interamerican development bank october 1999file/2nd… · futaleufu p. madryn posadas transnea 836...

Interamerican Development Bank

October 1999

SECOND GENERATION ISSUES IN THE REFORM OF PUBLIC SERVICES

National Electric Power Regulatory Entity Republic of Argentina

PRESIDENT: JUAN A. LEGISA*

Second Generation Issues in the Reform of Public Services 2

SECOND GENERATION ISSUES IN THE REFORM OF PUBLIC SERVICES

TABLE OF CONTENTS TRANSFORMATION OF THE ARGENTINE ELECTRICITY SECTOR 3 EXPORTS AND IMPORTS IN THE WHOLESALE ELECTRICITY MARKET 10 PROMOTION OF COMPETITION 15 A.- OPEN ACCESS PRINCIPLE 15 B.- GENERALIZATION OF THE RIGHT TO CHOOSE A SUPPLIER 17

C.- FURTHER DEREGULATION 19 DISPUTES 23 A.- JURISDICTION 23 B.- EDESUR’S CASE 25 C.- REVISION OF THE REMUNERATION FOR TRANSMISSION 36 D.- TRANSMISSION TECHNICAL FUNCTION 42


SECOND GENERATION ISSUES IN THE REFORM OF PUBLIC

SERVICES

TRANSFORMATION OF THE ARGENTINE ELECTRICITY SECTOR

The electricity sector transformation started in Argentina with the decade as a

consequence of necessity, by one side, and by de other, as a product of a general consent based in the theoretical discussion dominating the end of the 80´ and the beginning of the 90´.

Nevertheless, the accelerating factor was the serious crisis that the sector suffered in the summer of 88/89, as a result of many years of blunders successively incurred by the State administration.

The approval and enactment of the State Reform Law No. 23,696 and of the Economic Emergency Law No. 23,697 in 1989, represent a landmark in the role of the State in the Republic of Argentina. These laws institutionalized the decision for the State to give up its entrepreneurial role to assume the role of a designer of policies, regulator of essential activities, while exercising control over the development thereof.

But as to the electricity sector, it was Law No. 24,065, which together with Law No 15,336 created the “Electricity Regulatory Framework”, that marked the turning point in the sector’s policy, since it replaced former reorganization projects with a comprehensive transformation project.

Before this law was passed, the Argentine electricity sector was structured according to a vertical integration scheme, which meant that vertically integrated enterprises developed, in general, all the electric power industry segments (generation, transmission and, lastly, distribution to users).

The Electricity Regulatory Framework defined the private players that gradually came into all the electric power industry segments and, as a consequence, the State necessarily emerges as the guarantor of transparent markets governed by competition. Due to the transfer of monopolistic utilities to private entities, regulation appeared as a emulation of conditions of competition, wherever competition was not possible.

The State has focused its action on the role of regulating the activity and controlling the private concession-holding companies, to safeguard the users’ interests.

Start-up of the transformation process brought in private investments which allowed a reversal of a scenario with lack of electric power or low quality of service, creating one of abundance, and opened the way to reliable, instead of erratic services, at lower prices.


It should be made clear that not all the sector’s problems were solved by the Framework enactment. Much work was required to design operating criteria and procedures to supplement the body of rules and regulations for the facilities and companies which operated under the former system to adapt to the new guidelines, the most outstanding characteristic whereof was a market governed by competition and, in the monopolistic segments, by specific rules and quality and efficiency standards.

It is important to point out the institutional place of the regulatory entity. Created by a National Law as a self-governing body enjoying full legal capacity to act in the fields of public and private law, the ENRE’s duty is to adjust its action to the principles and rules contained in the Regulatory Framework, ensuring that services are rendered under conditions of reliability, competitiveness, equality, free access, fair and reasonable rates adapted to the expected service quality, protecting the users’ rights and guaranteeing long-term supply.

The Regulatory Framework, being approved and enacted by Congress, properly fits the criterion subsequently upheld by the 1994 Constitutional Reform, in that legislative action is an essential requirement for the formulation of the Regulatory Frameworks for privatized utilities.

Section 1 of Law 24,065 characterizes electricity transmission and distribution as public services, which are rendered under monopolistic market conditions with captive users where regulation determines and controls prices and quality, preventing the occurrence of practices that may be abusive of a predominant market position. Insofar as Transmission and Distribution facilities are concerned, the ruling principle is that of “Open Access”, which allows everybody to make use of them without restriction or opposition from the owner, paying the relevant costs, guaranteeing that it will not become a limitation to the principle.

Generation, irrespective of the intended use, is considered an activity of general interest, which develops in a competitive market, the operation whereof abides by legal rules and operating Procedures so that generators will receive a uniform rate for all, at each delivery site established by the National Load Dispatch, calculated on the basis of the systems’ economic cost, taking into account the cost that non-supplied energy represents for the community. The economic cost is represented by the short-term marginal cost.

Distributors are required to supply all the energy demanded in the geographical area of their concession, and are not allowed to claim lack of supply. This obligation - together with an adequate prices and rates scheme - guarantees that the appropriate steps are taken, according to the estimated demand development, so that the necessary investments will be made in the transmission and distribution segments to ensure supply.

Law 24,065 has dismantled the activity’s vertical integration, by restricting the participation of the owners of companies belonging to one segment, in the ownership of companies belonging to a different segment. These restrictions also extend to controlled and, where pertinent, controlling companies, through shareholdings. However, with the ENRE’s prior approval, two or more carriers or two or more distributors are allowed to merge or consolidate in a single business group. A further requirement intended to guarantee that no situations will arise that may constitute a


predominant position, is that the shares of corporations engaged in electric power distribution or transmission have to be non-endorsable registered shares.

In order to prevent eventual discriminatory situations, where certain users may be favored to the detriment of others, carriers are forbidden to buy and sell electric power.

One of the electricity market agents, the purpose of whose presence is to promote competition, is the Large User, i.e., any user who is able to make an independent contract with a generator or distributor, for electric power supply for its own consumption. The regulation of these operating procedures has gradually established decreasing power and energy modules to gain access to this user category.

The Regulatory Framework fixed the national policy goals for electricity supply, transmission and distribution.

LAW 24.065 – Section 2

General Policy Goals

* To provide adequate protection of the users’ rights

* To promote competitive production and encourage investments guaranteeing long-term supply

* To promote open access, non discrimination and generalized used of the transmission and distribution services

* To regulate the transmission and distribution activities ensuring fair and reasonable rates

* To encourage more efficient supply and demand through appropriate rates

* To invite private investments ensuring competitive markets

In the stage immediately before transfer of the state-owned companies to private hands, a transformation of said companies was required in order to adapt them to the new regulatory model.

Each of the three large companies owned by the National State was divided into independent business units, in the form of corporations, where the National State initially was the holder of 100% of their shares. Said business units had to be economically viable and transmission and distributions companies were transferred under concessions, establishing the initial rates table together with a system providing for service quality and penalties for non compliance, all contained in the respective contracts.

In the case of transmission and distribution companies, once the above described mechanism was implemented, the State then proceeded to sell the controlling stock, by international public invitation to tender. Such controlling stock is indivisible. In the case of thermal power generation, the transaction comprised direct sale of the assets and, in the case of hydropower generation, the required procedure


was to first grant concessions for the water resources, which in all cases is owned by the Nation and the Provinces.

In an effort to simplify, we can say that the major goals pursued by the new rules of the game are: introducing direct competition in production, where dispatch is based on costs and it is the more efficient generators who produce. Competitive production for large users, who can freely contract their energy purchases. Competition in transmission system expansions, which must be borne by the beneficiaries and awarded by bidding in the regulated segments, seeking prices (rates) comparable to those that would be obtained if the market operated under a competitive regime.

As mentioned above, electric power production operates under competitive conditions and, for the market to be able to develop fully, the Law has provided for the entry of new participants without restrictive conditions in the case of thermal power operators, while hydropower generation is subject to concessions, due to the aforesaid reasons.

The technological reality of the electric power industry, however, imposes certain restrictions to the introduction of absolute competition to the system as a whole. For instance, the need to match supply and demand instantly, coupled to the impossibility of storing the electric fluid, means that operations require centralized dispatch to determine where, who and how much will be generated at the same time. To this end, an entity has been created to oversee the wholesale market: Compañía Administradora del Mercado Mayorista Eléctrico (CAMMESA) (Wholesale Electricity Market Management Company), which is responsible for the Organismo Encargado del Despacho (OED) (Dispatch Management Agency).

