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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

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Title: 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


1
Sustainability of the Electric Sector Reforms in
Latin American Document Base for IPES 2001 on
Competitivity Jaime Millan, Eduardo Lora and
Alejandro MiccoMay 1, 2001
2
Presentation
  • Reform objectives and motivations
  • Accomplishments concerns
  • Our thesis
  • Technical institutional constraints to power
    sector reform
  • Main issues

3
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

4
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

5
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

6
Latin America is world leader in private
investment in electricity
Private investment 1990-99
Chile
Argentina
Brasil
Panama
Colombia
Trinidad y Tobago
El Salvador
Desinversión
Republica Dominicana
Jamaica
Nueva inversión
Perú
Bolivia
Operación y manejo privado con inversión
mayoritaria privada
Costa Rica
Guatemala
Nicaragua
Honduras
Venezuela
México
Ecuador
0
50
100
150
200
250
300
350
400
450
Dólares per cápita
Fuente PPI Project Database, Banco Mundial
7
ELECTRICITY LOSSESPublic Utility vs.
Private Utility
8
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

9
Our Thesis
  • While keeping prices low in the short-term is
    important the sustainability of reforms is the
    crucial element in assuring the regions
    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

10
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

11
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

12
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

13
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

14
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

15
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

16
Competition and ownership in the LAC power sector
Chile
ES ?
Private
BO
Argentina
Panama
Peru
BR 2003
Guatemala
ES
Colombia
BR2000
Mixed
Jamaica
Guyana
Honduras
Mexico
Public
Venezuela
Retail Competition
Wholesale Market
Monopoly
Single Buyer
17
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.

18
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

19
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?

20
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

21
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 gt cost of regulating vertically
    integrated monopolies.

22
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

23
The worlds largest utilities, 2000Source
Goldman Sachs
24
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

25
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

26
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?

27
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?

28
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 dont
    foreclose the adoption of future measures toward
    the attainment of a competitive and well
    regulated market?
  • Multitask - Multi-agency problems
  • Choosing the Regulator

29
Sustainability of the Electric Sector Reforms in
Latin American Document Base for IPES 2001 on
Competitivity Jaime Millan, Eduardo Lora and
Alejandro MiccoMay 1, 2001
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