Theme 1-Strengthening The Institutional Framework-Final Report-20210623

Hugh Rudnick Van de Wyngard
Alejandro Navarro Espinosa
Thematic Line 1: Strengthening the

Institutional Framework
June 2021
Prepared for:
Thematic Line 1: Strengthening the Institutional Framework Hugh Rudnick Van de Wyngard
Executive Summary
The Multisector Commission for the Reform of the Electricity Subsector (CRSE) contracted the
services of a specialized group of experts to participate in the preparation of a White Paper
that supports the institutional and regulatory modernization of the Peruvian electricity sector.
Among the Consultants, the CRSE hired Hugh Rudnick Van de Wyngard and Alejandro
Navarro Espinosa to identify actions and propose recommendations that seek the
adaptation of the institutional framework for the transition to the new electricity market. The
set of tasks, under the name “Strengthening the Institutional Framework”, include
recommendations under the following areas:
• Institutional Transformation of COES: i) Evaluate the evolution of COES into an
independent system operator (ISO), ii) propose COES new institutional governance,
iii) evaluate the separation of the system operation coordination functions and
market administration functions, iv) evaluate COES functions regarding future
regional interconnection electricity system and market, and v) analyze and propose
improvements to the transmission planning function of COES.
• Integration of Energy Planning: Evaluate institutional alternatives that allow
comprehensive coordination of the planning work for the expansion of electricity
transmission, generation, and development of natural gas infrastructure, including
(but not limited to) i) evaluating the viability in unifying in one entity the function of
structuring, carry out and manage public auctions/tenders/bidding for the
expansion energy infrastructure, and ii) analyze the governance of energy planning.
• Dynamization of the Natural Gas Market: Evaluate and propose alternatives that
allow the natural gas secondary market to be more dynamic and a more efficient in
the use of natural gas, for both natural gas producers and electricity generators,
including the establishment of an appropriate entity to coordinate the operation and
planning of natural gas and electricity markets,
• Modernization of Public-Owned Electricity Companies: Identify the barriers that
prevent state-owned companies from carrying out an adequate and efficient
operational and investments management to carry out their electricity supply
business and establish the requirements of and adequate and efficient corporate
governance and management of these companies.
• Strengthening of market regulation and supervision/monitoring: Identify the
modifications that are necessary to strengthen the administrative, financial,
regulatory, and technical autonomy of OSINERGMIN.
This document is the definitive report and includes a thorough analysis of the current
institutional framework, an identification of the main elements in the current regulatory
framework that should be modified or revisited to meet the goals set by CRSE, a revision of
international experience and best practices, and the recommendation of a set of proposals
to modify the identified elements. This study has been conducted in a period of over 5
months. The main elements identified, in the current regulatory framework, that are
proposed to be modified or revisited are the following:
1. Institutional Transformation of COES: COES is a non-profit private organization
composed by SEIN’s agents and its decisions are binding for all agents. Although
COES’ structure resembles the structure of an Independent System Operator (ISO), it
does not fully meet all the characteristics of an ISO.
COES’ Registered members participate in the election of COES’ Board members as
well as the adoption of agreements and actions in COES’ Subcommittees and
Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Phone: 56-2-22320501 systep@systep.cl www.systep.cl June 2021 1
Assembly. The current voting system allows some of COES members to have more
influence than others in the decisions taken by COES’ bodies. Moreover, under the
current governance structure, new entrants, new technologies and small agents are
underrepresented. In addition, the existing instructional framework does not fully
guarantee Board Directors to act completely independent of the members’
influences and biases. Even though Directors do not have any binding mandate with
the Subcommittee that appointed them, Directors would tend to avoid any conflicts
with the companies that elected them. It is important to move forward to a system
operator with a more independent corporate governance, keeping the checks and
balances system already in place but reducing the influence of any specific agent
on decisions taken by COES’ Board. The international revision shows different
schemes of corporate governance; some ISOs have a strong government influence
(IESO in Ontario, CAISO in California, and AEMO in Australia), while other are more
independent (CEN in Chile). PJM’s governance was found more suitable for the
Peruvian context at it has a similar structure to COES and includes and active
participation of market agents. However, the real independence of PJM’s
governance is under debate. Future changes to PJM’s governance should be
carefully monitored as they could provide valuable lessons to the Peruvian
framework. Based on the international revision the main proposals regarding COES’
corporate governance consider the following characteristics:
• Two additional and independent members should be included to the board
increasing the number of Board members from 5 to 7. These independent
members should represent non-registered agents, such as small companies
and new developers, and should pursue the efficiency of the system, rather
than following goals from specific groups of agents.
• Four members would remain to be selected by each of the existing
Subcommittees and would tend to represent each of the Subcommittees’
interests.
• The Board Chair would be continued to be selected by the assembly, but out
of 5 independent candidates selected by an independent executive search
firm that meet a specific set of criteria and requirements.
• The two additional independent members would initially be selected by the
Assembly, out of 5 independent candidates that meet a specific set of
criteria and requirements. On an ongoing basis, each of the independent
members would be selected by the incumbent Board members (including
those members that are leaving the Board), out of 5 independent candidates
proposed by an independent executive search firm.
• A Board Vice Chair would be selected by the Board out of the independent
members.
• Members would be appointed every 4 years. Members would be appointed
in staggered terms, to increase the board’s independence.
• Board meetings would be held with at least 5 attending members and every
2 weeks1, to prevent decisions are taken by a minority group of members.
1 Currently members meet at least once per month.