The Wholesale Electricity Market (MEM) supplies 93 % of the Argentine power system demand, while the Patagonia system, not linked to the former, meets 6 % of demand, and the remaining 1% of energy requirements is supplied by small isolated systems, located far from large consumption centers.

The MEM is a member of SADI (Sistema Argentino de Interconexión = Argentine Interconnection System), with almost 8,000 km of 500 kV lines and more than 13,000 km of 132 and 220 kV lines, which practically cover the entire Argentine territory.


EL BRACHO

RECREORECREO

MALVINASMALVINAS

RESISTENCIARESISTENCIA

ROMANGROMANG

C.ELIAC.ELIA

Sto:Sto:TOMETOME

ROSARIOROSARIOOESTEOESTE

HENDERSONHENDERSON

PUELCHESPUELCHES

CHOELECHOELECHOELCHOEL

ALMAFUERTEALMAFUERTE

ALICURAALICURA

P. DEL AGUILAP. DEL AGUILA

PLANICIEPLANICIEBANDERITABANDERITA

BAHIABAHIABLANCABLANCACHOCONCHOCON

SALTO GRANDESALTO GRANDE

YACYRETAYACYRETA

EZEIZAEZEIZA

ABASTOABASTO

OLAVARRIAOLAVARRIA

RODRIGUEZRODRIGUEZ

GRANGRANMENDOZA

FUTALEUFUFUTALEUFU

P. MADRYNP. MADRYN

POSADASPOSADAS

TRANSNEA836 km

601 MVA

National TransmissionSystem

TRANSENER7950 km

6450 MVA

TRANSNOA2464 km956 MVA

DISTROCUYO1245 km

1025 MVA

TRANSCOMAHUE829 km

387 MVA

TRANSPA2217 km

1248 MVA

TRANSBA5524 km

2280 MVA

At present (ago/1999), the installed generation capacity is 20,326 MW, according to the following structure: 50 % thermal power; 45 % hydropower and 5 % nuclear power.

The generation structure according to type of equipment is: 45 % thermal power, 44 % hydropower and 11 % nuclear power, for total generation of 70,000 Gwh, in 1998.


WEM

InstalledCapacity: 19486 MW

MaximumDemand: 12650 MW

NOAP=1187 MWD=809 MW

NEA

P=1858 MW D= 391MW

CENTROP=2148 MW D= 1148MW

GBA-L-BAP=7686 MWD=9033 MW

CUYOP=1276 MW

D= 795MW

COMAHUEP=5333 MW

D= 482MW

PATAGON.

P= 840 MWD= 622 MW

WEMSP

WEM+WEMSP

InstalledCapacity: 20326 MW

MaximumDemand: 13210 MW

The production segment has been expanding steadily, in response to market requirements, as consumption grew by 71 % from 1991 to 1998, which allowed supply to match demand, with the ensuing effects on the wholesale market prices. In the period under analysis, we see that the spot (monomial) price fell by about 48 %.


In the generation (competitive) segment, important achievements have been accomplished. The ongoing investment process has secured better possibilities of supplying the system. More production and better quality result in greater reliability among distributors and users.

The following table sets forth the development of the Argentine Electric Power System.

TOTAL WEM + WEMSP

Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98

SELF-GENERATORS 2 5 9 9 11 12

MAJOR L. U. 18 80 208 265 350 392

MINOR L. U. -- -- 207 459 797 1502

CARRIERS 7 14 21 21 25 30

DISTRIBUTORS 26 25 26 28 31 31

GENERATORS 23 31 37 43 44 44

CO-GENERATORS -- -- -- -- 2 3

SELLERS -- -- -- -- -- 1

TOTAL 76 155 508 825 1260 2015

WEM: Wholesale Electricity Market

WEMSP: Wholesale Electricity Market - Patagonia System

L.U. : Large Users


EXPORTS AND IMPORTS IN THE WHOLESALE ELECTRICITY MARKET

1.- INTRODUCTION

Description of the rules applying to electric power exports and imports in the Argentine Wholesale Electricity Market, international exchange agreements in force, duties of the Ente Nacional Regulador de la Electricidad (ENRE - National Electric Power Regulatory Entity) in connection with this subject and currently ongoing projects.

2.- APPLICABLE RULES

Set forth below is the fundamental part of the rules applying to export and import operations in the Wholesale Electricity Market (MEM).

2.1.- Law No. 24.065

Section 34. - Electric power exports and imports shall require previous authorization by the Energy Secretariat, Ministry of Economy and Public Works and Services.

Section 56. The Entity’s power and duties shall be:

f) To determine the selection specifications and conditions for granting electricity transmission and distribution concessions by means of public or private procedures, the latter where duly justified by duly proven special reasons.

g) To invite participation in selection procedures and to make the relevant awards, signing the concession contract ad referendum of the Executive Branch, which may delegate such duty on the agency or officer that the Executive may deem advisable;

h) To promote, before the Executive Branch, the assignment, extension, cancellation or replacement of concessions, where appropriate;

2.2.- Decree 0974/97.

♦ Makes a functional distinction between electric power regional and interregional transmission.

♦ Defines internationally interconnected electric power transmission.

♦ Differentiates, as a third sub-set with its own characteristics inherent to transmission intended to establish power links of wholesale electric power suppliers or demand located within the national territory with suppliers or demand located in other countries.

♦ Upholds free, non-discriminatory access.

♦ Jointly considers electric power export and import operations and the construction of facilities which, in the Argentine territory, are intended to allow the performance thereof.


♦ Delegates on the Energy Secretariat the power to grant concessions and establish regulations for internationally interconnected electric power transmission.

♦ Characterizes internationally interconnected electric power as a public service subject to concession.

♦ Establishes that said concessions in no case imply a territorially exclusive privilege that may prevent granting equal rights to third parties within the same area.

♦ Establishes conditions for

A. the creation of the concession-holding company

B. the concessionaire’s responsibility in rendering the service

C. the rates table for the internationally interconnected electric power transmission systems.

2.3.- Resolution SEyP 0021/97.

♦ Defines the regulatory aspects relating to internationally interconnected electric power transmission.

♦ Includes internationally interconnected electric power transmission in the power transmission regulations.

♦ Establishes regulatory criteria to enable international sales commitments.

♦ Establishes procedures for execution of facility enlargements intended for internationally interconnected electric power transmission.

♦ Regulates the procedure to be followed to apply for and grant internationally interconnected electric power transmission concessions.

♦ Establishes criteria to determine the essential aspects, the remuneration scheme and the service quality and penalty system of an internationally interconnected electric power transmission concession.

♦ Clarifies that any internationally interconnected electric power transmission concessions granted by the ENRE shall be approved by the Secretariat ad referendum of the NATIONAL EXECUTIVE BRANCH.

♦ Incorporates regulations for the admission of participants to the Wholesale Electricity Market and for sales in the Wholesale Electricity Market.

3.- INTERNATIONAL EXCHANGE AGREEMENTS

Listed below are the international energy exchange agreements currently in force.

♦ Energy Interconnection Agreement between the Republic of Uruguay and the Republic of Argentina - 1983.

♦ Mutual Cooperation Agreement for Electric Power Integration between the Republic of Paraguay and the Republic of Argentina – 1987.


♦ Economic Complementation Agreement No. 16 (ACE 16) between the Government of the Republic of Argentina and the Government of the Republic of Chile – 1991

♦ Protocol of Intent between the Republic of Argentina and the Republic of Brazil on Energy Integration – 1996.

♦ Memorandum of Understanding between the Republic of Argentina and the Republic of Brazil on power exchange development and future electric power integration – 1997.

♦ Protocol Additional to ACE No. 16 on “Rules Governing Electric Power Interconnection and Electric Power Supply between the Republic of Argentina and the Republic of Chile” - 1997.

♦ Partial-scope agreement on Electric Power Integration between the Republic of Argentina and the Republic of Bolivia - 1998.

♦ Memorandum of Understanding Relating to Electric Power Exchange and Integration of MERCOSUR, DEC. N 10/98 of CMC - 1998.

4.- RESPONSIBILITIES OF NATIONAL ELECTRIC POWER REGULATORY ENTITY (ENRE)

♦ To consider any applications and decide on the granting of any internationally interconnected electric power transmission concession.

♦ To resolve any objections or oppositions filed by MEM Agents with respect to the granting of a concession.

♦ To supervise the selection of the Carrier holder of a Concession to be granted according to a public bidding procedure.

♦ To convene Public Hearings to deal with the following issues:

1) impact on the system of any proposed work;.

