| gETURN T RESTRICTED | RE poRTS DESK Report No. TO-359a RF-PORTS (: OPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION COMPANIA ANONIMA DE ADMINISTRACION Y FOMENTO ELECTRICO (CADAFE) VENEZUELA September 3, 1963 Department of Technical Operations Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
| gETURN T RESTRICTED
| RE poRTS DESK Report No. TO-359aRF-PORTS (: OPYThis report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
1. Energy Sales 1960-19682. Projected Energy Purchases 1965-19683. Construction Prugram 1963-19684. Income- Statements 1960-19685. Sources & Applications of Funds 1963-19686. Balance Sheets 1960-19687. Economic Analysis of 230-kv System
MAP
SUrMARY
i. The Government of Venezuela has applied to the Bank for a loan tohelp finance the costs of the electric power expansion program of the govern-ment-owned Compania Anonima de Administracion y Fomento Electrico (CADAFE).CADAFE owns generation, transmission and distribution facilities which servesmaller communities and rural areas throughout the country from a largenumber of separate systems, whose operations would be improved by integration.The major project in the 1963-1964 program will be the construction of newtransmission facilities to interconnect two of CADAFE's most important marketareas with each other, and with an existing government-owned hydroelectricplant on the Caroni River, The estimated cost of this project is US$18.5million equivalent of which US$14 million would be foreign exchange.
ii. The Bank has not previously made any loans for power development inVenezuela.
iii. CADAFE, a subsidiary of the naticnal development corporation,Corporacion Venezolana de Fomento (CVF), has been in existence for a littlemore than four years. It was formed by the acquisition of a number ofindependent municipal and private systems, scattered throughout the country.At the end of 1962, generating capacity was about 380 1W in some 44 plantsand net investment stood at the equivalent of about $150 million. CVF has beenthe major source for financing CADAFETs expansion.
iv. The past financial results of CADAFE's operations have been poor.The nature of its service territory, and its widespread and non-interconnectedfacilities have contributed to this situation. CADAFE has inherited organi-zational problems, recognized by its management, as a result of the acquisitionof numerous, scattered systems. The national policy of rapid power supplyexpansion and rural electrification has inhibited CADAFEts management fromcarrying out a reorganization now badly-needed to improve efficiency anddevelop closer control of operations.
v. While only modest improvement in operations can be reasonablyexpected in the near future, CADAFE will nevertheless be able to finance asubstantial portion of future expansion from internal sources.
vi. CVF commitrments for further advances, cash from operations, and theproposed Bank loan will finance the 1963-1964 program. CADAFE would he asuitable borrower for a Bank loan of US'14 millicn. A term of 20 years, in-cludinag a two-year grace period woulld be appropriate for this loan.
I. INTRODUCTION
1. The Government of Venezuela has asked the Bank to consider a loan toassist in financing the 1963-64 expansion program of the Compania Anonima deAdministracion y Fomento Electrico (CADAFE). The cost of this program is basedon firm estimates of US$18.5 million equivalent for transmission facilities whichhave been completely engineered. In addition, CADAFE estimates that about US$25.4 million equivalent will be required for numerous items of plant which itconsiders necessary to maintain the expansion of its isolated and scattered net-works, but for which detailed engineering has not been completed.
2. The Project, for which Bank financing is proposed consists of 638 km of230-kv transmission line, associated substations, and reinforcements of the 115-krtransmission systems.
3. The total cost of these works is US$18.5 million equivalent, of whichUS$14 million would be in foreign exchange.
4. This would be the first loan made by the Bank for financing powersystem expansion in Venezuela.
5. This report is based on information obtained by a Bank mission toVenezuela in October/November 1962 to appraise the Project, and on data obtainedduring an earlier Bank mission in connection with the Guri Hydroelectric Project.
II. POIER INDUSTRY IN VENEZUELA
6. The electric power industry in Venezuela is characterized by the largenumber of individual power systems. The larger ones, serving only some mainurban centers, are owned by private companies, while most of the smaller onesnow belong to CADAFE, a wholly-owned government corporation.
7. The largest of the private systems is owned by La Electricidad deCaracas. It serves the Capital city and surrounding area, including the seaportof La Guaira, from three main thermal plants with a total capacity of 400 MJW.
8. Canadian interests own Compania Energia Electrica de Venezuela, whichoperates two separate systems with a total capacity of 186 i4W, serving the citiesof iMaracaibo and Barquisimeto.
9. A number of other private companies, mostly Venezuelan-owned, supplysmaller towns including part of Valencia, San Felipe, Barcelona, Ciudad Bolivarand Puerto Cabello.
10. Industrial enterprises and in particular oil companies obtain theirpower supplies largely from their own generating plants. Total capacity ofthese captive plants is estimated to exceed 400 M4W.
11. While the larger systems have generally expanded as necessary tosupply the growing demands on their networks, many scattered and isolatedmunicipal and private systems in smaller population centers throughout the
country have been unable to supply increasing demands, and particularly togive supplies to rural areas. This has generally resulted from poor manage-ment, basic financial weakness and lack of engineering and operating capabi-lity. The national development authority, Corporacion Venezolana de Fomento(CVF), responsible, inter alia, for development in the electric power field,began in the post-war period a gradual process of taking over and rehabili-tating these smaller, poorly-run systems. The magnitude of this activitybegan to require a greater degree of coordination than CVF could exerciseand in November 1958 CADAFE was formed and took over CVF's electric poweroperations.
12. Another important government activity in the field of power, inrecent years, has been the development of the hydro-electric resources ofthe Caroni River. Corporacion Venezolana de Guayana (CVG), an autonomousgovernment agency responsible for development of the southern part of thecountry has built and now operates the 370 14W Macagua run-of-river plant inconjunction with its nearby steelworks. Detailed plans are now being pre-pared by CVG for the Guri Project, about 90 km upstream from iiacagua, wherean ultimate capacity of 6,000 101 could be developed. The I4acagua and Suriplants will be owned and operated by CVG Electrification del Caroni C.A. (E(EDELCA) a wholly owned subsidiary of CVG.
