DOMINICAN REPUBLIC—Government Sets Date to Start Discussions About the National Accord for the Electricity Sector Reform and Presents Proposals

Author: Cristian Vallejo

Spanish

The Dominican government has announced that formal discussions about the so-called “National Accord for the Reform of the Electricity Sector,” which President Medina formally called for by means of Decree 389-14, dated October 13, 2014, pursuant to the mandate contained in Law No. 1-12 (Organic Law of the National Strategy for Development of the Dominican Republic), will commence on January 19, 2015. To that end, the Dominican government has made public a set of proposals representing the consensus of the relevant government agencies as to the matters that such accord should encompass in order to achieve the objectives for the electricity sector sought by said Organic Law, namely, resolution of the structural crisis affecting such sector and ensuring the necessary certainty required from the regulatory and institutional framework in order to facilitate investments in the energy sector required for the development of the country. It is expected that the accord will be signed within six months from the official launch of the aforementioned discussions.

The government’s proposal is organized around eight key subjects, namely:

• Subject 1: Purpose of the accord;
• Subject 2: Medium- and long-term planning of the electricity sector;
• Subject 3: Institutional framework;
• Subject 4: Legal framework;
• Subject 5: Generation sector and expansion thereof;
• Subject 6: Transmission sector;
• Subject 7: Distribution and commercialization; and
• Subject 8: Financial sustainability of the power sector, subsidies and technical tariff.

Some Relevant Aspects of the Government’s Proposal

Below are some of the relevant aspects included in the government’s proposal:

1. 1. As to Subject 1, purpose of the accord, the proposal contemplates the achieving of an electricity system that is reliable, efficient, transparent and sustainable and that supports the attainment of the vision of the nation and objectives contained in the National Development Strategy.
2. 2. As to Subject 2, medium- and long-term planning of the electricity sector, the proposal states that the government, through the Corporación Dominicana de Empresas Eléctricas Estatales (CDEEE), within a period not to exceed six months from the signing of the accord, would develop and make available a Comprehensive Development Plan for the Electricity Sector-2015-2030 containing the policies and actions agreed upon in order to achieve a comprehensive and sustainable development of the electricity sector (financially and environmentally), and that includes, among others, the following elements:
    
   • Review, strengthening and adjustment of the public institutional and functional structure of the electricity sector;
   • Review and amendment of certain laws and regulations governing the electricity sector;
   • A generation expansion plan with a portfolio of diversified production sources, including renewable sources;
   • A plan containing the actions and policies to be implemented to ensure the expansion of the transmission infrastructure, consistent with the objectives of financial sustainability of the power activity and ensuring the stability and reliability of the service;
   • A plan containing the actions and policies to be implemented to ensure financial sustainability of the distribution activity, including, (i) an investment plan for the modernization of the distribution networks, (ii) a plan for improving management of the commercialization effort, and (iii) provision of sources to finance investments;
   • A plan for managing and monitoring the financial self-sustainability of the provision of electricity service; and
   • Monitoring, accountability and interim evaluation of the above-mentioned Comprehensive Development Plan for the Electricity Sector-2015-2030, contemplating, for such purpose, among other measures, an independent tripartite mechanism (public sector, business sector and civil society) to monitor compliance with the agreed-upon actions and goals, and to assess the results of the reform process.
    
3. 3. As to Subject 3, institutional framework, the government’s proposal contemplates the need to readjust the institutional framework under which the electricity sector operates. According to the government, the structural reform should cover two areas, namely, (i) a reformulation of the legal-regulatory regime to redefine and clarify the “rules of the game” in order to give certainty, predictability and transparency to the development activities of the different sectors and actors, and (ii) a readjustment of the sector’s institutional framework, to achieve an efficient operation of same, that is aligned with the goals and objectives of the sector. To that effect, the government proposes, among other things, the following:
    