2) objections raised by MEM Agents who are able to prove that their facilities will be affected by any projected facilities;

3) the relevant environmental aspects related to projected facilities.

♦ To review and approve bidding documents proposed by applicants in the process for selecting an internationally interconnected electric power transmission concession holder.

♦ To supervise the invitation to tender and, particularly, the procedure for Awardee selection.

♦ To establish the amount to be recognized as operation and maintenance costs related to the use of the facilities in question by third parties.

♦ To establish the minimum technical requirements and antecedents to be met by a future concession holder.


♦ To fix the transmission rates of interconnection facilities in the case where an expansion has been carried out under the Parties’ Accord mechanism.

5.- PROJECTS UNDER CONSTRUCTION

5.1.- InterAndes: Güemes – Paso Sico Interconnection (Connection to Chile)

In general terms, the purpose of the Project is to supply a firm energy sales contract through:

a) One thermal power plant to be located in Güemes, Province of Salta, and

b) One transmission line to link the generation point with the delivery point on the border.

With this project, Termoandes S.A. will meet its firm energy delivery obligations under the contract executed with the Chilean firm Chilgener S.A., which gave rise to the electric power export authorization process.

As regards the main characteristics of the electric power transmission line to be built, for which the pertinent granting of a concession is required, the line will be approximately 263 km long on the Argentine side, consisting of a 345 kV rated voltage single-wire circuit, mounted on guyed “Y” or “V” type, self-supporting, galvanized steel structures, with horizontal phase arrangement.

In Chile, the high-voltage line will be 143 km long.

The line in question is not linked to any of the nodes of the Argentine Interconnection System, but will be operated entirely independent thereof.

The thermal power plant to be built will be of the Combined Cycle type with net power of about 630 MV in its final stage.

The export authorization is for a firm power contract, with increasing energy exports, as follows:

a) Commencement of activities with 1,800 GW-h/year as from January 1st, 1999,

b) With a first capacity increase to be made before January 1st, 2001, annual energy will grow to 3,400 GW-h/year,

c) After the second capacity increase before January 1st, 2003, annual energy produced will grow up to a total of 5,000 GW-h/year.

This is for the term of 27 years, starting on January 1st, 1999.

As to the present state of the work, in general, the estimated delay in the line is about two and a half months with respect to the original schedule, although today certain aspects of the pace at which the civil works are proceeding, have improved.

The estimated investment for the first stage is 440 million dollars.

5.2.- Rincón Santa María – Garabí Project (Connection to Brazil)

CIEN Compañía de Interconexión Energética, awardee of the invitation to tender carried out by Electrosur and FURNAS, signed contracts for twenty years and three months, as from March 1st, 2000, with the Costanera Plant, for 500 MW and with


CEMSA for a further 500 MW in order to meet the 1,000 MW of firm power that was the object of the above mentioned invitation to tender.

The Costanera Plant and CEMSA have applied to ENRE for the relevant international transmission concession, taking into account the fact that they already held the export permits issued by the Energy Secretariat. At present, granting of the concession is in process.

In this connection, both the Costanera Plant and CEMSA have made an agreement with Compañía de Transporte del Mercosur, according to the Parties’ Accord method, whereunder the latter will build and operate the internationally interconnected system.

From the viewpoint of the project, the idea is to establish a link from the Rincón de Santa María node up to the border node. On the other side of the river, i.e., in the Republic of Brazil, the project will be completed with the installation of a 50 Hz / 60 Hz frequency converter that will operate in Garabí, in a site that had been indicated by the authorities at the time of the bidding process, with a 385 km line from Garabí, going through Santo Angelo, up to the Itá substation, were energy is delivered.

On the Argentine side, a 500 kV line approximately 130 km long will be built in the Province of Corrientes.

The line consists of a single three-wire line, will be provided with guyed “Y” and A type suspension structures.

The investment foreseen for this project is 350 million dollars in Brazil and 44 million dollars on the Argentine side.


PROMOTION OF COMPETITION

A.- OPEN ACCESS

The open access principle is of paramount importance for the electric power sector reform.

According to the provisions of section 22 of Law no. 24,065, carriers and distributors are required to allow non-discriminate access of third parties to the transmission capacity of their systems, provided that said capacity is not committed to supply demand under contract, under the conditions agreed by the parties and in the terms established by said Law.

Plainly speaking, this means that third-party access to the grid cannot be prevented without duly founded reasons, or based on preferences or interests. The sole grounds for non access is insufficient surplus capacity, after the grid owner’s demand has been satisfied.

The sole restriction to open access is that such access should not cause an adverse impact on the system or other agents, understood from the point of view of electricity, although this issue may give rise to lengthy discussions if the effect is not too obvious and, normally, there are technical solutions to reduce such effect.

Before going further into the subject, it is well worth to define the concept of transmission capacity and its different variations.

The Technical Transmission Capacity between one or more specific delivery nodes and one or more specific reception nodes is defined as the capacity to transmit power through the grid, between said sets of nodes, which results in the concurrent application of limitations due to thermal, voltage or stability effects, plus allowances for transmission capacity margins according to reliability and/or safety criteria.

Moreover, based on considerations regarding priority right of use, a difference can be made between firm and non-firm capacity.

“Firm” transmission capacity is understood as the right, held by an agent, to be supplied a transmission service that can only be interrupted or restricted in the event of contingencies or system operation under abnormal or emergency conditions.

“Non-firm” capacity, instead, is a transmission service that, in addition to the aforesaid causes, may be interrupted or restricted due to the use of transmission capacity by other agents who hold a priority right of use thereof, i.e., “firm” transmission capacity.

According to these definitions, the grid’s remaining capacity, between one or

more delivery nodes and one or more receiving nodes, should be understood as the


difference between the Technical Transmission Capacity and the sum of all firm transmission capacities committed between said nodes.

Now then, the concessions upon which the Electric Power Sector is structured, establish different circumstances and, therefore, different scopes of the open access principle. The distinction arises basically in two fields : the Transmission System and the grids of distributors who operate as Additional Providers of the Transmission Technical Function.

In the facilities belonging to the High Voltage Electric Transmission System and to the Regional Electric Transmission Systems, they were transferred to the present concessionaires without any transmission capacity being reserved to any MEM agent, which implies that there are no privileges or priorities on account of precedence to access said facilities or any other reason.

Therefor, all the MEM agents use the High Voltage Electric Transmission System and the Regional Electric Transmission Systems under “non-firm” transmission capacity conditions.

Here we should made a second distinction as regards the Agents.

For Generation Agents, the use of transmission capacity of the High Voltage Electric Transmission System and Regional Electric Transmission Systems is inherently “non-firm” because said use is conditioned to their being called in and dispatched by the Dispatch Management Agency (OED) which, in accordance with regulations in force, allots to them the priority and order in which they will access said systems.

As to the agents on the demand side, in case of a transmission capacity shortage, they will see their electric power supply reduced, sending a signal for implementation of solutions intended to overcome said shortage jointly by all the agents involved in such restriction.

In the Transmission System there is only once exception to the open access principle, i.e., the exclusive use lines, which do not fall under the category of public service and, therefore, are not included therein.

The term Transmission Technical Function (FTT) designates the link service performed by power facilities which are part of the Argentine Interconnection System (SADI) or by the facilities connected to the latter, insofar as they physically connect electric power sellers and buyers, mutually and to the Wholesale Electricity Market (WEM).

This is the specific function of carriers, while for other agents, such as Distributors and, eventually, Large Users, this is a function they are required to perform, but only subsidiarily to the performance of their specific function, i.e., energy distribution to users or to themselves.


In the sphere of Additional Providers of the Transmission Technical Function, the concept of remaining transmission capacity is defined, accordingly, as the difference between the Technical Transmission capacity of facilities and the necessary transmission capacity for the Additional Provider of the Transmission Technical Function to supply contracted demand, i.e., the users’ demand, plus the allowance for the service reliability criterion used by such provider in its facilities in general.

The other side of open access is an occasional opportunistic behavior of certain agents, known as “free riding”, which refers to the unpaid use (in terms of capital associated to investment) of the transmission capacity supplied by an enlargement made by other agents, who bear the construction cost thereof, which, in addition to violating the principle of equity, causes unnecessary delays in completion of works and, ultimately, discourages expansion of the transmission system.

For this reason, the regulations include the possibility of reserving 90 % of capacity, only for radial lines and for the term of 6 years only, but the limited scope of this protection form and period makes it a scarcely attractive solution.

