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IFC’s Global Experience in Power Distribution. London March 12-13, 2012. Russian Power. The World Bank Group. IFC is a Leading Investor in Emerging Markets Power. 200+ power investments in 57 countries Generation – Financed 26,000+ MW across wide range of technologies

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ifc s global experience in power distribution

IFC’s Global Experience in Power Distribution

London

March 12-13, 2012

RussianPower

ifc is a leading investor in emerging markets power
IFC is a Leading Investor in Emerging Markets Power
  • 200+ power investments in 57 countries
    • Generation– Financed 26,000+ MW across wide range of technologies
    • Transmission – Selected investments in transmission assets
    • Distribution - Current power portfolio reaches over 20 million customers around the world
  • Typically play a leading role in financing early private investments in markets under reform
  • Have not been able to do so in Russia, despite early engagement on reform - and financing Mosenergo
  • We hope the distribution sector will soon offer an opportunity to contribute

Cumulative Commitments since 1967

Total Commitments = US$ 7.8 billion

ifc s experience in distribution
IFC’s Experience in Distribution

Some lessons distilled from that experience, follow

why are distribution systems privatized

Why are Distribution Systems Privatized?

Govs may have set tariffs set below costs generating mounting subsidies

Billing and Collections: often weak; high arrears; culture of non-payment

Poor Customer Service

Staffing – high number of staff, bureaucratic internal organization

Operational Issues – High technical losses and poor maintenance as a result of sustained lack of proper funding

Private investors are expected to reduce losses, cut costs, improve service

Some combination of these issues triggers privatisation or concessioning of distribution

multi year tariff regulation
Multi Year Tariff Regulation

Cost of Capital

This calculation is generally done at the beginning of the regulatory period (3 years or more)

failure to allow full pass through of generation cost

Failure to allow full pass through of generation cost

Regulatory risk is key – and the rules always change

All of the power sector’s policy mistakes tend to show up here

Often because the distributor not allowed to pass on full generation costs

An agreed level of losses included in costs- but may discover it is too low

Losses above that – valued at wholesale market price or at the import price?

Formula to fund smoothing of fluctuations in generation cost - beware

Devaluation will hit impact capital and maintenance costs

Inflation will impact staff and other overhead costs

Agreement that generation costs can be passed through to the consumer, can in practice, soon lead to a dispute which could bankrupt the distribution Co.

devaluation and no indexation

Devaluation and no indexation

Below cost tariffs policy – subsidies

Loss-making Billing and Collections – High arrears, culture of non-payment

Lack of Customer Service – No customer focus, lack of service and communication with customers

Staffing – high number of staff, bureaucratic internal organization

Institutional Set Up – Under the tutelage of one Ministry

Operational Issues – High technical losses and poor maintenance as a result of sustained lack of proper funding

privatization of distribution boomed in the1990s
Privatization of distribution: boomed in the1990s

Between 1992 and 1998, forty six electricity distribution companies were privatized worldwide...

…raising nearly $28 billion in sales proceeds

Since 2000, distribution companies were privatized in Armenia, Macedonia, Ukraine, Bulgaria, Slovakia, Uganda, Cameroon, Turkey, Pakistan and India

did privatization work

30%

25.6%

25%

20.0%

19.8%

20%

15%

10.1%

10%

8.1%

5%

6.0%

0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Chilectra (Chile)

Edesur (Argentina)

Luz del Sur (Peru)

Did Privatization Work?

1

3

Total Losses (%)

turnaround of privatised distribtion cos can be quick
Turnaround of PrivatisedDistribtion Cos can be quick

Controllable costs cut quite quickly

romania with a world bank guarantee of gov obligations

Romania - with a World Bank Guarantee of Gov. Obligations

WACC: 12% for first regulatory period (FRP) of 3 years; 10% for second

Efficiency Factor: 1% for FRP. For second: 80% of actual over FRP

New investments agreed with Regulator & included in RAB at the start

Loss reduction linked to new capital investments plan. Starting at 13%

Quality Standards: Apply only from 2nd period. Tougher in 3rd

RAB is indexed to inflation at the end of each regulatory period

Pass through of power purchase costs based on quarterly average

Investors see reliable, long term cash flow which they can borrow against

Government’s obligations under the concessions guaranteed by World Bank

distribution reducing regulatory market risks
Distribution: Reducing Regulatory & Market Risks
  • Maximize “choice” at the distribution level through competition in generation
  • Adjust and rebalance tariffs prior to privatisation: tariffs will always be “political”
  • Establish a transition tariff formula for an initial period – at least 4 years
  • Establish detailed methodology with efficiency incentives – avoid auditing costs
  • Avoid regulatory discretion by agreeing a market based return – e.g. a utility index
  • Avoid regulatory discretion by assuming model capital structure e.g. D/E of 60:40
  • Include a formula to adjust tariffs monthly for inflation and devaluation
  • Establish a long concession period – 30 years?
  • Must specify what would happen if terminated – how assets are to be transferred
  • Establish clear and measurable quality standards the concessionaire must meet
  • Obtain technical audit of distribution losses - agree realistic loss reduction targets
  • Obtain regulatory approval for investment program for first regulatory period
  • Indicate the upper limit of the efficiency factor “X” for 2 regulatory periods
  • Obtain an audit for starting “accounts receivable” and what % of that is “bad debt”