KELLEY, DRYE MEMO
The Electric Sector in Venezuela: Recent Developments
September 1997
Presidential Decree no. 1558 (the "Decree") of October 30, 1996 establishes basic rules for generation, interconnection, transmission, distribution and sale of electricity in Venezuela. It also defines the regulatory entities charged with application of these rules.
The Decree mandates decision making on principles of economic efficiency and free competition. Although the Decree mentions privatization of the country's public electric companies as well as reform of the tariff structure as possible means of achieving these principles, it does not provide specific measures to institute these steps. Instead, it limits itself to establishing a regulatory framework for setting tariffs and for the operation of markets for the sale of electricity.
1. Regulatory bodies
The Ministry of Energy and Mines (the "Energy Ministry") is the main body with supervisory and regulatory responsibility for the national electric sector. It grants licenses and concessions required, with limited exceptions, by the Decree to generate, transmit and distribute power. It also has ultimate responsibility for setting transmission tariffs and maximum tariffs for sale of electricity to final users not participating in the wholesale electric market.
The Regulatory Commission of Electric Energy (the "Commission") provides advice to the Ministry, and the Foundation for the Development of the Electric Sector (the "Foundation") is to provide technical assistance. The Commission is to make recommendations on electric tariffs, supervise application of a uniform accounting system in the electric sector, and make recommendations on the national electric sector development plan. The Foundation is to contribute to development of the electric sector by providing technical advice on the provision of electric service, the rational use of energy, the methodology of determining tariffs, application of tariffs and implementation of a uniform accounting system.
2. Accounting transparency
The Decree requires electric companies to maintain accounting and statistical information in accordance with a uniform accounting system, to be overseen by the Ministry of Energy and Mines, and to provide this information when asked by any regulator. Electric companies must also provide annual financial information certified by external auditors.
3. Prices
Prices in the electric market are to be governed by the Unified System of Operation and Remuneration of Generation and Transmission (the "System"). The Foundation is to design the System, and submit it to both the Commission and the Energy Ministry for approval. The System is to compensate generators for their fixed and variable costs through determination of hourly price of generation. The aggregate price of generation at the point of exchange in the national grid will include the corresponding cost of transmission.
The Energy Ministry has the ultimate responsibility for setting transmission tariffs and the maximum tariffs applicable to final users. Non regulated clients, who are defined in the Decree as users whose ". . .
characteristics allow them to independently contract for their supply of electricity in the wholesale electric market . . .," will not be subject to the final user tariff.
4. Activities subject to concessions and licenses
A. Generation
Generation of electric energy is an activity "open to free competition within the framework established by the Decree." Notwithstanding this declaration of freedom, for most generation a concession or license is required.
Hydroelectric generation remains subject to concession. The Energy Ministry awards such concessions after approval by the Ministry of Environment and Renewable Resources.
Thermoelectric generation is subject to license to insure that no technical incompatibilities exist with the operation and development of the national electric grid or with any isolated complimentary grids. Licenses are also necessary for modification of existing thermoelectric generating installations.
The Energy Ministry may grant provisional licenses to conduct studies on the expansion of thermoelectric generation. Any request for provisional or permanent licenses is to be published in order to allow third parties to offer objections. Should interest be expressed by third parties, then the Ministry is to organize a public bidding process. The Energy Ministry, with the aid of the Foundation, is to grant the license to the party that offers to generate the energy at the lowest cost. In case similar offers exist for a definitive license, the Energy Ministry is to give preference to a party previously awarded the provisional license for the project.
B. Transmission
Generators, distributors and non regulated clients may have access to the national grid provided that they comply with several conditions. They must pay the transmission tariff established by the Energy Ministry, perform the necessary work to connect to the grid, and observe the technical regulations established by the National Load Dispatch Center (the "Center"). They must also supply any technical and financial information solicited by the Center which relates to transmission activity.
C. Distribution
Distribution of electrical energy is subject to concession. State companies involved in the distribution of electrical energy must permit the use of their installations and transmission lines by other distributors, generators and non-regulated clients. Such third party users must ensure that their use does not impede that particular state company's ability to satisfy its obligations; and they must pay for their use of the installations and transmission lines in accordance with the tariffs set by the Energy Ministry.
5. Wholesale Electric Market
Transactions in the wholesale electric market are to be carried out in accordance with the rules set forth in the Decree and the Ministry's instructions to be published in the Official Gazette. Generators, distributors, and non-regulated clients are participants in the wholesale electric market.
The Center is to oversee the wholesale market. It is to maintain a record of transactions, calculate the hourly price of generation and the cost of transmission, establish a system of conciliation, compensation and monthly payment of credits and debits for the market participants, and maintain statistics on the exchange of energy in the national grid, the hourly price of generation, and the cost of transmission.
Short-term and long-term transactions are to be possible in the wholesale electric market. Short term transactions involve the sale of a generator's surplus capacity, which is defined in the Decree as the difference between the accredited capacity of a generator and the sum of all of its generating capacity which is under long term contract with non regulated clients. The Center, through the use of the System, is responsible for ensuring the proper remuneration of the generator's generation and transmission costs in the short-term market.
In contrast with the short term market, long-term transactions are to take place under a regime of free and direct contracting. The participants in the long-term market are generators and non regulated clients.
6. Conclusion
The delay in issuance of regulations implementing the Decree has impeded efforts by potential participants to respond to the opportunities afforded by the Decree. Implementing regulations for a new tariff framework were approved at the cabinet level of the Venezuelan government in the first quarter of 1997. Final regulations remain pending. Nonetheless, the Decree opens the door to substantial changes in Venezuela's electric sector.
This memorandum was prepared by Kelley Drye & Warren LLP's Project Finance & Infrastructure Group. For further information, please contact Patrick Del Duca in Los Angeles at 2131689-1300 or:
Alan M. Epstein
Anne Falvey
Yves Miedzianogora
Stuart T. Solsky
Steven W. Stein
Kyuhong Yuh
New York
2121808 7800
Andre Van Landuyt
Brussels
01 1132121646 1 1 10
William A. Wilson
Hong Kong
01 118521286910821
E-mail National Law Center for Inter-American Free Trade