By Matt Horsbrugh

Continued guerrilla attacks on electricity infrastructure in Colombia is just one of the problems the country faces in attempting to reform its power sector. Regulatory, political and legal issues have conspired to delay privatization and much-needed investment.

These are unsettling times for the power industry in Colombia. A stalled privatization process, regulatory question marks and an escalation of left-wing guerrilla sabotage on energy infrastructure throughout the country are constant headaches facing companies operating in South America’s fourth largest electricity market.

In March, the lights went out in 60 per cent of the country due to a fault at the transmission facilities of a key hydroelectric plant. Although the fault was not the result of a specific attack, the state transmission company, ISA, indicated that repeated bombings of substations over the past few months by left-wing guerrilla groups had weakened the national interconnected system. The escalation in guerrilla attacks followed the collapse in February of peace talks between the government and the main Revolutionary Armed Forces of Colombia (FARC) rebel group.

According to Francisco Ochoa, president of the Colombian Generators Association (Acolgen), the guerrilla attacks result in a number of specific problems. Investment possibilities are restricted as the mainly state-owned transmission companies have to assume the cost of reparation and are unable to pass costs on to users. Nevertheless, user costs increase anyway, as more expensive energy sources (thermo) are supplied through the so-called ‘restricted’ market.

Click here to enlarge image

Most dramatically, parts of the country are left without power supply sometimes for weeks on end as repairs are hindered by continuing fighting and the presence of guerrilla fighters (mainly in rural areas of the south).

A weakened system

The security issue has not been the single greatest threat to the power sector. Electricity companies have traditionally accounted for security-related risks and industry experts point out that the interconnected system itself works adequately, able to reroute power supplies when pylons are damaged by guerrilla attacks. But there is a growing recognition that the sustained bombing campaign against the electricity infrastructure is gradually weakening the ability of the grid to cope.

Security costs have the effect of compounding other operating problems. Spain’s Union Fenosa, which operates the Electricaribe and Electrocosta distributors on the Atlantic coast, has been suffering huge losses, estimated at $150 million for 2001. According to José Butillo Suarez, president of Electricaribe and Electrocosta, “The company continues to be in a very critical situation. Essentially, we face a very strong culture of non-payment among our clients and … a series of important regulatory issues.”

Click here to enlarge image

Therefore, recourse to more expensive electricity sources only adds to the company’s problems. However, Union Fenosa has remained committed to its investments, and hopes to turn in a profit on these assets by 2004.

Rate of return

Although the security issue is a prominent concern, it is the tariff structure that has been at the heart of problems between the government and electricity companies. Distributors claim that the rate of return on their investments means that they are being forced to operate on a loss-making basis. Government efforts to revise this have been drained by lack of political will as campaigning began last year for the 2002 presidential and congressional elections. The position of the distributors demonstrates that while they are generally willing to assume the extra costs and risk involved in relation to the security situation, such costs should be reflected in rates of return.

The Energy and Gas Regulatory Commission (CREG) eventually announced a tariff hike on 20 March 2002, pushing the rate of return for distributors up to 16 per cent. Mines and Energy Minister María Luisa Lafaurie said that the tariff hike would be introduced gradually in order to mitigate the impact on users.

Under the current electricity law both the gas and electricity tariffs schedules are applied for five-periods. The next period was due to begin on 1 January 2003 although the current operating difficulties for distributors forced an early revision of charges. Industry experts see this as a must in order to pave the way for further investment in distribution. Head of the Colombian Energy Distributors Association (Asocodis), Abraham Korman, said that CREG’s announcement of a rate rise was a ‘responsible decision’ although still presenting a challenge, given that some industry and independent assessments had put the figure nearer 19 per cent.

The outlook for generators has been bleak since the government imposed a ceiling on electricity charges after a severe escalation of prices in early 2001. Many generators claimed that the price restrictions forced them to operate at a loss. They also claimed that the government was meddling in regulatory issues.

However, there are claims that investors have only themselves to blame for their predicament. One industry expert said that many companies did not do their maths properly on assets when they originally considered the investments. He suggested that “AES used [the regulatory complaints] as a pretext to reverse a mistake it had made in buying Termocandelaria,” announcing in October 2001 that it would close down the 250 MW plant, and look to move it elsewhere.

AES’ announcement was not a surprise. It had warned that it might move its Termocandelaria plant earlier in the year, citing that Colombia’s electricity rules allow for plants to be relocated. The decision has some justification given the low levels of demand in Colombia.

A popular backlash against the rate rise is unlikely. Government officials are keen to point out that electricity charges will remain below many other countries in Latin America, and have sought to increase subsidies through its social investment fund.

Attracting investment

The spectre of severe blackouts looms large in the minds of energy policymakers a little over a decade since a prolonged drought and inefficient management of the sector conspired to force severe energy rationing. Changes were contemplated with the introduction of a new constitution in 1990, which permitted private investment in public services. Nevertheless, the failure to attract interest in key assets by 1993 demanded new regulations.

“The bases for investment in the sector were still falling short of requirements,” says Camilo Villaveces of Inverlink, one of Colombia’s leading investment banks, “and so in 1994 the public utilities/services and electricity laws were introduced.” This led to a number of privatizations, of which the Bogota distribution and generation assets were the most important, helping to raise $8 billion and providing some much needed investment in the sector.

It is hoped that the incoming government will seek to address problems relating to remaining restructuring plans for the electricity sector. Under Pastrana the privatization process has stalled, mainly due to overriding political concern of pursuing peace talks with the guerrilla groups.

Stalled privatization

Originally slated for sale in 1999 were majority stakes in ISA and Isagen (the state-owned generator) as well as 14 regional distributors. Failure to proceed with any of the sales was due to a range of factors, including a series of injunctions preventing the sale of Isagen.

Regulatory problems have also played a part. RC Consultancy, the local Rothschild representative, which was asked to handle the distributor sales, has claimed that inaction over the tariff complaints made it impossible for it to recommend that the privatizations should go ahead.

The position of many of the regional distributors is precarious. Over half are in government administration unable to pay mounting debts. In addition, the distributors have been unable to benefit from government funding since the original auction date in 1999. This has prevented key maintenance work from being carried out.

Poor management is a key contributory factor to the crisis among the regional distributors. Electrolima, serving the western department of Tolima, and which went into administration in January, has a power wastage rate of 29 per cent, bad even by Colombia’s standards.

The news is not all bad. ISA, the most attractive remaining power asset, has circumvented the government’s failure to sell off its 76 per cent interest by launching a share offering in December 2000. The successful sale of just over 13 per cent of the shares, generating $57 million for ISA’s investment plans, has encouraged a second offer due in May.

Interest in ISA is likely to remain strong, despite the severe challenges it faces. Importantly, ISA has growing international interests, mainly transmission activity in other Andean nations such as Peru, Ecuador and Venezuela. This expansion has been facilitated by the excess capacity in Colombia. Installed capacity is 13 500 MW while in 2001 demand was under 8000 MW. This has consequently paved the way for cross-border transmission deals with Ecuador and Venezuela.