Setting Rural Tariffs: The Case of Peru – Main Issues

Eduardo Zolezzi World Bank Former Staff and Consultant

Former Peru Energy Sector Regulator

Washington, March 7, 2006

Situation of Electrification in Peru (1)

The population of Perú is about 27 million inhabitants, of which 65% live in urban areas (17.5 millones) and the remaining 35% (9.5 millones) live in rural areas.

The highest poverty indexes correspond to rural areas, mainly located in the highlands and the amazon.

The average annual family income in the rural areas is in the range of US$ 300-1,500.

The rural population without electricity is approximately 6.5 million; corresponding to about 70% of the total rural population.

Access to other type of infrastructure in rural areas is also very limited – according to the 2000 National Household Survey, one in eight inhabitants of rural areas has access to paved road and less than 40% has public pipeline potable water service.

Situation of Electrification in Peru (2)

Consumption Interconnected Isolated Total Percentage0-30 kWh 1 026 964 137 639 1 164 603

31-100 kWh 1 139 643 89 746 1 229 389> 100 kWh 1 516 483 61 121 1 577 604 40%

Total 3 683 090 288 506 3 971 596 100%

60%

Consumption Rural Customers Percentage

0-30 kWh 140 546 75%

31-100 kWh 31 024 17%

> 100 kWh 16 381 9%

Total 187 951 100%

Overall

Rural

Situation of Electrification in Peru (3)

Consumption (kWh)

0 30 100 200 300 400 500

0

Consumption Poor Households

Consumption Non Poor Household

Electrification Index per Province

Per Capita Expenditures and Electricity Access

Socio-EconomicQuintiles (5)

Per CapitaExpenditures (Mean)

(US$)

% with Electricity

Poorest 814.40 40.0

2 1,432.22 65.0

3 2,110.38 81.9

4 3,164.53 91.0

Richest 7,894.30 96.7

Total 3,082.35 74.9

Access Gap to Reach the Poor

Affordability Frontier Access GapMarket

Efficiency Gap

Politically & Socially Desirable

Commercially Feasible

Expansion with Tolerable Private Return

Actual Access with Desirable Private Return

Expansion with Reduced Private Return

Farthest, Geographic Isolation

Pove rty

Theoretical analysis and empirical evidence show that electricity distribution cost functions exhibit:

important economies of scale increasing returns with scale; and important economies with consumption and clients’ geographical density.

Main Characteristics of Distribution Systems

Distribution Investment and O&M Costs Indicator

Sector 1 Urban

High Density

Sector 2 Urban

Medium Density

Sector 3 Urban

Low Density

Sector 4 Urban-Rural

Sector 5 Rural

“New” Rural

ProjectsElectrification

The Cost Problem of Rural Electrification

Situation of Electricity Distribution in Peru (1)

Very Diverse Structure/Management: High Density Market: (very) profitable, efficient private

ownership/management (Edelnor, Luz del Sur) Medium Density Markets: profitable, efficient public

ownership/management (e.g. Distriluz, Seal, Electrosur Este); minor problems for introducing private participation.

Low Density Markets: barely sustainable, not very efficient public ownership/management (some RDC)

Disperse and Very Low Density Markets: non profitable, loosing making, inefficient public ownership/management (most of public-owned RDC)

MEM Expansion of Electricity Frontier/Rural Projects: high loosing making projects, administered by Adinelsa; the major problem of electrification.

