Setting Rural Tariffs: The Case of Peru

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• 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

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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.

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Situation of Electrification in Peru (2)
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Situation of Electrification in Peru (3)

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Electrification Index per Province
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Per Capita Expenditures and Electricity Access
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Access Gap to Reach the Poor
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Main Characteristics of Distribution Systems

• 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.

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The Cost Problem of Rural Electrification
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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.

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Situation of Electricity Distribution in Peru (2)

• 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

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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

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FOSE Impact (2)
FOSE Impact on Average Residential Tariff
Consumption of 30 kWh/Month
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17,39
18
16,33
16
13,62
14
12,56
12
9,85
Cents of US/kWh
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8,79
8
6
4
2
0
No FOSE
No FOSE
With FOSE
With FOSE
With FOSE
With FOSE
Monthly Reading
Monthly Reading
Monthly Reading
Six-Month Reading
Six-Month Reading
Six-Month Reading
Law 27510 (2001)
Law 8307 (2005)
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Electricity Prices in Peru and Other LAC
Countries
OLADE ELECTRICITY PRICE STATISTICS (US/kWh) Dec2003 OLADE ELECTRICITY PRICE STATISTICS (US/kWh) Dec2003 OLADE ELECTRICITY PRICE STATISTICS (US/kWh) Dec2003 OLADE ELECTRICITY PRICE STATISTICS (US/kWh) Dec2003
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 Organización Latinoamericana de Energía Organización Latinoamericana de Energía Organización Latinoamericana de Energía
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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

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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)

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The Great Challenge of Rural Electrification in
Peru Its Geography
Satellite Digital Terrain Elevation Model
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Thank You For Your Attention