13. Interconnection between the different power systems in Venezuela hasbeen hindered by lack of coordination tetween the different power companiesand by the existence of two service frequencies (50 and 60 cycles).
III. THE BORROWER
14. In accordance with its statutes, CADAFE is governed by a Board con-
sisting of 7 members appointed by CVF. The President and two other membersof the Board are full time executives of the conpany and the remaining 4
members are representative of business interests.
15. CADAFE is organized into 15 regional administrations, each respon-sible for its own day-to-day operations, and reporting to headquarters inCaracas which provides centralized general management, planning, engineeringservices, and financial control.
16. The Government expects CADAFE to continue the taking over of un-satisfactory local utilities, and tentative plans have been made for theincorporation of eleven such small systems into CADAFE during the next sixyears.
17. To supply the regional loads, CADAFE is operating 44 generatingplants with a total installed capacity of 373 14W, including 7 14W in 8 mobileplants. Of this capacity, 31 plants are diesel (79.5 10,), 6 hydroelectric(11.5 l-W), and 7 thermal (275 ;11). The largest installations are the gas-fired steam plants at Puerto Cabello (90 M4W), La Mariposa (80 14W) and LaCabrera (30 Hb), all located in the north central service area betweenPuerto Cabello and Caracas. An 8 PWJ gas turbine addition to the Punto Fijoplant will be completed in 1963. The output of these generating plants isdistributed over about 570 km of 115-kv, 830 km of 23-kv to 66-kv, 1600 kmof 13.8-kv transmission and distribution lines, and about 300,000 KVA ofsubstation capacity.
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Organization and Mlanagement
18. Since its conception, CADAFE, in addition to rehabilitating the variouEregional distribution systems, has been engaged in the development of itscentralized management, planning, engineering and accounting services and avigorous program of plant renewal and extension so that by the end of 1962,after its fourth year of operation, generating capacity had been increased 86%and sales of energy increased 76%.
19. The rapid growth of CADAFE has resulted in problems principally dueto the characteristics of the service areas and properties, such as scatteredand isolated networks of low load density and low-level consumer income; thecontinuous acquisition, at the Government's insistence, of small propertiesin poor repair; the responsibility for maintaining personnel in the acquiredproperties; and the inheritance of diverse supply frequencies and voltages.
20. The organization of CADAFE is not unlike that of a holding/operatingcomplex. The fifteen administrative regions are responsible for operation andmaintenance, billing, collections, local accounting and certain construction.Headquarters provides engineering, design, consolidated accounting and control,system-wide labor relations, related service functions, and overall finance.There exists a large degree of compartmentalization in the headquarters. Thereis no centralized system planning function, and there is lack of coordinationbetween engineering and financial planning. Some of these conditions areattributable to the fact that CADAFE has inherited some organizational rigidityfrom CVF.
21. Little, if any progress has been made by CADAFE in solving itsnumerous and difficult organizational problems, and this aspect of its activitiesnow requires immediate attention. CADAFE also has a complex tariff structure,the operation of which to produce adequate revenues requires immediate study(paragraphs 61-63, 74).
22. These problems should be defined and measures for their solutionoutlined and put into effect before further property acquisitions are under-taken.
23. Although CADAFE has projected a capital expenditures budget for theperiod 1963-1968, including the proposed acquisition of eleven small properties,the resulting six year program is one which the present organization could notcompetently undertake. It will be more reasonable for CADAFE to carry out thecontinued development of the systems already owned (1963-1964 program) while asolution of the organizational problems is defined and put into effect. Thesubsequent part of the program (1965-68), and in particular any further take-overof facilities, should remain flexible and subject to later review depending onthe rate at which organizational improvements are achieved.
24. The management of CADAFE is aware there are deficiencies in theorganization and has recently commissioned its consulting engineers, Electricitede France, to provide specialized staff to investigate the situation and makerecommendations for a solution.
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25. It is difficult therefore to appraise, except in a general way,CADAFE's 1963-68 program because of the changes in its structure which willarise from action on the Consultant's recommendations. For this reason, theBank's appraisal has been limited to the more immediate and urgent program ofsystem improvements in the period 1963-64.
IV. POWER MARKET
26. The 15 regional administrations, which are the operating divisions ofCADAFE, are geographically grouped for general statistical and planning purposesinto four regions. These are:
Region I: the north-central, extending from Puerto Cabello to southand east of Caracas, including Lago de Valencia;
Region II: the eastern, extending from Puerto La Cruz to Carupano onthe Caribbean coast, and south through Ciudad Bolivar andPuerto Ordaz, almost to British Guiana;
Region III: the western, extending from Valencia to the western shoresof Lago de Niaracaibo, and up to the Colombian borderthrough the Andes; and
Region IV: the south-central, extending over the inland area south ofa line through Valencia and Caracas.
27. These four regions are not interconnected with each other. Region Iis the most important and accounted for about 70% of all energy sales in 1962.Within Regions II, III and IV there are some 40 small isolated distributioncenters in small towms.
28. In the four regions covering the area from the relatively inaccessibleAndes mountains near the Colombian border to the savannah extending to BritishGuiana, CADAFE is now providing electric service to some 500 communities.CADAFE estimates that the population in the areas served is about 1,700,000,about 22% of the total population of the country. There are about 300,000customers.
29. The largest consumer is the Instituto lNacional de Obras Sanitarias(INOS) a government water supply agency operating throughout the country. Themajor INOS load is Caracas, where pumping requirements for city water areabout 40 HW. In 1962 INOS accounted for about 36% of CADAFE total energy sales,but only 4% of total revenues (paragraphs 62-63).
30. The annual growth of electricity sales, by region, is shown in thefollowing table:
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19582/ 1959 1960 1961 1962
Region I kwh millions 357 489 4841/ 645 733Region II kwh millions 52 58 81 90 108Region III kwh millions 109 134 164 182 192Region IV kwh millions 11 13 15 16 19
Total 529 694 744 933 1,052
% Growth annually 31% 7% 25% 13%
Forecast Load and Sales
31. Whilst expansion will take place in all regions, those other thanRegion I will expand mainly by an increase of residential loads and increaseof rural distribution networks. By far the most important future developmentof the CADAiFE system is projected for Region I in which sales are forecast toincrease at a rate of about 13% in the next few years, reaching 1580 millionkwh by 1968.
