Electricity Regulation

SYNOPSIS

A. THE ARGENTINE ELECTRIC INDUSTRY

1. Introduction 21.101
2. Brief Description of the
    Argentine Electric Industry before Privatization 21.103
3. Privatization 21.108
4. The Regulatory Authority (ENRE) 21.118
5. CAMMESA 21.120
6. Agents of the WEM 21.124
7. Generation Market and Competition. Prices 21.132
8. The Retail Electricity Market 21.142

A. THE ARGENTINE ELECTRIC INDUSTR

1. Introduction

21.101 Up to 1989 it was impossible to think that electricity could be a product traded freely in a market place. This wasn't mainly because of constitutional or contractual law constraints, but due to political views that considered the whole electric sector as a public service which could only be provided by the State or by state-owned companies.

21.102 These views changed radically from 1989 onwards due basically to the initiative of the Executive Power. In order to give a clear picture of the restructured system, we will first focus in the pre-existing electric sector and the privatization process.

2. Brief Description of the
    Argentine Electric Industry before Privatization

21.103 In 1958, the government enacted Law 14.772, which declared under federal jurisdiction all public services provided in the Federal District and in the Province of Buenos Aires. This was the first federal Law to consider jurisdiction on electric public services.

21.104 Though such Law included very important general principles, we can say that the first Federal Regulatory Framework Act on the Argentine Electric Industry was Law 15.336, enacted on September 22, 1960, which declared a public service the distribution of electricity and considered generation as an activity of general interest affected to a public service.

21.105 By 1990 practically all the electric sector was owned and operated by Federal and Provincial integrated utilities:

The principal Federal and state owned utilities were:

* Agua y Energía Eléctrica S.E. - AyEE- (generation, transmission and distribution), created by Decree 14.004 in 1957.

* Servicios Eléctricos del Gran Buenos Aires S.A. -Segba- (generation, transmission and distribution), created as a result of several transfers from AyEE since 1962.

* Hidroeléctrica Norpatagónica S.A. -Hidronor- (generation and transmission), created by Decree 7925 on October 23, 1957.

21.106 The policy and regulation for the electric industry was under the responsibility of the Federal Government, through the Secretary of Energy.

21.107 The industry use to suffer from poor management and inadequate investment policies which produced a deterioration of the services and of the utilities financial condition.

3. Privatization

21.108 In 1989, a State Reform Law (23.696) declared certain state enterprises eligible for privatization. In addition to increasing the efficiency of services provided by state owned companies, privatizations have also served to reduce outstanding debt (by applying cash proceeds and through the selective use of debt-equity convertions), increase reserves and increase tax revenues from new owners of the companies created. The privatization program has also served as an important means for direct foreign investment into Argentina, attracting investors from Europe, North America, Asia and Latin America.

21.109 Starting on February 1992 the Federal Government, based on the State Reform Law 23696 (sanctioned in 1989) and on the Electricity Regulatory Framework Act (Law 24.065 and Decree 1398/92) created several generation, transmission and distribution "business units", and consequently privatized practically all the SEGBA, HIDRONOR and AyEE business assets.

21.110 The Regulatory Framework’s main features are:

* Separation of Generation, Transmission and Distribution activities.

* Separation of generator, distributor and transmission companies and large users, as agents of the Wholesale Electricity Market.

* Promotion of Competition in generation of electricity.

* Promotion of efficiency, reliability, non discrimination and open access in transmission and distribution systems.

* Rules for granting concessions to operate transmission and distribution activities which are qualified as public service.

* Creation of CAMMESA (by Decree 1191/92), a private corporation (owned equally by Federal Government and 4 associations representing generators, transmitters, distributors and large users) to perform the dispatch of the system.

* Creation of an independent regulatory agency (ENRE).

21.111 As per the provisions of the Regulatory Framework Act, the Secretary of Energy issued several Resolutions creating the "Wholesale Electric Market" (the WEM) in which generators, distributors and large users may buy and sell electricity in a spot market at uniform prices based on the marginal cost system, or under direct contracts (term contracts).

21.112 The ultimate objective was to utilize competition to reduce tariff rates and improve the quality of services provided.

21.113 More than 2/3 of the installed capacity of the country, is now owned by private generation companies and operated by qualified northamerican, chilean and european companies.

