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ELECTRICITY DISTRIBUTION TARIFFSThe Chilean Experience
Hugh RudnickPontifícia Universidad Católica de Chile
Brasilia, June 2009
Objective
Describe the building of the electricity distribution tariff in Chile, within a regulation that aims at a “pseudo competition” against efficient reference models. A description is made of its implementation, the analytical cost models, the model company and model network concepts, the tariff structure and the actual results.
2
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
3
Chile facts
Population (June 2009 estimate) 16 928 873
Density 22 inhab/km2
GDP (PPP) per capita 2008 estimate $ 14.510
Electricity sector reform in 1982All companies privately owned
4
SIC
CENTRAL INTERCONNECTED SYSTEM (SIC)
NORTHERN INTERCONNECTED SYSTEM (SING)
Average load growth 1999-2008 7.2 %Expected annual load growth 5.3 %Inst. capacity / Max. Dem. 3,610/ 1,700 MWRegulated/ Non Reg. Customers 10% / 90%Hydro / Thermal 1% / 99%Length 600 kmPopulation 6%
Average load growth 1999-2008 5.1 %Expected annual load growth 5.3 %Inst. capacity / Max. Dem. 9,538/ 6,150 MWRegulated/ Non Reg. Customers 65% / 35%Hydro / Thermal 60% / 40%Length 1,800 kmPopulation 93%
Main Chilean Interconnected Systems
Figures: December 2008 5
SING
SIC
0
10.000
20.000
30.000
40.000
50.000
60.000
70.000
80.000
90.000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
‐2%
0%
2%
4%
6%
8%
10%
12%
14%GWh Rate
Demand rate
GDP rate
Demand
As in developing countries, high correlation between energy growth and GDP growth
Chile GDP and electricity demand growth
6
GDP and electricity worldwide
7
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
8
•Electric energy as a strategic public service-monopolistic activity driven by the State, with minor role for private sector•Vertical integration generation-transmission- centralized planning and operation
•Regulated cost based tariffs, subsidies
9
Chile pre reform conditions
Change of paradigm
•establish conditions for economic efficiency•wholesale market deregulation (unregulated prices for large consumers)•competition at generation level with centralized generation dispatch -marginal cost transfers among generators
•regulation of wire monopolies (transmission and distribution)•protection of small consumers with regulated tariffs
10
Generation TrunkTransmission
LargeConsumers
MediumConsumers
EndConsumers Distribution
LVDistribution
MV
Subtransmission
The market segmentation
11
Price structure relating different agents
TransmiterGenerators Distributor
Regulatedclients
Large freeclients >2MW
Large free clients > 2MW
Unregulated price
Auction price
Toll
Toll
Toll
Distributiontoll
Regulatedprice
Spot pricefor energy
Spot pricefor capacity
Unregulated price
Competition at generation + efficiency signals at wires
(Chi$ 2008/kWh)
60,58
21,47
19,39
2008
Taxes
Cta RM88
Distribution
Transmission
Generation
10
20
30
40
50
60
70
80
90
100
110
120
130
Efficient cost for final domestic consumer
Efficiency through competition (marginal spot price scheme for energy and capacity)
Spot price scheme plus toll payments for efficienttransmission (investment and operation), including consideration of congestion
Need to stimulate efficient distribution
12
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
13
Distribution characteristics and need for regulation
Scope and density economies
Inelasticity of demand
No economies of scale
Possibility to distinguish the network business
with the marketer
Large number of small users
DISTRIBUTION
Development in geographic regions as monopolies (wire technology restrictions)
NEED FOR REGULATION14
15
Distribution monopolies in Chile
Largest ones grouped in holdings
11747
10187
2670
2722728
CHILECTRA
CGE y Filiales
CHILQUINTA y Filiales
SAESA y Filiales
Otros
Distribution monopolies in Chile
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
CHILECTRA CGE y Filiales CHILQUINTA y Filiales
SAESA y Filiales
Energy sold (GWh) by holdings in 2008
Clients by holdings in 200816
17
Regulating distribution prices in Chile
Strategic objectives-avoid loses of monopoly prices-avoid individual tariff considerations (per company assessment)-provide
-economic efficiency signals for operation and investment-flexibility and stability -adequate response to market changes-symmetry of risks and opportunities for the regulated agent
Prices to be fixed considering-cost of service provision (reflect the supply cost structure)-adequate return to investment capital -incentives for cost reduction
Incentive regulation-yard stick/benchmark regulatory model-competition of monopolies against model company
Requirements-concession required to run the business-public service activity-obligation to serve-quality of service regulated-open access to wires
Rights-concession granted for the right to use public roads -concession to ask rights of way in private grounds -price regulation based on benchmark approach
-realistic price considering restrictions-adequate return to investment capital, if efficient-higher efficiency rewarded
18
Regulating distribution in Chile
19
Yard stick approach-comparison of different companies achieved through identifying different “distribution areas”-model companies determined for each area, different tariffs for each area
Challenges-definition of “efficient” investment and administration-manage information deficiencies (although limited assymetries)-avoid regulatory capture-avoid political manipulation by regulator
Risks-conflictive interests between regulator and monopoly
Model company approach
Pass-through of generation-transmission costs, summing up an added distribution value (VAD) reflecting distribution cost
Cost of distribution dictated by capacity requirements(demand defines network dimensioning, thus defines investment and operation)
Energy only important in reflecting network losses
Important economies of scope (the higher the load density, the lower the unit costs).
