2004 IEEElPES Transmission amp Distribution Conference amp Exposition Latin America 1

The Deregulation Process of the Electrical Sector Into Practice - A Comparison Between

Developed and Developing Countries M F de Oliveira R C G Teive Member IEEE and G A B Arfux

Abstract-A worldwide analysis of the electrical sector deregulation process is presented comparing the causes and consequences between the countries that have faced this movement An economical and social classification is used defining two distinct groups of countries and characterizing them by electrical social economical and political aspects in relation to the electricity service unbundling The common challenges are discussed and the particular ones are highlighted The applied electricity market models and their consequences are analyzed composing the basic profile of each category

index Terms- Electrical power system deregulation process electricity market models and electricity service unbundling

I INTRODUCTION HE electric sector has been changing since the nineties T As the market opened and the consolidation of the

electricity as a commodity became a fact the private participation rose sensitively over the world in all stages of electricity production This opening started in the generation segment alIowing independent power producers to sell its energy production The natural evolution of this market implied the competition even at retail segment which currently could be detected in some countries Transmission and distribution utilities are considered natural monopolies thus competition is not possible and the regulatory agency controls the trade rules

The deregulation of the power industry followed different paths worldwide and each country applied its particular process and model according to its politics economics and regulatory needs It is possible to observe that the competition and the divestiture level varied from country to country

All these features have a huge influence on the choice of the kind of electricity market model applied in each country and the consequent way to manage and to regulate these new markets However one knows that political claims play a significant role in this process and its influence level depends on the corresponding economic stage of each country

M F de Oliveira thanks CAPES by the financial support and he is with

R C G Teive is an associated lecturer at LahPlsnRIFSC Brazil (e-mail

G A B Arfux is with LahPIan UFSC Brazil (e-mail

LabPlan UFSC Brazil (e-mail mauricioflabplanufxbr)

teivelabpIanufscbr)

gutolabplanufsc br)

Usually the lesser economic development level of the country the bigger is the political influence on the technical and structural divisions

The whole deregulation process is very complex because a lot of issues and interests are discussed including social and foreign questions The similar economic characteristics of the countries guide them to common choices and decisions but the consequences were different even where the theorical model applied was the same

Analyzing all the countries that opted to open their electricity market to private investors and the results of this process it is possible to divide them into two economical categories The developed countries and the developing ones

This economic classification evaluates the inequalities between the countries which increased since the nineties caused mainly by the globalization and the economic multipolarity The measurement of these inequalities classifies the countries into the groups above This classification parameters considers social politic economic and geographic issues as much as considers indexes like GNP and HDI [ I ] - PI

The developed countries have a high eIectricity consume per capita low increase of demand and predominance of thermal plants The high industrialization level of these countries influences these characteristics because there are many factories and appliances to be powered on Thus the high demand level obliged them to use all avdable kinds of energy sources like hydro fossil and nuclear In these countries is common to use electricity tariffs to execute load curve modulation and demand side management aiming at energy conservation

On the other hand the deveIoping countries have a low consume per capita and a high charge growth of energy demand because they have been industrialized recently The natural evolution of each country will try to equalize the features of developed and developing countries in a long term Considering that the developing countries will need many power plants to provide energy to this future demand and new primary sources could be utilized Another important feature is that they have adopted oldfashioned tariffs structures and minor levels of price elasticity affecting the possibility to perform energy conservation programs

It is possible to distinguish politic-economics causes comparing all the deregulation processes classified above

0-7803-8775-9104$2000 02004 IEEE 81 5

However there are exceptions for this thesis Countries like Chile and USA had different deregulation process results from its similar economic nations [8]-[5]-[3] According to this it is also possible to infer the consequences within historic and social aspects drawing the worldwide overview of the electricity market

11 THE POLITIC-ECONOMICS CAUSES OF DEREGULATION

Analyzing the researches and studies related to the experience of the deregulation processes it could be inferred that the success or the failure of these new models in the electrical sector is associated with some political and economical aspects

The reasons to open the electricity market were different in each country but there are similar causes among them characterized by the economic level and by the particular energetic matrix These causes will be explained below designing the groups of countries with similar features

A Developing Countries The developing countries are represented by nations such

as Brazil Argentina Chile the African and the Asian ones Their principal causes to introduce competition were the inflationary control and the crossed subsidies by eIectric tariffs 191 The government maintained the electricity tariffs constant to decrease the inflation rate or to avoid its excessive growth This act decreased the revenues of electrical companies and in some cases not covered even the production cost reflecting an unreal electricity price to the consumers Other economic sectors like metallurgy and electro intensive industries paid low tariffs to create jobs and increase production On the other hand the populations paid high electricity tariffs to ensure the crossed subside

It was also visible the corruption and the excess of employees in the governmentrsquos utilities responsible by the bad and slow electricity service disposed to the community In some of these countries a great portion of the population had no access to electricity like poor people and rural citizens most of them people living in distant places from the urban centers

The investments to increase system reliability and quality were irrelevant obligating the over-operation of old equipments and maintaining the power electric system in emergency state However the most important cause was the lack of money for the govemment to invest on the electricity production industry This forced these countries to borrow money abroad accepting economics risks and raising the financial debt

In the same way the neoliberal politics and the hard impositions from the loanrsquos corporations like IMF and the World Bank disabled these countries to spend public money with the electric sector [9]-[10]-[12]-[13J Even the Asian Bank had this behavior

In this case the foreign capital was useless because even if the country succeeded on getting a loan the money could not be spent in the electrical sector This fact forced the

-

81 6

2

nations to open the electricity market and let the private groups invest and make profits in the sector over the social and policies worries To attract private capital it is necessary a model that allows and ensures profits by competition and encourages new entrants in the market [4]-[5]

With this scenario the governments started to sell the electric public companies to built a competition framework and use this capital to pay public loans and debits

In this aspect there is other difference in relation to the developed countries procedures Some developing countries sold even hydro power plants to private companies This fact did not occur in developed countries

B Developed Countries The potitical influence afTected these countries

characterized by the neoliberal ideology and will be affecting for some time as well as in Europe This influence started in England with Margaret Thatcherlsquos privatization program planning to sell public companies to pay governmentrsquos debts and to weaken the sindical power of the coal workers [8]-[3] This pressure of the neoliberal movement was smaller than in developing countries

In the developed countries the principal deregulation causes were the smooth rising of the load curves affecting the expected return rate old investments and avoided the dispatch of old plants not amortized yet This situation changed the investor planning due to the development of new gas technology cheaper cleaner and more effrcient which initiated the substitution of the old coal power plants This opportunity attracted investors to the electricity production sector considering the merit order dispatch

The environmental issues have played an important role as well including the pollution emissions and the nuclear technology Many documents and agreements like the Kyoto Protocol obliged the countries to limit the carbone dioxide emissions or pay the excess of pollution that affected the energy production of thermal sources [16] The production of nuclear cells is being avoided due to the nuclear garbage radiation and its dangerous applications These reasons increased the energy cost in order to develop cleaner and renewable sources of energy and penalizing the inefficient plants

Some exceptions like France hang back to open the market and avoid nuclear plants despite the hard pressures from the European Union The global context with economic blocks should insert competition between the countries inside the block like EU and Mercosul Now there is some movement towards the market deregulation in France aiming at the unbundled electrical service of EDF

Geographic characteristics and the high autonomy of small states such as in Norway caused a fragmentation of the electric power system with isolated grids and a high price diversification [SI Sometimes consumers of the same level and city had different electric tariffs This features induced people to ask for new electricity provider choices

In some countries a common cause to start the opening process was the privatization of public assets to pay public debts and loans by their own desire or by foreign pressure

3

111 CHALLENGES TO INTRODUCE COMPETITION

The difficulties to ensure competition in the electricity market and to implement the market models were related to the creation of new agents and the design of instruments to guarantee open access to the wires and conditions to market efficiency 141 The market power is another great problem that may camouflage the market prices causing inefficiency being in some cases hard to detect and to solve This problem was inherited from the old monopoly characteristic of the sector and the vertical integration where a unique company was responsible to generate transmit and distribute the electricity Some authors prove that the deregulation process procedures have an optimal sequence to avoid these kinds of problems searching an unbundled electrical sector but few countries reached it successfully [5]-[10]

The developing countries had enormous annoyance to open the market with a slow and inefficient process The political questions are object of endless discussions and even subjects of common sense lasted months to be solved The ideology against thr technical solutions was the main barrier In that way the market designed had not had a satisfactory operation with confused procedures and incomplete regulatory arrangements