   • Creation of the Empresa de Generación Eléctrica Dominicana (Dominican Power Generation Company) (EGEDOM) for purposes of coordinating the thermal generation units owned by the state, which would operate under the CDEEE’s supervision and guidance;
   • That the distribution companies (i) maintain their corporate-operational independence, and (ii) operate under the same coordinating policies and guidelines established by the CDEEE’s Board of Directors;
   • Setting up management rules for the state-owned power companies that are in accord with the best practices and standards in the region (Latin America);
   • Setting up conditions that ease a private investment development process, either alone or under a PPP (public-private participation) scheme, that opens the door for the entry of new actors;
   • Setting up rules and conditions aimed at easing outsourcing of management of the electricity commercialization effort;
   • Reform the CDEEE’s management so that the state-owned power companies operate under a single corporate unit, with one Board of Directors. For such purpose, the government proposes, among other things, that (i) the reform be commenced with a management audit of the CDEEE by an independent firm of international reputation and include recommendations to improve the CDEEE’s operation and management, (ii) the result of such audit be made public, (iii) the CDEEE’s operational governance be adjusted to comply with the industry’s highest standards of efficiency and effectiveness and supply quality, and (iv) the CDEEE be subject to the necessary reforms/adjustments so that same can be traded on the stock exchange, with substantive public involvement and mechanisms to prevent share concentration; and
   • Institutional strengthening of the National Energy Commission so that it can effectively carry out the roles and functions assigned to it by Article 12 of Law 125-01 (Electricity Law), among others, to (i) develop and coordinate legal and regulatory initiatives, and (ii) propose and adopt policies and regulations and prepare indicative plans.
    
4. 4. As to Subject 4, legal framework, the government’s proposal includes, among other things, the following:
    
   • Guarantee the independence of the Superintendency of Electricity (SIE) so that it can assume the roles and mandates assigned to it by the Electricity Law (Article 24), which empowers the SIE as the authority in charge of regulating and enforcing regulations against the different agents in the sector, regardless of its origin, whether national or foreign, public or private. This would include noninterference with the resolutions issued by the SIE in fulfillment of its duties, including those relating to setting and applying the electricity tariff;
   • Revision of Article 93, paragraph 2, of the Electricity Law, as amended by Article 3 of Law No. 186-07 dated August 6, 2007, regarding “compensation for energy not supplied” by the distribution companies, which penalizes such companies with 150% of the energy not supplied. The government proposes to suspend application of this compensation until the distribution companies achieve a sustainable financial position;
   • Revision of the permits issued for the installation of private transmission lines in violation of Article 41, paragraph IV, of the Electricity Law, which provides that “in no event shall be concessioned or authorized hydro generation or electricity transmission companies, which shall remain under state ownership and operation”;
   • Compliance with Section 139 of the Electricity Law, as amended by Article 25 of Decree No. 494-07 of August 30, 2007, with respect to the operation of unregulated users;
   • Definition and regulation of the affiliation among generating companies to avoid anticompetitive and/or abuse of dominant market power practices/activities, which are prohibited by the Electricity Law; and
   • Ensuring conditions for the transparent setting of the electricity tariff for end consumers, as provided by Article 111 of the Electricity Law.
    
5. 5. As to Subject 5, generation sector and expansion thereof, the government’s proposal states that to achieve a sustainable development of the electricity sector, configuration, with long-term vision, of a generation matrix supported by an appropriate mix of renewable and nonrenewable sources (directed to achieving the goals of energy security and satisfaction of the electricity demand in terms of sufficiency, efficiency and reliability) is required. This goal states the government’s proposal and includes an energy development policy based on both renewable and nonrenewable sources and a greater commitment to exploration activities to achieve self-sufficiency.
   
   In this context, the government proposes the following:
    
   • Government’s commitment, through the National Energy Commission and in coordination with the CDEEE, to prepare and make available to all parties, within six months from the signing of the accord, a works plan for the period 2015-2030 that is based on projected electricity demand and includes investment projects in generation from renewable and nonrenewable sources and power transmission projects, all as necessary to enable a power supply that is timely, reliable and at competitive prices;
   • Oversight by the SIE of the tender processes to be launched by the distribution companies in order to ensure power supply in the short term and medium term. In addition, the government’s proposal states that the projects related to such processes could be undertaken by the private sector or by the Dominican state itself;
   • Government’s commitment to use all available technical means and adopt management policies as may be necessary to achieve an efficient management of the financial efforts and to regularize the debts and cash flow of the National Interconnected System (SENI). The foregoing is aimed at ensuring an economic operation of the power generation units interconnected to the system;
   • Government’s commitment to complete installation of the two coal-fired power plants currently under construction in Punta Catalina;
   • Government’s commitment to promote public or private investments to convert to natural gas the existing fuel oil-fired power plants, based on profitability and efficiency criteria; and
   • Government’s commitment to promote a balanced distribution in the country of the natural gas re-gasification infrastructure, particularly the installation of a re-gasification terminal in the northern part of the country to facilitate conversion to natural gas of the power plants existing in such area.
    