B.- GENERALIZATION OF THE RIGHT TO CHOOSE A SUPPLIER

Large Users

Large Users were established as agents of the Wholesale Electricity Market for the aforesaid purpose, in order to afford a direct benefit to concentrated demand, by enabling them to participate in the operation of said market.

A Large User is any user that, because of its consumption characteristics, is in position to enter into contracts for energy purchases in block, negotiating the conditions that will afford it extra benefits with respect to obtaining supply from the distributor in whose concession areas said user is located. To encourage the development of this kind of operations, since the enforcement of the Regulatory Framework the power modules required to become a Large User have been gradually reduced from 5,000 kW to 50 kW.

This creates new relationships between agents and non-agents of the Wholesale Electricity Market, where providers who are not carriers, in addition to their inherent function, also perform the transmission technical function for other Wholesale Electricity Market agents.

The relationships among agents grow in number and complexity, from 18 large users, in late 1993, to more than 1,800, by late 1998.


The MEM distributors are required to secure open, but not gratuitous access to their facilities, as long as they have remaining capacity to do so. In this context, the ENRE defines the criteria for exercising the right of open access to the transmission capacity of carriers’ and/or distributors’ system, in addition to guaranteeing that right.

The Electric Transmission Technical Function is the link service provided by

the power facilities that form the Argentine Interconnection System, or facilities connected to the latter, making no distinction as to the legal entities or private persons to whom they belong, insofar as they physically link electric power sellers and buyers both mutually and to the Wholesale Electricity Market.

All the electric facilities serving the Transmission Technical Function fall within the non-discriminatory, open access principle set forth in Law 24,064. In addition to the value of the open access principle, upheld by the law, inclusion thereof in the Procedures is important because those who are acknowledged as agents of the Wholesale Electricity Market undertake the commitment to operate according to the methodology established for the purpose, determined by the Energy Secretariat and the ENRE.

The conditions for providing the transmission and/or distribution services constitute a single unit, as regards quality and price. Each quality category has its corresponding service price, being the ENRE the one to apply and work in establishing the relevant rates, according to the system’s development and the resulting quality.

Large Users in the MEM - Characteristics A contract agreed upon with a Generator Transmission Charges are paid additionally There are no voltage level restrictions


GUMA GUME GUPA

POWER

More than 1000 kW 100 kW up to 2000 kW 50 kW up to 100 kW

CONTRACT

Minimum: 50 % of demand 100 % of Demand 100 % of Demand

Energy over 4380 MWh/year

Minimun Duration: 1 year Minimun Duration: 2 years Minimun Duration: 2 years

COMMERCIAL METERING

The agent’s responsibility The Distributor’s responsibility The Distributor’s responsibility

TRANSPORTE

Toll payable to PFTT Toll payable to PFTT Toll payable to PFTT

SEÑALES DEL MEM

Active vis-à-vis signs Passive vis-à-vis signs Passive vis-à-vis signs

C.- FURTHER DEREGULATION

Initial Conditions

Restructuring of the sector, together with the creation of a Wholesale Market (the MEM) were the instruments that started transformation of the Argentine electric power industry. The electricity regulatory framework and the set of rules known as THE PROCEDRUES designed the market organization and created economic signs in order to promote the economic use of resources, service quality and efficient development of investments.

The sector’s initial structure and the enormous change involved determined the conditions for this process, the following among them:

• Restrictions as to the methods for declaring and calculating the price of energy, since competition possibilities were limited until a diversification of agents occurred.

• Market closing (and therefore, prices) was affected by a condition where there was a structural shortage of supply.

• The new companies (agents) in the MEM needed learning time in order to specialize in the new types of business and to know the results of the new rules.

Present Conditions

In the MEM’s current state of development, the following can be seen:


• That the rules for grid expansion, programming and dispatch created conditions that promoted competition in the generation, sale and transmission expansion activities, as well as in operation efficiency and new investments.

• That the price systems allowed acknowledgement of technological changes, increased competition and changes in the average production costs, and that said changes were transferred to end users, thus securing fair and reasonable rates for them.

• That agents have multiplied, both in number and type, location and individual characteristics, providing the necessary conditions for a real market with diverse buyers and sellers, where each agent not only has the freedom, but also the possibility to choose to whom it will sell or from whom it will buy.

• That the operating restrictions which affect dispatch have to be reflected in the short-term prices, in the form of increases taking into account lower quality and the risk of interruptions at the wholesale level, and in the form of reductions in the case of excess supply.

• That the market is characterized by the fact that it closes without programmed supply restrictions being required due to shortages in the generation supply and that, in view of this reality, the most critical issue for users now is the quality they seek and the prices to be paid for it.

•That agents have gained knowledge and experience in designing and adopting operating and business strategies, as well as in negotiating contracts.

• That opening of the MEM’s borders to import and export operations increases the size of the market and alters the characteristics of demand and supply according to the requirements of firm contracts and Spot operations between markets, as well as the system’s operating conditions.

Having achieved this new technical, commercial and business structure, the MEM is a demonstration of success of the basic principles criteria that define the electric power regulatory framework. However, most of the conditions that made it necessary to establish restrictions to and controls over the market’s operation, today have disappeared. Therefore, it is now possible to develop a more dynamic market.

Deregulation of Conditions Currently in Force

In the MEM, the next stage consists in deregulating THE PROCEDURES, i.e., eliminating those restrictions and administrative rules which, although justified in the early stages of transformation as they paved the way to the MEM’s success, do not fit today’s reality and, in some cases, curb an efficient market development. With competitive conditions and experienced agents who know how to operate in the market, it is now possible and advisable to eliminate unnecessarily regulated restrictions and to add, instead, where necessary, new regulatory techniques and financial tools that have been developed for competitive electric power wholesale markets.

The summary below sets forth the subjects to be deregulated.


Contracts Market

The purpose is to foster a more flexible Contracts Market, so that contracts may be used as tools adapted to covering the financial and physical risks (assured supply and quality requirements) of each agent or Seller.

Operating and Quality Requirements

For assured and quality operation, the system requires additional services. It is advisable to have economic signs available to promote the efficiency of said services and to allow measuring their economic cost.

In periods of significant demand variations, such increase should be provided for in less than one hour. Each Consumer agent shall submit its demand forecast broken down every 30 minutes, except for the peak period and daytime demand increase period (end of valley and beginning of remaining hours), where each shall report its demand forecast broken down every 15 minutes.

A thermal unit or hydropower plant cannot sell the same reserve for different reserve ancillary services.

The following measures will be required:

• Clarifying the different types of reserves required for operation, according to the type and speed of response.

• Adjusting the definition of operating reserve so that supply thereof will be consistent with the additional power that a generating unit may provide in 5 minutes, taking into account its dispatch, the restrictions inherent in the unit and in Transmission.

• Incorporation of Interruptible Large Users to provide reserve services with a response time of less than 20 minutes.

Spot Market and Energy Price

The purpose is to increase the efficiency of short-term signs that arise from energy prices, allowing them to reflect the fuel market conditions, competition in the generation activity, and the experience and knowledge gained by Generators in calculating the Production Variable Cost and the value of water.

High-Voltage Transmission

It is deemed necessary to broaden the spectrum of possible mechanisms to expand transmission, through the creation of new concepts to contribute new instruments to the market, for the latter to decide on the expansions to be made in the system.

An expansion application shall be filed by one or a group of interested parties, called “Initiators”, who need not be Market Agents.


All Initiators shall undertake the commitment to bear the cost, during the repayment period (15 years), of not less than 30 % of the FEE payable to the Contractor under the risk transmission COM Contract. As compensation, users shall pay toll, determined according to the average Use Factor, to be proposed by said Initiators, but which shall be higher than a minimum value fixed by regulations.

With the ENRE’s authorization, the Initiators shall make a public invitation to tender to select those who will form the group of “COM Contract Principals”, who will contract risk transmission out to one or more Independent Carriers.

During the same repayment period, the “COM Contract Principals” will be paid toll by third parties using the facilities built, in proportion to their percentage of the FEE arising from the Construction, Operation and Maintenance Public Invitation to Tender (COM Bidding).

As regards oppositions, the requirements currently in force will be maintained. Oppositions backed by reliable evidence, based on the claim that the proposed risk expansion does not result in a positive, net social benefit, will also be accepted.

Reactive Power Market

With a view to promoting availability of the necessary operating equipment and reserves, vis-à-vis possible contingencies, it is deemed convenient to implement a Reactive Power Futures Market.


DISPUTES

A.- JURISDICTION

The ENRE, according to Law 24,065, under which it was created and which

establishes its powers and duties, has primary jurisdiction over any and all disputes arising between Wholesale Market agents and between the latter and users or other interested third parties.