• Parent companies with more than one registered member would only have
one member with voting rights, thus, reducing the influence of vertically
integrated companies in COES’ decisions.
• Finally, COES’ budget would be funded by a postage stamp charge paid by
all end users. The Budget would be proposed by COES, approved by
OSINERGMIN and any discrepancy would be solved by an Independent
Tribunal.
On the other hand, some of COES functions were reviewed, considering that the
system operator’s role will be crucial to modernize the Peruvian energy sector, as well
as pursuing energy security while meeting efficiency, justice, and equity criteria as
well as complying with the country’s commitments in greenhouse gases emissions.
The strong interdependency between the system operation and the short-term
market management areas, was needed to be evaluated, considering that the
future energy market will require highly specialized teams, that will tend to act more
independently and will have different sets of skills and capabilities. The international
revision does not provide any strong evidence in favor of separating the market
management functions from the system operation responsibilities. Under the current
framework it is not required to separate the functions into separate entities. In the
future, the decision of separating these functions under separate divisions will
depend on the number of market-based mechanisms that will be incorporated and
the complexity of these mechanisms. However, including a Market Monitoring Unit
reporting directly to COES Board would be necessary. This market monitoring unit
would conduct analyses and elaborate descriptive reports mainly focused on the
wholesale market and would provide all relevant information and inputs to
INDECOPI’s Antitrust Commission, responsible for overseeing the competition
conditions in the electricity market, among others.
Finally, COES is currently judge and party in multiple dispute resolutions regarding
discrepancies involving market agents. A permanent Independent Expert Tribunal
composed by 5 members, with a diverse set of qualifications and experience, and
funded through a postage stamp charged paid by end users, should be established.
This Tribunal would be responsible in solving disputes by COES’ bodies with market
agents, disputes between OSINERGMIN and COES or market agents, and disputes
arising among agents.
2. Integration of Energy Planning: Planning processes in the generation segment,
transmission segment and the natural gas sector, are currently conducted by
multiple different players, either private agents or public entities. Each of the
participating players have different goals and interests that are not necessarily
aligned neither they will ensure a social equilibrium solution. There is no
comprehensive energy sector planning, conducted by one single entity, that follows
consistent goals and criteria under a long-term view and coordinated with
countrywide goals. In fact, in segments such as the generation sector, out-of-market
laws have been enacted by Governments pursuing specific public policy objectives
that will not necessary be consistent in the long term. For instance, the Government,
through public entities such as MINEM, Proinversión or OSINERGMIN, has conducted
several auctions targeting specific technologies (renewable energy sources, hydro
power plants and cold reserve), pursuing different goals (generation resources
diversification, promotion of renewable sources, security of supply), not necessarily
aligned and not ensuring an efficient development of the generation capacity.
The lack of an effective comprehensive energy sector planning is the main source
behind multiple problems such as insufficient transmission expansion, weak

