future challenges in the deregulation process: …

Hugh Rudnick, DPRT 2000, City University, London, April 5, 2000

1

Hugh RudnickIEEE PES Distinguished Lecturer

DPRT 2000, City University, London, April 5, 2000

FUTURE CHALLENGESIN THE DEREGULATION PROCESS:LESSONS FROM LATIN AMERICA

Pontificia Universidad Católica de ChileSchool of Engineering

The American Electricity Market

CANADA & UNITED STATES

• Market of 765000 MW• 1-2% annual growth = 7650 - 15300 MW a year

LATINAMERICA

• Market of 190000 MW• 5% annual growth = 9500 MW a year


2

GDP versus electricity demandGDP versus 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

Source: CNE Chile 1997

COLOMBIA1994

PERU1993

BOLIVIA

1994

CHILE1982

ARGENTINA

1992

BRAZIL

1998

Pioneering regulatory changes in the electrical sector

MEXICO

1999

CENTRAL AMERICA & PANAMA1997-9


3

Objetives of the reforms in the energy sector

Segmentation of industry and regulation

Was it worth it?

Oportunities and risks in future competitive markets

Alternatives - structure and conduct

Regulatory coherency - interfaces between segments

Regulatory practices

Challenges for the future

Objectives of the reforms in the energy sector

• Achieve maximum social benefits

• Conditions of economic efficiency in the sector– development of lowest cost energy supply– economic level of reliability and quality– efficient use of energy, loss reduction– efficient management of companies, benefiting

consumers

• Stimulate private investment– expansion, electrification

• State evolves from entrepreneur to regulator andindicator


4



Was it worth it?






Fuelco Gasco

Genco Genco

Sellco Sellco

Gridco

Waterco Fuelco

Genco Genco

Sellco Sellco

Gridco

Brokeco Brokeco

Buyco Buyco

Lineco Lineco

Brokeco Brokeco

Buyco Buyco

Lineco Lineco

Disco Disco

Cons Cons Cons Cons Cons Cons

Disco Disco

SEGMENTATION OF THE INDUSTRYcompetitive and regulated (William Hogan, Harvard)

DIS

TR

IBU

TIO

N

Poolco/Marketco

GE

NE

RA

TIO

NT

RA

NS

MIS

SIO

N


5

• FUELCO/GASCO/WATERCOpurchases fuels for electricity generating plants

• GENCO/PLANTCOoperates and maintains existing generating plants.

• SELLCOmarkets long-term supply compensation contracts to provide pricehedges for customers and generators.

• POOLCO/MARKETCOdispatches generating plants and operates/manages short-term market.

• GRIDCOconstructs and maintains the network of transmission wires.

• SELLCOmatches buyers and sellers as brokers of long-term power supplyand transmission compensation contracts.

• BUYCOpurchases long-term power supply and transmission compensationcontracts for final customers.

• LINECOconstructs and maintains distribution wires connecting transmissiongrid to final customers

• DISCO/SUPPLYCO/RETAILCOprovides services to final customers including connection andbilling.


6

ELECTRICITY MARKET REFORMS

Competitive segments

*wholesale market deregulation (unregulated prices for large consumers)

*competition at generation level with centralized generation dispatch

*short term marginal cost based schemes

ELECTRICITY MARKET REFORMS

Monopolistic segments

*regulation in transmission and distribution

*transmission open access regulation, base for competition, global allocation of network costs

*incentive based regulation in distribution(yard stick competition, price cap)


7



Was it worth it?






Was it worth it?

“impresive efficiency gains”“performance has improved greatly with deregulation and

privatization”“labour productivity has doubled”

“coverage rates have grown”“energy losses are about a third”

“sharp reduction of prices”“consumers benefit from the introduction of competition”

Estache, A. & Rodríguez-Pardina, M., “Light and lightning at the end of thepublic tunnel: reform of the electricity sector in the southern cone”, EDI, WorldBank, 1998


8

PERU- ELECTRICITY COVERAGE

Ene-

94

Jun-

94

Ene-

95

Jun-

95

Dic-9

5

Jun-

96

Dic-9

6

Dic-9

7

83% 83% 86% 87% 90% 90%

91%100%

0%

20%

40%

60%

80%

100%

39% 42% 46% 50% 54%

0%

20%

40%

60%19

87

1992

1993

1994

1995

National Edelnor- Lima

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


9

Energy losses in distribution systems in Perú(1990-1999)

11.8%12.4%

14.6%17.1%

19.7%20.6%21.8%

13.9% 15.4%18.2%

0%

5%

10%

15%

20%

25%

90 91 92 93 94 95 96 97 98 99

E. Zolezzi, CTE, Oct. 99

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


10

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

Source: CNE Chile



Was it worth it?