The developed countries were more successful in applying the market in the electric sector The maturity of their policies allowed these countries to execute fast changes in an efficient and democratic way However a lot of faults and mistakes still remain and will be adjusted as soon as the market regulator notices them

The recent and particular characteristics of the electricity market will induce new discussions and changes as time passes by The developing countries use the experience of developed countries to apply themselves because a wrong step can spoil them and to fix a politic action it is very difficult in these countries where govemment discontinuity is a fact Chile is an exception because was the first country to open the electricity market And it is one of the successful cases without benchmarking because had a strong and ericient stated regulatory institution

Once started the deregulation process some uncertainties were introduced in the electricity market affecting the devetoped countries and the developing ones These uncertainties cause several risks such as operatives markets credits environmental and politics Concerning these risks the developing countries suffer more with both politics and credits risks On the other hand the developed countries are more affected by environmental and technological risks

England Norway and Chile were the deregulation precursors having obtained some and bad results proving that the economic level was not a bamer as the energetic characteristics

Iv MODELS APPLIED

The competition can be introduced in different manners but there are four classic models that define the competition level [4] These models started with monopoly in all stages of electricity production (model I ) followed by the single buyer

model with competition only in generation (model 2) The next model allows competition in the wholesale market (model 3) and finally the competition is hlly permitted even at the retail level (model 4)

The developing countries preferred to use the model 2 that certify a little governmentrsquos power over the electric sector This ensures subsidies to high cost power like eolics plants etectricity to poor people and social acts which are inhibited by the market This allows the State to use the electric sector as a tool to increase production in other sectors such as the automotive one On other hand governmentrsquos members can easily corrupt the electricity sector using the political power to deviate money or just allocating the relatives into the public companies causing extra costs and inefficiency Just like the market power these kinds of problems are difficult to detect and to eliminate

Some developing countries opted by the model 3 following the developed countries but the slowly process of change and the government inefficiency done the designed market fail in many aspects Brazil is a special case that failed to introduce the model 3 fully and correctly because the regulatory and market rules were not spread out at time [6]-[7]-(8] Currently the Brazilian govemment is changing the electricity market to fit in model 2 [ 1 11

The model 3 has been chosen by the developed countries that allows competition at the wholesale level As the market has been consolidated the model 4 was been implemented Some countries stopped at the mode1 3 because to introduce retail competition the market must be well designed with complex trading arrangements and technological questions like special energy meters must be solved There are some bad incidents between the developed countries such as the England and California where the market power caused bankruptcy of some companies

Tne privatization level of the public electric companies was diversified following the own economic policy or suffering international pressures for divestiture For instance Argentina privatized its all generation assets by World Bank and IMF orders Another developing countries like Brazil suffered this kind of pressure but did not sell all the public assets The distribution segment was more privatized than the generation segment in spite of the regulated nature of this service

On the opposite side Norway did not privatize its power plants which has majority hydra Characteristic

Most countries opted to privatize only the thermo electrical plants keeping the nuclear and hydro plants controlled by the govemment because of politic and security subjects

V CONSEQUENCES The electricity market brought some new questions to the

sector like operational and transmission rights [5] These issues are common for all countries not distinguishing the economic stage or the market model applied These arrangements should be well discussed and planned by all market agents to warrant the correct market operation

81 7

4

The principal consequences at the developing countries were the rising of number of consumers characterized by the electrification of distant and poor areas In some countries like Moroccorsquos and Chile the electrification rate raised one hundred percent in approximately four years 191 The reliability and the quality of electricity increased by the rigid market regulator rules

It was detected a strong presence of foreign investors that bought assets or created new electric companies in the developing countries A great amount of unemployed specialized people that left the electrical companies without professional reallocation was noted in order to fit these companies into effective privatization management models

Commercial electric losses decreased to acceptable levels and a better image of the electrical companies to the population was observed These facts caused a high valuation of electricity companies at the stock market The environmental concern of the consumers government and companies emerged inducing rational electricity usage Specific ecological laws were created to build power plants and transmission lines protecting the wild nature [ 131

In most of countries the industrial consumers were more beneficed by the open market because the wholesale electricity price decreased by competition The residential and commercial consumers were not really affected by the new choices since the price to the retail level decreased at insensitive rates This event can be explained by the great quantity of consumers to share a bill discount and the low individual consumption of them Another reason can be considered analyzing the electricity production chain where the residential and the commercial consumers are the last ring of it This unhappy position infers all taxes of each ring that compose this chain the generation transmission and distribution stages Industrial consumers generally pay just generation and transmission services

The consumer demand elasticity especially the residential and commercials increased due to the real electricity cost was passed to final consumers This elasticity brought more efficiency to the market mainly in the developing countries where the government fixed unreal electricity prices

All electricity services had an appropriated cost separation like generation transmission distribution and commercialization services Then the consumer could know how much he paid to each electricity production stage until to reach his house In some countries the direct subsidies income tax and other costs are clearer and unbundled now at the consumer bill This event is very important to motivate the market conscience in the consumer agents because knowing the incurred costs to use the electricity they can incite the competition between agents that provide the same service

Despite the market could decrease the electricity price and rise the system reliability there were lack of energy in some developing countries like in Chile and Brazil [15] Nowadays Argentina is suffering electricity ration problems because there is insufficient gas to generate electricity A federal intervention is necessary in these cases because the market

regulator can not oblige the agents to build new generation In the developed countries the coach potatoes consumers

were a peculiar incident Some people prefer pay more than to spent time choosing an electricity provider The high cultural level of the population implied in many discussions appoint to the consumers view protecting excessively the consumer agent Another incidents like blackouts were noted in countries like Italy and USA characterized by problems in transmission trading arrangements

The high volatility of the electricity prices and the appearance of new risks induced the market agents to protect themselves They are using hedging instruments to create a new market environment as the financial derivatives used in stock markets The options contracts are the hedging solution more used to energy agreements

The integration of power systems from several countries caused by competition is a great advantage that optimizes the natural resources increases the system reliability and decreases the electricity price for all consumers

The growth of distributed generation was an important consequence as well as co-generation because of the excess of electricity produced could be sold at the spot market and the cost of little plants came down This kind of electricity generation is causing some operational problems like power flow inversion and voltage control Technical solutions are being developed but the trading arrangements and rules to define penalties and standard operation procedures still remain unsolved

The green energy became more competitive because environmental questions are being valuated and the cost of fossil fuel to generate electricity is increasing In some these countries consumers prefer to pay a higher tariff in order to use energy from a clean source as the eolics plants

VI FINALREMARKS

In general sense one can demonstrate that specific aspects related to politics economic and developing level associated with regulatory rules of each country has had influence on the performance of the competitive models applied to electrical sector as well as its success or failure considering consumers other market agents and the whole society

The developed countries are been more successful in relation to the electricity market aspect Some countries are introducing the derivative market at the electricity sector and some optimal portfolio simulations are helping the agents to maximize their profits

The developing countries are having difficulties to introduce the competition but there are some good consequences as the raising of electrification level and the consumer worrying about environmental questions

The strong governmental presence and an effective regulatory body with fast planned decisions are the basics parameters to ensure a successful deregulation process and to create good market mechanisms In this case the development level is not the most important issue

The mutual cooperation and confidence between the agents

81 8

5

are key behaviors to sustain the market model applied by each country as happened in the successful experience of Norway

The efficient and rational use of the power sources will be an important target for all citizens because the energy price should increase along the years despite the market competition and the waste of power will be not tolerable

r141

VI] REFERENCES [I] A P Gremaud A F M Filho A E T Lanzana C A Luque D C 0

Alves D E Pinho F A Neto G L Garbfalo W C E Carmo J Sayad J P Z Chahad J T Kimten J A B Rizieri J M Pires L C P Carvalho M E Garcia M E Braga M A S Vasconcellos M G Fonseca M C Cacciamali M R P Spindola P C Milone P F Azevedo R G Olivzira R L Troster and S D Silber Economy Manual Book (in Portuguese) 3th ed S o PauloSaraiva 1998 pp