coordination of hydropower and natural gas expansion, and weak harmonization

with social and environmental objectives. It is important to evaluate the
implementation of a systematic long-term strategic energy planning process
conducted by a single entity that consider a holistic and less detailed approach,
under a long-term horizon and pursuing the maximization the net social welfare,
country-set global and local emissions reduction commitments, justice and equity
metrics, regional development, and energy independence, among other
objectives.
Other aspects that need to be improved are the integration between the
transmission planning process, elaborated by COES and the Transmission Investments
Plans elaborated by each concessionaire, both under the approval of OSINERGMIN,
as well raising requirements and fines imposed to data submitted by the agents in
each of the planning processes.
Based on a revision of long-term energy planning processes currently conducted in
Colombia and Chile, a comprehensive energy-wide planning process is proposed to
be implemented in Peru. The long-term planning process would be conducted by a
specialized unit within MINEM with sufficient technical independence, being either
MINEM’s General Energy Efficiency Directorate (DGEE), or a new unit, defined by
MINEM. Energy plans would be elaborated every 6 years and reviewed every 2 years,
considering a 30-year horizon. The planning process would allow the participation of
all stakeholders, that would contribute on defining the long-term scenarios, although
the definitive scenarios will be defined based on objective metrics and criteria. The
planning process would involve the co-optimization of the electricity and gas sectors.
The results of the process would mainly be an indicative guidance in the generation
expansion, main guidelines regarding future growth in the gas sector and the main
inputs to be considered in the transmission planning process.
Regarding transmission planning, single process should exist that integrates the
existing plans (PT and PIT), led by COES, and approved by OSINERGMIN. In the
integrated transmission plan, each proposed expansion project would be evaluated
in its own merit, comparing the net present value of the system´s operational cost
reduction due to the project construction.
3. Dynamization of the Natural Gas Market: The current natural gas supply and
transportation contracts scheme contain guarantee mechanisms (take or pay or
take or ship clauses) that although provide certainty in the revenues perceived by
natural gas producers and transporters, they introduce restrictions that add
constraints to an efficient operation of the natural gas and electricity markets.
In addition, several norms included in the existing regulatory framework, such as the
requirements of firm transport agreements to receive capacity payments, have led
to an inefficient use of natural gas, contribute to a steep reduction in marginal costs,
and have resulted in an almost inexistent secondary market where gas could be
traded among consumers.
Several regulatory changes are currently in progress, aiming to encourage a
dynamic secondary market and reduce the existing constraints regarding natural
gas contracts. Some of the modifications are the reduction in the requirements to
generators to contract firm transport capacity to receive capacity payments, and
the implementation of a new secondary market within a 2 year-period that would
operate through electronic auctions and would be managed by MINEM. The
impacts behind the new regulatory changes are still unclear. Promoting an increase
in natural gas consumption by fostering growth in electricity demand and massifying

the consumption of natural gas, could also help dynamizing the natural gas market
although these objectives should be aligned with the strategic energy plans. Finally,
allowing the negotiation of committed capacity with producers and distributors in
bilateral agreements (currently only transport capacity is traded) can also
encourage an efficient use of natural gas.
The proposals are focused in improving the existing regulation (specifically, Bylaws
that pursue the “Optimization of Natural Gas Use and Create the Natural Gas
Manager) ruling over the secondary gas market. Proposals did not consider changes
to the regulation ruling over firm contracted capacity requirements, the gas price
declaration procedures and the take or pay clauses. The main proposals aiming to
improve the referred Bylaws are the following:
• Contracts that will be traded in the secondary market need to be
standardized. Although most contracts have similar characteristics and
clauses, there are several elements that are not present in all agreements
and must be first set to uniform conditions. All contracts must be a specific
type (firm, interruptible, firm but subject to conditions, and options) and
include standard key terms and clauses.
• The Market Manager should not be focused only in collecting and sharing
information but should also have the Market Administrator’s functions. An
independent entity should have this role.
• As described in the Bylaws, trades through the secondary market would be
done through an electronic auction-based market. The recommended
auction is an ascending clock auction.
• Finally, the role of the Market Manager is to promote and manage the trading
of natural gas supply and transport capacity in the secondary market, and
eventually, include the trading of the primary market. To achieve this goal,
the market manager must have the right incentives, such as an adequate
remuneration including symmetric incentives (premiums and penalties).
4. Modernization of Public-Owned Electricity Companies: The government efforts in
privatizing the energy sector cease to continue after the partially failed privatization
processes of generation and distribution companies. Today, multiple companies
(mostly distribution companies) continue to be state-owned.
Currently, there are multiple barriers that prevent state-owned companies to operate
efficiently and increase their investment levels. On the one hand, legal barriers
prevent companies to increase their financial leverage and issue debt, and hence,
distribution companies do not have enough available resources to invest in network
upgrades and expansions. In addition, the procurement of equipment and services,
governed by the State Procurement Law, has led to a slow execution of investments.
On the other hand, excessive control, regulation, and supervision of public entities
such as OSINERGMIN, FONAFE and the General Comptroller of the Republic add
bureaucracy obstacles that slow down the decision-making process and the
efficient management of public companies. Political pressure that prevents
company to be managed independently is also a major barrier. To reduce barriers
and encourage investment among public distribution companies, a trust was
mandated to be created and managed by FONAFE to fund the Distribution
Investment Plans. The trust was supposed to be funded by the investment annuities
considered in the VAD rate process. However, up to date the Distribution Investment
Plans have still not been implemented.

