Cross Border Transactions

February 10, 2015

DOMINICAN REPUBLIC—The Dominican Electricity Industry Association Issues Proposals for the National Accord for the Reform of the Electricity Sector

Author: Cristián Vallejo

As announced in our January 14, 2015 newsletter, on January 19, 2015, the Dominican government gave formal start to the discussions regarding the “National Accord for the Reform of the Electricity Sector,” which President Medina had previously 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). As indicated in said newsletter, prior to the foregoing announcement the government had 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. Now the Asociación Dominicana de la Industria Eléctrica (Dominican Electricity Industry Association) (ADIE), an organization that groups the power companies owned by the private sector, has made public its proposals for purposes of the accord’s discussions. The ADIE’s proposals focus on institutional, financial, generation, distribution and transmission-related matters pertaining to the Dominican electricity sector. Notably among such proposals is the merger, into a single entity, of the three state-owned distribution companies.

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

1. As to the structural and institutional aspects of the electricity sector, the ADIE proposes, among other things, the following:

Supply all (100%) of the country’s electricity demand in the shortest possible time, as provided by the law.
Comply fully with the general electricity law, its amendment and supplementary rules with respect to the roles of the electricity subsector’s institutions and the planning and regulatory aspects of the industry.
Apply the technical tariff in accordance with the law, (i) complying with the provisions of the law regarding application of tariffs determined by regular studies conducted to that effect, (ii) updating on a monthly basis the tariff in accordance with the indexation parameters (fuel prices, inflation, exchange rate, etc.), as established by the law and its regulations, and (iii) updating on a regular basis the Valor Agregado de Distribución (Distribution Added Value), Valor Agregado de Transmisión (Transmission Added Value) (VAT), recognized losses, etc., and transfer same to the tariff.
Have a more focused approach to the tariff subsidy by (i) applying a social tariff only to customers consuming fewer than 100 kWh/month, and (ii) granting the so-called “Bonoluz” subsidy only to customers consuming fewer than 100 kWh/month.
Determine, by agreement, the total projected energy demand and power through 2030.
Prepare an indicative plan for the generation, transmission and distribution expansion (including determining the size and location of new power-generation projects and participation in same of renewable energy sources) to ensure security of the system, at a minimum cost and sustainable with the environment.
Strengthen operation of the wholesale market, including, inter alia, by integrating the entire system demand, removing market price caps and applying the operating and regulatory framework established in the general electricity law.
Simplify the mechanism for the processing of definitive concessions for electrical works by (i) having the governmental institutions (Superintendency of Electricity and National Energy Commission) strictly comply with the law as to the terms/time limits set forth therein, (ii) strictly complying with the regulatory requirements, and (iii) issuing a regulation for the processing of permits and concessions for electrical works.
Compliance with the provisions of the public function statute, by recruiting personnel through open competition processes and through the job permanence, stability and meritocracy that must exist in every public entity of the electricity sector.

2. As to the financial aspects of the electricity sector, the ADIE proposes, among other things, the following:

Eliminate the sector’s accumulated debt by, among other measures, (i) outlining a payment plan for the existing debt, (ii) issuing bonds to pay off the total past-due debt, (iii) freeing the distribution companies’ cash flow by transferring pledged accounts to the government, (iv) restructuring the tariff and adjusting same to cover costs, and (v) to ensure that debt will not continue to accumulate year after year, incorporating into the budget the actual/real deficit of the sector so that the funds necessary to complete implementation of the sector’s annual budget, including payment of current bills and accumulated debt with the generation and transmission companies, are appropriated.
Timely payment of the sector’s bills in accordance with the law and contracts.
Eliminate the tax distortions that affect the sector’s companies and are contrary to the taxpayer rights established in the tax code.
Make the information regarding the sector’s performance more transparent by publishing on a monthly basis the sector’s statistics, particularly the technical and commercial variables of the sector’s state-owned companies (Corporación Dominicana de Empresas Eléctricas Estatales, Empresa de Transmisión Eléctrica Dominicana, Empresa de Generación Hidroeléctrica Dominicana and the three distribution companies) so that performance of same can be monitored.

3. As to the generation sector, the ADIE proposes, among other things, the following:

Tender, in accordance with the law, the long-term electricity supply to distribution companies.
Tender all contracts for the purchase of energy by the distribution companies.
Revise the capacity marginal cost and firm capacity allocation mechanism, (i) changing the reference technology to determine the capacity marginal cost in accordance with market conditions, (ii) calculating the capacity marginal cost in accordance with technical, commercial and financial market conditions, and (iii) revising the evolution of the hydroelectric companies’ capacity payment vis-à-vis their actual contribution.
Facilitation by the state of private investments aimed at expanding and/or constructing new infrastructure for the import and transport of low-cost fuels.

4. As to the distribution sector, the ADIE proposes, among other things, the following:

Merge the three distribution companies into a single entity, (i) creating a board and management team for the new distribution company staffed with professionals of recognized integrity and experience in business management, (ii) establishing corporate governance rules similar to those required for companies that issue public securities or corporate bonds in the Dominican capital markets, (iii) complying with the provisions of the public function statute, by recruiting personnel through open competition and through the job permanence, stability and meritocracy that must exist in every public entity of the electricity sector.
Reduce the total distribution losses to international standards (~ 10%) by, inter alia, (i) focusing and prioritizing state investments in the distribution sector, (ii) prioritizing investments aimed at reducing losses in the circuits with higher economic losses nationwide, (iii) designing and implementing a technical network management system and a commercial management system with a proper investment plan that guarantees a reduction of losses of at least 5% annually, and (iv) implementing a five-year plan for the expansion and rehabilitation of networks.

5. As to the transmission sector, the ADIE proposes, among other things, the following:

Update and comply with the transmission expansion plan in accordance with the needs of the system by, among other actions, (i) analyzing on a regular basis the demand needs, (ii) adapting the transmission network so that the future power generation is optimally used, (iii) updating the works plan, and (iv) identifying and making on a timely basis the necessary investments in transmission lines.
Review, on regular basis, the transmission system’s pricing mechanisms in accordance with the law by, among other actions, (i) reviewing and adjusting the transmission toll, (ii) calculating and applying the VAT, (iii) implementing a transmission expansion plan to resolve the restrictions in the east and south power generation centers, and (iv) defining a range of penalties in the transmission toll for unavailability of transmission lines.