surplus capacity. If the
58 IEEEpower & energy magazine july/august 2007
Greater fairness in efficiency sharing is an objective that,
although partially achieved, should be revised, in order to allow
a larger transfer of benefits of the scheme to end users.
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E E E E E E E E E E E E E
d d d d d d d d d d d d d
o o o o o o o o o o o o o
Peri Peri Peri Peri Peri Peri Peri Peri Peri Peri Peri Peri Peri
h h h h h h h h h h h h h
nt nt nt nt nt nt nt nt nt nt nt nt nt
o o o o o o o o o o o o o
M M M M M M M M M M M M M
Six- Six- Six- Six- Six- Six- Six- Six- Six- Six- Six- Six- Six-
° ° ° ° ° ° ° ° ° ° ° ° °
1 2 3 4 5 6 1 2 3 4 5 6 7
Internal Total
figure 3.Evolution of quality of service indicators.
july/august 2007 IEEEpower & energy magazine 59