The analysis was focused on public distribution companies that need to undertake
significant investments to increase electricity coverage and improve the quality of
service. An international revision in Chile (Codelco) and Colombia (Codensa and
EPM) was conducted to identify the best practices regarding the corporate
governance of state-owned companies in Latin America. Based on the international
revision, several alternatives were analyzed, that were separated based on the type
of assets that are currently under control by public distribution companies:
• Existing and new transmission infrastructure controlled by public distribution
companies would be granted through concessions to private companies.
These assets would be auctioned through public tenders and granted in a 30-
year concession period. The auctioning of new infrastructure would be
performed following similar procedures to those currently implemented in the
auctioning of SGT systems, while existing infrastructure would be grouped into
regional clusters and auctioned in public tenders.
• Regarding distribution infrastructure, several proposals were analyzed. Each
of the proposals considering grouping all distribution companies into regional
clusters. The alternatives that were analyzed were i) continue the privatization
process undertaken in the 90s, ii) allow the incorporation non-controlling
private investors, iii) allow the entry of operationally controlling private
investors, iv) transferring the operation of distribution companies to private
investors through concessions, and v) increasing the economic,
administrative, and financial independence of state-owned companies. The
selected alternative based on the analyzed advantages and disadvantages
was allowing the participation of private investors by granting concessions.
Under this alternative, distribution companies would remain under public
ownership, but the operation, and management of the distribution assets
would be transferred to private operators for a 30-year period. Distribution
companies would continue to comply with the regulations dictated by
OSINERGMIN, including tariff settings (VAD or any other future tariff
methodology). Concessionaires would be required to comply with quality of
supply standards to be able to participate in any future auction involving the
same or different distribution assets. However, the implementation of a
concessions scheme would be conducted in a two-stage process. In a first
stage the companies would remain under public ownership but modernized
by modifying the financial, budget, and corporate governance framework,
aiming to reduce the existing barriers that prevent public distribution
companies to operate and execute investments. In a second stage, the
operation of companies would be transferred to private operators through
competitive auctions. The two-stage process on the one hand raise the value
of public companies before the auction is conducted, and, on the other
hand, provides a safe-guard in case the concession scheme fails. The first
stage would be required to be undertaken before moving on to the second
stage.
5. Strengthening of market regulation and supervision/monitoring: Under the current
regulatory framework, OSINERGMIN is responsible in performing supervisory,
regulatory, normative, fiduciary, and sanctioning, dispute resolution and user
complaints solution functions. Having multiple functions concentrated in a single
entity provides several challenges.
On the one hand, each of the different activities require multidisciplinary teams
composed by specialized members in legal, economical, and technical matters. On

the other hand, considering that the majority of OSINERGMIN’s Directors are
appointed by Government officials, the conduction of regulatory, supervision,
sanction, and dispute resolution functions on a same matter, could be biased by
public policies pursued by the Government, and not necessarily pursue long-term
goals (such as increase energy security while meeting efficiency, environmental.
justice, and equity criteria). Specific attention is placed in dispute resolution
functions, considering that the Dispute Resolution Tribunal members are appointed
by government representatives. Therefore, the Government, through its institutions
could act as judge and party in discrepancies involving their actions and decisions.
Moreover, as previously mentioned, neither OSINERGMIN, COES nor INDECOPI
conduct proper market monitoring functions in the energy sector. An active
competition surveillance will be required to prevent market dominance behavior by
incumbents or new players.
Based on an analysis of regulatory, normative supervision, sanctioning and dispute
resolution functions in Chile and Colombia, the proposal consists in delegating each
of the functions to a different entity:
• Regulatory and normative functions would continue to be performed by
OSINERGMIN. OSINERGMIN’s current governance would be maintained.
• Supervisory, fiduciary, and sanctioning functions that are currently performed
by OSINERGMIN should be conducted by a Superintendence, responsible for
overseeing the electricity and fuel markets (natural gas, liquefied petroleum
gas and petroleum), carry out actions leading to impose sanctions on agents
for breach of obligations and non-compliance with regulations and solve
users´ complaints. The Superintendence should be managed by a
Superintendent, appointed by the President out of 5 candidates proposed
by and independent Ad-hoc Committee.
• Long-term planning functions, as previously mentioned, would be performed
by a specialized technical unit within MINEM.
• A Market Monitoring Unit, mainly focused on the wholesale market and
reporting directly to COES Board would be created and would provide all
relevant information and inputs to INDECOPI’s Antitrust Commission,
responsible for mitigating or punish antitrust behavior.
• Finally, as mentioned, an Independent Expert Tribunal would be responsible
in solving disputes arising between agents, COES and OSINERGMIN.
Concluding, there are several changes that are required to do to the existing institutional
framework to assure that existing institutions perform their functions under a complete
independent and unbiased approach, have the sufficient capabilities to cope with the
future challenges, and pursue consistent and long-term policies under economic efficiency,
equity and fairness, quality, and reliability, and decarbonization criteria. The set of
recommendations elaborated by the Consultants pursues the mentioned goals.