32. The main general industrial and commercial development of Venezuelahas taken place in Region I in the past few years, particularly in industrialparks adjacent to the cities of Valencia and Maracay. The most importantindustries, as consuners of electricity, are rubber, cement, food products,motor vehicle assembly plants and the government-owned petrochemical plant.
33. Industrial sales have increased from 78 million kwh in 1958 to 125million kwh in 1961. During 1962, total sales in this region reached about700 million kwh.
34. CADAFE has prepared energy sales forecasts covering all regions forthe next 10 years, 1963-1972. These forecasts form the basis for the proposedimprovements and rehabilitation works in the various service areas. Fore-casts of future sales in each of the communities, or groups of small communitiesserved, have been projected on the basis of past consumption, known futureloads (such as expansion of individual industries), population increases,income levels, and other factors affecting economic activity in each area.The demands of major consumers such as INOS, and the government-owned petro-chemical plant at Moron, have been estimated separately. CADAFE's totalsystem load forecast is shown below, and in detail for each region in Annex 1.
1/ Under CVF operation/ Part of the INOS load was supplied by La Electricidad de Caracas during
1960.
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Percent IncreaseYear Sales - million kwh Over Prior Year
35. The average annual rate of growth in the past 5 years (including 1962,for which ten months records were available when the forecasts were made) was18.8%. The forecast average annual rate of growth for the 6 years 1963-68 is13.4%. A Bank mission which was in Venezuela during June and July 1962, in con-nection with the Guri Project, made energy sales forecasts which correspondclosely with the forecasts prepared by CADhFE. The CADAFE forecasts are reasonab
V. EXPANSIOiN PROGRAM
36. To meet the forecast increase of consumption in the four regions,CADAFE has prepared a program of investments in new facilities and reinforcementand expansion of existing facilities covering the period 1963-68. (See Annex 3).Before this long range program can be made firm the problems of organization dis-cussed in paragraphs 18 to 25 must be solved and detailed engineering plansprepared. Regardless of the final details of the 1963-68 program, the missionconsiders that the 230-kv and 115-kv transmission work proposed for completionin 1963-64 is urgently required, has been adequately planned, and can be satis-factorily completed. The remainder of the 1963-64 program consists largely ofnormal expansion and rehabilitation of distribution facilities, additions todiesel generating capacity in isolated areas, and small amounts for initiationof engineering investigations for a 24 JiW hydroelectric plant in Los Andes.The planning of the program other than the major transmission works, has notbeen undertaken in any detail, and the cost was estimated by rough calculationsbased on general knowledge of the situation by the management. Although moredetailed planning would be required before any consideration could be given tolending for these miscellaneous items, expenditures for the type of improvementsare no doubt necessary and there could be no objection to CADAFE's proceedingwith the work. An understanding, however, hias been obtained that during 1963-64CADAFE would not undertake any major works other than those proposed for Bankfinancing, and the miscellaneous items included in the 1963-64 progran, exceptwith the agreement of the Bank, and that its longer range planning would bereviewed with the Bank when the recommendations of the reorganization study arebeing placed in effect.
1/ INOS load decreased 12%, part served by La Electricidad de Caracas 1960.2/ Major increase in petrochemical load.V Mlajor increase in INOS load in 1966-67; second water-supply transmission
pipeline for Caracas.4/ 1962 estimated from 10 months' records.
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37. The CADAFE expansion program is predicated on the availability offirm power from La Electricidad de Caracas (see Annex 2): the only alterna-tive would be the construction by CADAFE of additional thermal plant, whichafter 1968 would be operated only at very low load factor once Caroni Riverpower is available. CADAFE will purchase power from E1DELCA in 1968 and lateryears, rather than expand its own generating plant. However, a critical ele-ment in the near future will be negotiation of satisfactory interconnectionagreements to provide for power interchange between the CADAFE and La Elec-tricidad systems, since the CADAFE system will require increased productioncapacity by about 1966 before the com,pletion of Guri in 1968.
38. The La Electricidad system operates at 50 cycles, whereas both CADAFEand EDELCA are 60 cycle systems. Since La Electricidad is potentially a majormarket for Guri power, and since CADAFE will require interim power during1966-68 ways and means of effecting unification of frequency are under activeinvestigation. A Comision representing La Electricidad, CADAFE, and CVG iscurrently studying the problem, and hascompleted a preliminary report.
39. The engineering problems involved in making an interconnection forinterim power sales to CADAFE by La Electricidad are not conplicated. LaElectricidad generating units are designed for either 50 or 60 cycle operation.Several could be converted to 60-cycle operation in a short time, and connectedto CADAFE's system at 66-kv. The Bank has received an assurance from Govern-ment that the La Electricidad system will be converted to 60-cycle operationby the time the Guri Project comes into operation.
1963-1964 Construction Program
40. Important works now in progress for completion early in 1963 are:
(i) The Las Morochas-Cabimas double-circuit, 115-kv transmissionline about 39 km long;
(ii) The Las Miorochas gas turbine plant with an installed capacityof 3 x 7.5 P1W for which the powerhouse, 11/115-kv switchyardand most auxiliary wiring are now complete. The three STALgas turbine generating units are now being delivered;
(iii) Conpletion of the second 8 MW gas turbine installation atPunto Fijo power station, recently placed in corrmercialoperation.
41. New work for which construction would be undertaken in 1963-64 con-sists of the following:
(i) a 230-kv, 638 km long, double-circuit steel tower transmissionline, and substations, between the existing 370 IMWV Macaguahydroelectric plant operated by EDELCA and the existing thermalplants in Regions I and II;
(ii) modifications to the existing 115-kv transmission systems inRegions I and II;
(iii) system-wide expansion and rehabilitation of distributionfacilities;
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(iv) additions to diesel generating capacity at 10 isolated locations inRegions III and IV; and
(v) the initiation of a new 24 MW hydroelectric project at Mucujum, inRegion III, for which planning is now being started. This projectis now expected to be in operation before 1966 at which time loadforecasts indicate that new capacity will be needed in the Region.