6. 6. As to Subject 6, transmission sector, the government proposes, among other things, the following:
    
   • Government’s commitment to take or adopt the actions and policies needed to ensure an efficient and transparent operation of the transmission subsector, as established in its multiyear planning and in the corresponding annual-2015 operating plan for the Empresa de Transmisión Eléctrica Dominicana (Dominican Power Transmission Company) (ETED). For this purpose, the government proposes, among other things, the following:
     
     
     • Complete the transfer of assets to the ETED;
     • Effectively manage collection of the transmission toll by the agents of the SENI so that the ETED can make the necessary investments for expansion, operation and maintenance of the national transmission system’s facilities;
     • Establish an institutional framework agreement between the Ministry of Finance and the ETED for the repayment of the loans arranged by said ministry for the projects included in the expansion plan;
     • Investing in the economic sustainability of the works to expand the electric transmission infrastructure and revise the plan for the expansion of such infrastructure taking into account the results of the supply and demand study to be conducted;
     • Increase the transmission capacity of the power plants installed in the eastern side of the country by installing the 345 kV transmission line interconnecting Santo Domingo and San Pedro de Macoris;
     • Work on the interconnection of the coal-fired power generation plants under construction in Punta Catalina (to be connected to the 345 kV Julio Sauri Line – Punta Catalina);
     • Work on the interconnection of the natural gas-fired power plants to be installed, preferably in the land owned by the CDEEE in Manzanillo, as a result of the tender process for the purchase of energy (to be connected to the 345 kV July Sauri Line – Manzanillo);
     • Working on the interconnection to the SENI of the new substations of 138/12.5 kV and 69/12.5 kV projected by the distribution companies, divided between tourist areas and other isolated systems;
     • Given that the transmission voltage levels will only be 130 kV and higher (as the government’s proposal states), establish that all existing 69 kV networks will be owned and managed by the distribution companies by 2030; and
     • End the urban areas’ interconnection rings based on the projections contained in the 2013-2020 plan.
   • Agree that the isolated systems be regulated and interconnected to the SENI, following a gradual scheme and considering adequate levels of quality of service in the SENI before their interconnection.
    
7. 7. As to Subject 7, distribution and commercialization, the government proposes, among other things, the following:
   
   
   • Establishment of clear operational and jurisdictional rules between local governments and the distribution companies, as well as the distribution of costs and fees for land use, payments for lighting and consumption by the different municipalities.
   • Establishment of amendments to the Electricity Law to improve and make more efficient the management of the distribution companies.
   • Commitment by the government, under the coordination of the CDEEE, to establish appropriate management policies to ensure efficient performance and financial recovery of the distribution companies by adopting, among others, the following measures:
     • Review and adjustment of the existing policy setting forth those customers to whom the electricity service can and cannot be interrupted, as well as the billing and collection policies, including the energy saving policies of the different units of the Dominican state;
     • Expansion of the payment options for all customers;
     • Improving management of the service interruption to delinquent customers;
     • Continue the restructuring of distribution networks;
     • Ensure the allocation of resources to continue, more aggressively, improvement of the distribution networks and telemetry universalization;
     • Continue the installation of telemetering meters to all users and prepaid meters in low-income sectors; and
     • Agree on the investment plan, measurement technology and management strategy to reduce the commercial, technical and administrative losses of electricity.
   • Enable outsourcing to third parties by the distribution companies of the commercialization efforts in specific areas or circuits, subject to prior approval by the CDEEE’s Board of Directors.
    
8. 8. As to Subject 8, financial sustainability of the electricity sector, subsidies and technical tariff, the government proposes, among other things, the following:
   
   
   • Redefine the status of the Electricity Tariff Stabilization Fund (FETE) to limit it exclusively to subsidize the poverty and extreme poverty sectors, according to the Solidarity Program and the so-called “Bono Luz”;
   • Establish a mechanism to compensate the distribution companies for the subsidy to the impoverished population for an amount in no event lower than the purchase and distribution costs;
   • Focus the electricity subsidy to the low-income sectors so that the technical tariff can be implemented;
   • Agree on a targeted electricity subsidy to the beneficiaries of the so-called “Bono Luz” for up to 100 kW/h to the 840,000 families accounted for by the SIUBEN in the category of poor and extremely poor, together with the installation of prepayment meters to each of these families;
   • Establish, as mandatory, the prepayment mechanism for those customers with recurrent payment delinquency; and
   • Government’s commitment to implement the technical tariff established by the SIE, eliminating the indiscriminate electricity subsidy through the FETE.