Operating Margin of Public-Owned Distribution Companies:(1.00 US$ = S/. 3.3 New Soles)

Operating Profits Distriluz Group: S/. 32 million in 2002, 37.5 in 2003 and 64.7 in 2004

Operating Profits Seal, ELSO: S/. 11 million in 2002, 3.8 in 2003 and 2.8 in 2004

Operating Profits Other (ELS, ELO, Puno, Ucayali): S/. -18.6 million in 2002, +6.3 en 2003 y +12.2 en 2004

Operating Losses Adinelsa: S/.3.9 million in 2002, 9.3 in 2003 and 15.5 in 2004

Situation of Electricity Distribution in Peru (2)

FOSE Impact (1)

62% of all residential clients at national level benefit from FOSE

Lima consumers are the major contributors to FOSE

An average of S/. 2.5 millions each month are transferred to distributors that receive FOSE

Only regulated consumers pay for FOSE; representing about 50% of total consumption

The newly expanded FOSE has increased this subsidy transfers considerably

FOSE Impact (2)

FOSE Impact on Average Residential TariffConsumption of 30 kWh/Month

16,33

8,799,85

12,56

17,39

13,62

0

2

4

6

8

10

12

14

16

18

20

No

FO

SE

Mo

nth

ly R

ea

din

g

No

FO

SE

Six

-Mo

nth

Re

ad

ing

Wit

h F

OS

EM

on

thly

Re

ad

ing

Wit

h F

OS

ES

ix-M

on

th R

ea

din

g

Wit

h F

OS

EM

on

thly

Re

ad

ing

Wit

h F

OS

ES

ix-M

on

th R

ea

din

g

Law 27510 (2001) Law 8307 (2005)

Cen

ts o

f U

S$

/kW

h

OLADE ELECTRICITY PRICE STATISTICS (US¢/kWh) Dec’2003

RESIDENTIAL COMMERCIAL INDUSTRIAL

ARGENTINA 4.14 4.44 2.08

BOLIVIA 5.49 8.43 3.98

BRASIL 8.27 7.27 3.84

COLOMBIA 7.70 9.24 7.17

CHILE 8.56 8.21 5.56

ECUADOR 13.03 11.11 9.65

MEXICO 8.09 13.95 6.95

PARAGUAY 5.60 5.97 3.76

PERU 11.37 7.59 7.20

REP. DOMINICANA 9.53 10.60 10.82

SURINAME 17.10 17.30 13.10

URUGUAY 10.55 7.03 3.89

VENEZUELA 5.50 7.90 2.80

Organización Latinoamericana de Energía

Electricity Prices in Peru and Other LAC Countries

Main Problems Identified

Lack of Predictable and Sustainable Sources of Funding Lack of Incentives for Investment in Rural Electrification

Programs/Projects Inadequate Tariffs for Rural Electrification Development Very Low Rural Electricity Consumption and Barriers to

Densification Deficiencies in Planning, Design, Regulations,

Management and Implementation of RE Projects Lack of Adequate Legal and Regulatory Framework for

RE and Electrification of remote, isolated communities Limited Participation of Regional and Local Governments,

and Practically Null Participation of Private Sector

Existing Legal Frameworks for RE

Electricity Concession Law (LCE) No. 25844-1992 and Regulations (overall sector framework; no specific reference to electrification of urban marginal, rural, remote and isolated comunities, and consumers).

Rural, Remote, Isolated and Frontier Electrification Law No. 27744-2002 (establish a financing fund; keeps a centralized approach with MEM/DEP in charge of planning, designing and construction of projects. This law was objected by the executive and was not regulated – not operational)

Draft Law for the Promotion of Private Investment in Rural Electrification, approved by congress, but objected by the executive; not enacted (do not supercedes Law 27744; it complements some of the articles of Law 27744 creating a special regime for promoting private investment in RE under the general ProInversion concession regime)

Law for the Promotion and Use of Renewable Energy Resources in Rural, Remote and Isolated Areas, No. 28546-2005 (very general and declarative with no specific promotion mechanisms; it has not yet been regulated)

Second Draft Law for the Promotion of Private Investment in Rural Electrification, approved by congress but objected by the executive (some improvements to Law 27744; main objection is to sources of funding for the RE fund it establishes and the tax exceptions to investment subsidy)

The Great Challenge of

Rural Electrification in Peru

Its Geography

Satellite Digital Terrain Elevation

Model

Thank You For Your Attention