Bank financing is proposed for (i) and (ii) only.
42. The estimated costs of this immediate program of new work are asfollows:
1963 1964 TotalBs x 1000 US$ x 1000 Bs x 1000 US$ x 1000 Equiv. US$ x 1000Local Foreign Local Foreign
43. The major elements of the 1963-1964 program are the 230-kv trans-mission line and substations, and the 115-kv system modifications, which to-gether will integrate the thermal capacity in Regions I and II and inter-connect i-t with the Macagua hydroelectric plant. Moreover, these facilitieswould supply, from efficient central plants, areas now dependent on high costdiesel generation.
44. The consulting engineers who have assisted in the planning and designof the 230-kv and 115-kv work are satisfied it represents the most economicsolution to system power transmission and stability requirements. The Bank ngreeg
;itth this cc-c-upaion. Costs of the work are known, as internationalbids have been accepted for approximately 90G of the work. The foreign ex-change cost of this work is about equal to the external financing (in additionto CVF's contribution) which CADAFE will require in 1963-1964 to complete theoverall program for these two years outlined in paragraph 41.
45. In view of the definitive planning for construction of these works,the firmness of the cost estimates, and the fact that the foreign exchangecomponent is approximately equal to CADAFEts 1963-1964 construction budgetshortfall, the 230-kv and 115-kv works would form a suitable Project forBank financing.
VI. DESCRIPTION OF PROJECT
46. The work which would be constructed under the proposed Bank loanwould comprise the following:
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(a) 230-kv facilities
(i) a 638 km long, 230-kv double-circuit steel tower transmission
line, from the Macagua hydroelectric power station to SantaTeresa, about 30 km south-east of Caracas;
(ii) 230/115-kv terminal substations with appropriate switching atMacagua and Santa Teresa and transformer capacities of 150and 100 MVA, respectively;
(iii) a 230/115-kv substation with appropriate switching and atransformer capacity of 30 MVA at Naricual, about 15 km southof Puerto La Cruz;
(iv) a 230/34.5-kv substation with appropriate switching and atransformer capacity of 23 MiVA at Ciudad Bolivar;
(v) a 230-kv transmission line sectionalizing switching stationat El Tigre; and
(vi) telemetering and carrier current communication equipment;
(b) 115-kv facilities
(i) 34 km of double-circuit 115-kv steel tower transmission lineand 115-kv switching to permit circuit reconnections and toeliminate taps on the existing 115-kv system linking Puerto
Cabello, Santa Teresa, and the three principal Region I thermalplants;
(ii) 14 km of double-circuit 115-kv steel tower transmission line,
to interconnect the new Naricual 230/115-kv substation withthe Puerto La Cruz system;
(iii) a 115/34.5-kv substation with appropriate switching and atransformer capacity of 16 iM1VA at Naricual;
(iv) a 115/34.5-kv substation with appropriate switching and a
transformer capacity of 30 MVA at the industrial park ofValencia.
Estimated Cost of the ProJect
47. The estimated costs, including interest during construction, of
the work covered by the proposed loan, are shoim on the following page.
48. International corpetitive bids for the 230-kv line, and the fiveassociated substations were solicited and evaluated by CADAFE in a manneracceptable to the Bank. Contracts for this work have been executed. Pro-curement will be from French, German, Italian, Japanese, Swiss, and UnitedStates sources. CADAME will construct the civil works required for the fivesubstations, and has included adequate contingency and overhead allowances inits local currency cost estimates. Engineering and design for the 115kv systemwork are satisfactorily advanced. International competition will be solicitedfor this work.
Consulting Engineers
49. CADAFE will retain consultants in connection with both the factoryand field inspections during manufacture and erection of the transmission linesand substations.
Purchasing Procedures
5o. Very little electrical equipment required for public utility use isat present manufactured in Venezuela and it is the practice of CADAFE to makeall purchases through international competitive bidding.
Insurance
51. Adequate insurance cover is carried by CADAFE on all insurable partsof its assets. Each item is considered on its individual risk basis and in-surance cover arranged through brokers by the Insurance Department of CADAFE.
52. Types of insurance cover currently held by CADAFE are briefly asfollows:
Explosion and resulting damage to pressure vessels and apparatus;Fire and lightning damage;Damage resulting from aircraft crashes;Explosion damage to plant and buildings;Damage and loss of equipment during transport;Personal property, third party;Fidelity;Personal Accident;Professional staff accident and sickness;Vehicle damage.
VII. ECONOMIC ASPECTS OF THE PROJECT
53. At the present, CADAFE systems in the areas of Caracas, Puerto LaCruz, El Tigre, and Puerto Ordaz/San Felix are not interconnected. Continuedexpansion of service, including either sales to the private system in CiudadBolivar or its acquisition, can proceed by constant investment in smalldiesel and gas turbine plants, or by system interconnection with generation
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supplied by larger and more efficient central stations. The latter develop-ment would require initially larger capital investments than the former, butin a reasonable period -- about 10 years -- will result in a lower overall
cost when operating expenses are taken into account. CADAFE's combined RegionsI and II will be short of generating capacity by about 1966 while surplusthermal capacity will be available on the neighboring privately-owned LaElectricidad de Caracas system. Certain amounts of low cost energy would beavailable now to CADAFE from the Macagua hydroelectric plant, and with theinitial operation of the Guri Project in 1968, adequate firm power will beavailable until the mid 1970's.