INDEX
Executive Summary 1
1 Introduction 10
2 Definitions 14
3 Institutional Transformation of COES 27
3.1 Regulatory framework 27
3.2 Main characteristics regarding COES’s institutional framework 27
3.3 Diagnosis 37
3.4 International revision of ISOs 45
3.5 Proposals 70
4 Integration of Energy Planning 76

4.2 Planning processes and new infrastructure development initiatives 80
4.3 Diagnosis 94
4.4 International Revision 99
4.5 Comprehensive Planning Proposal for Peru 113
4.6 Additional proposals 115
5 Dynamization of the Natural Gas Market 116

5.1 Natural Gas Prices 116
5.2 Price determination in CAMISEA’s transport and distribution networks 117
5.3 Natural gas market and current context 117
5.4 Diagnosis 120
5.5 Revision of recent proposals 123
5.6 Proposals 123
6 Modernization of Public-Owned Electricity Companies 131

6.2 Privatization process 131
6.3 Public and private companies’ performance 135
6.4 FONAFE’s main characteristics 139
6.5 Diagnosis 142
6.6 International revision of companies with partial or total ownership by the states145
6.7 Modernizing distribution companies 150
6.8 Analysis of alternatives to modernize the operation, management and
development of transmission systems currently owned by state-owned companies 151
6.9 Analysis of alternatives to modernize state-owned distribution companies 155
6.10 Selection of the best alternative and proposals 167
7 Strengthening of market regulation and supervision/monitoring 169

7.2 Main characteristics regarding OSINERGMIN’s institutional framework. 169

7.3 Diagnosis 178

7.4 International revision 181
7.5 Proposals 184
8 Conclusions, and main recommendations 188

1 Introduction
In 20192, the Multisector Commission for the Reform of the Electricity Subsector (CRSE) was
created, to formulate proposals aimed at the adoption of measures that guarantee
sustainability and development in the activities of generation, transmission, distribution, and
retailing of electricity.
The CRSE contracted the services of a specialized group of experts to participate in the
preparation of a White Paper that supports the institutional and regulatory modernization of
the sector. The White Paper should include analyses and recommendations regarding
economic, institutional, and regulatory signals that promote modernization and proposal
related to challenges encountered in the electricity industry for the assurance of generation
sufficiency, incorporation of renewable energies, smart metering, distributed generation,
empowering demand and the harmonious development of the electricity and natural gas
sectors, among others.
Four thematic lines have been assigned to the group of experts:
I. Strengthening the institutional framework: Identify actions and propose
recommendations that seek the adaptation of the Peruvian electricity sector
institutional framework for the transition towards a new sectorial architecture and
electricity market, the consolidation of a comprehensive planning scheme, the
revitalization of the natural gas market in its relationship with the electricity sector as
a major fuel resource, and the review of the administrative regime of public-owned
electricity companies.
II. Transformation of the Wholesale Market: Propose the most suitable model in the
Peruvian electricity market to face the challenges of integration of renewable
energy resources, guarantee security of supply and sufficiency to achieve
competitive-efficient generation prices.
III. Innovation in distribution and retail marketing: identify and develop a new model of
economic regulation for electricity distribution, as well as the redesign of the Peruvian
retail market, and the potential role of consumers and prosumers that deal with the
challenges posed by the incorporation of renewable energies and other distributed
resources, the improvement of service quality and the expansion of coverage.
IV. Simplification/Modernization of transmission networks regulation and their
operation/management: Review the variety and multiplicity of regulatory
approaches, planning institutions, special business and ownership arrangements in
the transmission, sub-transmission, and distribution networks, to propose modifications
in existing transmission regulation and management.
Among the expert the CRSE hired Hugh Rudnick Van de Wyngard to elaborate the task
included in the Thematic Line I. Hugh Rudnick requested the support of Alejandro Navarro
Espinosa in conducting the requested activities. Both experts (the Consultants) elaborated
the report.
Hugh Rudnick is a partner and Director of Systep Ingeniería y Diseños3 and Emeritus Professor
at the Faculty of Engineering at Pontificia Universidad Católica de Chile. He has a deep
2 Through the publication of the Supreme Resolution No. 006-2019-EM.

3
Systep Ingeniería y Diseños (Systep) is an international consulting company located in Chile, created in 1989 by
Dr. Hugh Rudnick, highly specialized in the field of technical, market and economic studies of energy markets, with