The term jurisdiction, as used above, is understood to mean the power to determine the fair solution to conflicting positions between the above mentioned subjects.

Personal Jurisdiction

A distinction was made between disputes involving market agents and those involving market agents and users or interested third parties, because, in the first case, the conflict has to be solved necessarily through the Entity’s jurisdictional action.

This means that conflicts between agents cannot be filed with the Law Courts, if the ENRE has not previously issued a decision in respect thereof.

Instead, conflicts between public service users and providers or between other interested parties and market agents require that a claim be filed with the Entity for the latter to exercise its jurisdiction, but they may also directly resort to the law courts.

Competent Jurisdiction

The Entity’s competent jurisdiction is also restricted to the subject-matters falling under the ENRE’s vested powers. Law 24,065 specifies that the origin of such disputes must be the supply of electric power transmission and distribution public services.

Remedies

The interested parties are entitled to file two kinds of administrative remedies against resolutions issued by the Entity in the exercise of this function, viz. : reconsideration , to be file with the ENRE itself, or an Appeal, with the Energy Secretariat.

In the second case, since the resolution in question is issued according to a

jurisdictional function established by law (which is not the Energy Secretariat’s case), the remedy is limited to events of manifest arbitrariness, gross error or gross violation of law, in which case the Secretariat may revoke the contested decision.


Other than filing any of the above administrative remedies, an interested party may also file a direct judicial remedy with the National Administrative Disputes Court of Appeals. Therefore, the parties are not required to resort to the lower courts.

Other Jurisdictional Activities

1. Understanding the term “jurisdictional” in its broadest sense, i.e., with reference to an activity similar to that inherent to Judicial Courts, this characteristic is shared also by the Entity’s power to penalize any infringements, incurred by Market Agents or third parties, of the Regulatory Framework Law and regulations. Here, following procedures that allow any such party to exercise the right of defense, the Entity is empowered to apply against them penalties ranging from fines of up to 100,000 dollars to special disqualification or suspension of the service they render, confiscation of the elements used, of the facilities or devices built or failing to comply. In the case of public service concessionaires (transmission and distribution), infringements and the penalties therefor are included in the regulations contained in the Concession Contracts. 2. A second activity inherent to the judiciary is the investigation and gathering of elements to determine if generators, carriers or distributors have incurred in the offense of unfair competition or abuse of their predominant market position, which offenses are defined in a special law (Defense of Competition Law No. 22,262). This law, which creates the National Committee for Defense of Competition as the body in charge of investigating such offenses in the field of production in general, is thus altered as regards the activity of said Electricity Market agents, by transferring those functions to the Regulatory Entity. Once the case is investigated and if the evidence found determines that, in the Entity’s opinion, the provisions of said law have been violated, under a specific resolution, the docket is forwarded to the Domestic Trade Secretary, who then decide whether to forward the case to the Criminal Courts in Economic Matters, in which case the investigated conduct will be thence treated in the judicial sphere.

Problems

The main problem arising from the above mentioned rules refers to controlling compliance with the quality standards and with the duties that the electricity carriers and, particularly, the distribution concessionaires have towards their users.

Indeed, if we take into account the fact that usually there are alterations in the quality levels provided for in the Concession Contracts, in the case of distribution, either due to power cuts or voltage problems, and that these failures obviously affect a large number of users at the same time, even where the Concession Contracts


provide for an administrative procedure to determine unfulfillment and the application of pre-established penalties according to the frequency, duration or departure from the established voltages levels, these provisions clash with the above mentioned power of users to resort, if the so choose, to the courts instead of filing a claim with the Regulatory Entity.

Although the petty amount of claims that may arise in favor of users in situations of unfulfillment regarded as normal or within tolerable limits, have not generated any situations with a two-fold, simultaneous administrative and judicial activity, in exceptional situations - on account of the duration of power cuts capable of causing significant damages (e.g., Edesur’s power cut occurred on February 15, 1999), there may be several court actions overlapping an identical activity concurrently carried out by the Entity.

In this respect we should point out that our National Constitution, as amended in 1994, now includes article 42, referred to consumers’ and users’ rights, which reads : “Legislation shall establish efficient procedures for the solution of conflicts”. Accordingly, the above described procedures fall under this constitutional provision, although the Congress has yet to enact a law to regulate the solution of this type of disputes.

B.- EDESUR’S CASE

On February 15, 1999, a failure and a subsequent fire occurred at the Azopardo Sub-Station, owned by EDESUR S.A., which left almost 160,000 users of the City of Buenos Aires without electricity supply, affecting the neighborhoods of Almagro, Balvanera, San Cristóbal, Boedo and Monsterrat. The distributor succeeded in fully restoring service only ten days later.

The event took place in the course of works intended to connect the existing 132 kV grid to the new 220/132 kV Azopardo Sub-Station, recently commissioned.

The failure of one of the OF cable joints, due to a single-phase short circuit, ignited a fire that ultimately destroyed all the cables laid in the affected area of the tunnel and did away with the reserve represented by the redundant three-wire line designated with the numeral 136, because it was not fire-protected. The three-wire lines 135 and 136 supplied the 132/13.2 kV Azopardo, Pozos, Once and Independencia SS’s. At the time of the event, there was no technical personnel present in the SS and there was only one watchman.

The cause was that the joints has been made inside the tunnel under the station, where all the 132 kV cables entered and left the station, without any measures to protect the other wires. Moreover, the site did not have a fire detection system.

After several failed attempts to reconnect the cables in the same site, EDESUR S.A. decided to by-pass the cable outside the station, restoring the previous set up for the Pozos, Once and Independencia SS’s.


ENRE carried out an expert examination according to technical standards and the state of the art. Said examination showed that :

• The tests performed in Azopardo SS to transfer the load were carried out at insufficient test voltage levels and, purportedly, without previously treating the cables and accessories with oil.

• The splicing failure which, from the electrical point of view, was a simple contingency turned, due to negligence, into a double contingency, cancelling out the possibility of load recovery from the high-voltage grid.

• The absence of specialized personnel during load delivery, given the significance of this task - initial transfer of the electricity public service to 160,000 customers of the Sub-Station -, determined that the fire went undetected for 30 minutes, and that the firemen began fighting the fire by gushing water into the tunnel.

• Of the 16 oil samples taken from the tunnel cables, 10 exceeded the moisture limits for installed cables (25 p.p.m.) and, as to new cables, all 16 exceeded said limits (10 p.p.m.), while in the samples taken from the by-pass the moisture content was ≤ 11 p.p.m.

Below is a summary of the chronology of events and attempts made by EDESUR to repair the failure and restore service.


FIG. 1 . State before connection to the new station

FIG. 2 . State foreseen after connection to the new station

ESTACION AZOPARDO 220/132 kV (NUEVA)

A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135

220 kV

132 kV


A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135

C 453

EMPALMES

C 454

220 kV

132 kV


SUNDAY, FEBRUARY 14, 1999

At 07:44 p.m., the first jointed three-wire line (No. 453) is energized and commissioned.


A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135C 453 EMPALME

220 kV

132 kV

02/14/99 - 07.44 p.m.: Energized and commissioned 02/15/99 - 02:57 a.m.: Load delivery at Independencia 02/15/99 - 03:01 a.m.: Load delivery at Pozos

FIG. 3 . First joint carried out

MONDAY, FEBRUARY 15, 1999

At 03:14 am a discharge occurred in a joint of cable No. 453, phase “T”, which ignited a fire in the cable tunnel near the Azopardo 126 SS, which damaged cables Nos. 135, 136, 453 and future cables 451, 452, 454, 455 y 456.



A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135

220 kV

132 kV

EMPALMEC 453

FALLA

INCENDIO

02/15/99 - 03:14hs.: Joint failure Cable 453 out of service due protections Load was not cut off A fire starts

02/15/99 - 03:47hs.: Cable 136 out of service due protections damaged by de fire Load cut off in Pozos, Once and Independencia

02/15/99 - 03:57hs.: Manual switching of cable 135 Load cut off in Azopardo

FIG. 4 . First joint failure


A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135C 453

220 kV

132 kV

All cables inside the tunnel damaged by fire

Cable 451Cable 453Cable 453Cable 454Cable 455Cable 456Cable 135Cable 136

FIG. 5 . State after the fire


TUESDAY, FEBRUARY 16, 1999

In the late hours of the day, execution of six (6) joints begins in order to solve the emergency, all six with newly supplied materials.