11

REGIONAL ENERGY MARKET DEVELOPMEN T

Commercial/market agreements

Gas interconnections

Electricity interconnections

Geographic distribution of consumer loads and energy resources

Important load

Natural gas resources

Hydroelectric resources

BRASIL

URUGUAY

PARAGUAY

BOLIVIAPERU

Asunción•

Lima

Santa Cruz

Sao PauloRio de Janeiro

•

••

•

Concepción

Buenos Aires

•

•

Santiago

Mejillones •

•

NOA

ARGENTINA

ExcedentesHidráulicos

Neuquén

CHILE

Figura 2

Endesa 1999


12

BRASIL

URUGUAY

PARAGUAY

BOLIVIAPERU

Asunción•

Lima

Santa Cruz

Sao PauloRio de Janeiro

•

••

•

Concepción

Buenos Aires

•

•

Santiago

Mejillones •

NOA

Excedentes

Hidráulicos

Neuquén

Asunción

•

Asunción

• Interconexión

Argentina Brasil

Electroducto

Argentina Chile

Gasoducto

Atacama

Interconexión

SING-SIC

Generación Hidro

Sur Austral

Gasoducto del Pacífico

Electroductos

Tucumán - Carrera Pinto

Mendoza - San Isidro

Asunción

•

Electroducto

Alicurá - Osorno

Gasoducto

Gasandes

Carrera Pinto

San Isidro

•

Interconnections and market integration

Endesa 1999

M. Pereira, 1999

Growingelectricinterconections

Colombia

Ecuador

Perú-SICN

Perú-SISUR

Bolivia

Chile-SING

Chile-SIC

ArgentinaMercado

ArgentinaComahue

Paraguay

Uruguay

Brasil-N

Brasil-NE

Brasil-SE

Brasil-Sur

Venezuela


13

Growinggasinterconections

CIER, 1996

Integration among markets

-price equilibrium among markets

-natural gas grows in importance - large gas companiesjoin the electricity market

-decisions of gas and electricity expansion projects arelinked

-regional expansion of transmission


14

Integration among markets

-minimum size of companies changes - expansion toother markets and new economies of scale

-arrival to Latin America of main world energy players(gas and electricity) looking for regional portfolios

-increase of competition along with increase of verticaland horizontal integration

Will it be it worth it?

Possible future:

-regional gas and electricity integrated markets

-few operators at the regional level (Endesa, EdF, Enron,?). Five or six large regional electricity holdings?

-mergers - growing vertical and horizontal integration

How do we face that possible future? How do we adapt toit? How do we rethink the sector?


15



Was it worth it?






How do we face that future?

Alternatives

-regulate industrial structures (60’s and 70’s)-market quotas, desintegration, prohibitions-higher costs and less flexibility


16


Alternatives

-regulate industrial structures (60’s and 70’s)-market quotas, divesting, desintegration, prohibitions-higher costs and less flexibility

-regulate conducts (90’s)-supervise conducts, supervise monopolistic activities-costs and information assymetries


Alternatives

-regulate industrial structures (60’s and 70’s)-market quotas, divesting, desintegration, prohibitions-higher costs and less flexibility

-regulate conducts (90’s)-supervise conducts, supervise monopolistic activities-costs and information assymetries

Challenges are to create consistant regulations andeconomic incentives to stimulate adequate intrasegmentand intersegment conducts.Challenges in relation to future consumers.


17



Was it worth it?






Consistant regulations that stimulate adequate intrasegmentand intersegment conducts

Intrasegment conduct-stimulate competitive conducts in competitive segments,even with horizontal integration-stimulate competitive conducts in “seudo” competitivesegments (yard stick competition), even with horizontalintegration


18

Consistant regulations that stimulate adequate intrasegmentand intersegment conducts

Intersegment conduct-avoid extension of market power from monopolisticsegments to competitive segments, even with verticalintegration (avoid subsidies, avoid discrimination to nonintegrated competitors)

Regulatory coherency between segments

Need that interfaces between segments restrict anticompetitiveconducts

-economic signals - intersegment price schemes

-competitive pools-forcing “perfect” competition-costs versus bids (space for market power)-retail competition

-open access (gaspipes, transmission and distribution wires)-transparent tariffs-economic signals for expansion-independent transmission operators


19

Regulatory coherency between segments

Need that interfaces between segments restrict anticompetitiveconducts

-transparent public tenders, particularly in distribution andsupply

-development of the supply segment

-quality and reliability requirements

-separate accounting / separate shareholder societies

-strengthening regulation and control

Regulatory coherency within segments

Need that interfaces within segments restrict anticompetitiveconducts

-economic signals - intrasegment price schemes (generatingmarkets)

-pools / system operator / market operator-governance-independence-forcing “perfect” competition-costs versus bids (space for market power)


20

Regulatory coherency within segments

Need that interfaces within segments restrict anticompetitiveconducts

-tariffs for regulated activities capturing economies of scale -stand alone company versus integrated company

-identifying efficiencies and transfering them to the consumer

-expansion mechanisms

-quality and reliability requirements

-strengthening regulation and control



Was it worth it?




Regulatory practices and challenges for the future


21

How do we face a future with few players and increasingintegration?

Partial regulation of structures• Admit vertical integration between generation and distribution• Admit horizontal integration• Separate transmission activities (independent operator)

Coherent regulation and supervision of conducts• Tariff schemes, regulation and control

– open access / price cap– energy pools

• Supervision of anticompetitive conducts– antimonopolies commissions / cartel control

How do we face a future with few players and increasingintegration?

Develop coherent regional regulatory arrangements


22

Hugh RudnickProfessor

Department of Electrical EngineeringPontificia Universidad Católica de Chile

Santiago, Chile

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

future challenges in the deregulation process: …

Documents