developing countries restructuring with benefits from

16 IEEE power & energy magazine september/october 2004

MMANY DEVELOPING COUNTRIESin Asia, Africa, Eastern Europe, andSouth America are freeing up theirelectric energy industries in search ofbenefits from competition. This activityis more pronounced in Eastern Europebecause restructuring of the electricenergy industry is a requirement for

accession to the European Union (EU).Some developing countries in Asia arerestructuring without any plans foreventual introduction of competition.

A considerable number of develop-ing countries are on a fast-paced planto implement restructuring, despite thefact that the benefits from restructuring

are yet to prove themselves in the moredeveloped countries such as the UnitedStates, Western Europe, and Australia.

The challenge among the developingcountries is to develop a balancebetween introduction of competition,regulation, and command and control,which is not a trivial task. The lessonsof the California energy crisis of 2000and 2001 are tilting the balance moretoward command and control. Recenttrends in restructuring within the devel-oping countries reflect that governmentcontrol and monopoly is being main-tained in some form, even afterunbundling the traditional functions ofgeneration, transmission, and distribu-tion. Retention of command and control

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developing countriesrestructuring with benefits from competition (or not)

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The challenge among developingcountries is todevelop a balancebetween introductionof competition,regulation, andcommand andcontrol, which is nota trivial task.

september/october 2004 IEEE power & energy magazine

is being justified as a measure to preventrunaway costs.

Key Considerations in RestructuringDeveloping countries need to conducta comprehensive analysis and addressa number of key considerations beforeproceeding with the decision torestructure their electric energy indus-tries. These considerations include thefollowing:

✔ Prepare and approve an energypolicy stating the intended goalsof restructuring; specifically, thenational and social goals to beachieved by restructuring and therequired implementation timeframe must be addressed.

✔ Implementation of restructuringcan start only after effectivelegal, regulatory, and oversightinstitutions are in place.

✔ A gradual implementation plan isrecommended. Depending onavailability of the supportinginfrastructure, 8–15 years is rec-ommended for planning fullimplementation.

✔ The structure and design of themarkets for any developing coun-try must be consistent with otherregional markets to promotecross-border trading.

✔ Competition in electricity mar-kets can place “long-term” down-ward pressure on prices withmeasurable benefits in cost andefficiency. However, the risks and“short-term” cost of market intro-duction can be considerable.

✔ Restructuring an electric energyindustry costs public funds andhas financial risks. Developingcountries need to assess the abili-ty of their economy to absorb the

short-term increases in costs torealize the potential benefits.

✔ Introduction of competition cangenerate stranded assets andlower asset valuations resultingin the inability of investors topay debts. This can create bank-ruptcies of companies, as gov-ernments witnessed in California.

✔ If the government subsidizes theelectricity rates, the cost of thesubsidies must be accounted forin determining the true cost ofproviding service.

✔ If the current prices in genera-tion are already close to produc-tion cost, the introduction ofcompetition, which also has acost, is unlikely to create tangi-ble benefits.

✔ Unbundling of services is anecessary step in restructuring.Development of cost-reflective

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transmission and distributiontariffs are required to identifythe contribution of each sectorto the overall cost of providingenergy.

✔ The competitive potential oftransmission and distributionsectors needs to be examinedseparately in addition to that ofthe generation sector. In addi-tion, it is necessary to assess theimpacts of restructuring withineach sector individually.

✔ The short-term cost of competi-tion in generation can compro-mise other traditional objectivesof a power grid, such as justifica-tion of investments to constructnew generation capacity andtransmission and distributionreinforcements.

✔ Restructuring requires effectivemetering and high customer pay-ment discipline.

Key Considerations inSelecting Market StructureDeveloping countries must evaluate anumber of considerations before select-ing a specific market structure and pro-ceeding with development of marketdesign, rules, and protocols. These con-siderations include the following.

✔ Before selecting a market struc-ture, it is absolutely necessaryto undertake a comprehensivecost-benefit analysis withineach sector to ensure that theoverall benefits are commensu-rate with costs.

✔ Many developing countriesexperience double-digit load-growth rates. Such growthrates require a market, whichprovides an attractive invest-ment environment and encour-ages new investments in thegeneration sector.

✔ There is no one-size-fits-all

model that meets the needs of alldeveloping countries.

✔ Simple market structures, inmany circumstances, can deliversimilar benefits to more complexmarket structures. Developingcountries should avoid complexmarket structures.

✔ Many developing countries suf-fer from substandard voltage andfrequency regulation and lack amodern control center. The day-ahead and hour-ahead and real-time forward markets that areused in the developing countriescannot be easily implemented indeveloping countries with insuf-ficient capacity for governoraction and lack of automaticgeneration control (AGC). Mar-ket structures and designs whichrequire frequent schedulechanges (i.e., hourly) are not rec-ommended for the developingcountries. Longer procurementcycles such as weekly or month-ly are more appropriate.

✔ Available transmission capacityand infrequent congestion is a keyrequirement for viable electricitymarkets. It is recommended thatdeveloping countries ensureavailability of in-area and inter-area transmission capacity byassigning “must-run” resources.Amarket mechanism for managingtrans- mission congestion is notinitially recommended.