5h. If arrangements are made with La Electricidad to supply power toCADAFE prior to the operation of the proposed Guri Project, CADAFE would notbe required to install new thermal plant, as the construction of the proposed230-kv Macagua-Caracas line interconnecting the CADAFE system with theMacagua-Guri hydroelectric stations would enable CADAFE to continue systemdevelopment on an economically sound basis. The following advantages ofinterconnection would accrue:
1. Pooling of reserves, and consequent postponement of new generatingplant requirements;
2. The economies inherent in base-loading of existing larger generatingunits; and
3. The advancement of the retirement of diesel generating capacity inareas to be served by the 230-kv system and the release of thisequipment for transfer to other locations.
55. In addition, transmission will be necessary to deliver the powergenerated on the Caroni River to the load centers, since major markets forGuri power are the city of Caracas and CADAFE. La Electricidad de Caracasalready has in service a 230-kv line from its thermal plants on the coastnorthwest of Caracas, and has under construction a second circuit to forma ring around the city. The interconnection of this ring with the proposed230-kv line would make Guri power available to the La Electricidad system.
56. The economic justification for the 230-kv interconnecting trans-mission line was studied in detail by a Bank mission in June/July 1962 inconnection with an economic evaluation of the proposed Guri hydroelectricproject. A present worth study was made of the cost of providing CADAFEwith power from independent thermal power stations as compared with the costof the alternative of an integrated system with the proposed 230-kv trans-mission line interconnecting the Caroni River hydroelectric projects withRegions I and II. This study showed that over the life of the transmissionline, the cost of integrated system development would be substantially lowerthan that of isolated development without the transmission line. Reductionsin out-of-pocket expenses and investment costs will more than recover thecost of the line in the first ten years of operation. This study is set outmore fully in Annex 7.
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VIII. FINANCIAL ASPECTS
Past Operating Results and Current Position
57e CADAFE completed its fourth full year of operations December 31, 1962.The results of 1960-1962, the years for which comparable records are available,are shown in Annexes 4 and 6, and are summarized in the following table.
Operation 78.5 39.8 100l 6Depreciation 19.4 24.3 26.0Taxes on Income 0.9 0.7 2,5
98.8 114.8 129.1Net Income 10 0e4 i.4
percent
Operating Ratio 99.0 99.7 98.9Return on Net PlantJ/ 0.3 0.1 0.3
58. Except for minor debts of Bs 15.3 million (supplierts creditsi/ inaid of construction of Las Morochas and Punto Fijo plants, and for studies of
the expansion of the Guanta plant) CADAFEts capitalization consists simply ofthe CVF capital and advances,3/1 which at the end of 1962 totaled about Bs 610million, representing the value of the properties turned over to CADAFE uponits formation, as well as the substantial subsequent cash advances by CVF.These advances, which depend upon annual Government appropriations, have, infact, been the most important source of CADAFE's construction funds and nowamount to over Bs 300 million. CADAFE is under no obligation to pay dividendsor interest to CVF, and in any event could not have done so in the past to anysignificant extent, owing to its poor earnings record. An undertaking has beer.Obtained thit tile CVF advances would continue to be treeted as equity duringthe life of the proposed BRnk loan,
59. CADAFE's operating ratio (all operating expenses including depreci-ation and taxes, to operating revenues) of over 98% during 1960-1962, is extremel
high. Although to some extent this situation reflects the nature of CADAFE'smarket and the condition of the facilities in operation (whose rehabilitationhas required large, essentially unproductive expenditures) it is also indicativeof the need for closer management control if improvement is to be made.
1/ the ratio of net income after taxes to average net plant in service./ any interest on these credits has apparently not been charged against income.3/ both CVF and CADAFE consider these advances as equity, although the accounts
of both organizations carry them as non-interest bearing debt of no maturity.
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60. CADAFE has substantial uncollected billings from energy sales toother government agencies, among them INOS and municipalities which purchasestreet lighting service. These uncollected amounts are now about 14% of all
billings. The Government has agreed to 7ssist CIDADE by the use of all businessand legal methods available to reach a satisfactory solution of this prrblem.
61. Largely due to its m6ke-up of many small, scattered systems, CADAFEtoday continues to maintain a large numbe'r of different tariff schedules forcomparable classes of service. To a certain extent the tariff structurereflects varying fuel costs and load densities in the several administrativeregions. For example, 1961 average residential sales realization in CADAFE'sterritory surrounding Caracas was 29.0¢ (US 6.4¢)/kwh while that in the remotesparsely populated south-central area was 39.70 (US 8.7¢)/kwh. CADAFE'smanagement is aware of the administrative and billing burdens imposed by itsunwTieldy tariff structure, as well as the public relations implications, andthe subject has been studied by both Electricite de France and CADAFE itself.-
62. The overall '961 average sales realization was 12.50 (US 2.8¢)/kwhincluding the previously mentioned substantial sales to INOS. With a rateof only 1.50/kuh (US mills 3.3), INOS accounted for 36% of all sales, butcontributed only 4% of CADAFE's revenues. Average 1961 realization on allsales other than INOS was 18.7¢ (Us 4.10)/kwh. The rate paid by INIOS has ofcourse been long recognized as inadequate, since it is less than the realproduction cost of energy in CADAFE's modern 80 MvW La Mariposa steam plant,which is electrically close to the Caracas water-pumping system. This INOSload is scheduled to increase 100% by 1968 with the completion of a secondmajor water supply pipeline to the city from the Rio Tuy.
63. Adjustment of INOS' power rate lies wholly within the power ofthe national Government, since both CADAFE and INOS are agencies of it.Beginning in 1963, the rate wa-s doubled to 3.0¢ (US mills 6.6)/kwh whichwill of course be of benefit to CADAFE. This rate should be studied in detail,however, to determine and place in effect a truly realistic rate which shouldcover all of CADAFE's costs, including the cost of capital, of serving this load.
64. While CADAFE nominally has the authority to increase its rates, in
practice it is subject to government pressures to maintain rates no higherthan the private companies which serve the inherently inore attractive markets.2/The adequacy of the existing tariff level in general is discussed in paragraph
74.