P R Krugman and M Obstfeld Iniernotional Economics Theoy und P o k y in (Portuguese) Sth ed SBo Paulo Makron Books 1999 pp 699-743 L P Rosa M T Tomalsquim J C L Pires The Reform ofrhe Electric Sector in the Brazil end in rhe WuVorld - A Critic View (in Porruguese) Rio de Janeiro Relume Dumad 1998 pp 107-141 S Hunt and G Shutteworth Competition and Choice in Efeclricity New York John Wiley and Sons 1996 pp 21-25 S Hunt Making Competition Work in EIeclriciry New York John Wiley and Sons 2002 pp 17-29 G E Schuch F P o m and R C Lotera ldquoAn Analyses of the Electricity Commercialization Activity in the Brazilian Electric Sectorrdquo in Portuguese) presented at the Energy Forum Novo Hamburgo Brazil 2003 h i s v 01 pp 01 -OS F P M Bandeira (2004 January 11) ldquoAn Analyzes of the Alterations Proposed to The Electric Sector Modelrdquo (in Portuguese) Study Report Deputies Chamber August 2003 [Onlinel Available httpwwwabraceelcombduploa~c~nt~O9092003 10 1 1 18pdf G A B Arfioc R C G Teive and F S V Silveira ldquoInstitutional Models Adapted in the World - The Brazilian Electric Sector Caserdquo (in Porfupese) presented at the IV Brazilian Congress of Energetic Planning Itajuba Brazil 2004 N K Dubash (2004 February 7) rdquoThe Global Context For Electricity Reformrdquo World Research Institute Power Politics [Online] Available httppdfwri orgpowerpolitics-chap2pdf

[ 101 R W Bacon and J Besant-Jones (2004 February IS) ldquoGlobal Electric Power Reform Privatization and Liberalization of the Electric Power lndustry in Developing Countriesrdquo The Energy and Mining Sector Board Discussion Paper Series Paper nrdquo2 June 2002 [Online] Available httpwwwworldbsnkor~~ergypdfsiglo~a~refo~pdf

[ I l l D Roussef (2004 January 4) ldquoInstitutional Model of the Electric Sectorrdquo (in Portuguese) Brazilian Mining and Energy Ministry Brazilian Government December 2003 [Online] Available http~vwwmmegovbr~oticis~~O~3dezembr~ Modelo-1 1 dezO3_Finall pdf

1121 D Bouille H Dubrovsky and C Maurer (2004 February 20) ldquoReform of the Electric Power Sector in Developing Countries Case Study of Argentinardquo Institute of Energy Econorrdcs Bariloche Foundations World Resources Institute March 2001 [Ontine] Available Ilttppdfwriorglargentinapdf

[f3] A report by a study group of the WorId Energy Council (2004 March 5) ldquoEnergy Markets In Transition The Latin America and Caribbean Experiencerdquo Buenos Aires June 2001 [Online] AvailabIe httpKvmr worldenergy o r g w ~ - g e i r g l o b a ~ d a ~ ~ ~ ~ ~ ~ e ~ ~ e m t ~ f

1141 0 Gjerd ldquoThe Deregulated Nordic Electricity Market - I O Years of Experiencerdquo in Proc 2002 IEEE Power Engineering Society Transmission and Disrribution Conj

[lSl J M Aracjo L C S Frade A S Fires and M C Amijo ldquoReestructuration of the Electric Sector in Latin America ~ Advantages Disadvantages and Tendenciesldquo (in Portuguese) Presented at the IX Symposium of Specialists in Electric Operational and Expansion Planning Rio de Janeiro 2004

263-272 [2]

[3]

[4]

[5]

[6]

[7]

[SI

[9J

[I61 UNFCCC (1997a) Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) FCCCCPl997L7Addl on Porhtguese) Bonn [Online] Available httpwwwmctgovbr clidquioto protocolhm

Mauricio Figueiredo de Oliveira was born in Curitiba Brazil on June 19 1980 He graduated at the Federal University of Parana Cuntiba He is a master student from the Labplan at the Federal University of Santa Catarina

His employment experience included the Lactec Laboratory the lntertechne Associated Consultants SC and Copel Distribution SA His special fields of interest include elecmcity markets energy nsk management and ALM

Raimundo C Ghizone Teive was born in Santa Catarina BraziI on June 20 1963 He graduated at Federal University of Santa Catarina (UFSC) in Electrical Engineering in 1985 He earned his MS and PhD degrees both at UFSC in 1991 and 1997 respectively

He is the head of Computer Engineering Course at UNIVALI and Associated Lecturer at UFSC His interested areas include Expansion Planning Demand Side Management and Electricity Markets

Custavo Antonio Baur Arfux was bom in G16ria de Dourados Braril on October 02 1978 He graduated at the FederaI University of Santa Catarina Flonanbpolis He is a master student from the Labplan at the Federal Universiiy of Santa Catarjna

His special fields OF interest include electricity sector structures electricity markets energy derivatives contracts and energy risk management tools (Markowitz Theory and VaIue at Risk)

81 9

However there are exceptions for this thesis Countries like Chile and USA had different deregulation process results from its similar economic nations [8]-[5]-[3] According to this it is also possible to infer the consequences within historic and social aspects drawing the worldwide overview of the electricity market

11 THE POLITIC-ECONOMICS CAUSES OF DEREGULATION

Analyzing the researches and studies related to the experience of the deregulation processes it could be inferred that the success or the failure of these new models in the electrical sector is associated with some political and economical aspects

The reasons to open the electricity market were different in each country but there are similar causes among them characterized by the economic level and by the particular energetic matrix These causes will be explained below designing the groups of countries with similar features

A Developing Countries The developing countries are represented by nations such

as Brazil Argentina Chile the African and the Asian ones Their principal causes to introduce competition were the inflationary control and the crossed subsidies by eIectric tariffs 191 The government maintained the electricity tariffs constant to decrease the inflation rate or to avoid its excessive growth This act decreased the revenues of electrical companies and in some cases not covered even the production cost reflecting an unreal electricity price to the consumers Other economic sectors like metallurgy and electro intensive industries paid low tariffs to create jobs and increase production On the other hand the populations paid high electricity tariffs to ensure the crossed subside

It was also visible the corruption and the excess of employees in the governmentrsquos utilities responsible by the bad and slow electricity service disposed to the community In some of these countries a great portion of the population had no access to electricity like poor people and rural citizens most of them people living in distant places from the urban centers

The investments to increase system reliability and quality were irrelevant obligating the over-operation of old equipments and maintaining the power electric system in emergency state However the most important cause was the lack of money for the govemment to invest on the electricity production industry This forced these countries to borrow money abroad accepting economics risks and raising the financial debt

In the same way the neoliberal politics and the hard impositions from the loanrsquos corporations like IMF and the World Bank disabled these countries to spend public money with the electric sector [9]-[10]-[12]-[13J Even the Asian Bank had this behavior

In this case the foreign capital was useless because even if the country succeeded on getting a loan the money could not be spent in the electrical sector This fact forced the

-

81 6

2

nations to open the electricity market and let the private groups invest and make profits in the sector over the social and policies worries To attract private capital it is necessary a model that allows and ensures profits by competition and encourages new entrants in the market [4]-[5]

With this scenario the governments started to sell the electric public companies to built a competition framework and use this capital to pay public loans and debits

In this aspect there is other difference in relation to the developed countries procedures Some developing countries sold even hydro power plants to private companies This fact did not occur in developed countries

B Developed Countries The potitical influence afTected these countries

characterized by the neoliberal ideology and will be affecting for some time as well as in Europe This influence started in England with Margaret Thatcherlsquos privatization program planning to sell public companies to pay governmentrsquos debts and to weaken the sindical power of the coal workers [8]-[3] This pressure of the neoliberal movement was smaller than in developing countries

In the developed countries the principal deregulation causes were the smooth rising of the load curves affecting the expected return rate old investments and avoided the dispatch of old plants not amortized yet This situation changed the investor planning due to the development of new gas technology cheaper cleaner and more effrcient which initiated the substitution of the old coal power plants This opportunity attracted investors to the electricity production sector considering the merit order dispatch

The environmental issues have played an important role as well including the pollution emissions and the nuclear technology Many documents and agreements like the Kyoto Protocol obliged the countries to limit the carbone dioxide emissions or pay the excess of pollution that affected the energy production of thermal sources [16] The production of nuclear cells is being avoided due to the nuclear garbage radiation and its dangerous applications These reasons increased the energy cost in order to develop cleaner and renewable sources of energy and penalizing the inefficient plants

Some exceptions like France hang back to open the market and avoid nuclear plants despite the hard pressures from the European Union The global context with economic blocks should insert competition between the countries inside the block like EU and Mercosul Now there is some movement towards the market deregulation in France aiming at the unbundled electrical service of EDF

Geographic characteristics and the high autonomy of small states such as in Norway caused a fragmentation of the electric power system with isolated grids and a high price diversification [SI Sometimes consumers of the same level and city had different electric tariffs This features induced people to ask for new electricity provider choices

In some countries a common cause to start the opening process was the privatization of public assets to pay public debts and loans by their own desire or by foreign pressure