✔ To avoid creating the potentialfor corruption and favoritism,market structures should not relyon unsupervised negotiated pro-curements, closed bidding, etc.

✔ Extensive use of long-termpower purchase agreements(PPAs), are not recommended.These agreements can reducethe size of the electricity mar-kets to an extent that a demand-supply economic model is nolonger viable.

✔ Developing countries need refer-ence prices for local and regionalenergy. In many developingcountries, such prices for energy


have not been established and aprice discovery mechanism maybe lacking. Introduction of a sim-ple pool auction or powerexchange (PX) can facilitate thecreation of the much needed ref-erence price.

✔ The financial stability and healthof the key organizations, such asthe transmission system operator(TSO), is critical to the successof any market structure. Govern-ment or financial institution guar-antees may be necessary toremove any concerns over theability of the TSO to pay.

✔ Successful implementation of“Retail Access” requires anestablished, workable, and stablewholesale market. Privatizationof the distribution system is sim-ply at its early stages of develop-ment and its concept is not yetviable for the developed as wellas the developing countries.

✔ For countries that are net buyersof energy, the market structureand rules need to encourage par-ticipation and promote cross-bor-der trading.

Common Market StructuresThe following three market structuresare commonly used in the developingcountries: negotiated third-party access(nTPA), regulated third-party access(rTPA), and single buyer model (SBM).

Each model is described briefly andis ranked according to suitability for thedeveloping countries. The most com-monly adopted market structure, name-ly the single buyer model, is describedin detail.

Negotiated Third-Party AccessThe nTPA market structure is shown inFigure 1. Under this structure, competi-tion is created in the generation sector.The private generators would have tonegotiate with the transmission compa-ny, which may have its own generatorswith competing financial interests. Thenegotiation includes transmission

access and sale of energy. The con-sumers remain regulated. The financialrisks associated with nonviable invest-ments remain with the private genera-tor. This model offers exceptionalversatility because it is based on negoti-ation and offers flexibility in cost.

The successful implementation

requires strong institutional require-ments including a strong antimonopolyregulator and an effective oversightagency. Every negotiated agreementwill have to be closely examined toavoid favoritism and corruption, pre-venting increased costs to consumers.As a result of strong institutional

19

requirements and many possibilities forabuse, nTPA is the least suitable fordeveloping countries.

Regulated Third-Party AccessThe rTPA market structure is shown inFigure 2. Under the rTPA marketstructure, the transmission companypublishes transmission tariff andaccess requirements so that generatorsmay enter into agreement with the eli-gible customers. The eligible cus-tomers can directly negotiate with thegenerators. Under this alternative, theremaining customers are charged acost-based rate by the regulator basedon presumably optimal operation.Under the rTPA, the regulator observesthe merits of the resources, such ashydro, thermal, and IPPs under verytight regulation. In addition to the reg-ulated market, a spot market may alsobe created for real-time operation withmarginal cost pricing. With this model,competition is created to some extentat the generation level (despite tightregulation) and at the retail level.

The rTPA does not offer a level play-ing field due to lack of a central market,with transparent rules and a single pricefor all. This model has the tendency to

promote long-termpower purchase agree-ments with inflatedprices, which can pro-mote corruption andshield the generatorsfrom true market risks.The end result can beunfavorable retailprices and a noncor-rectable financial sce-nario for the durationof such contracts. Inaddition, the rTPAtends to favor largercustomers with morebuying power able toaccess cheaper energy(cherry picking), there-by increasing costs(more expensive ener-gy) to the remaining captured cus-tomers. This can create civil andfinancial problems for a developingcountry where poverty and low paymentdiscipline are preexisting problems.

A highly effective contracting dis-cipline and regulatory and oversightbody are the key requirements for suc-cessful implementation of rTPA. Thechallenge for these organizations is to

develop a balancebetween regulation andcompetition. The rTPAis a favorite marketdesign model inEurope and has beenadopted by Romania,Poland, and the CzechRepublic. The rTPAmay be viewed as anacceptable model fordeveloping countries;however, special cir-cumstances of thecountry under studywill have to be consid-ered before the rTPAcan be adopted. TheWorld Bank and recentEU directives favorrTPA.

Single Buyer ModelThe SBM is the most commonly adopt-ed market structure in the developingcountries and first started to appear inthe developing countries in the 1990s.The SBM is often used in the develop-ing countries as the first step in restruc-turing with subsequent plans tointroduce competition. Developing

countries argue that SBM providesthe means for private investment tosave public funds that may other-wise have to be used in constructionof power plants.

Under the SBM, an independentTSO may be created. The term“independent” is meant to reflectthe fact that the TSO must not haveownership interests in any genera-tion or transmission company andshall treat all suppliers equally andby the same set of participationrules and standards.