21.114 The electricity transmission service has been divided according to voltage and geographical areas. Hence, there is only one company which provides the public service of high voltage electricity transmission through the country (TRANSENER S.A.), and several regional transmission companies.

21.115 The distribution system of Buenos Aires and its suburbs is owned and operated by three private companies and the distribution activity in the provinces is owned by provincial governments or by privatized distribution companies. At this point of time, the provinces of Buenos Aires, Entre Ríos, Tucumán, Salta, Jujuy, Río Negro, San Luis, La Rioja and San Juan have already privatized their distribution companies.

21.116 The Federal Government still owns and operates the two binational hydroelectric plants, Yacyretá with Paraguay and Salto Grande with Uruguay, and the nuclear plants of Atucha and EMBALSE, which also are expected to be privatized.

21.117 After privatization of almost all the electric utilities, we can point out the following consequences:

- Reduction of thermal generation unavailability.

- Increase in installed capacity.

- Reduction in energy prices.

- Increase of transmission reliability and of efficiency in transmission and distribution.

- Increase in demand.

4. The Regulatory Authority (ENRE)

21.118 The National Regulatory Entity (ENRE) is an independent agency that acts as the regulatory authority in the field of the Secretary of Energy.

ENRE´s main responsibilities are:

(i) to enforce the law and its regulations;

(ii) to control the delivery of services and to enforce compliance with the terms of the concession agreements;

(iii) to adopt rules applicable to generators, transmission companies, distributors and users of electricity with respect to safety, technical rules and procedures; measuring and billing consumption, the interruption and reconnection of suppliers, third party access to the transmission network and the quality of the offered services;

(iv) to prevent anti-competitive, monopolistic and discriminatory conducts between participants in the electric industry;

(v) to impose penalties when provisions of the concession agreements or other related regulations are infringed; and

(vi) arbitrate conflicts between agents of the Wholesale Electricity Market (the WEM).

21.119 The ENRE is managed by a five member board of directors that is appointed by the Executive Branch of the Argentine Government.

5. CAMMESA

21.120 The management of the WEM is under the responsibility of Compañía Administradora del Mercado Mayorista Eléctrico (CAMMESA), a private company which includes representatives from generators, transmission companies, distributors, large users and the Secretary of Energy.

21.121 CAMMESA is in charge of scheduling and dispatching energy to meet demand (principally on the basis of a merit order using marginal costs and availability, with those units having the lowest production costs generally being dispatched first). In addition, CAMMESA is responsible for settling market transactions, and for the operation of the Pool described below.

21.122 The Secretary of Energy, is the chairman of the Board of Directors of CAMMESA and decisions taken by such board must include the vote of the chairman. Likewise, decisions adopted by the Shareholders Meetings must include the favorable vote of the Secretary of Energy.

21.123 The operating costs of CAMMESA are covered by mandatory contributions made by the members of the WEM.

6. Agents of the WEM

21.124 As one of the most important aspects of the Regulatory Framework Act we have mentioned the separation of Generation, Transmission and Distribution activities. Thereto, Law 24.065 declared generators, distributors, transmitters and large users as Agents of the electricity market.

Generators:

21.125 Electricity is generated in bulk at power stations which can be classified by the type of energy source used and, consequently, the cost of energy produced. The three energy sources are: hydroelectric, nuclear and thermoelectric (coal, gas or oil).

Distributors:

21.126 Each distributor operates under a concession agreement which establishes, among other things, its concession area, the quality of service which it is required to provide, the rates which it is permitted to charge and its obligation to satisfy demand. The ENRE monitors compliance by distributors with the provisions of their respective concession agreements and with the Regulatory Framework Act, and provides a mechanism for public hearing at which complaints against distributors can be heard and resolved.

Transmission Companies:

21.127 Energy is transmitted from power generation facilities to distributors through the transmission system. Transmitters engage in high voltage power transmission and in regional power transmission. They neither purchase nor sell power, and their service is regulated by their concession agreements, the Regulatory Framework Act, and related Regulations enacted by the Secretary of Energy and the ENRE.

21.128 In Argentina, transmission is carried at 500 kV, 220 kV and 132 kV through the National Interconnected System (NIS). The NIS consists primarily of over head lines and sub-stations. TRANSENER S.A. is the company which provides the public service of high voltage electricity transmission which covers, approximately, 90% of the country. The majority of the remaining portion of the NIS is owned by the regional transmission companies. Only one regional transmission company is still state owned. Supply points link the NIS to the distribution systems and to large users which are connected directly to the NIS. Transmission companies operate as common carriers and must provide access to all generators, distributors and large users.