3

111 CHALLENGES TO INTRODUCE COMPETITION

The difficulties to ensure competition in the electricity market and to implement the market models were related to the creation of new agents and the design of instruments to guarantee open access to the wires and conditions to market efficiency 141 The market power is another great problem that may camouflage the market prices causing inefficiency being in some cases hard to detect and to solve This problem was inherited from the old monopoly characteristic of the sector and the vertical integration where a unique company was responsible to generate transmit and distribute the electricity Some authors prove that the deregulation process procedures have an optimal sequence to avoid these kinds of problems searching an unbundled electrical sector but few countries reached it successfully [5]-[10]

The developing countries had enormous annoyance to open the market with a slow and inefficient process The political questions are object of endless discussions and even subjects of common sense lasted months to be solved The ideology against thr technical solutions was the main barrier In that way the market designed had not had a satisfactory operation with confused procedures and incomplete regulatory arrangements

The developed countries were more successful in applying the market in the electric sector The maturity of their policies allowed these countries to execute fast changes in an efficient and democratic way However a lot of faults and mistakes still remain and will be adjusted as soon as the market regulator notices them

The recent and particular characteristics of the electricity market will induce new discussions and changes as time passes by The developing countries use the experience of developed countries to apply themselves because a wrong step can spoil them and to fix a politic action it is very difficult in these countries where govemment discontinuity is a fact Chile is an exception because was the first country to open the electricity market And it is one of the successful cases without benchmarking because had a strong and ericient stated regulatory institution

Once started the deregulation process some uncertainties were introduced in the electricity market affecting the devetoped countries and the developing ones These uncertainties cause several risks such as operatives markets credits environmental and politics Concerning these risks the developing countries suffer more with both politics and credits risks On the other hand the developed countries are more affected by environmental and technological risks

England Norway and Chile were the deregulation precursors having obtained some and bad results proving that the economic level was not a bamer as the energetic characteristics

Iv MODELS APPLIED

The competition can be introduced in different manners but there are four classic models that define the competition level [4] These models started with monopoly in all stages of electricity production (model I ) followed by the single buyer

model with competition only in generation (model 2) The next model allows competition in the wholesale market (model 3) and finally the competition is hlly permitted even at the retail level (model 4)

The developing countries preferred to use the model 2 that certify a little governmentrsquos power over the electric sector This ensures subsidies to high cost power like eolics plants etectricity to poor people and social acts which are inhibited by the market This allows the State to use the electric sector as a tool to increase production in other sectors such as the automotive one On other hand governmentrsquos members can easily corrupt the electricity sector using the political power to deviate money or just allocating the relatives into the public companies causing extra costs and inefficiency Just like the market power these kinds of problems are difficult to detect and to eliminate

Some developing countries opted by the model 3 following the developed countries but the slowly process of change and the government inefficiency done the designed market fail in many aspects Brazil is a special case that failed to introduce the model 3 fully and correctly because the regulatory and market rules were not spread out at time [6]-[7]-(8] Currently the Brazilian govemment is changing the electricity market to fit in model 2 [ 1 11

The model 3 has been chosen by the developed countries that allows competition at the wholesale level As the market has been consolidated the model 4 was been implemented Some countries stopped at the mode1 3 because to introduce retail competition the market must be well designed with complex trading arrangements and technological questions like special energy meters must be solved There are some bad incidents between the developed countries such as the England and California where the market power caused bankruptcy of some companies

Tne privatization level of the public electric companies was diversified following the own economic policy or suffering international pressures for divestiture For instance Argentina privatized its all generation assets by World Bank and IMF orders Another developing countries like Brazil suffered this kind of pressure but did not sell all the public assets The distribution segment was more privatized than the generation segment in spite of the regulated nature of this service

On the opposite side Norway did not privatize its power plants which has majority hydra Characteristic

Most countries opted to privatize only the thermo electrical plants keeping the nuclear and hydro plants controlled by the govemment because of politic and security subjects

V CONSEQUENCES The electricity market brought some new questions to the

sector like operational and transmission rights [5] These issues are common for all countries not distinguishing the economic stage or the market model applied These arrangements should be well discussed and planned by all market agents to warrant the correct market operation

81 7

4

The principal consequences at the developing countries were the rising of number of consumers characterized by the electrification of distant and poor areas In some countries like Moroccorsquos and Chile the electrification rate raised one hundred percent in approximately four years 191 The reliability and the quality of electricity increased by the rigid market regulator rules

It was detected a strong presence of foreign investors that bought assets or created new electric companies in the developing countries A great amount of unemployed specialized people that left the electrical companies without professional reallocation was noted in order to fit these companies into effective privatization management models

Commercial electric losses decreased to acceptable levels and a better image of the electrical companies to the population was observed These facts caused a high valuation of electricity companies at the stock market The environmental concern of the consumers government and companies emerged inducing rational electricity usage Specific ecological laws were created to build power plants and transmission lines protecting the wild nature [ 131

In most of countries the industrial consumers were more beneficed by the open market because the wholesale electricity price decreased by competition The residential and commercial consumers were not really affected by the new choices since the price to the retail level decreased at insensitive rates This event can be explained by the great quantity of consumers to share a bill discount and the low individual consumption of them Another reason can be considered analyzing the electricity production chain where the residential and the commercial consumers are the last ring of it This unhappy position infers all taxes of each ring that compose this chain the generation transmission and distribution stages Industrial consumers generally pay just generation and transmission services

The consumer demand elasticity especially the residential and commercials increased due to the real electricity cost was passed to final consumers This elasticity brought more efficiency to the market mainly in the developing countries where the government fixed unreal electricity prices

All electricity services had an appropriated cost separation like generation transmission distribution and commercialization services Then the consumer could know how much he paid to each electricity production stage until to reach his house In some countries the direct subsidies income tax and other costs are clearer and unbundled now at the consumer bill This event is very important to motivate the market conscience in the consumer agents because knowing the incurred costs to use the electricity they can incite the competition between agents that provide the same service

Despite the market could decrease the electricity price and rise the system reliability there were lack of energy in some developing countries like in Chile and Brazil [15] Nowadays Argentina is suffering electricity ration problems because there is insufficient gas to generate electricity A federal intervention is necessary in these cases because the market

regulator can not oblige the agents to build new generation In the developed countries the coach potatoes consumers

were a peculiar incident Some people prefer pay more than to spent time choosing an electricity provider The high cultural level of the population implied in many discussions appoint to the consumers view protecting excessively the consumer agent Another incidents like blackouts were noted in countries like Italy and USA characterized by problems in transmission trading arrangements

The high volatility of the electricity prices and the appearance of new risks induced the market agents to protect themselves They are using hedging instruments to create a new market environment as the financial derivatives used in stock markets The options contracts are the hedging solution more used to energy agreements

The integration of power systems from several countries caused by competition is a great advantage that optimizes the natural resources increases the system reliability and decreases the electricity price for all consumers

The growth of distributed generation was an important consequence as well as co-generation because of the excess of electricity produced could be sold at the spot market and the cost of little plants came down This kind of electricity generation is causing some operational problems like power flow inversion and voltage control Technical solutions are being developed but the trading arrangements and rules to define penalties and standard operation procedures still remain unsolved

The green energy became more competitive because environmental questions are being valuated and the cost of fossil fuel to generate electricity is increasing In some these countries consumers prefer to pay a higher tariff in order to use energy from a clean source as the eolics plants

VI FINALREMARKS

In general sense one can demonstrate that specific aspects related to politics economic and developing level associated with regulatory rules of each country has had influence on the performance of the competitive models applied to electrical sector as well as its success or failure considering consumers other market agents and the whole society

The developed countries are been more successful in relation to the electricity market aspect Some countries are introducing the derivative market at the electricity sector and some optimal portfolio simulations are helping the agents to maximize their profits

The developing countries are having difficulties to introduce the competition but there are some good consequences as the raising of electrification level and the consumer worrying about environmental questions

The strong governmental presence and an effective regulatory body with fast planned decisions are the basics parameters to ensure a successful deregulation process and to create good market mechanisms In this case the development level is not the most important issue

The mutual cooperation and confidence between the agents

81 8

5

are key behaviors to sustain the market model applied by each country as happened in the successful experience of Norway

The efficient and rational use of the power sources will be an important target for all citizens because the energy price should increase along the years despite the market competition and the waste of power will be not tolerable

r141

VI] REFERENCES [I] A P Gremaud A F M Filho A E T Lanzana C A Luque D C 0

Alves D E Pinho F A Neto G L Garbfalo W C E Carmo J Sayad J P Z Chahad J T Kimten J A B Rizieri J M Pires L C P Carvalho M E Garcia M E Braga M A S Vasconcellos M G Fonseca M C Cacciamali M R P Spindola P C Milone P F Azevedo R G Olivzira R L Troster and S D Silber Economy Manual Book (in Portuguese) 3th ed S o PauloSaraiva 1998 pp

