Transcript Sustainability of the Electric Sector Reforms in Latin American

Sustainability of the Electric
Sector Reforms in Latin
American
Document Base for IPES 2001
on Competitivity
Jaime Millan, Eduardo Lora and
Alejandro Micco
May 1, 2001
Presentation
•
•
•
•
Reform objectives and motivations
Accomplishments & concerns
Our thesis
Technical & institutional constraints to
power sector reform
• Main issues
2
Motivation- The Statist Model Ran Out of
Gas
• SOE poor performance led to huge financial
deficits in the sector during the eighties:
– Lack of incentives for efficiency
– Rent seeking politicians and interest groups
• Putting a tremendous burden to government
finances:
– large transfers from central budgets exacerbated fiscal
crisis
• Putting system expansion into jeopardy and thus
compromising the region competitiveness
– High cost, low quality for a crucial input
3
Reform Objectives and Elements
• Liberate governments from a cumbersome fiscal burden,
while at the same time attaining economic efficiency goals
under the constraints imposed by equity and environmental
considerations.
• According to the new paradigm these goals could be
achieved by
– attracting private sector investors, mainly foreign
– enlisting market forces to attain efficiency in the competitive
segments of the market, thus minimizing regulatory burden
– establishing a new regulatory framework and regulatory
institutions that foster competition, attain efficiency in the
monopoly segments and protect the consumer
– using non-distortion, well targeted instruments to address social
considerations
4
Reform has produced substantial
benefits
• Private sector has taken the investment
burden while the lights are still on.
• Substantial improvements in efficiency
• Many sectors have profited from lower
prices and higher quality
– Large industrial and commercial consumers
• State coffers drain has been reversed
5
Latin America is world leader in
private investment in electricity
Private investment 1990-99
Chile
Argentina
Brasil
Panama
Colombia
Trinidad y Tobago
El Salvador
Republica Dominicana
Jamaica
Perú
Bolivia
Costa Rica
Guatemala
Nicaragua
Honduras
Venezuela
México
Ecuador
Desinversión
Nueva inversión
Operación y
manejo privado
con inversión
mayoritaria
privada
0
Fuente: PPI Project Database, Banco Mundial
50
100
150
200
250
Dólares per cápita
300
350
400 6
450
ELECTRICITY LOSSES
Public Utility vs. Private Utility
30
30
25
20
1971
14
1989
1972
1 5 .5
1990
14
1973
16
1991
1 3 .3
1974
1 4 .4
1992
1 2 .6
25
1975
1 5 .5
1993
12
21
1976
1 4 .2
1994
10
18
16
1977
15
1995
10
15
13
1978
1 5 .2
17
1996
10
1 5 .5
12
1979
1 9 .2
1 5 .5
1 9 .4
1997E
10
14
11
25
1980
21
16
2 1 .5
1998E
9
1 2 .8
11
2 2 .5
1981
1 8 .5
1 5 .5
2 1 .5
1999E
9
1 1 .9
10
20
1982
1 9 .9
15
20
2000E
9
11
10
18
1983
2 2 .3
14
1 8 .5
1984
2 5 .7
14
18
24
1985
2 4 .5
1 3 .2
1 7 .5
1 02 3
1986
25
17
21
1987
2 5 .7
16
19
25
1 5 .5
16
21
1989
51 5
18
1990
1 3 .4
25
20
15
10
1988
5
19
71
19
73
1 9 9 15
97
1 919 2
19
A C TU A L
1985 F O RE CA S T
77
19
79
19
81
19
83
19
1980 F O RE CA S T
1987 F O RE CA S T
85
19
87
19
89
19
91
1981 F O RE CA S T
15
8
19
16
16
9
9
19
0
1
1 949.9
1
19
92
19
93
1 3 .9
19
94
19
95
19
96
9
19
7E
9
19
8E
9
19
9E
0
20
C H IL E C TR A (C h ile )
E D E S U R (A rg e n t in a )
E D E L N O R (P e ru )
C E R J (B ra z il)
0E
7
2 7 .5
In spite of these successes there are
reasons for concern
• Limited number of players are a threat to
competition
• Prices remain high in some countries
• Coverage remains low and subsidies are not
transparent
• SOEs role still is important in many countries
• Reform fatigue start to show in many countries
• Good regulation remains an elusive concept
8
Our Thesis
• While keeping prices low in the short-term is
important the sustainability of reforms is the
crucial element in assuring the region’s
competitiveness
• Reforms are still work in progress. While major
achievements have been accomplished and the
reformed sector is certainly an improvement over
the Ancient Regime, important issues arising from
the lack of institutional coherence of the reform
package, and technical constraints threaten its
sustainability
9
Technical Constraints: Why markets for
electricity and oranges are different?