Marginal cost of distribution equal to average costs (except for high density)- determination of MgC through average cost of efficiently built, operated and expanded company
20
Characteristics of distribution costs
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
21
Process of electricity distribution
Investmentplanning
Networkconstruction
System operations
Systemmaintenance
Businessmanagement
• Identify new system needs.• Develop plans to satisfy need.• Facilitate plans and budgets.•Assess large projects.
• Build lines, substations, low voltage networks.
• Connections & disconnections•Follow up and control of system operations•Correct damages & incidents.
• Maintenance of lines, substations and low voltage networks.• Maintenance of protection equipment.
•Measurement, meter reading•Billing•Contracts•Solution management.
22
Cost components in added distribution value
Distribution Value Added
Fixed costs Investment costs, Operation & Maintenance Distribution losses
Technical losses
Other losses
StorageWorkshopsLabs and toolsOperational engineeringTransportSecurityRent, insuranceNetwork maintenance and
operationPatents and property taxes
HV LV
Capital costs
Operationalcosts
High Voltage• Feeders• Control equipment.• Protection equipment.
Low Voltage• Distribution substations•Low voltage networks•Protection equipment
• Meter reading• Billing• Distribution of bills• Accounting related to client• Bill follow up• Client relation• Other fixed costs related to client.
23
Total monthly costs semi urban area, Chile, 1988 Average value 10,2 US$/kW/month
0200400600800
10001200140016001800
0 50 100 150 200Maximum demand (MW)
Tota
l cos
t (M
US
$/M
onth
Characteristics of distribution costs
24
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
25
Cost structure for distribution
Replacement cost concept for investment.
Investment annuity considering useful life of installations and given return rate.
Econometric models are built to represent the industry costs, with a log-log regression between the average cost per km*kW and the km*kW, for high voltage and low voltage.
LVHV kWkWLossesOperationannuityInvestmentCost
+++
=
26
Replacement cost and operation
-New replacement cost (VNR) as basis for comparison-Audited GIS based accounting of installations-Valued at today’s technologies and costs-High volume of network information
27
Replacement cost
28
Operation cost
29
Physical parameters: Iength of HV and LV networks, kW demand HV and LV30
Existing networks
Relation between unit costs HV and the product kmHV*(kWHV+kWLV)
-7
-6
-5
-4
-3
-2
-1
0
1
2
0 5 10 15 20 25
ln(kW*km)
ln(C
ost H
V p
er k
W*k
m)
(m$/
kW/k
m)
Distribution function characteristics Chile
31
Relation between unit cost LV and the product kmLV*kWLV
-6
-5
-4
-3
-2
-1
0
1
2
3
4
0 5 10 15 20 25
ln(kW*km)
ln(C
ost L
V p
er k
W*k
m)
(m$/
kW/k
m)
32
Distribution function characteristics Chile
Industry segmentation in typical areas-companies are grouped according to similar distribution costs,
considering a maximum deviation-segments (typical areas) are identified
Reference company is chosen for each typical area-cost close to the group average; representation coverage-existence of previous studies
Efficiency distribution costs determined for each typical area-model company built and costed for each typical area (parallel
studies by regulator and companies, averaged 2/3 and 1/3)-global industry check up (industry performance with calculated
tariffs)
Tariffs set every four years-indexation
The regulatory process
33
Ref: Bitrán & Asociados
0
20
40
60
80
100
120
140
160
180
200
VAD $/kW/year
Bars represent theoretical VAD for each company with real investment and operational costs
The segmenting results for 2004
Reference company
Typical area 2
34
Company 1
Company 2
Company 1
Company 2
Area 1
Area 1Area 2
Area 2
Area 3
Area 3Area 4
Area 1
Area 2
1984-1996 2000-2008
Changes in typical area concept
35
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