Projected Operating Results
65. Proposed Bank financing of that part. of CADAFE's 1963-1964 constru-ction program discussed in paragraphs 46 and 47 awould still require advancesfrom CVF of about Bs 85 millions over the two years. Based on CADAFE'sapplication for a Bank loan to assist in financing its short-term program,
1/ Estudio Economico del Sistema de la Zona Central. CADAFE: December 1961.
2/ There is no public utility regulation in Venezuela.
- 15 -
CVF has committed Bs 55 million for CADAFE in 1963. Although CVF itself is
dependent upon annual government appropriations for its funds, and thus cannotmake definite commitments past one year, it has indicated that it will continue
to make contributions to CADAFE in support of its construction program, in-
cluding approximately Bs 30 million which will be required in 1964 to completethat year's works. When estimlatinlg.future operating lresults of CADAFE, ithas therefore been assumed tha.tt;e 't" i963-,1964 programr would be financed by:
(i) reinvestment of net income;
(ii) CVF contributions of Bs 85 million; and
(iii) a US$14 million (including interest during construction) Bank loanat 5-1%, repayable in 27 years including a two-year grace periodduring construction, equal to the foreign exchange costs of the
Project described in paragraph 47.
It has been agreed th..-t any cor:trtct's entered ir:to by CVF in behlfof CADAFE will be obligations of CADAFE and will be reflected in its accounts.
66. On the foregoing basis, estimated financing of the 1963-1964 con-
struction program is shown below, and in more detail in Annex 5.
Bs millions1963 1964
Construction Program 109.7 94.4
Net Income 9.9 15.4Depreciation 28.1 31.8
38.0 47.2Less: Repayment of Supplier's
Credit 12.5 0.8
Net Internal Cash 25.5 46.4CVF Advance 55.0 30.0Proposed Bank Loan 36.8 26.6
117.3 103.0
The projections of CADAFE's operating results discussed below in paragraphs69 through 73 indicate that future CVF contributions can be reduced consider-
ably below past levels as CADAFE's net internal cash available for reinvest-ment increases. By the late 1960's, CADAFE should be able to finance the majorportion of its construction program requirements from internal sources.
67. For the reasons outlined in paragraphs 22 through 25, all projectionsare based upon CADiFE's existing system, and do not include the furtheracquisition of independent properties.
- 16 -
68. CADAFE forecasts the need to purchase energy in bulk from LaElectricidad de Caracas and EfELCA in accord-ance.with the schedule in Annex 2.These projected purchases are related to tne combined generation availablefrom all three interconnected systems to meet forecast loads. Prior toentering into formal power interchange agreements, the three companies willretain consultants to assist in developing equitable bulk tariffs. For thepurposes of making operating projections in this appraisal, sales to CADAFEwere priced at 1.5¢ (US mills 3.3)/kwh from La Electricidad, and 1.0¢(US mills 2.2)/kwh from 'EFELCJ. In the case of t.'p -lectrididad, this repre6entsa price some 15% higher than 1961 system production costs. In the case of
EDtLCA, the price was developed fronm actu?al costs at Macagua and estimated costsat Guri. Although these prices are subject to study and negotiation, themission considers them reasonable for use in the projections of CADAFE'sfuture operations. In this connection, estimated purchased power expenses inthe period 1965-1968 average about 5% of total operating expenses.
69* Based on the sales forecasts discussed in paragraph 3h, and atcurrent power rates, including the new rate for INOS which at 3.0¢/wcvjh istwice that of previous years, it is estimated that CADAFE's return on netplant in service, after taxes, will show continuing improvement from 2% in 1963to about 5% in 1968. This is principally attributable to two factors: adepreciation policy which keeps net plant fromn increasing as rapidly as grossplant; and a modest but continuing reduction in operating ratio. From theviewpo4nt of net return on net plant in service, CADAFE's current and projectedoperating results are unsatisfactory. CADAFE should be producing an 8% return.However, in view of the fact that the effects of the reco.mmended reorganization(paragraph 21) will not be fully known for about two years, it would not bereasonable to expect CAD2-iFE to earn 8% before 1966.
70. When considering the financial operations of CADAFE, another mean-ingful parameter, in addition to return on plant, would be the operating ratio.Gradual improvement from the extremely high levels in the past rnay be reason-ably expected but with 94% estimated for 1963, and 87% for 1968, it isapparent that close control of operating expenses is a critical managementproblem. This highlights the need for the rapid solution of existing organi-zational problems and consolidation of operations before further propertyacquisitions are undertaken.
71. CADAFE should be able to finance ab9ut 35% of all its constructionprogram cash requirements frcm net internal so .rces during 1963-196h, andabout 66% of its 1963-1968 requirements, without provisions for payment ofdividends or interest to CVF. The critical period in respect to constructionfund availabilities is 1963-1964, the years for which Bank financing is pro-posed. The increasing ability to meet construction cash requirements internallyis in part due to the reduced level of investments required in the latter halfof the decade 1963-1972 when Caroni River powe,r will bp available in bulkthrough the proposed 230-kv interconnection.,
1/ The almost total absence of budgeting for 1968, as shown in Annex 3, yieldsan apparently high "Percent construction program firanced by net internalcash" for 1968, as shown in Annex 5.
- 17 -
72, Under the assumed terms of the proposed Bank loan, debt service wouldbegin in 1965. Coverage by internal cash generation after taxes will be 10times in that year, and increase thereafter, reflecting both the fact that theproposed Bank loan would be small in relation to CADAFE 1s total capitalization,and the absence of any other substantial debt,Y In these circumstances, theusual debt-limitation covenant related to earnings would not be appropriate.Perhaps an operating ratio requirement could be considered after CADAFE hascompleted its reorganization. CADAFE has agreed, during 1963-1964 not to incurany long-term debt without prior approval of the Bank, After the reorganiza-tion is completed, the Bank could then decide what type of debt-limitationcovenant would be appropriate.
73. Because of CADAFE's high operating ratio, relatively small changes infuture sales levels, as compared to forecast levels, will have an appreciableeffect on operating income. Nevertheless, CADAFE would still be able to meetall operating expenses, including depreciation and debt service on the proposedBank loan, if projected 1963-1968 kwh sales were 30% lower than forecast. How-ever, planned construction expenditures during this period would then have tobe reduced by about 20%.