P R Krugman and M Obstfeld Iniernotional Economics Theoy und P o k y in (Portuguese) Sth ed SBo Paulo Makron Books 1999 pp 699-743 L P Rosa M T Tomalsquim J C L Pires The Reform ofrhe Electric Sector in the Brazil end in rhe WuVorld - A Critic View (in Porruguese) Rio de Janeiro Relume Dumad 1998 pp 107-141 S Hunt and G Shutteworth Competition and Choice in Efeclricity New York John Wiley and Sons 1996 pp 21-25 S Hunt Making Competition Work in EIeclriciry New York John Wiley and Sons 2002 pp 17-29 G E Schuch F P o m and R C Lotera ldquoAn Analyses of the Electricity Commercialization Activity in the Brazilian Electric Sectorrdquo in Portuguese) presented at the Energy Forum Novo Hamburgo Brazil 2003 h i s v 01 pp 01 -OS F P M Bandeira (2004 January 11) ldquoAn Analyzes of the Alterations Proposed to The Electric Sector Modelrdquo (in Portuguese) Study Report Deputies Chamber August 2003 [Onlinel Available httpwwwabraceelcombduploa~c~nt~O9092003 10 1 1 18pdf G A B Arfioc R C G Teive and F S V Silveira ldquoInstitutional Models Adapted in the World - The Brazilian Electric Sector Caserdquo (in Porfupese) presented at the IV Brazilian Congress of Energetic Planning Itajuba Brazil 2004 N K Dubash (2004 February 7) rdquoThe Global Context For Electricity Reformrdquo World Research Institute Power Politics [Online] Available httppdfwri orgpowerpolitics-chap2pdf

[ 101 R W Bacon and J Besant-Jones (2004 February IS) ldquoGlobal Electric Power Reform Privatization and Liberalization of the Electric Power lndustry in Developing Countriesrdquo The Energy and Mining Sector Board Discussion Paper Series Paper nrdquo2 June 2002 [Online] Available httpwwwworldbsnkor~~ergypdfsiglo~a~refo~pdf

[ I l l D Roussef (2004 January 4) ldquoInstitutional Model of the Electric Sectorrdquo (in Portuguese) Brazilian Mining and Energy Ministry Brazilian Government December 2003 [Online] Available http~vwwmmegovbr~oticis~~O~3dezembr~ Modelo-1 1 dezO3_Finall pdf

1121 D Bouille H Dubrovsky and C Maurer (2004 February 20) ldquoReform of the Electric Power Sector in Developing Countries Case Study of Argentinardquo Institute of Energy Econorrdcs Bariloche Foundations World Resources Institute March 2001 [Ontine] Available Ilttppdfwriorglargentinapdf

[f3] A report by a study group of the WorId Energy Council (2004 March 5) ldquoEnergy Markets In Transition The Latin America and Caribbean Experiencerdquo Buenos Aires June 2001 [Online] AvailabIe httpKvmr worldenergy o r g w ~ - g e i r g l o b a ~ d a ~ ~ ~ ~ ~ ~ e ~ ~ e m t ~ f

1141 0 Gjerd ldquoThe Deregulated Nordic Electricity Market - I O Years of Experiencerdquo in Proc 2002 IEEE Power Engineering Society Transmission and Disrribution Conj

[lSl J M Aracjo L C S Frade A S Fires and M C Amijo ldquoReestructuration of the Electric Sector in Latin America ~ Advantages Disadvantages and Tendenciesldquo (in Portuguese) Presented at the IX Symposium of Specialists in Electric Operational and Expansion Planning Rio de Janeiro 2004

263-272 [2]

[3]

[4]

[5]

[6]

[7]

[SI

[9J

[I61 UNFCCC (1997a) Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) FCCCCPl997L7Addl on Porhtguese) Bonn [Online] Available httpwwwmctgovbr clidquioto protocolhm

Mauricio Figueiredo de Oliveira was born in Curitiba Brazil on June 19 1980 He graduated at the Federal University of Parana Cuntiba He is a master student from the Labplan at the Federal University of Santa Catarina

His employment experience included the Lactec Laboratory the lntertechne Associated Consultants SC and Copel Distribution SA His special fields of interest include elecmcity markets energy nsk management and ALM

Raimundo C Ghizone Teive was born in Santa Catarina BraziI on June 20 1963 He graduated at Federal University of Santa Catarina (UFSC) in Electrical Engineering in 1985 He earned his MS and PhD degrees both at UFSC in 1991 and 1997 respectively

He is the head of Computer Engineering Course at UNIVALI and Associated Lecturer at UFSC His interested areas include Expansion Planning Demand Side Management and Electricity Markets

Custavo Antonio Baur Arfux was bom in G16ria de Dourados Braril on October 02 1978 He graduated at the FederaI University of Santa Catarina Flonanbpolis He is a master student from the Labplan at the Federal Universiiy of Santa Catarjna

His special fields OF interest include electricity sector structures electricity markets energy derivatives contracts and energy risk management tools (Markowitz Theory and VaIue at Risk)

81 9

3

111 CHALLENGES TO INTRODUCE COMPETITION

The difficulties to ensure competition in the electricity market and to implement the market models were related to the creation of new agents and the design of instruments to guarantee open access to the wires and conditions to market efficiency 141 The market power is another great problem that may camouflage the market prices causing inefficiency being in some cases hard to detect and to solve This problem was inherited from the old monopoly characteristic of the sector and the vertical integration where a unique company was responsible to generate transmit and distribute the electricity Some authors prove that the deregulation process procedures have an optimal sequence to avoid these kinds of problems searching an unbundled electrical sector but few countries reached it successfully [5]-[10]

The developing countries had enormous annoyance to open the market with a slow and inefficient process The political questions are object of endless discussions and even subjects of common sense lasted months to be solved The ideology against thr technical solutions was the main barrier In that way the market designed had not had a satisfactory operation with confused procedures and incomplete regulatory arrangements

The developed countries were more successful in applying the market in the electric sector The maturity of their policies allowed these countries to execute fast changes in an efficient and democratic way However a lot of faults and mistakes still remain and will be adjusted as soon as the market regulator notices them

The recent and particular characteristics of the electricity market will induce new discussions and changes as time passes by The developing countries use the experience of developed countries to apply themselves because a wrong step can spoil them and to fix a politic action it is very difficult in these countries where govemment discontinuity is a fact Chile is an exception because was the first country to open the electricity market And it is one of the successful cases without benchmarking because had a strong and ericient stated regulatory institution

Once started the deregulation process some uncertainties were introduced in the electricity market affecting the devetoped countries and the developing ones These uncertainties cause several risks such as operatives markets credits environmental and politics Concerning these risks the developing countries suffer more with both politics and credits risks On the other hand the developed countries are more affected by environmental and technological risks

England Norway and Chile were the deregulation precursors having obtained some and bad results proving that the economic level was not a bamer as the energetic characteristics

Iv MODELS APPLIED

The competition can be introduced in different manners but there are four classic models that define the competition level [4] These models started with monopoly in all stages of electricity production (model I ) followed by the single buyer

model with competition only in generation (model 2) The next model allows competition in the wholesale market (model 3) and finally the competition is hlly permitted even at the retail level (model 4)

The developing countries preferred to use the model 2 that certify a little governmentrsquos power over the electric sector This ensures subsidies to high cost power like eolics plants etectricity to poor people and social acts which are inhibited by the market This allows the State to use the electric sector as a tool to increase production in other sectors such as the automotive one On other hand governmentrsquos members can easily corrupt the electricity sector using the political power to deviate money or just allocating the relatives into the public companies causing extra costs and inefficiency Just like the market power these kinds of problems are difficult to detect and to eliminate

Some developing countries opted by the model 3 following the developed countries but the slowly process of change and the government inefficiency done the designed market fail in many aspects Brazil is a special case that failed to introduce the model 3 fully and correctly because the regulatory and market rules were not spread out at time [6]-[7]-(8] Currently the Brazilian govemment is changing the electricity market to fit in model 2 [ 1 11

The model 3 has been chosen by the developed countries that allows competition at the wholesale level As the market has been consolidated the model 4 was been implemented Some countries stopped at the mode1 3 because to introduce retail competition the market must be well designed with complex trading arrangements and technological questions like special energy meters must be solved There are some bad incidents between the developed countries such as the England and California where the market power caused bankruptcy of some companies

Tne privatization level of the public electric companies was diversified following the own economic policy or suffering international pressures for divestiture For instance Argentina privatized its all generation assets by World Bank and IMF orders Another developing countries like Brazil suffered this kind of pressure but did not sell all the public assets The distribution segment was more privatized than the generation segment in spite of the regulated nature of this service