WEDNESDAY, FEBRUARY 17, 1999

By mid-morning, execution of the six (6) normal joints is completed.

At 12:30 p.m., from the Once SS, a voltage test is performed on the three-wire line No. 453 (200 kV, 15’), where a discharge is detected in phase “R”, phases “S” and “T” pass the test satisfactorily.


A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135C 453

220 kV

132 kV

C 453

FALLA

02/17/99 - 04:00 am: 6 new joints are made on cable 463 One joint fails the insulation test

FIG. 6 . First reconnection attempt

In view of the repeated failure, execution of six (6) new joints in the three-wire cable No. 454 is proposed, using materials from a different lot.

THURSDAY, FEBRUARY 18, 1999

Execution of two (2) joints in phase “S” is completed during the afternoon.

At 08:00 p.m. an applied voltage (200 kV, 15’) test is carried out with satisfactory results.


FRIDAY, FEBRUARY 19, 1999

In the first hour the four (4) remaining joints are completed in the three-wire cable No. 454.

At 02:30 am an applied voltage (200 kV, 15’) test was performed on these joints. At the end of 8 minutes of the test, a discharge occurs on the Pozos SS side of phase “R”.

Minutes were drawn up recording the presumption of material failure and that the new materials will be 100 % lab tested.

It is decided to make a new joint, to replace the faulty one, with materials to be supplied by EDESUR.

In view of the repeated failures and since the cause thereof was unknown, the possibility of a by-pass on the three-wire cables No. 135 and/or No. 136 is considered once again, contemplating two alternatives, one on Venezuela Street and the other in the square located at the intersection of Belgrano and Paseo Colón Avenues.

Drilling work starts, and it is then decided that it is advisable to carry out this operation in the square located at the intersection of Belgrano and Paseo Colón Avenues.

In the early hours of the morning excavation begins in the square and on Venezuela Street; finally it was determined that it was best to concentrate all efforts on the square.

On the other hand, in the early hours of the afternoon the joint was completed.

At 03:00 p.m. an applied voltage test was performed, and a failure was detected at 100 kV.



A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135C 454

220 kV

132 kV

FALLA

02/19/99 - 04:00 am: 6 joints were completed on cable 454 One joint fails the insulation test

02/19/99 - 04:00 p.m.: The failed joint on cable 454 is redone Once again it fails the insulation test

FIG. 7 . Second and third reconnection attempts

SATURDAY, SUNDAY AND MONDAY, FEBRUARY 20, 21 AND 22, 1999

Work continues for the purpose of solving the situation in the trench dug in Belgrano and Paseo Colón Avenues although, alternatively, the cables of the Azopardo - Pellegrini three-wire lines (457 - 458) are uncovered in Belgrano Avenue and Bernardo de Irigoyen Street so that, if the first solution fails, provisional joints could be made between these three-wire lines.

The three-wire lines No. 135 towards Puerto Nuevo and Pozos are oil-treated, and the achieved moisture levels are below the minimum values for new cables.

TUESDAY, FEBRUARY 23, 1999

A dielectric test was carried out in the connection with a 132 kV, ZLPE cable from the GIS - connection 451, up to the Azopardo SS 40 MVA Faraday transformer field. 228 kV (+) are applied. A minute was drawn up.

Phase R - time 09:55 p.m.

Phase S - time 10:29 p.m.

Phase T - time 10:59 p.m.

With this job, the “Old” Azopardo SS is reconnected.


WEDNESDAY, FEBRUARY 24, 1999

Time: 10:00 am. Ready to carry out the dielectric test on cable 135 from Once SS to Pozos - Puerto Nuevo, passing through the latest joints:

Three joints for Crossbonding systems were used - for a 650 kV BIL.

In the trench of Colón and Belgrano, the LAT-IITREE, the experts reported that these joints, as reported by EDESUR’s personnel working in the trench, are of English origin.

The test voltage was 200 kV - 15 minutes CC.

The dielectric test was performed with the joints and cable supported on trusses placed 60 cm up from the trench bottom. At the end of the test, the joints were moved down to the trench bottom. Then they were covered with sand.

At 04.20 p.m. the three-wire line No. 135 was energized from Puerto Nuevo, which would remain without load until 08:20 p.m. From then on the procedure is started to take delivery, including interlocking into service position the 13.2 KV switches of the respective transformers of Pozos - Independencia and Once SS, which were severed.

At 11:30 p.m. the three-wire line was loaded with approximately 30 MVA.

WEDNESDAY, MARCH 3, 1999

EDESUR informed that the three-wire line 136 was under voltage (conditioning period) and that the load delivery procedure would begin at 8 or 9 p.m..


FIG. 8. Final reconnection

As shown by the above narration, said power cut largely exceeded the downtime limits established in the Concession Contract which, added to the high number of affected users, caused particularly serious damages, jeopardizing also the citizens’ safety and health.

The power cut was not the result of an Act of God or force majeure event, but of faulty facilities comprised in EDESUR’s own distribution system, located in an area which is under its sole jurisdiction. Accordingly, there are no reasons that could possibly exempt EDESUR from its liability.

In view of the extent of the aforesaid failure, the ENRE deemed it convenient to proceed to immediate identification of the affected users, as well as to determine the contractual penalties to be acknowledged to each under the Concession Contract.

Consequently, on February 17, 1999, day two after the event, the ENRE issued Resolution No. 222/99, disallowing force majeure and Act of God, instructing EDESUR to credit to the affected users the amount of contractual penalties in their next bill, and to extend the due date of bills until March 3, in order to allow time to include said credits.

As the power cut lasted more than ten days, the ENRE understood that the Concession Contract provisions referred to determining the amount to be discounted for energy not supplied had been established within the context of normal contingency provisions, fixing maximum admissible periods for interruption of the power distribution service for systems similar to the grid transferred to EDESUR S.A.


A PUERTO NUEVO

SE POZOS

SE ONCE

SE INDEPENDENCIA

TUNEL DE CABLES

SE AZOPARDO C 136

C 135

220 kV

132 kV

02/19/99 - 12:00 p.m.: In view of the failed attempts to connect to thenew station, EDESUR decides to make joints oncables 135 and 136 outside the station, at thecorner of Belgrano and Paseo Colón Avenues.

02/24/99 - 04:00 am: Work completion date reported by EDESUR.


at the time the Concession Contract was executed. Consequently, the penalties provided for in the Contract were intended to compensate only marginal interruptions exceeding the reference standard.

In the present case, a high number of the users affected by the event penalized under ENRE Resolution No. 222/99, were left without effective, normal service for several days.

In addition to the above mentioned contractual penalties, the Entity issued Resolution No. 292/99, which provides that, in view of the exceptional characteristics of the event (supply cut off for an extraordinarily long time), the provisions of the pre-established penalties have been exceeded and that, according to the general principles of law, the affected users are entitled to compensation of all damages suffered.

The legal grounds for this resolution arise from the contractual relationship between the distributor and the service users, and from the jurisdictional powers granted to the ENRE by Law 24,065 to solve conflicts in the distributor - user relationship.

This decision leads to the problem of seeking a way to solve about 160,000 claims, a number that is impossible to treat following the normal dispute solution procedures.

To this end, the ENRE decides to determine uniform, minimum estimated damages to which all residential users are entitled, without any claim or evidence of damage, in the amount of $ 90 for those who had no electricity for less than 24 hours, and of $ 100 plus $ 3,75 / hour for those who had no electricity for a longer time. Such compensation does not limit other higher damages, if duly proved.

This estimate is also based on the ENRE’s jurisdictional powers and in view of the distributor’s own acknowledgement of having caused damage to users.

Insofar as shops and industries are concerned, they are required to prove the damages suffered to be entitled to collect the pertinent compensation.

EDESUR S.A. filed an appeal to reconsider against this resolution, based on purported formal flaws in the contested act, which would originate in the failure to comply with specific administrative provisions, as well on purported flaws of content, that would affect the rules regulating the electricity distribution public service and which, in consequence, would prejudice the constitutional rights to defense and to own property. Therefore, EDESUR S.A. claims annulment of the appealed resolution on such grounds.

Lastly, by Resolution No. 471/99, the ENRE disallows the distributor’s appeal to reconsider, setting forth the legal arguments supporting its action and decisions, which were then expressly accepted and consented to by the distributor.


C.- REVISION OF THE REMUNERATION FOR TRANSMISSION

1.- INTRODUCTION

Within the framework of the Electricity Sector transformation started in 1991, a concession for the high-voltage electric power transmission service was granted to the firm TRANSENER S.A.