Large Users:

21.129 The WEM classifies large users of energy into two categories: major large users (GUMAS) and minor large users (GUMES), who may freely agree upon the prices of their supply contracts with generators.

21.130 GUMA´s are all users that are connected to voltages equal to or higher than 1 kV, with a maximum capacity of at least 1 MW and a minimum annual energy consumption of 4,380 MW/h. These users must contract at least 50% of their estimated demand and purchase the rest from the Spot Market. Their transactions in the Spot Market are invoiced by CAMMESA.

21.131 GUME´s are all users that are connected to voltages equal to or higher than 1 kV, with a maximum capacity ranging from 0.1 to 2 MW. They are not required to have any minimum annual demand. These users must contract all of their demand and do not affect any transactions in the Spot Market. They have no relation with CAMMESA.

21.132 As a consequence of the restructuring and privatization of the generation sector, there are more than 40 independent generation companies that sell electricity in the WEM.

21.133 The installed capacity of the system is of approximately 16.000 MW composed of approximately 6,2% Nuclear, 50% Hydro and 43% Thermal.

21.134 Generators may sell electricity: (i) through the spot market and (ii) by negotiated contracts.

a) Spot Price

21.135 The hourly price established in the spot market (the Spot Price) is equivalent to the marginal cost of supplying an additional MWh to satisfy demand adjusted for its location within the NIS

b) Seasonal Price

21.136 Distributors are entitled to purchase electricity in the WEM at a stabilized seasonal price (the Seasonal Price). The Seasonal Price is intended to reflect two six-month seasonal periods (namely winter-spring and summer-autumn, with quarterly revisions), each having a different contribution of hydroelectric, nuclear and thermoelectric generation. Seasonal prices are established by the Secretary of Energy based on calculations by CAMMESA.

c) The Term Contract Price

21.137 In addition to the Spot Market, generators can enter into term contracts with Distributors and/or Large Users and/or other generators in terms, prices and conditions which may be freely agreed.

21.138 The main characteristics of contracts are as follows:
- Minimum term of two six-month seasonal periods, except for contracts with GUME´s that must have a minimum of four six-month seasonal periods.

- Generators can only contract the energy that they are able to produce.

- Details of each contract are required to be made public.

21.139 For thermal generators, the quantity is determined based on their installed capacity. In the case of hydroelectric generators, the quantity is determined based on the concept of firm energy which corresponds to the quantity of energy, the production of which such generator can be certain of exceeding by at least 70%.

21.140 Mismatches between the actual output of a generator and its contractual commitments, must be purchased by the generator in the Spot Market. If a generator is dispatched below the power it has contracted to supply, it must buy the difference at the Spot Price. If the power dispatched is higher than the contracted power, the generator will sell the excess to the market and receive the Spot Price. It is assumed that electricity contracted is bought and sold at the load center of the system, defined as the node at Ezeiza (near Buenos Aires), with a node factor of 1.0, which is the node at which the Spot Price is calculated. If a generator is unable to satisfy its contracts due to a lack of availability, it must either purchase capacity in the Spot Market or enter into a Term Contract with another generator.

21.141 If there is a shortfall in the WEM and, as a result, a generator is unable to fulfill its contractual commitments, the distributors and large users holding contracts with the generators will be subject to restriction in the supply of electricity, although the generator may purchase its energy shortfall in the Spot Marker. In the event that the major distributors are unable to supply their customers, they are subject to penalties in accordance with the terms of their concessions. Additionally, distributors can enter into contracts with guarantee of supply which insure that the penalties described above are passed through to the relevant generator.

21.142 The majority of electricity consumers in Argentina are the customers of distributors within their respective concession areas. Each customer is charged in accordance with the applicable tariff. Distributor’s charges seek to recover the various costs associated with supply and to earn an appropriate distribution margin. Costs of distribution, transmission and electricity purchased in the WEM are passed though to the ultimate consumer. Tariffs may vary between distributors.

21.143 The objective of the regulation of distributors is to provide appropriate protection to consumers with respect to the monopolistic entity providing service, taking into account the rates permitted to be charged for service and the quality of service.