On the opposite side Norway did not privatize its power plants which has majority hydra Characteristic

Most countries opted to privatize only the thermo electrical plants keeping the nuclear and hydro plants controlled by the govemment because of politic and security subjects

V CONSEQUENCES The electricity market brought some new questions to the

sector like operational and transmission rights [5] These issues are common for all countries not distinguishing the economic stage or the market model applied These arrangements should be well discussed and planned by all market agents to warrant the correct market operation

81 7

4

The principal consequences at the developing countries were the rising of number of consumers characterized by the electrification of distant and poor areas In some countries like Moroccorsquos and Chile the electrification rate raised one hundred percent in approximately four years 191 The reliability and the quality of electricity increased by the rigid market regulator rules

It was detected a strong presence of foreign investors that bought assets or created new electric companies in the developing countries A great amount of unemployed specialized people that left the electrical companies without professional reallocation was noted in order to fit these companies into effective privatization management models

Commercial electric losses decreased to acceptable levels and a better image of the electrical companies to the population was observed These facts caused a high valuation of electricity companies at the stock market The environmental concern of the consumers government and companies emerged inducing rational electricity usage Specific ecological laws were created to build power plants and transmission lines protecting the wild nature [ 131

In most of countries the industrial consumers were more beneficed by the open market because the wholesale electricity price decreased by competition The residential and commercial consumers were not really affected by the new choices since the price to the retail level decreased at insensitive rates This event can be explained by the great quantity of consumers to share a bill discount and the low individual consumption of them Another reason can be considered analyzing the electricity production chain where the residential and the commercial consumers are the last ring of it This unhappy position infers all taxes of each ring that compose this chain the generation transmission and distribution stages Industrial consumers generally pay just generation and transmission services

The consumer demand elasticity especially the residential and commercials increased due to the real electricity cost was passed to final consumers This elasticity brought more efficiency to the market mainly in the developing countries where the government fixed unreal electricity prices

All electricity services had an appropriated cost separation like generation transmission distribution and commercialization services Then the consumer could know how much he paid to each electricity production stage until to reach his house In some countries the direct subsidies income tax and other costs are clearer and unbundled now at the consumer bill This event is very important to motivate the market conscience in the consumer agents because knowing the incurred costs to use the electricity they can incite the competition between agents that provide the same service

Despite the market could decrease the electricity price and rise the system reliability there were lack of energy in some developing countries like in Chile and Brazil [15] Nowadays Argentina is suffering electricity ration problems because there is insufficient gas to generate electricity A federal intervention is necessary in these cases because the market

regulator can not oblige the agents to build new generation In the developed countries the coach potatoes consumers

were a peculiar incident Some people prefer pay more than to spent time choosing an electricity provider The high cultural level of the population implied in many discussions appoint to the consumers view protecting excessively the consumer agent Another incidents like blackouts were noted in countries like Italy and USA characterized by problems in transmission trading arrangements

The high volatility of the electricity prices and the appearance of new risks induced the market agents to protect themselves They are using hedging instruments to create a new market environment as the financial derivatives used in stock markets The options contracts are the hedging solution more used to energy agreements

The integration of power systems from several countries caused by competition is a great advantage that optimizes the natural resources increases the system reliability and decreases the electricity price for all consumers

The growth of distributed generation was an important consequence as well as co-generation because of the excess of electricity produced could be sold at the spot market and the cost of little plants came down This kind of electricity generation is causing some operational problems like power flow inversion and voltage control Technical solutions are being developed but the trading arrangements and rules to define penalties and standard operation procedures still remain unsolved

The green energy became more competitive because environmental questions are being valuated and the cost of fossil fuel to generate electricity is increasing In some these countries consumers prefer to pay a higher tariff in order to use energy from a clean source as the eolics plants

VI FINALREMARKS

In general sense one can demonstrate that specific aspects related to politics economic and developing level associated with regulatory rules of each country has had influence on the performance of the competitive models applied to electrical sector as well as its success or failure considering consumers other market agents and the whole society

The developed countries are been more successful in relation to the electricity market aspect Some countries are introducing the derivative market at the electricity sector and some optimal portfolio simulations are helping the agents to maximize their profits

The developing countries are having difficulties to introduce the competition but there are some good consequences as the raising of electrification level and the consumer worrying about environmental questions

The strong governmental presence and an effective regulatory body with fast planned decisions are the basics parameters to ensure a successful deregulation process and to create good market mechanisms In this case the development level is not the most important issue

The mutual cooperation and confidence between the agents

81 8

5

are key behaviors to sustain the market model applied by each country as happened in the successful experience of Norway

The efficient and rational use of the power sources will be an important target for all citizens because the energy price should increase along the years despite the market competition and the waste of power will be not tolerable

r141

VI] REFERENCES [I] A P Gremaud A F M Filho A E T Lanzana C A Luque D C 0

Alves D E Pinho F A Neto G L Garbfalo W C E Carmo J Sayad J P Z Chahad J T Kimten J A B Rizieri J M Pires L C P Carvalho M E Garcia M E Braga M A S Vasconcellos M G Fonseca M C Cacciamali M R P Spindola P C Milone P F Azevedo R G Olivzira R L Troster and S D Silber Economy Manual Book (in Portuguese) 3th ed S o PauloSaraiva 1998 pp

P R Krugman and M Obstfeld Iniernotional Economics Theoy und P o k y in (Portuguese) Sth ed SBo Paulo Makron Books 1999 pp 699-743 L P Rosa M T Tomalsquim J C L Pires The Reform ofrhe Electric Sector in the Brazil end in rhe WuVorld - A Critic View (in Porruguese) Rio de Janeiro Relume Dumad 1998 pp 107-141 S Hunt and G Shutteworth Competition and Choice in Efeclricity New York John Wiley and Sons 1996 pp 21-25 S Hunt Making Competition Work in EIeclriciry New York John Wiley and Sons 2002 pp 17-29 G E Schuch F P o m and R C Lotera ldquoAn Analyses of the Electricity Commercialization Activity in the Brazilian Electric Sectorrdquo in Portuguese) presented at the Energy Forum Novo Hamburgo Brazil 2003 h i s v 01 pp 01 -OS F P M Bandeira (2004 January 11) ldquoAn Analyzes of the Alterations Proposed to The Electric Sector Modelrdquo (in Portuguese) Study Report Deputies Chamber August 2003 [Onlinel Available httpwwwabraceelcombduploa~c~nt~O9092003 10 1 1 18pdf G A B Arfioc R C G Teive and F S V Silveira ldquoInstitutional Models Adapted in the World - The Brazilian Electric Sector Caserdquo (in Porfupese) presented at the IV Brazilian Congress of Energetic Planning Itajuba Brazil 2004 N K Dubash (2004 February 7) rdquoThe Global Context For Electricity Reformrdquo World Research Institute Power Politics [Online] Available httppdfwri orgpowerpolitics-chap2pdf

[ 101 R W Bacon and J Besant-Jones (2004 February IS) ldquoGlobal Electric Power Reform Privatization and Liberalization of the Electric Power lndustry in Developing Countriesrdquo The Energy and Mining Sector Board Discussion Paper Series Paper nrdquo2 June 2002 [Online] Available httpwwwworldbsnkor~~ergypdfsiglo~a~refo~pdf

[ I l l D Roussef (2004 January 4) ldquoInstitutional Model of the Electric Sectorrdquo (in Portuguese) Brazilian Mining and Energy Ministry Brazilian Government December 2003 [Online] Available http~vwwmmegovbr~oticis~~O~3dezembr~ Modelo-1 1 dezO3_Finall pdf

1121 D Bouille H Dubrovsky and C Maurer (2004 February 20) ldquoReform of the Electric Power Sector in Developing Countries Case Study of Argentinardquo Institute of Energy Econorrdcs Bariloche Foundations World Resources Institute March 2001 [Ontine] Available Ilttppdfwriorglargentinapdf

[f3] A report by a study group of the WorId Energy Council (2004 March 5) ldquoEnergy Markets In Transition The Latin America and Caribbean Experiencerdquo Buenos Aires June 2001 [Online] AvailabIe httpKvmr worldenergy o r g w ~ - g e i r g l o b a ~ d a ~ ~ ~ ~ ~ ~ e ~ ~ e m t ~ f

1141 0 Gjerd ldquoThe Deregulated Nordic Electricity Market - I O Years of Experiencerdquo in Proc 2002 IEEE Power Engineering Society Transmission and Disrribution Conj