Characterized as “public service” (section 1, Law 24,065) and in view of its monopolistic nature, the electric power transmission activity is subject to regulation, both with respect to rates and service quality.

Upon expiration of the first pricing period (i.e., the first five years after the beginning of the concession, on 07/17/93), the ENRE proceeded to revise - in the light of applicable rules (the aforesaid Law 24,064 and the Concession Contract) - the remuneration payable to TRANSENER S.A. and the issues relating to service quality.

The Concession Contract provided that, in principle, it was necessary to approve a new value for the Remuneration for Transmitted Power (RVT)1, to fix an efficiency encouragement factor, to establish a premium system for quality and to reclassify transmission line categories for the application of penalties.

For this purpose, at first C.A.M.M.E.S.A. was asked to estimate the average annual income forecast for RVT for the second pricing period, which yielded - for the three demand hypotheses adopted - a maximum of $ 33.17 million and a minimum of $ 23.45 million. For the first pricing period, the RVT had been determined in $ 55 million2.

The decrease of said income was mainly due to an improved energy supply - both in quantity and efficiency - with the consequent decline in prices.

As set forth in the rules in force, the ENRE convened a public hearing to discuss four issues related to the transmission remuneration payable to carriers, i.e., the variable remuneration for transmitted electric power, the efficiency encouragement coefficient, the premium system and the reclassification of line categories.

2.- FIRST PUBLIC HEARING

The Entity convened a public hearing, held on 05/29/98 and 06/02/98, where the various interested parties had the chance to expose their respective positions with respect to the four issues that, later on, would be subject to the Regulatory Entity’s decision.

In that hearing, TRANSENER S.A. stated that, if the decision to be adopted by the Entity were limited to the four issues under review, the resulting remuneration for

1 The High-Voltage Power Transmission Remuneration System establishes that the carrier’s remuneration is comprised of the following items: “Connection”, “Transmission Capacity” and “Transmitted Power” 2 At the end of the first rate period, the RVT value, adjusted according to the Concession Contract terms, was $ 59.21 million.


the second pricing period would not meet the principles applicable to rates provided for in Law 24,065.

Even if the highest RVT value were approved - held the carrier - the remuneration to be collected during the second five-year period would not provide income enough to meet the service operating costs, taxes, repayment, and to obtain a reasonable profitability rate, as provided for in sections 40 and 41 of the above mentioned law.

In view of this situation, the ENRE requested the concessionaire to supply more detailed and complete information with respect to operating expenses, investments, capital base and expected profitability rate.

Once the requested information was obtained, the Entity decided to revise calculation of the remuneration to be fixed for the second pricing period and to determine whether the amount to be approved would comply with the provisions of Law 24,065.

Without prejudice thereto, the Entity passed resolutions on the four issues for which the public hearing had been convened.

2.1.- Remuneration for Transmitted Electric Power

Through ENRE Resolution No. 1319/98 , the Entity approved an RVT value equal to $ 33,17 million / year for the second pricing period, according to the highest hypothesis taken into account in CAMMESA’s calculation.

2.2.- Efficiency Encouragement Factor

In turn, for the efficiency encouragement factor, the Entity fixed the following annual reduction percentages with respect to remuneration for connection and transmission capacity in the next 10 years:

Year Reduction % to be applied

1999 0.0

2000 0.2

2001 0.2

2002 0.4

2003 0.4

2004 0.6

2005 0.6

2006 0.8

2007 0.8

2008 1.0


2.3.- Premium System

The Entity also decided on the premium system, establishing a formula that takes into account the quality level observed in the first pricing period, which is proportional to the amounts of penalties applied during said period.

(DAM li - DMH l) Tfamp l - Tfamli Premium li = max [PMMH l * ut l * max [ -----------------------; 0]+ -------------------- ; 0] (1 - DMH l ) Tfamp l

Where, for each type of equipment:

PMMH: Monthly Average Penalties in the 1st pricing period

Ut: total number of units

DAM: Variable Annual Average Availability of the month

DMH: Average Availability of the 1st pricing period

Tfamp: Variable Annual Average Failure Rate for the 1st pricing period

Tfam: Variable Annual Failure Rate of the month

Also approved were the values for PMMH, DMH and Tfam for each type of equipment, and the procedure according to which CAMMESA must obtain collection among the Wholesale Electricity Market agents.

This formula applies, on a monthly basis, to the different types of transmission system equipment, lines (Categories A, B and C), transformers, connection equipment (connections) and Reactive Power compensation equipment.

2.4.- Reclassification of Line Categories

As regards reclassification of line categories, the ENRE decided that they shall be reclassified on a yearly basis, starting on 11/01/98, taking into account the cost overruns determined by CAMMESA with the summer seasonal schedule, which contemplates the significant changes foreseen in the system for the following year.

3.- SECOND PUBLIC HEARING

At the same time, the ENRE convened a new public hearing, intended to discuss TRANSENER S.A.’s report on operating expenses and investments, expected capital base determination and profitability rate, and remuneration implicitly expected by the concessionaire - based on the above mentioned elements.

A further purpose of the hearing was assigning the payment, by the different transmission service users, of an eventual difference between the remuneration to be finally adopted and the remuneration arisen from a strict application of the four issues resolved.


After the second public hearing, and taking into account the information gathered - particularly as regards disbursements already made and those estimated for the next five-year period - the ENRE evaluated the operating costs and investments, in order to determine the amounts of expenditures in such items that were compatible with the reasonableness criteria established by Law 24,065.

3.1.- Operating Costs

As a consequence of the above, a reasonable estimate of Operating Costs for the second five-year period was obtained, as follows: (in million pesos): 1999: $ 34.75 - 2000: $ 34.65 - 2001: $ 34.65 - 2002: $34.65 - 2003: $ 34.65.

The total Operating Costs amount estimated as reasonable should be understood, in the context of a “price cap” type price revision, as an amount that is consistent with efficient and effective management of the utility concessionaire.

A more efficient performance would allow the concessionaire to provide the service according said level of expenses as well as to increase its profitability. On the other hand, a lower efficiency level, stated in actual expenses exceeding those estimated by the regulator - either itemized or in the aggregate - would not entitle the concessionaire to request any adjustment whatsoever.

3.2.- Investments

The ENRE analyzed the investments to be made during the next pricing period according to TRANSENER S.A.’s report, and determined which of the proposed investment should be considered for inclusion in the Carrier’s regulated remuneration.

Also, the Entity purged the investment list, to avoid inclusion of those investments which, according to the rules in force, should be treated as enlargements and, therefore, should not be taken into account for the purpose of fixing TRANSENER S.A.’s rate.

As a result, the Entity determined the following investment amounts for the next five-year period: (in million pesos): 1999: $ 5845.2 - 2000: $ 10,469.1 - 2001: $ 11,438.0 - 2002: $15,780.3 - 2003: $ 15,045.3.

3.3.- Capital Base

Also, to determine the reasonable profitability level to be computed as a component of the carrier’s remuneration, the Entity analyzed the question of capital base and profitability rate to be acknowledged thereon.

Since the concessionaire carries out non regulated activities, from which it obtains part of its total income, the Entity determined that the reasonable profitability should be calculated on a portion, not the whole, of the capital base.

In this connection, the ENRE took into account that, in compliance with the provisions of section 19 of Law 23,696, the Enforcement Authority had appraised the concessionaire’s assets, and that this appraisal had been taken into account to value the capital applied to regulated activities in the amount of $ 310.9 million.


3.4.- Profitability rate

To determine the reasonable profitability rate provided for by Law 24,062, the Entity used the calculation method known as CAPM (capital assets pricing model), understanding it was acceptable for the case in question.

This is so because the CAPM builds the profitability rate on the basis of a risk-free rate to which an allowance is added which represents an average of profits earned by private investments over and above a risk-free investment.

In order to fully adapt the rate to the case under examination, the CAPM takes a multiplier - the Beta factor - which, applied to the market premium, allows obtaining the margin to be added to the risk-free rate to made the specific activity in question profitable.3 Lastly, the method includes the “country risk” rate.

TRANSENER S.A. considered that the applicable rate of return should be between 12.44 % and 15 % (as the rate of return of a company operating with its own capital).

Upon analysis, the Regulatory Entity concluded that the profitability rate to be acknowledged to the concessionaire should be 10.54 %. To arrive at this value, the Entity used a 5.178 % risk-free rate, a 0.58 Beta factor applied to a 3.03 % market premium, and the country risk was estimated in 3.6 %.

