What is the current framework for grid expansion?

The current distribution model recognizes for revenue “the costs of supply, according to the structure of an efficient company[1]”, the theory behind them is to provide economic signals of cost recognition to bring it closer to what an efficient company would do, however, by leaving to the distributor’s option the supply to network users located outside the 200 meter band of its facilities[2] it leaves aside the access to communities for which such economic signals do not work. Recently through a series of resolutions of the CNEE for the Distribution Companies, among them the CNEE resolution 109-2020 of April 23, 2020, resolved: “IV Expansion Plans and their respective Investment Programs” establishes Specific Investment Programs”, specifically determines that the costs for the execution of the investment programs that may be recognized in tariffs, will correspond to those works that have been demonstrated to be executed and put into operation”, it also establishes: “The costs that may be recognized in tariffs, will correspond to those works that have been demonstrated their execution and put into operation”, it also establishes: “The costs that are recognized in tariffs, must correspond to efficient costs”: “The costs to be recognized in tariffs must correspond to efficient costs”, further on the resolution mentions a series of parameters in the execution of the investment, without detailing specifically what is meant by “efficient costs”.

On the other hand, the instrument recognizes “(…) the Investment Programs, whose execution is approved within the period of validity of the present tariff schedule are (..) ii. Investment programs related to Rural Electrification Programs: Its purpose is to provide electricity to communities in rural areas, within the concession area of the Distributor beyond the mandatory 200-meter band, in order to promote the development of the least favored areas of the country and contribute to the fulfillment of the electricity coverage objectives established by the Ministry of Energy and Mines in the National Rural Electrification Policy 2019-2032.“

Up to this point we can recognize that the regulatory instrument will recognize investments to the extent that they are “cost efficient” and that they belong to the “Rural Electrification program”.

This being the case, an ordinary citizen of the community that does not have power will wonder why the community has not been electrified?: In the light of the regulations and business common sense, the answer is (i) The Distributor has not done it because its costs are not efficient – according to what the regulator determines – and with that the potential recognized revenue would be lower than the recognized cost, which would produce negative marginal utilities, in other words it does not have the economic signal to make the additional investment; all in the assumption that he is a rational businessman who would look for marginal utility in each additional investment decision and in good faith and given the apparently exclusive territorial characteristic of the Distribution, he would be willing to invest in each option that provides him with additional marginal utilities- , or ii) the Rural Electrification program does not include the community.

We will assume that the plan is sufficiently developed to include the community, and that the distribution companies providing service in Guatemala are bona fide rational entrepreneurs, hence the focus of the analysis will then be on understanding the parameters or barriers related to “efficient costs”, to explain to the community member why such “recognized efficient costs” do not provide the economic signals for the distributor to provide energy access and supply to the community on an ongoing basis.

As for the regulator’s determination of efficient costs, it apparently assigns them based on the investment costs that it theoretically determines to be those of an efficient company under the conditions of the Distributor’s network in question – which it uses to define tariffs – by means of specialized studies that it contracts, i.e. it is assumed that the investment necessary to provide access to energy to a new community are the theoretical “efficient costs” that the regulator has calculated based on studies.

In light of the evident limited expansion of the distribution network, it is reasoned that distribution entrepreneurs do not have the economic signals to make investments in rural electrification and that a new mechanism is needed to find the “efficient costs” for the necessary investments in rural electrification.

How to define “efficient costs” for investments to be made?

The remuneration model for electricity transmission infrastructure gives the CNEE the power to set a maximum toll value to carriers for the use of their facilities, considering economically adapted facilities based on a cost mechanism called New Replacement Value “NRV” which is the cost that would have to build the works and physical assets, with the technology available in the market, to provide the same service[3].

As indicated above, the remuneration model established in the RLGE also includes the possibility of expansion through public bids[4]; the theory establishes that the conditions of an efficient company are met through a competitive bidding mechanism, which is an internationally recognized practice to determine efficient costs that the public must pay, provided that the competitive bidding conditions are reasonably free of barriers to free competition, sufficient scale to achieve relevant economies, sufficient conditions of certainty, appetite of potential participants that generates abundant supply, among others.

Likewise, as referenced above, as a precedent the MEM has already exercised the power to define the mechanisms to award extensions and electric transmission facilities, in the case of the Transportation System Expansion Plan called PETNAC[5], 2014, said plan was substantially tendered and awarded[6] through the payment of a fee to the vested parties.

It is worth noting that the objectives of the referred plan established: “ii. Increase the rural electrification index from 82.7% to 90.0% in 2015, as defined in the PET ; and from 90.0% to 95% in 2021, by expanding the coverage of the transmission networks of the National Interconnected System (SNI). iii. Increase the electrification rate between 80% and 85% by 2015 in the departments that currently have the lowest electricity coverage: Alta Verapaz, Petén, El Quiché, Baja Verapaz and Izabal.Therefore, congruent and aligned actions by the institutions for the development of these rural electrification objectives are to be expected.

In other words, having established mechanisms for electricity transmission solutions, it is necessary to link these solutions with the next link in the chain, rural electrification, in order to achieve the ultimate goal, access to energy for these communities.

Following the order of ideas, it is therefore proposed to apply the bidding mechanism similar to that established in the RLGE for transmission network expansions, such as the PETNAC, to define the “efficient costs” for developing the rural electrification plan, thus overcoming the barriers to investment in network expansion.

The final horizon, the proposed solution:

Having gone through the phenomenon, we can conclude in the proposal of adjustments to the regulatory instruments issued by the CNEE, incorporating competitive bidding processes that determine the infrastructure costs to be recognized for investments in rural electrification to the Distributors.

Of course, the detailed alignment of the objectives of the rural electrification policy with the regulatory instruments, as well as its effective and coherent implementation, has a component of will, in which public policy makers and managers, companies and the community must collaborate to achieve the common good as a result.

[1] Regulation of the General Electricity Law RLGE, Article 82, b) states that the costs of the facilities correspond to the replacement cost of all the equipment used to supply energy to users at the time the tariffs are calculated. These costs will be obtained according to the concept of an efficient company.

[2] Regulation of the General Electricity Law RLGE, Article 65, provides that all authorized Distributors. To provide the service, it acquires the obligation to connect to its networks all consumers who require it, and who are located within a strip of no less than 200 meters around its facilities.

[3] General Law of Electricity, article 67, establishes that the toll is calculated by dividing the annuity of the investment, and it will also be calculated on the basis of the New Replacement Value of the installations, optimally dimensioned, considering the update rate used in the calculation of the tariffs and a useful life of 30 years.

[4] Regulation of the General Electricity Law, Article 54 Bis “Extension by Public Bidding”.

[5] Governmental Agreement 008-2014, Ministry of Energy and Mines.

[6] Award Minutes of the Tender Board of the Ministry of Energy and Mines of January 22, 2015.

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