[lSl J M Aracjo L C S Frade A S Fires and M C Amijo ldquoReestructuration of the Electric Sector in Latin America ~ Advantages Disadvantages and Tendenciesldquo (in Portuguese) Presented at the IX Symposium of Specialists in Electric Operational and Expansion Planning Rio de Janeiro 2004

263-272 [2]

[3]

[4]

[5]

[6]

[7]

[SI

[9J

[I61 UNFCCC (1997a) Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) FCCCCPl997L7Addl on Porhtguese) Bonn [Online] Available httpwwwmctgovbr clidquioto protocolhm

Mauricio Figueiredo de Oliveira was born in Curitiba Brazil on June 19 1980 He graduated at the Federal University of Parana Cuntiba He is a master student from the Labplan at the Federal University of Santa Catarina

His employment experience included the Lactec Laboratory the lntertechne Associated Consultants SC and Copel Distribution SA His special fields of interest include elecmcity markets energy nsk management and ALM

Raimundo C Ghizone Teive was born in Santa Catarina BraziI on June 20 1963 He graduated at Federal University of Santa Catarina (UFSC) in Electrical Engineering in 1985 He earned his MS and PhD degrees both at UFSC in 1991 and 1997 respectively

He is the head of Computer Engineering Course at UNIVALI and Associated Lecturer at UFSC His interested areas include Expansion Planning Demand Side Management and Electricity Markets

Custavo Antonio Baur Arfux was bom in G16ria de Dourados Braril on October 02 1978 He graduated at the FederaI University of Santa Catarina Flonanbpolis He is a master student from the Labplan at the Federal Universiiy of Santa Catarjna

His special fields OF interest include electricity sector structures electricity markets energy derivatives contracts and energy risk management tools (Markowitz Theory and VaIue at Risk)

81 9

4

The principal consequences at the developing countries were the rising of number of consumers characterized by the electrification of distant and poor areas In some countries like Moroccorsquos and Chile the electrification rate raised one hundred percent in approximately four years 191 The reliability and the quality of electricity increased by the rigid market regulator rules

It was detected a strong presence of foreign investors that bought assets or created new electric companies in the developing countries A great amount of unemployed specialized people that left the electrical companies without professional reallocation was noted in order to fit these companies into effective privatization management models

Commercial electric losses decreased to acceptable levels and a better image of the electrical companies to the population was observed These facts caused a high valuation of electricity companies at the stock market The environmental concern of the consumers government and companies emerged inducing rational electricity usage Specific ecological laws were created to build power plants and transmission lines protecting the wild nature [ 131

In most of countries the industrial consumers were more beneficed by the open market because the wholesale electricity price decreased by competition The residential and commercial consumers were not really affected by the new choices since the price to the retail level decreased at insensitive rates This event can be explained by the great quantity of consumers to share a bill discount and the low individual consumption of them Another reason can be considered analyzing the electricity production chain where the residential and the commercial consumers are the last ring of it This unhappy position infers all taxes of each ring that compose this chain the generation transmission and distribution stages Industrial consumers generally pay just generation and transmission services

The consumer demand elasticity especially the residential and commercials increased due to the real electricity cost was passed to final consumers This elasticity brought more efficiency to the market mainly in the developing countries where the government fixed unreal electricity prices

All electricity services had an appropriated cost separation like generation transmission distribution and commercialization services Then the consumer could know how much he paid to each electricity production stage until to reach his house In some countries the direct subsidies income tax and other costs are clearer and unbundled now at the consumer bill This event is very important to motivate the market conscience in the consumer agents because knowing the incurred costs to use the electricity they can incite the competition between agents that provide the same service

Despite the market could decrease the electricity price and rise the system reliability there were lack of energy in some developing countries like in Chile and Brazil [15] Nowadays Argentina is suffering electricity ration problems because there is insufficient gas to generate electricity A federal intervention is necessary in these cases because the market

regulator can not oblige the agents to build new generation In the developed countries the coach potatoes consumers

were a peculiar incident Some people prefer pay more than to spent time choosing an electricity provider The high cultural level of the population implied in many discussions appoint to the consumers view protecting excessively the consumer agent Another incidents like blackouts were noted in countries like Italy and USA characterized by problems in transmission trading arrangements

The high volatility of the electricity prices and the appearance of new risks induced the market agents to protect themselves They are using hedging instruments to create a new market environment as the financial derivatives used in stock markets The options contracts are the hedging solution more used to energy agreements

The integration of power systems from several countries caused by competition is a great advantage that optimizes the natural resources increases the system reliability and decreases the electricity price for all consumers

The growth of distributed generation was an important consequence as well as co-generation because of the excess of electricity produced could be sold at the spot market and the cost of little plants came down This kind of electricity generation is causing some operational problems like power flow inversion and voltage control Technical solutions are being developed but the trading arrangements and rules to define penalties and standard operation procedures still remain unsolved

The green energy became more competitive because environmental questions are being valuated and the cost of fossil fuel to generate electricity is increasing In some these countries consumers prefer to pay a higher tariff in order to use energy from a clean source as the eolics plants

VI FINALREMARKS

In general sense one can demonstrate that specific aspects related to politics economic and developing level associated with regulatory rules of each country has had influence on the performance of the competitive models applied to electrical sector as well as its success or failure considering consumers other market agents and the whole society

The developed countries are been more successful in relation to the electricity market aspect Some countries are introducing the derivative market at the electricity sector and some optimal portfolio simulations are helping the agents to maximize their profits

The developing countries are having difficulties to introduce the competition but there are some good consequences as the raising of electrification level and the consumer worrying about environmental questions

The strong governmental presence and an effective regulatory body with fast planned decisions are the basics parameters to ensure a successful deregulation process and to create good market mechanisms In this case the development level is not the most important issue

The mutual cooperation and confidence between the agents

81 8

5

are key behaviors to sustain the market model applied by each country as happened in the successful experience of Norway

The efficient and rational use of the power sources will be an important target for all citizens because the energy price should increase along the years despite the market competition and the waste of power will be not tolerable

r141

VI] REFERENCES [I] A P Gremaud A F M Filho A E T Lanzana C A Luque D C 0

Alves D E Pinho F A Neto G L Garbfalo W C E Carmo J Sayad J P Z Chahad J T Kimten J A B Rizieri J M Pires L C P Carvalho M E Garcia M E Braga M A S Vasconcellos M G Fonseca M C Cacciamali M R P Spindola P C Milone P F Azevedo R G Olivzira R L Troster and S D Silber Economy Manual Book (in Portuguese) 3th ed S o PauloSaraiva 1998 pp

P R Krugman and M Obstfeld Iniernotional Economics Theoy und P o k y in (Portuguese) Sth ed SBo Paulo Makron Books 1999 pp 699-743 L P Rosa M T Tomalsquim J C L Pires The Reform ofrhe Electric Sector in the Brazil end in rhe WuVorld - A Critic View (in Porruguese) Rio de Janeiro Relume Dumad 1998 pp 107-141 S Hunt and G Shutteworth Competition and Choice in Efeclricity New York John Wiley and Sons 1996 pp 21-25 S Hunt Making Competition Work in EIeclriciry New York John Wiley and Sons 2002 pp 17-29 G E Schuch F P o m and R C Lotera ldquoAn Analyses of the Electricity Commercialization Activity in the Brazilian Electric Sectorrdquo in Portuguese) presented at the Energy Forum Novo Hamburgo Brazil 2003 h i s v 01 pp 01 -OS F P M Bandeira (2004 January 11) ldquoAn Analyzes of the Alterations Proposed to The Electric Sector Modelrdquo (in Portuguese) Study Report Deputies Chamber August 2003 [Onlinel Available httpwwwabraceelcombduploa~c~nt~O9092003 10 1 1 18pdf G A B Arfioc R C G Teive and F S V Silveira ldquoInstitutional Models Adapted in the World - The Brazilian Electric Sector Caserdquo (in Porfupese) presented at the IV Brazilian Congress of Energetic Planning Itajuba Brazil 2004 N K Dubash (2004 February 7) rdquoThe Global Context For Electricity Reformrdquo World Research Institute Power Politics [Online] Available httppdfwri orgpowerpolitics-chap2pdf

[ 101 R W Bacon and J Besant-Jones (2004 February IS) ldquoGlobal Electric Power Reform Privatization and Liberalization of the Electric Power lndustry in Developing Countriesrdquo The Energy and Mining Sector Board Discussion Paper Series Paper nrdquo2 June 2002 [Online] Available httpwwwworldbsnkor~~ergypdfsiglo~a~refo~pdf