knowledge of the Chilean electricity market, where he has made significant contributions in
methodological and tariff terms. He is a Civil Electrical Engineer from Universidad de Chile
and Doctor of Philosophy from The Victoria University of Manchester, Great Britain. During his
professional activity of more than 50 years, Dr. Rudnick has developed a vast trajectory in
issues related to the regulation of the electric sector in Latin America, both in the regulation
and pricing of transmission and distribution and in the organization of competitive
generation markets.4
Alejandro Navarro has more than 15 years of experience as a researcher and consultant in
the electrical sector. He holds a Doctor of Energy and a master’s degree in Power Systems
from the University of Manchester (England) and a Civil Engineer of Industries and a master’s
in engineering sciences from the Pontifical Catholic University of Chile. He currently serves as
Associate Director at Systep Ingeniería y Diseños and as Lecturer at the Electrical Engineering
Department in Universidad de Chile5.
Thematic Line 1 includes several tasks that are mainly (but not limited to) the following:
1. Institutional Transformation of COES:
a. Analyze and propose, if necessary, the evolution of COES into an
independent system operator (ISO) or keep its institutional governance as it is
structured at present. Propose the ISO governance to guarantee its
organizational, financial, and technical independence.
b. Analyze, evaluate, and recommend the separation or not of the system
operation coordination functions and market administration functions of
COES (or the new ISO) and how each scheme facilitates or not the
establishment of modern independent market platforms.
c. Analyze and propose organizational changes, if recommended, to
incorporate the necessary functions and facilities for COES, or the ISO, to
handle efficiently the future regional interconnection electricity system and
market.
d. Analyze and propose improvements to the transmission planning function of
COES, or the new ISO. Analyze how this planning function would interact with
the general energy planning function, which could be the responsibility of a
separate entity/agency. Analyze and propose alternatives for the
coordination of free-market entry of electricity generation (mostly from
private initiative) and COES transmission planning.
2. Integration of Energy Planning:
its main strengths in the electrical and gas sectors. Further information of Systep can be found in
http://www.systep.cl/,
4 Dr. Rudnick also has developed several technical studies in transmission and distribution segments. He has
rendered consultancy services to large consumers, electric firms and governments in Argentina, Bolivia, Brazil,
Canada, Central America and Panama, Chile, Colombia, Dominican Republic, Spain, England, Mexico, Peru,
Tasmania, Uruguay, and Venezuela, and for the UNDP, UNCTAD and the World Bank.
5
Dr Navarro’s main research lines are impacts of low technologies on carbon emissions in distribution systems,
intelligent networks, optimization and planning of distribution and transmission systems, resilience of electrical
systems and optimization and operational flexibility of electrical power systems. As an expert in the area, he has
been invited to teach courses and seminars for OLADE, International Development Bank, Universidad de Estatal de
Campinas (Brazil), Universidad Nacional de San Juan (Argentina), among others. Previously, he served as Study
Manager at Systep, leading, coordinating, and developing studies of economic analysis, investments, planning and
pricing in electrical markets, along with the development of both dynamic and static electrical and technical
studies in the generation, transmission, and distribution segments.

a. Evaluate institutional alternatives that allow comprehensive coordination of

the planning work for the expansion of electricity transmission, the expansion
of electricity generation and the development of natural gas infrastructure.
Among the institutional alternatives to be analyzed, the feasibility and
convenience of having a single entity in charge of energy planning should
be evaluated.
b. Evaluate the viability and convenience of unifying in one entity the function
of structuring, carry out and manage public auctions/tenders/bidding for the
expansion of electricity generation and transmission, for those energy
facilities/infrastructures that are not carried out by private initiative. In the
case the Consultant proposes a single planning entity, evaluate the possibility
of intervention of the planning entity in advancing the execution of the
projects, so that projects of high priority are not delayed.
c. Analyze alternatives and propose the governance of the energy planning
entity to guarantee its organizational, financial, and technical
independence.
d. Identify and propose the necessary actions to involve the energy
requirements of the mining sector and large loads in the energy planning
process.
3. Dynamization of the Natural Gas Market:
a. Evaluate and propose commercial, financial, contractual, jurisdictional, or
other alternatives that allow the natural gas secondary market to be more
dynamic and a more efficient in the use of natural gas, for both natural gas
producers and electricity generators.
b. Establish the most appropriate institutional arrangement to enable the
coordination of electricity and natural gas in the following activities: (i) the
electricity market, with the primary and secondary natural gas markets; (ii)
organized natural gas markets harmonized with the development of the
electricity sector; (iii) electricity generation operational dispatch, considering
natural gas supply (production) and transportation; iv) maintenance,
interventions and inventory management in the natural gas infrastructure
with the corresponding ones in the electricity sector; (v) planning and
development of the expansion of natural gas and electricity infrastructures;
(vi) consolidation and disclosure of operational and commercial information
from both sectors; and (vii) other actions that the Consultant considers
convenient for the coordination of both sectors. Likewise, the consultant must
identify the actions required in the gas market to facilitate the integration of
renewable energy resources.
4. Modernization of Public-Owned Electricity Companies:
a. Identify the specific barriers (in public policy, legal or regulatory) that prevent
companies in the sector, specifically the public-owned distribution
companies, from carrying out an adequate and efficient operational and
investments management to carry out their electricity supply business.
b. Establish the requirements of and adequate and efficient corporate
governance, assets contracting for expansion, budgetary autonomy, and
human resources management, which allow these companies to carry out
their business timely and efficiently for the development of their activities in
the electricity public service.