In turn, information originating in U.K. regulations (The Transmission Price Control Review of the National Grid Company, published by OFFER, August 1996 issue), showed that the cost of capital considered at the time of revising carrier prices in the United Kingdom was within the range of 6.5 - 7.5 %. Therefore, considering a 3.6 % country risk, a profitability rate comparable to the aforesaid 10.54 % came to within a range of 10.1 - 11.1 %.

3.5.- Reasonable Remuneration Calculation

Based on the foregoing definitions, the Entity calculated the remuneration to be acknowledged to TRANSENER S.A. for the pricing period started on 07/17/98, and decided that the reasonable level to be allotted to TRANSENER for the second pricing period would be $ 94.6 million4.

This new income level implied an 8 % reduction with respect to the high-voltage carrier’s income during the first five years of operation.

The study results showed that, indeed, if TRANSENER S.A.’s remuneration for the second pricing period had be established only on the basis of the four items dealt with in the first public hearing, the pricing principles established by Law No. 24,065 would not have been complied with.

In other words, the remuneration of approximately $ 77.5 million that would have applied in the first case, would have been clearly insufficient to meet said principles. 3 For calculation, the Beta factor includes the (higher) risk difference between operating in a “price cap” type pricing system and a price calculated according to the “rate of return” system. 4 The Carrier’s regulated income at the end of the first pricing period was equal to about $ 103 million, before penalties.


Examination of the nature of RVT showed that the method provided for in the Concession Contract for calculating remuneration in each pricing period has become unreasonable, because it may lead to establishing said remuneration at levels that are contrary to the reasonableness criteria upheld by Law 24,065.

Therefore, the Entity concluded that it is empowered to make a board revision including both the carrier’s remuneration and the questions related to service quality, while at the same time, it its required to act for the purpose of ensuring compliance with the provisions of the Law.

3.6.-. Assigning Payment among Users

Lastly, the Entity cleared the issue of assigning payment of the difference between the remuneration fixed for TRANSENER S.A. and the remuneration that would have resulted from taking only the new RVT approved by ENRE Resolution No. 1319/98.

Although the remuneration was determined in accordance with the provisions of Law 24,065, the RVT will still be part of the fund collection mechanism under which the payment obligations undertaken with the concessionaire will be met.

Therefore, the remuneration for Connection and Capacity was determined taking into account that the transmission system users share in the payment of the costs thereof, to the extent of their respective utilization.

To that end, and in order to ensure a total annual remuneration of $ 94.6 million, through ENRE Resolution No. 1650/98, the Entity changed the connection remuneration values established in paragraph 1.1., Sub-Annex II-C, of TRANSENER S.A. Concession Contract, for the following:5

- For each 500 kV connection: $ 28.186 / hour



- For each dedicated transformer: $ 0.141 / hour / MVA

5 The values at the end of the first pricing period were: -For each 500 kV connection: $ 10.766./ hour. - For each 220 kV connection: $ 9.689 / hour - For each 132 kV connection: $ 8.613 / hour - For each dedicated transformer: $ 0.054 / hour / MVA


D.- TRANSMISSION TECHNICAL FUNCTION

Through SE Resolution 159/94m the Energy Secretariat of the Nation

established that there are facilities which, on account of their physical interconnection, and irrespective of the legal entitles or private persons to whom they belong, perform a certain stage of the ELECTRIC POWER TRANSMISSION TECHNICAL FUNCTION (FTT) in the wholesale commercialization of electricity.

Also, it determined that, insofar as said function or communication or link service between buyers and sellers in the WHOLESALE ELECTRICITY MARKET (MEM) is concerned, said facilities are part of an integrated electric power system.

In view of this and of the growing number of recognized agents in the WHOLESALE ELECTRICITY MARKET (MEM) who requested the Secretariat to determine the prices for use of the electric power transmission facilities through which the WHOLESALE ELECTRICITY MARKET (MEM) is linked, the Secretary deemed it advisable and timely to establish further definitions on the subject matter of ENERGY SECRETARIATY RESOLUTION No. 137, dated November 25, 1992, without prejudice to the provisions of Section 25, Law 24,064. The DISPATCH MANAGEMENT AGENCY (OED) shall identify the transmission services required when the HIGH-VOLTAGE POWER LINK FACILITIES owned by Entities or Companies responsible for regular and continued electricity distribution to meet the essential and general electricity requirements of users, according to the terms of Section 3, Law 15,336, are o can be used by third parties.

Therefore, this resolution established the quality and price conditions for agents who supply medium or high voltage power, identifying two types of services which, were later defined as Firm and Non-Firm Transmission, under SEyT Resolution No. 406/96.

With these resolutions the National Government complied with its obligation to protect the electric power users’ rights, by defining the specific regulations applicable to the WHOLESALE ELECTRICITY MARKET (MEM), as the Government could not allow eventual restrictive situations open to the preferential treatment of certain power supply users to the detriment of others.

Later on, SE Resolution 91/97 determined the toll conditions for large users connected through low voltage facilities (Voltage <1 kV).

The Energy Secretariat based this new rule on the fact that promoting competitiveness in the electricity production market and demand is one of the aims of the national policy on electricity supply, transmission and distribution set forth in Law No. 24,065.

In the whereas clauses, the Secretariat stated that the resolution was considered to fully agree with Section 42 of the National Constitution, in which


authorities are ordered to protect the right of consumers and users to make a free choice in their goods they consume or services they use.

The Secretariat also established that performance of the Low Voltage TRANSMISSION TECHNICAL FUNCTION (FTT) provided to Major Large Users and Minor Large Users, connected at less than ONE KILOVOLT (1 kV) located in:

v Electric Power Distribution Public Service areas of an ADDITIONAL PROVIDER OF THE TRANSMISSION TECHNICAL FUNCTION (PAFTT) holding a Concession Contract, shall be governed by the provisions contained in said contract for the provision of the Electric Power Distribution Public Service by ADDITIONAL PROVIDERS OF THE TRANSMISSION TECHNICAL FUNCTION (PAFTT) which establish the technical and economic conditions for providing the Low Voltage TRANSMISSION TECHNICAL FUNCTION,

v Electric Power Distribution Public Service areas of an ADDITIONAL

PROVIDER OF THE TRANSMISSION TECHNICAL FUNCTION (PAFTT) who does not hold a Distribution Concession Contract or who holds a Contract that does not fix the technical and economic conditions for providing the TRANSMISSION TECHNICAL FUNCTION (FTT), shall be governed by the following stipulations:

a) The toll rate shall be equal to or less than the rate for end users set

forth in the rate tables applicable to the distribution public service provider in question, for services of the same voltage level and type of consumption, after deducting the energy and power reference prices at the distributor’s purchase node.

b) The quality and safety levels shall be equal to or higher than those to

which the distribution public service provider is obliged with respect to the rest of users of the same voltage level and type of consumption.

Furthermore, the Secretariat established that the technical and economic

conditions for providing the Low Voltage TRANSMISSION TECHNICAL FUNCTION (FTT) shall be revised by the NATIONAL ELECTRIC POWER REGULATORY ENTITY (ENRE), taking into account the provisions of Sections 40, 41 and 42, Law No. 24,065, within twelve (12) months of the effective date of this Resolution. For that purpose, the ADDITIONAL PROVIDERS OF THE TRANSMISSION TECHNICAL FUNCTION (PAFTT) shall submit to the Entity the information and studies required by the latter and any other additional data or studies that the providers may deem relevant.

On the other hand, the National Electric Power Regulatory Entity, taking into account the provisions of section 25, Law No. 24,065, saw that studies were urgently needed to revise the quality and economic conditions corresponding to Provision of the Transmission Technical Function (PAFTT) for providers who were not carriers, for


firm or non-firm transmission, as the case may be, to Large Users, Generators or Distributors.

Taking the above into account, the Entity decided to hire several consultants at the same time since, eventually, they would contribute different methodological approaches, making for a more fruitful analysis at the time of deciding how to establish the conditions for providing the FTT.

Accordingly, the Entity started by studying the FTT providers in three provinces, which would enable implementation, in a first stage, of an original methodological and conceptual development that later, in a second stage, would be used to evaluate the rest of the provinces.

Along this line of thought, the Entity deemed it advisable to start working on the territories of the provinces of Córdoba, Santa Fe and La Pampa.

Lastly, while the ENRE was developing said studies, the Energy Secretariat issued SE resolution 428/98, adopting new measures referred to the applicable rate to remunerate the Additional Provision of the firm Electric Power Transmission Technical Function (PAFTT), including the aspects of service quality and expansion, performed by the provider of the Electric Power Distribution Public Service.

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