============================================================================== RED CIENTIFICA PERUANA ============================================================================== This section is from the document '/PIC/pid/pid/perpa119.txt'. Project Name Peru-Electricity Privatization Adjustment Loan Region Latin America Caribbean Sector Energy, Electric Power Project ID 6PERPA119 Implementing Agency Government of Peru Ministry of Energy and Mines, and Comission for Promotion of Private Investment (COPRI) Lima, Peru Contact: Carlos Montoya, COPRI Tel: (5114) 754842 Fax: (5114) 750078 Date Prepared January 6, 1994 Projected Board Date June 1994 1. Project Objectives/Description. The proposed loan would be a $150 million three-tranche adjustment loan to support privatization and regulatory reform in the electricity sector. Tranche releases would be linked to progress in privatization and regulatory reform, as well as maintenance of an adequate macroeconomic policy framework and financing plan. 2. Background. The electricity sector is emerging from a crisis, the result of extended periods of policy and institutional weaknesses at the government level, and of deficient management, operations, and finances associated with inadequate pricing and high indebtedness at the enterprise level. Supplies continue to be affected by frequent interruptions, low reliability and high losses. Drought-induced shortages of hydropower made extensive electricity rationing necessary in 1989 and 1992. 3. Since nationalization in the early 1970s, public electricity service has been provided exclusively by government-owned utilities, including: (a) Electroperu, a nation-wide generation and transmission utility; (b) Electrolima, the second-largest generation company and the largest distribution company; and (c) nine smaller regional utilities. The Ministry of Energy and Mines is responsible for formulating electricity policies and supervising the electricity enterprises. The Electricity Tariff Commission is charged with economic regulation, primarily setting tariffs. 4. Sector Objectives and Strategy. The Government became aware at an early stage of its reform program that, in order to obtain adequate and efficient electricity supplies without draining public resources, far-reaching policy and institutional reforms were needed. Key elements of the strategy include: (a) deregulation of activities where competition is feasible, combined with arm's-length regulation of natural monopolies; and (b) privatization of state-owned enterprises and sector expansion through new private investment. 5. A new Electricity Law and corresponding regulations covering the public system were enacted in late 1992/early 1993. Key principles of the new legal framework are that: (a) generation will be decentralized, deregulated, and made subject to market forces through competition; (b) transmission will provide open access to all suppliers and purchasers under a common carrier system with an adequately regulated toll scheme; and (c) distribution will continue as a natural monopoly, with fully regulated rights and duties of suppliers and consumers. Integrated enterprises are being segmented into independent companies at the generation, transmission, and distribution levels. 6. The new structure of the electricity sector will result in open access to all stages of the grid and free contracting between producers and distributors and major consumers. Large- volume consumers (in excess of 1,000 Kw, accounting for about 40 percent of total sales) will be allowed to negotiate contracts directly with generation and distribution companies. Small- volume consumers will be protected through tariff regulation based on marginal cost pricing. Transactions between generating companies will be self-regulated by the COES (supply pools to manage load dispatch). 7. By end-1989, electricity prices were only 18% of economic costs overall (and only 2.3% for residential consumption). Prices have been increased substantially since the new Government took office in August 1990. At end-1993, tariffs averaged roughly 77% of economic costs (defined as short-run marginal costs over the following 48 months) for all consumers and 61% for residential consumers. 8. Project Implementation. The Ministry of Energy and Mines is responsible for implementing regulatory and institutional reforms in the electricity sector. An inter-ministerial commission (COPRI) oversees the Government's privatization program. Special privatization committees, reporting to COPRI, have been appointed to implement the privatization of Electrolima and Electroperu. Consultants have been hired and technical work is well advanced. Both companies are expected to be privatized during 1994. 9. Tranche disbursements will be linked to continued progress in four areas: (a) maintenance of a macroeconomic policy framework and financing plan consistent with the objectives of the reform program; (b) further legal, regulatory and institutional reforms in the electricity sector, such as enactment of anti-trust measures for the sector, and reinforcing the autonomy of the Electricity Tariff Commission; (c) further adjustment of electricity prices to economic levels; and (d) progress in the privatization of the Government's holdings in the sector. As a quick-disbursing adjustment loan, the tranche disbursements will be used to finance general eligible imports. 10. Environmental Aspects. General environmental legislation is adequate. Detailed environmental regulations for the electricity sector are being prepared and will be implemented shortly. These regulations will set out the environmental standards for the sector and procedures for preparation of environmental impact assessments for new projects. Contact Point - Public Information Centre The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 ________ Note: This is information on an evolving project. Certain components may not necessarily be included in the final project.  .