• Markets for electricity are a little different
– Lack of storage and need to balance the network in real time
– inelastic supply and demand
• Competitive segments
– Generation
– Supply
• Monopoly segments (wires)
– Transmission
– Distribution
– System operation
10
Create new institutions and review existing
ones
• New institutions are required to operate the market
• Market Exchanges
• System operators
• Hedging
• And to monitor, review and regulate the conduct of
competitive and monopoly actors
• Regulators
• Market oversight
• The credibility and effectiveness of the governance
structure of these institutions and their incentive structure
depend on their compatibility with the institutional
endowments of the country.
–
–
–
–
–
The rule of Law
The Judiciary
Property rights
Antitrust
Risk management
11
Institutional Constraints...
• The critical role of institutions was seriously
underestimated
– Consultants lacked expertise in institutional issues
– Regulation is a foreign concept in French Law,
therefore the lack of regulatory culture
• Institutional endowment is a limiting factor
– Antitrust institutions are weak or nonexistent
– Property rights are often not clearly defined and control
is not always exercised by the owner
– Unpredictable and prone to capture Judiciary
– Weak financial institutions and lack of hedging
instruments
12
Institutional Constraints...
• Regulatory capacity is also limited
– Regulatory bodies and governance of the pool
lack independence, human and financial
resources, and expertise
– Lack of coherence between regulatory and
oversight functions and the adequacy of the
institutions
– These and other factors, like scarce human
resources in small countries and the asymmetric
relation with the private foreign investors, make
regulators easy to capture
13
Main Issues Confronting
Reforms
• Sequence of reforms and lack of separation
of roles of the State
• The achievement of workable competition
• Regulation of noncompetitive segments
• Too much volatility?
• Fostering private investments
• Architecture of regulatory institutions
14
Political Economy of Reform
• Timing and sequence of reforms allowed interest groups
and residual property rights to entrench, thus forcing a
cohabitation of the new and Ancien Regimes that burdens
the reformed sector and limits its scope.
• In many countries distribution companies were no
privatized until late into the process
– PPAs contracted by SOEs
– Coexistence of SOEs and private companies
• Lack of regulatory culture and public education on the
reform makes difficult to create coalitions of stakeholders
which take ownership with the reform
• Politicians continued to profit because of the ambiguities
of the new regime
15
Competition and ownership in the
LAC power sector
Chile
Private
ES ?
BO
Panama
Argentina
Peru
BR
2003
Guatemala
ES
Mixed
Colombia
BR2000
Jamaica
Guyana
• Becoming private and
competitive: BR, GU,
ES, EC, DR, NI
• Thinking in Reform:
CR, UR, VE, PR
Mexico
• and Mexico?
Venezuela
Monopoly
• Private becoming
competitive: BO, PE,
CH, PN
• Competitive becoming
private: CO
Honduras
Public
• Private and
competitive: AR
Single Buyer
Wholesale
Market
Retail
Competition
16
Political Economy...
• In Guatemala Hydro generation remains in State
hands. It is used as a vehicle for compensating the
impact of onerous take or pay PPAs signed with
private generators before the law was enacted.
– This has allowed the government to postpone a much
needed price increase. The rigidity of this PPAs
severely limits the scope for competition in the spot
market.