74. CADAFE's existing tariffs are in the aggregate adequate to providesufficient cash for operations and financing expansion. They are not adequate,however, to produce an 8% net return on net plant in service. Serious consider-ation to an increase in revenues is in order now, and CADAFE has informed theBank mission it proposes to retain a specialist firm of consultants to studyits tariff structure. To achieve by 1965 an 8% return on the basis of presentprojections, revenues would have to be about 25% higher than the forecastlevel, even when the 4% reduction in operating ratio projected for 1963-1965is taken into account.
Accounts
75. CADAFE is currently using the system of accounts instituted underCVF management. In connection with the recent installation of electronic dataprocessing equipment for speeding the customer accounting function, CADAFE hasunderway a revision of its general accounting system, which when completedduring 1963 should place its accounting on a basis comparable to the UnitedStates Federal Power Commission Uniform System of Accounts.
Audits
76. The accounts of CADAFE are audited by CVF. CADAFE and CVF haveagreed that in order to comply with the Bank's requirements, an independentfirm of accountants satisfactory to the Bank would be appointed.
see paragraph 58.
- 18 -
IX, CONCLUSIONS
77. CADAFE's proposed 1963-1964 program is reasonable in view of loadforecasts and system requirements (paragraphs 34j, 35, and 36).
78. The foreign exchange kostsfo;f the 230-kv andill5-kv transmissionsystem work scheduled for 1963-1¢964 would be.suitable 'for Bank financing, whichwith CADAFEts projected income and the expected contributions from CVF wouldenable CADAFE to complete the proposed construction program (paragraph 66).The estimated costs are reasonable and the work could be completed in the timescheduled (paragraph 47),
79, Past operating results have not been good when measured by return onplant, or by operating ratio. This situation is a reflection of the natureof CADAFE t s service territories, the condition of the scattered small propertieswhich comprise the system, the rapid acquisition of properties, and pressuresfrom the national government to expand service, which have created organizationalproblems within CADAFE headquarters and in the operating administrations(paragraphs 21 and 22).
80. Future operating results should continue to irrprove modestly (para-graphs 69-73). CADAFE will be able to finance about 66% of its constructionprogram requirements in the next six years (paragraph 71)o
81. CADAFE would be a suitable borrower for a 20-year Bank loan, includinga grace-period of two years, of approximately US$14 million, including interestduring construction, to be expended in the years 1963-1964. The VenezuelanGovernment has agreed with the Bank that:
(i) The Government will not require CADAFE to take over additionalproperties until reorganization has been completed (paragraph 22);
(ii) CADAFE will not undertake any major works other than those listedin the 1963-1964 progran as shown in paragraph 42 except with theagreement of the Bank (paragraph 36);
(iii) During the period to the end of 1965, CADAFE will not incur anylong-term debt unless the Bank otherwise agrees (paragraph 72);
(iv) During the life of the proposed Bank loan, CVF advances to CADAFEwill continue to be treated as equity (paragraph 58);
(v) CVF will advance the funds required to finance the 1963-1964 program(paragraph 65, (ii)); and the Government has guaranteed to take theaction required of it for this to be done;
(vi) Any contracts entered into by CVF on behalf of CADAFE will beobligations of CADAFE, and will be reflected in its accounts;
- 19 -
(vii) The services of Electricite de France will be retained, asprovided for in their existing agreement, to plan and assistin the implementation of a program of reorganization, improvedsystem and financial planning, and improved information pro-cessing (paragraph 24);
(viii) Consultants will be engaged to review the structure and generallevel of existing tariff schedules so that simplified tariffsat levels appropriate in terms of revenue requirements can beput into effect (paragraphs 61, 74);
(ix) CADAFE will adjust its rates to such levels and improve itsoperating ratio to such extent, that in the year 1966 a re-turn of 7% on net fixed assets in operation and thereafteran 8% return thereon will be achieved (paragraphs 69, 70 & 74);
(x) The Government will arrange the prompt payrrent by otherofficial agencies of CADAFE's uncollected billings for energysales (paragraph 60);
(xi) An independent firm of public accountants, acceptable to theBank, will be appointed to make an annual audit of the CADAFEaccounts (paragraphs 76);
(xii) Towards the end of 1964 the generating capacity of CADAFL willbe insufficient to carry the expected loads of its system, andin view of this, CADAFE has already started negotiations withLa Electricidad de Caracas for a mutually agreeable powersales contract.
September 3, 1963
CADAFE
ENERGY SALES 1960 - 1968(Millions of Kwh)
Actual Estimated
1960 1961 1962 1963 1964 1965 1966 1967 1968
REGION I. 484.3 644.6 733,0 867.8 969.5 1,055.0 1,225.6 1,481.6 1,579.5
REGION II. 81.1 89.5 107e5 132.6 148.3 164.4 181.4 199.5 217'07
REGION III. 164.4 182.0 192.4 219.5 244.2 272.6 303.6 336.8 372.4
REGION IV. 14.9 16.3 19.2 22s4 25.5 29.1 33.1 37.6 42.3
TOTAL 744.7 932.4 1,052.1 1,242.3 1,387.5 1,521.1 1,743.7 2,055.5 2,211.9
ANNEX 2
CADAFE
PROJECTED ENERGY PURCHASES
1965 - 1968
Millions Kwh
Purchases fromLa Electricidad
Year de Caracas CVG
1965 610
1966 400 570
1967 400 530
1968 400 440
CADAFE
1963-1968 CONSTRUCTION PROGRAM SUMMARY(Ihousands of Bs and US$)
1963 964 1965 1966 1967 1968
Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Local ForeignCurrency Exchange Currency Exchange Currency Exchange Currency Exchange Currency Exchange Currency Exchage
1/ Exclusive of further property acquisitions2/ Includes write-off of intangible assets3/ 40.5% on taxable income1/ Estimated from six months' statement
ANNEX 5
CADAFE
FORECAST OF SOURCES AND APPLICATIONS OF FUNDS !Millions of Bolivares
1/ Exclusive of Further Property AcquisitionsZ/ Estimated from Mid-Year Statement
A'NNEX 7
ECONOilIC ANALYSIS OF 230-KCV SYSTDi!