5. Strengthening of market regulation and supervision/monitoring:

a. Identify the regulatory, administrative, and budgetary modifications that are
necessary to strengthen the administrative, financial, regulatory, and
technical autonomy of OSINERGMIN.
b. Establish the functions and competences, in matters of supervision,
monitoring and control of the electricity and gas markets, derived from the
architecture of the Peruvian electricity market that is adopted.
The Consultants are requested to submit three reports regarding the requested Thematic
Line: (i) an initial partial report; (ii) a second full draft final report, and iii) a definitive report.
This document is the definitive report and includes a thorough analysis of the current
institutional framework as well as the identification of the main elements in the current
regulatory framework could be modified or revisited to meet the goals set by CRSE. Based
on the diagnosis conducted in this report, an international revision is conducted to identify
the best practices and then high-level recommendations are presented for each of the
main elements.
This report includes 8 chapters. Chapter 2 includes a list of definitions regarding entities, norms
and terms that are discussed in this document. In Chapter 3, a comprehensive analysis is
conducted regarding the Institutional Transformation of COES. Following the diagnosis, an
international revision is presented, and general recommendations are proposed.
Chapter 4 contains the diagnosis regarding current planning processes in the energy
segments, the analysis of energy plans that are undertaken in Colombia and Chile, and the
proposal of conducting integrated energy plans.
Chapter 5 analyzes the natural gas market and its barriers regarding the development of a
secondary market and the proposal of a new fully operational natural gas secondary
market.
In Chapter 6, state-owned companies are analyzed to identify the main barriers that prevent
them from improving their efficiency and increasing their investments. The diagnosis is
followed by the analysis of benchmark public companies in Chile and Colombia, and then
different alternatives to modernize state-owned companies are evaluated.
Chapter 7 analyzes the role of OSINERGMIN in order to identify possible improvements in its
regulatory, supervising and monitoring functions. The regulatory and supervision entities in
Chile and Colombia are analyzed.
Finally, Chapter 8 contains the report’s main conclusions and recommendations.
The Consultants would like to thank the support of Ivan Rudnick, Alejandra Miquel, Pedro
Miquel, and Pablo Lecaros, from Systep and Carlos Centeno, Estefanía Centeno, Luis Torres,
and Rafael Quispe from SIDEC6 for their support, insights provided, and fruitful discussion
regarding the different problematics and challenges analyzed in this report.
6 Sidec is a consulting company located in Peru that provides integral solutions regarding technical, regulatory,
financial, and social challenges in the energy sector. Further information of Sidec can be found in
http://www.sidec.com.pe/page/homepage.

2 Definitions
For all purposes of this Report, the following terms have the meaning indicated in the
following:
• (Australia) AEMO: Australian Energy Market Operator manages electricity and gas
systems and markets across Australia 7.
• (Australia) AEMO’s 2020 Annual Report: Annual Report on AEMO’s performance8.
• (Australia): AEMO Constitution: Defines the main rules regarding AEMO’s structure,
functions, and governance9.
• (Australia): AEMO’s Board Charter: Sets out the functions and responsibilities of
AEMO’s board10.
• (Australia): AER’s Wholesale Electricity Market Performance Monitoring 201811.
• (Australia): National Electricity Rules: Rules that govern the Australian National
Electricity Market12.
• (Australia) National Gas Rules: Rules that govern the Australian gas markets13.
• (California) CAISO: California Independent System Operator (ISO) oversees the
operation of California's bulk electric power system, transmission lines, and electricity
market generated and transmitted by its member utilities14.
• (California) CAISO’s Bylaws: Define specific rules regarding CAISO’s corporate
governance and structure15.
• (California) CAISO’s Corporate Governance Principles: Define main rules regarding
CAISO’s corporate governance16.
• (California) CAISO’s Decision Board Selection Policy: Define the guidelines regarding
the selection of the Board of Governors17.
• (California) CAISO’s Dispute Resolution Procedures: Standard Procedures for
Resolution of Disputes, Version # 3.018.
7 AEMO’s website: https://aemo.com.au/

8Source: https://aemo.com.au/-/media/files/about_aemo/annual-report/aemo-annual-report-
2020.pdf?la=en&hash=A5D63C053F09A9C1D8C748142E9CE0BD
9 Source: https://www.aemo.com.au/-/media/files/about_aemo/board_and_governance/aemo-constitution.pdf
10 Source: https://aemo.com.au/-/media/files/about_aemo/board_and_governance/board-charter.pdf
Source: https://www.aer.gov.au/system/files/AER%20Statement%20of%20approach%20-
11
%20Wholesale%20electricity%20market%20performance%20monitoring%20-%20March%202018.pdf
12 Source: https://www.aemc.gov.au/sites/default/files/2021-04/NER%20v163%20full.pdf
13 Source: https://www.aemc.gov.au/sites/default/files/2021-04/NGR%20v58%20full.pdf
14 CAISO’s website: http://www.caiso.com/
15 Source: http://www.caiso.com/Documents/ISOCorporateBylaws_amendedandrestated_.pdf
16 Source: https://www.caiso.com/Documents/CorpGovernancePrinciples.pdf
17 Source: http://www.caiso.com/Documents/DecisiononBoardSelectionPolicy-ProposedFinalPolicy-July2020.pdf
18 Source: https://www.caiso.com/Documents/DisputeResolutionProcedure.pdf