• In Colombia, most distribution companies were
not privatized and remained subject to the
incentives and political patronage of the old
regime.
17
Separating the roles of the State has not
been easy
• Fuzzy borders remain between policy making and
regulation.
– Colombia. Struggle about liberalization of natural gas
market
– El Salvador, lack of policy institution
• Independence and competence of regulatory
institutions is an issue in all countries.
– In Guatemala the regulator depends directly from the
ministry of energy.
– In Colombia enforcement and oversight functions are
performed by a highly politicized organization
depending directly from the President.
– The balance required by the necessary trade-offs
between regulatory commitment and flexibility has
been difficult to obtain
18
Questions
• Aside from completing the privatization of all
government assets, what can we do to minimize
rent seeking opportunities for politicians that
profited from the old regime?
19
Workable competition
• Perfect competition is not possible and
some degree of workable competition is the
only competition we may still hope for.
• There is a trade-off between the short-term
needs for regulation and the danger of
foreclosing future opportunities for
competition
20
Market Structure and Competition
• If reforms are to rely on competitive markets these
markets must be structured in a way that will yield
effective competition.
• Most analyst agreed that a full vertical unbundling
and  participants are necessary but not sufficient
conditions for benefits from competition > cost of
regulating vertically integrated monopolies.
21
Some reforms are struggling because these
markets are not reasonably competitive
• Concentration of ownership. In Several countries
sectors were unbundled prior to privatization. However, lack
of structure constraints and mergers and acquisitions have
concentrated
• Inherent limitations in the number of competing
suppliers due to small market sizes and the strategic
behavior of multinationals
• Weak industrial base and small per capita residential
consumption in LAC countries limits the scope of retail
competition
• Transmission Constraints
• Design flaws and lack of adequate surveillance
22
C
o
Vi rp.
v
En end
el i
Su E. SpA
ez ON
Ly A
on G
AE na
Du S C ise
ke or
En p.
En er
g
W des y
ill a S
So iam A
K uth s C
or e o
ea rn .
EP Co
Co .
Sc RW rp
.
ot
tis E A
Ib h P G
er ow
dr e
ol r
a
SA
n
En
ro
Capitalisation (US$ m.)
The world’s largest utilities, 2000
Source : Goldman Sachs
70000
60000
50000
40000
30000
20000
10000
0
23
Questions: Workable Competition in
Small Markets
• Is market concentration inevitable?
– The Global strategies of multinationals
– The difficulties in integrating regional energy markets
in the short-term
• If the markets are not workably competitive then
some sort of regulation is inevitable
– what kind of market power mitigation mechanisms
should be used
• Contracts, Caps, cost based pools
• Regulated of vertically integrated monopoly
– how best could they be enforced in weak institutional
contexts
• Trade-offs
24
Regulated segments
• Distribution and supply remain bundled in
all countries
• Transmission: a critical element for the
market
• The difficulties of regulating distribution
– Price caps
– Cost of service
– efficiency standard
25
Too much volatility?
• Price response vs volatility
• Volatility sources
– supply & demand fluctuations
– market design flaws
– market power
• Cures
– Hedging and long term contracts
– increase demand response
– Market intervention
• Is there any way to bring the demand side into
the equation?
26
Fostering private investments
• Reducing Investment costs
• Securing favorable prices
• Ameliorating risks
• What are the best options for providing assurance
to private investors without jeopardizing
competition?
27
Architecture of regulatory
institutions
• Capture by the State or Capture of the State
– How binding is the lack of complementary institutions
to the implementation of the model as initially
conceived?
– What can we do avoid the dilemma?
• How much flexibility
– Can we devise transition strategies that don’t foreclose
the adoption of future measures toward the attainment
of a competitive and well regulated market?
• Multitask - Multi-agency problems
• Choosing the Regulator
28
Sustainability of the Electric
Sector Reforms in Latin
American
Document Base for IPES 2001
on Competitivity
Jaime Millan, Eduardo Lora and
Alejandro Micco
May 1, 2001