36
Month 3 4 5 6 70 1 2
Start of new tariffs
Basis for studies
Observations and beginning of
studies
Studiescompleted
Companies report simulated income
CNE calculates
tariffs
Tariffs decree
VAD calendar and institutions involved
SEC-Superintendence of Electricity and Fuels (determines VNR and operation costs on previous year to VAD process)CNE-National Energy Commission (defines basis for studies and typical area segmentation, directs one study for each area, calculates preliminary tariffs and industry check up, fixes new tariffs) Companies (develop studies for each area) 37
Minimize investment+operationHorizon :10 yearsDiscount rate: fixed at 10%
Efficient network-Low voltage network design-Distribution transformer sizing-High voltage network design
Efficient infrastructure (buildings and facilities)Efficient management
Energy and capacity balances (to determine divider for tariff calculation)
Loss calculations (to determine loss expansion factors)
Use of geographical information - GIS based 38
Building the efficient company
Load allocation to substations
39
Optimal location & sizing of transformers
40
41
Based on computational modelNavarro-PUC
LV network design
42
HV network design
Santiago high voltage network (12 and 23 kV)
43
Based on computational modelPeco-IIT
Important areas•Administrative•Comercial &•Operation
Efficiency indicators &Benchmarking
Study of processes
Adjusting to Salary Studies
Study of PayBonds
ORGANIZATIONAL DESIGN
MANPOWERREQUIREMENTS
SALARIES RESULTS
Study of contracts•Related•Non Related
Number of Employees
Sub Contracting
Management design
44
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
45
2008 VAD results Typical Area 1
Chilectra, largest companyM$ as of Dec 2007
2008 VAD results all Typical Areas ($)
VAD HV ($/kW/year)VAD LV ($/kW/year)
47
VAD HV (% difference)VAD LV (% difference)
2008 VAD results all Typical Areas (%)
48
US$/MWh December 2008
0
50
100
150
200
250
300
Ene‐00
Jul‐0
0
Ene‐01
Jul‐0
1
Ene‐02
Jul‐0
2
Ene‐03
Jul‐0
3
Ene‐04
Jul‐0
4
Ene‐05
Jul‐0
5
Ene‐06
Jul‐0
6
Ene‐07
Jul‐0
7
Ene‐08
Jul‐0
8
Costo Marginal Precio de Nudo
Cost of energy- generation level
Spot price
Regulated price
49
50
Final tariffs
-20
0
20
40
60
80
100
120
140
Nov
-00
Ene-
01M
ar-0
1M
ay-0
1Ju
l-01
Sep-
01N
ov-0
1En
e-02
Mar
-02
May
-02
Jul-0
2Se
p-02
Nov
-02
Ene-
03M
ar-0
3M
ay-0
3Ju
l-03
Sep-
03N
ov-0
3En
e-04
Mar
-04
May
-04
Jul-0
4Se
p-04
Nov
-04
Ene-
05M
ar-0
5M
ay-0
5Ju
l-05
Sep-
05N
ov-0
5En
e-06
Mar
-06
May
-06
Jul-0
6Se
p-06
Nov
-06
Ene-
07M
ar-0
7M
ay-0
7Ju
l-07
Sep-
07N
ov-0
7
PER
CEN
TAG
E, %
Generation+transmission
Distribution
Final tariff
51
33,51 29,47 27,0136,22
60,58
33,1527,56
20,18
18,44
21,4712,96
11,089,66
11,91
19,39
0
10
20
30
40
50
60
70
80
90
100
110
120
130
1992 1996 2000 2004 2008
IVA
Cta RM88
Distribución
Sub‐transmisión
Generación
Costs for final domestic consumers ($)
(Chi$ 2008/kWh)
51
39% 41% 43% 49%57%
39% 38% 32% 25% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1992 1996 2000 2004 2008
Generación Sub-Transmisión Distribución IVA
Costs for final domestic consumers (%)
52
Period 1990‐2008(Santiago base)
53Ref: Bitrán & Asociados
Variation of prices for public services
‐35%
81%
43%
‐5%
41%
20%
ElectricDistribution
ElectricGeneration
ResidentialElectricity
Local phones SanitaryServices
Water
Frecuencia media de interrupción por kVA
1,20
1,30
1,40
1,50
1,60
1,70
1,80
1,90
2.003 2.004 2.005 2.006 2.007
FMIK
Frecuencia media de interrupción por transformador
1,501,601,701,801,902,002,102,202,302,40
2.003 2.004 2.005 2.006 2.007
FMIT
Quality Indicators (Chilectra)
54
Profits Chilean Distribution Companies
55
http://info.worldbank.org/etools/lacelectricity/home.htm
56
Latin American Data Base
57
Latin American Data Base
Distribution losses (%)
Loss Reductions (Chilectra)
58
%
State monopoly
Privateregulated monopoly
59
Latin American Data Base
Electricity sold per employee(MWh)
Duration of interruptions per subscriber (hrs.)