The TSO acts on the behalf of allcustomers and is provided the exclu-sive rights to buy and sell energy tothe distribution company, who, inturn, sells it to the customers. Theconsumers are then charged for thepurchase price of electricity alongwith transmission and distributioncosts. The TSO may procure energyeither through contracts with the


Generator

TSO

Transmission

Distribution

Customers

figure 1. The negotiated third-partyaccess market structure.

Generator

TSO

Transmission

Distribution

Customers

figure 2. The regulated third-party accessmarket structure.

Three marketstructures arecommonly used in developingcountries:negotiated third-partyaccess, regulatedthird-partyaccess, andsingle buyermodel.


suppliers or through competitive for-ward markets. The customers remainregulated and are not generally allowedto leave their traditional supplier untilthe implementation of further steps inrestructuring. This is graphically illus-trated in Figure 3.

The SBM has been adopted by Hun-gary, Moldavia, Bulgaria, Slovenia,Lithuania, and India.

Other business models are also pos-sible, where the TSO actually owns thetransmission system. Business modelswith different governance and marketstructures have different pros and cons.

Adoption of the SBM in developingcountries has been subject to criticismfor a number of reasons, including lackof transparent and solid institutions andlow payment discipline. Yet, it is con-sidered the most common model forrestructuring traditional vertically inte-grated electric utility industries.

Plausible criticisms of the SBMinclude the fact that the TSO may nothave proper incentive to buy energyfrom the most economical resourcesand may exercise favoritism. These crit-icisms can be rectified in two ways.

✔ First, by creating a competitivewholesale forward pool auction(PX) with transparent marketrules. The TSO is then obligatedto procure its needs from the PXat market-established prices.

✔ Second, by creating regulatoryand oversight committees thatmonitor the daily operation of theTSO and the market participants.

Once created, the TSO preparesclear and transparent bidding, schedul-ing, and settlement protocols and pre-qualifies the participants of its markets.Acting on the behalf of all customers,the TSO forecasts its demand, conductsthe necessary markets in a least-cost

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Generator

TSO

Transmission

Distribution

Customers

figure 3. The single buyer model.


fashion, procures energy and otherservices, operates the power grid in realtime, and performs the necessary meter-ing, energy accounting, and financialsettlements functions.

The TSO needs to publish timelymarket information such as expectedprocurement levels, actual procure-ments, prices, total costs, trends, etc.This is known as the “market informa-tion dissemination” function. The mar-ket participants use this information todevelop bidding and scheduling prac-tices that are consistent with their busi-ness strategies. The regulatory andoversight committees monitor the mar-kets and identify and establish flaws inthe market design and detect gamingand unacceptable participant behaviors.These organizations may go to theextent of rescinding payments andassigning penalties and sanctions tomarket participants with repeated viola-

tions of unacceptable behavior. TheWorld Bank and recent EU directivesdo not favor SBM.

ConclusionsRestructuring and privatization of theelectric energy industry is proceedingdespite the negative impacts of the Cali-fornia energy crisis of 2000 and 2001.

The United States and some West-ern European countries have devel-oped complex market structures andmodels for restructuring and privatiz-ing their electric energy industries.Many of these developments havebeen implemented at a relatively fastpace. Developing countries are recom-mended to avoid fast-paced plans toimplement restructuring without aclear objective and established realiza-tion of benefits.

This article provides two check-lists; one for deciding whether to pro-

ceed with restructuring and a secondfor consideration in selecting suitablemarket structure and rules. It is rec-ommended that developing countriesuse these two checklists in a due-dili-gence process to ensure that theexpected benefits from restructuringand privatizations are commensuratewith its risks and costs.

The market rules and protocols ofthe more developed countries may notfit the needs of developing countries.Developing countries should avoidcomplex market structures and rulebecause it will require long implemen-tation time, expensive software, exten-sive IT infrastructure, and retraining ofstaff. Although there is no one-size-fits-all model, often, simple market struc-tures and rules can result in many of thebenefits of the more complex ones.

It is important to note that marketrules and protocols cannot be developed


in a vacuum and the markets rules andprotocols of the neighboring countriesmust be taken into account. This isespecially important if the countryunder consideration requires energythrough imports.

For Further ReadingPower Applications and Research Sys-tems Inc. [Online]. Available: http://www.parsenergy.com

BiographyEddie S. Dehdashti is the president andfounder of Power Applications andResearch Systems (PARS), Inc., a con-sulting firm providing services in thearea of transmission systems and whole-sale electricity market design and opera-tion. He has over 22 years of experiencein transmission planning, design andoperations and over seven years of expe-rience with restructuring and wholesaleelectricity markets. While at the PacificGas and Electric Company, he partici-

pated in WECC (Formerly WSCC)activities for modeling, analysis andoperation of the transmission systems inthe Western States. He was a participantin the WEPEX process in Californiawhich led to the creation of the firstIndependent System Operator in the US.He has designed and developed many

software tools and conducted numerousanalyses for the California ISO in theareas of market operations, market oper-ator tools, market monitoring and sur-veillance, compliance, load forecastingetc. He is Senior member of the IEEEand chairman of the IEEE special taskforce on energy trading.

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developing countries restructuring with benefits from

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