ELECTRICITY DISTRIBUTION TARIFFS The Chilean … Rudnick_Jun09_AneelSeminar.pdfELECTRICITY...

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







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







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







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







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







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







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


Distribution losses (%)

Loss Reductions (Chilectra)

58

%

State monopoly

Privateregulated monopoly

59


Electricity sold per employee(MWh)

Duration of interruptions per subscriber (hrs.)

Tariffs of Endesa Distribution Companies

Average valuesUS$ 2008

60







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







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

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