CADAFE proposes to construct a 638 km 230-kv double-circuit steeltower transmission line to link its two major market areas in Regions I andII (Valencia - Maracay - Caracas environs, including demand of the watersupply system for the latter city; and Puerto La Cruz - Barcelona - Cumana)with the new government-owned Nlacagua hydroelectric plant near Puerto Ordazon the Caroni River. These two areas are not interconrnected, although eachhas local ll-icv transmission facilities, and the H4acagaa plant is operatingto supply only the government-owned steel mill at M4atanzas and the towni ofPuerto Ordaz. Between the Puerto Ordaz area and Puerto La Cruz, there areseveral isolated, privately-owned diesel-based systems, the principal ofwhich serve CiuUad Bolivar and El Tigre. The proposed 230-kv line woald berouted to permit serving these isolated private systems from central substations.The current load and generating capacity in the areas which the line woaldsupply is shown below.
1962 Peak - Nd Capacity - IPW
Region I 138 213Region II 24 53Matanzas, Ciudad Bolivar 209 325
When the iMatanzas steel mill reaches full operation in 1963, theload in that area will rise to about 220 1vi'.
The principal generating plants on the CADA,.E systems, togetherwith their maximum gross capabilities are:
La Mariposa 85 NWLa Cabrera 96Puerto Cabello 32Guanta 2L
The isolated diesel stations in the areas under consideration havean aggregate capability of 29 NW.
The Proposed 230-kv Transmission Line
The three major termini of the line would be at Piatanzas (theMacagua hydroelectric plant); Puerto La Cruz (the existing CADAFE Guanta Igas-turbine plant); and Santa Teresa, a site southeast of Caracas where anew substation would be erected. At these three termini, 230/115-kv trans-formation would be installed to connect the proposed line with existing115-kv facilities. The line wiould be tapped with minimum-size transformersat Ciudad Bolivar, and later at El Tigre.
The cost of the line and all associated facilities (terminal stationsand tap-off stations, complete with transformers, switching, etc.) has beenestimated from recent international competitive bidding.
AiNNEX 7Page 2
Millions
Line costs $7.2 Bs 12.9Station costs 4.3 5.5
$11.5 Bs 18.4
This is equivalent to about Bs 71 million, or US$15.5 million, atthe current rate of exchange of Bs 4.54 = US$1.00. The estimated cost of theline alone is equivalent to about US$30,000 per mile.
Benefits accruing fromn Line
Without regard either to the proposed Guri hydroelectric project orthe benefits from an interconnection between CADAFE and the private systemwhich serves Caracas, three principal benefits would be provided to theCADAFE system by the immediate construction of the line:-
1. by integration of its market areas and the 'ikacagua hydroelectricplant, CAD'FE would be able to defer investment in new central stationgenerating plant;
2. advantage could be taken of the economies of operation and, at alater date, of the savinas in first cost inherent in large-sizegenerating units; and
3. the existing high-cost diesel plants could be retired sooner.
When CADAFE first requested the Bank to consider financing the pre-posed transmission line, in early 1962, it was concluded that thle line couldnot be justified on a short-term basis, particalarly if new large thermalpower facilities were also to be added to the system simultaneously, as thenproposed. Subsequently, in the course of an economic evaluation of the pro-posed Guri hydroelectric project, a Bank mission made a study to determinequantitatively the long range advantages which would accrue from the proposedline. The study estimated the cost of system development and operation overthe life of the line (30 years) based upon the load forecasts made by theJune/July Venezaelan mission. Two alternatives wiere studied: thermal-baseddevelopment with, and without the line. In those imarket areas where themission forecasts gave ranges of load growth, the lower estimzate was taken.The study compared both the actual cash costs of the alternatives, and thepresent worth of the cash costs, over the life of the line.
The results of the study are summarized in the followring table.
ANL'EX 7Page 3
COST COMsPARISON10-Year Period -- 1962-1971
Bs MillionsAdvantage
Item of Cost With Line Without Line of Line
Investment in Transmission Plant 83 18 - 65Investment in Generating Plant 203 267 + 64Operating Expense, Generation
& Transmission 87 92 + 5Fuel Expenses 48 59 + 11
Cash advantage of Integration (1962-1971) + 15
The aggregate cash savings over the 30-year life of the line areBs 400 million.
The discount rate at which the present worth of the cash costs ofthe alternatives are equal is greater than 20.
Conclusions
The proposed 230-kv line represents an attractive investment forCADAFE since the indicated return, in an economic sense, is over 20% per annum.The comparison of cash costs, not discounted values, shown above for thefirst ten year period, 1962-1971, covered by the alternative studies, indicatesthat the investment in the proposed transmission facilities would permit savingsof the same order oi magnitude in new generating facilities, while at the sametime realizing substaiitial savings in operating and fuel costs.
AiMEX 7Page 3
COST CONIPARISON10-Year Period -- 1962-1971
Bs MillionsAdvantage
Item of Cest With Line Without Line of Line
Investment in Transmission Plant 83 18 - 65Investment in Generating Plant 203 267 + 64Operating Expense, Generation
& Transmission 87 92 + 5Fuel Expenses 48 59 + 11
Cash advantage of Integration (1962-1971) + 15
The aggregate cash savings over the 30-year life of the line areBs 400 million.
The discount rate at which the present worth of the cash costs ofthe alternatives are equal is greater than 20%.
Conclusions
The proposed 230-kv line represents an attractive investment forCADAFE since the indicated return, in an economic sense, is over 20' per annum.The comparison of cash costs, not discounted values, shown above for thefirst ten year period, 1962-1971, covered by the alternative studies, indicatesthat the investment in the proposed transmission facilities would permit savingsof the same order of magnitude in new generating facilities, while at the sametime realizing substaiitial savings in operating and fuel costs.
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