[ I l l D Roussef (2004 January 4) ldquoInstitutional Model of the Electric Sectorrdquo (in Portuguese) Brazilian Mining and Energy Ministry Brazilian Government December 2003 [Online] Available http~vwwmmegovbr~oticis~~O~3dezembr~ Modelo-1 1 dezO3_Finall pdf

1121 D Bouille H Dubrovsky and C Maurer (2004 February 20) ldquoReform of the Electric Power Sector in Developing Countries Case Study of Argentinardquo Institute of Energy Econorrdcs Bariloche Foundations World Resources Institute March 2001 [Ontine] Available Ilttppdfwriorglargentinapdf

[f3] A report by a study group of the WorId Energy Council (2004 March 5) ldquoEnergy Markets In Transition The Latin America and Caribbean Experiencerdquo Buenos Aires June 2001 [Online] AvailabIe httpKvmr worldenergy o r g w ~ - g e i r g l o b a ~ d a ~ ~ ~ ~ ~ ~ e ~ ~ e m t ~ f

1141 0 Gjerd ldquoThe Deregulated Nordic Electricity Market - I O Years of Experiencerdquo in Proc 2002 IEEE Power Engineering Society Transmission and Disrribution Conj

[lSl J M Aracjo L C S Frade A S Fires and M C Amijo ldquoReestructuration of the Electric Sector in Latin America ~ Advantages Disadvantages and Tendenciesldquo (in Portuguese) Presented at the IX Symposium of Specialists in Electric Operational and Expansion Planning Rio de Janeiro 2004

263-272 [2]

[3]

[4]

[5]

[6]

[7]

[SI

[9J

[I61 UNFCCC (1997a) Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) FCCCCPl997L7Addl on Porhtguese) Bonn [Online] Available httpwwwmctgovbr clidquioto protocolhm

Mauricio Figueiredo de Oliveira was born in Curitiba Brazil on June 19 1980 He graduated at the Federal University of Parana Cuntiba He is a master student from the Labplan at the Federal University of Santa Catarina

His employment experience included the Lactec Laboratory the lntertechne Associated Consultants SC and Copel Distribution SA His special fields of interest include elecmcity markets energy nsk management and ALM

Raimundo C Ghizone Teive was born in Santa Catarina BraziI on June 20 1963 He graduated at Federal University of Santa Catarina (UFSC) in Electrical Engineering in 1985 He earned his MS and PhD degrees both at UFSC in 1991 and 1997 respectively

He is the head of Computer Engineering Course at UNIVALI and Associated Lecturer at UFSC His interested areas include Expansion Planning Demand Side Management and Electricity Markets

Custavo Antonio Baur Arfux was bom in G16ria de Dourados Braril on October 02 1978 He graduated at the FederaI University of Santa Catarina Flonanbpolis He is a master student from the Labplan at the Federal Universiiy of Santa Catarjna

His special fields OF interest include electricity sector structures electricity markets energy derivatives contracts and energy risk management tools (Markowitz Theory and VaIue at Risk)

81 9

5

are key behaviors to sustain the market model applied by each country as happened in the successful experience of Norway

The efficient and rational use of the power sources will be an important target for all citizens because the energy price should increase along the years despite the market competition and the waste of power will be not tolerable

r141

VI] REFERENCES [I] A P Gremaud A F M Filho A E T Lanzana C A Luque D C 0

Alves D E Pinho F A Neto G L Garbfalo W C E Carmo J Sayad J P Z Chahad J T Kimten J A B Rizieri J M Pires L C P Carvalho M E Garcia M E Braga M A S Vasconcellos M G Fonseca M C Cacciamali M R P Spindola P C Milone P F Azevedo R G Olivzira R L Troster and S D Silber Economy Manual Book (in Portuguese) 3th ed S o PauloSaraiva 1998 pp

P R Krugman and M Obstfeld Iniernotional Economics Theoy und P o k y in (Portuguese) Sth ed SBo Paulo Makron Books 1999 pp 699-743 L P Rosa M T Tomalsquim J C L Pires The Reform ofrhe Electric Sector in the Brazil end in rhe WuVorld - A Critic View (in Porruguese) Rio de Janeiro Relume Dumad 1998 pp 107-141 S Hunt and G Shutteworth Competition and Choice in Efeclricity New York John Wiley and Sons 1996 pp 21-25 S Hunt Making Competition Work in EIeclriciry New York John Wiley and Sons 2002 pp 17-29 G E Schuch F P o m and R C Lotera ldquoAn Analyses of the Electricity Commercialization Activity in the Brazilian Electric Sectorrdquo in Portuguese) presented at the Energy Forum Novo Hamburgo Brazil 2003 h i s v 01 pp 01 -OS F P M Bandeira (2004 January 11) ldquoAn Analyzes of the Alterations Proposed to The Electric Sector Modelrdquo (in Portuguese) Study Report Deputies Chamber August 2003 [Onlinel Available httpwwwabraceelcombduploa~c~nt~O9092003 10 1 1 18pdf G A B Arfioc R C G Teive and F S V Silveira ldquoInstitutional Models Adapted in the World - The Brazilian Electric Sector Caserdquo (in Porfupese) presented at the IV Brazilian Congress of Energetic Planning Itajuba Brazil 2004 N K Dubash (2004 February 7) rdquoThe Global Context For Electricity Reformrdquo World Research Institute Power Politics [Online] Available httppdfwri orgpowerpolitics-chap2pdf

[ 101 R W Bacon and J Besant-Jones (2004 February IS) ldquoGlobal Electric Power Reform Privatization and Liberalization of the Electric Power lndustry in Developing Countriesrdquo The Energy and Mining Sector Board Discussion Paper Series Paper nrdquo2 June 2002 [Online] Available httpwwwworldbsnkor~~ergypdfsiglo~a~refo~pdf

[ I l l D Roussef (2004 January 4) ldquoInstitutional Model of the Electric Sectorrdquo (in Portuguese) Brazilian Mining and Energy Ministry Brazilian Government December 2003 [Online] Available http~vwwmmegovbr~oticis~~O~3dezembr~ Modelo-1 1 dezO3_Finall pdf

1121 D Bouille H Dubrovsky and C Maurer (2004 February 20) ldquoReform of the Electric Power Sector in Developing Countries Case Study of Argentinardquo Institute of Energy Econorrdcs Bariloche Foundations World Resources Institute March 2001 [Ontine] Available Ilttppdfwriorglargentinapdf

[f3] A report by a study group of the WorId Energy Council (2004 March 5) ldquoEnergy Markets In Transition The Latin America and Caribbean Experiencerdquo Buenos Aires June 2001 [Online] AvailabIe httpKvmr worldenergy o r g w ~ - g e i r g l o b a ~ d a ~ ~ ~ ~ ~ ~ e ~ ~ e m t ~ f

1141 0 Gjerd ldquoThe Deregulated Nordic Electricity Market - I O Years of Experiencerdquo in Proc 2002 IEEE Power Engineering Society Transmission and Disrribution Conj

[lSl J M Aracjo L C S Frade A S Fires and M C Amijo ldquoReestructuration of the Electric Sector in Latin America ~ Advantages Disadvantages and Tendenciesldquo (in Portuguese) Presented at the IX Symposium of Specialists in Electric Operational and Expansion Planning Rio de Janeiro 2004

263-272 [2]

[3]

[4]

[5]

[6]

[7]

[SI

[9J

[I61 UNFCCC (1997a) Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) FCCCCPl997L7Addl on Porhtguese) Bonn [Online] Available httpwwwmctgovbr clidquioto protocolhm

Mauricio Figueiredo de Oliveira was born in Curitiba Brazil on June 19 1980 He graduated at the Federal University of Parana Cuntiba He is a master student from the Labplan at the Federal University of Santa Catarina

His employment experience included the Lactec Laboratory the lntertechne Associated Consultants SC and Copel Distribution SA His special fields of interest include elecmcity markets energy nsk management and ALM

Raimundo C Ghizone Teive was born in Santa Catarina BraziI on June 20 1963 He graduated at Federal University of Santa Catarina (UFSC) in Electrical Engineering in 1985 He earned his MS and PhD degrees both at UFSC in 1991 and 1997 respectively

He is the head of Computer Engineering Course at UNIVALI and Associated Lecturer at UFSC His interested areas include Expansion Planning Demand Side Management and Electricity Markets

Custavo Antonio Baur Arfux was bom in G16ria de Dourados Braril on October 02 1978 He graduated at the FederaI University of Santa Catarina Flonanbpolis He is a master student from the Labplan at the Federal Universiiy of Santa Catarjna

His special fields OF interest include electricity sector structures electricity markets energy derivatives contracts and energy risk management tools (Markowitz Theory and VaIue at Risk)

81 9