Tariffs of Endesa Distribution Companies
Average valuesUS$ 2008
60
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
61
Tariff Structure
•Defined and calculated by the regulator
•Transmit cost parameters to consumers (generation, transmission and distribution) •Consider both energy and capacity costs•No explicit subsidies among classes of consumers (they introducedistortions)•Reflect use of distribution infrastructure (essentially capacity)•Each distribution company with different tariffs, depending on geographical location (reflecting nodal pricing) and typical area
•Give the consumer the option to choose tariff options (for 1 year)•Different tariffs at high and low voltage networks
62
23001800
Tariff Capacity bought at generation
Use Dx += +Energy + Use Tx
Tariff Components
Peak hours
63
Tariff Components
•Fixed charge ($/client) reflects fixed distribution costs
• Capacity payment at peak hours ($/kW)Generation capacity costCapacity losses at distributionVAD costs (HV and LV capital and operation)
•Capacity payment outside peak hours ($/kW)VAD costs for infrastructure next to the consumer
•Energy payment•Cost of energy bought at power substations plus distribution losses
64
Tariff Building
•Tariff integrating generation prices, transmission costs and VAD
•Tariffs built by regulator considering parameters determined by itself
•Hours of use (relating energy consumed by small consumers
and their peak demand)
•Coincidence factors (relating distribution company peak and
system peak)
•Neighborhood factors (relating different densities within a
company)
•Underground and over ground infrastructure factors
•Indexing factors reflecting economies of scale
65
BT1: Under 10 kW, only energy measurement , with capacity limiter (home consumers). Additional charge for energy consumed in winter months over 120% of summer one.
BT2: Energy measurement and capacity (maximum demand) contract (homeconsumers, mid commercial and public lights)
BT3: Energy and maximum demand measurement (larger commercial and midindustrial)
BT4: Energy measurement and:BT4.1: Capacity contract al peak hours and capacity contract BT4.2: Measurement of maximum demand at peak hours and capacity contractBT4.3: Measurement of maximum demand at peak hours and maximum demand
Similar tariffs at high voltage.
Peak hours defined between 18 & 23 hrs, between April and September (SIC)
Tariff Alternatives LV
66
Chilectra tariffs June 2009
67
Tariffs and Social Objectives
Charges should be in line with what drives network costsNo subsidies within tariff scheme, transmit efficient costLegal restriction for government to change and distort tariffs
Direct subsidies to lower income families under social umbrella (outside electricity sector, avoiding distortions and irrational use of resources)
Direct subsidies for rural electrificationNational program for rural electrification administered by the
National Fund for Regional Development. Tripartite funding ofthe capital costs of rural connections whereby the users pay 10%, companies 20% and state funding 70% with users expected to pay for running costs.
In 1982, 62% of rural households (some 269,841 homes) were without electricity supply . By 2002 only 14% of rural households were without electricity.
68
The Chilean electricity market framework
Price structure and the efficiency signals
Regulating the monopoly
The distribution activity- costs to consider
Analytical models and regulatory process
The building of an efficient company
Results
Tariff structure
The open challenges
69
Need for improvement in VAD basis-Improve design of management of model company-Define benchmarks for management-Improve determination of typical areas, increasing number
Alternatives for coupling studies made by regulator and companies-Panel of Experts (special bar for the electricity sector) to
decide between VAD costs
Limit action of regulator into final tariff calculations
70
Improvements to tariff process
Incorporate distributed generation-Consideration of impact of distributed generation-Incorporate distribute generation concepts into tariff process-Create tools to facilitate distributed generation
Incorporate load management schemes-Existing credit scheme for energy reduction in critical conditions-Consider load management schemes in tariff process-Introduce tariff flexibility (timid first step on 2009)-Create opportunities for smart metering
Incorporate energy efficiency mechanisms-The more you sell, the better, as core distribution business-Decoupling of tariffs-Stimulus for proactive action of distribution companies
71
Challenges
ELECTRICITY DISTRIBUTION TARIFFSThe Chilean Experience
Hugh RudnickPontifícia Universidad Católica de Chile
Brasilia, June 2009
IEEE Power & Energy Magazine Volume 5, Number 3, July/August 2007, pp. 50-67Special issue on Evolution of Distribution Systems
73
74IEEE Transactions on Power Systems, Vol. 24 , No 2, pp. 744-751 , May 2009
Chilectra Tariffs
75