• (California) CAISO’s Five-year 2015-2019 Financial Summary: Summarizes CAISO’s

financial statements19.
• (California) CAISO’s Quarterly Financial Report 4Q-2020: CAISO’s financial statement
for the quarter ending on December 31st, 202020.
• (California) CAISO Tariff: CAISO’s Open Access Transmission Tariff document21.
• (California) Federal Power Act: US Federal Regulation and Development of Power22.
• (Chile) Antitrust Court: In Spanish, the “Tribunal de Defensa de la Libre
Competencia”, ("TDLC") is a special and independent court of law, composed of 3
lawyers and 2 economists, and subject to the supervision of the Supreme Court. Its
role is to prevent, correct and sanction anti-competitive conducts, The TDLC is also
in charge of issuing general guidelines for the enforcement of competition law 23.
• (Chile) Codelco’s statutes: Statues that were updated in 201224.
• (Chile) Experts Panel: In Spanish, the “Panel de Expertos” is a specialized collegiate
body to resolve discrepancies in the electricity sector 25.
• (Chile) Experts Panel Bylaws: Define the main rules that governs the Experts Panel
function and structure26.
• (Chile): IAA Refers to the PELP´s “Update Information Report”.
• (Chile) Independent System Coordinator’s Bylaws: Set the specific rules that define
the Independent System Operator, its characteristics, and main functions 27.
• (Chile) Law N° 20.392: Enacted in 2009, modifies Codelco statutes28.
• (Chile) Law N° 21.305: Enacted in 2021, is the Law corresponding to Energy
Efficiency29.
• (Chile) LGSE: General Law of Electrical Services (LGSE for its acronym in Spanish or
DFL Nº 1 of 1982) set the mains rules that govern the Chilean electricity sector 30.
• (Chile) National Energy Commission: In Spanish the “Comisión Nacional de Energía”,
(“CNE”) is the regulatory agency. CNE is a technical body responsible for analyzing
prices, tariffs and technical standards to which energy production, generation,
19 Source: http://www.caiso.com/Documents/Five_Year_2015-2019_Financial_Summary.pdf
20 Source: http://www.caiso.com/Documents/QuarterlyFinancialReport_Q4_2020.pdf
21 Source: http://www.caiso.com/Documents/Conformed-Tariff-as-of-Feb17-2021.pdf
22 Source: https://www.law.cornell.edu/uscode/text/16/chapter-12
23 TDLC’s website: www.tdlc.cl
24Source:
https://www.codelco.com/prontus_codelco/site/artic/20130906/asocfile/20130906141522/decreto_n3.pdf
25 Expert Panel’s website: https://www.panelexpertos.cl/
26 Source: https://www.bcn.cl/leychile/navegar?idNorma=1113260/
27 Source: https://www.bcn.cl/leychile/navegar?idNorma=1116675
28 Source: https://www.serviciocivil.cl/wp-content/uploads/2020/11/ley_20392_codelco.pdf

transport, and distribution must adhere, to have a sufficient, safe, and quality service,
compatible with the most economical operation31.
• (Chile) PELP: Refers to the Chilean “Long-term Energy Planning”.
• (Chile) Senior Public Management Agency: In Spanish, the “Alta Dirección Pública“
is a special public organism, mainly responsible for selecting through competitive
procurement process, senior management to assume state management roles 32.
• (Colombia) Bogota District Council Agreement N°1: Agreement adopted in 1996 that
modifies Empresa de Energía de Bogota’s corporate structure 33.
• (Colombia) CAPT: The CAPT is the “Transmission Planning Advisory Committee”
integrated by agents representing generation, distribution and transmission
companies, large consumers, and energy traders34.
• (Colombia) CREG 024 of 2013: Procedures involving the expansion of Regional
Transmission Systems35.
• (Colombia) FNCER: Refers to “Energy Efficiency and Non-conventional Renewable
Energy Sources” in Colombia.
• (Colombia): Law N° 142 Household Utility Services Law, enacted in 199436.
• (Colombia) ODS: “Sustainable Development Objectives”.
• (Colombia) PEN: Refers to the Colombian National Energy Plan.
• (Colombia) PERS: Refers to Sustainable Rural Energization Plans.
• (Colombia) PIAG: Refers to the Indicative Natural Gas Supply Plan.
• (Colombia) PIEC: Refers to Indicative Electrical Energy Coverage Expansion Plan.
• (Colombia) STN: National Transmission System or STN is the interconnected electrical
transmission system with a voltage equal or higher than 220 kV.
• (Colombia) STR: Regional Transmission Systems or SRTs is the electrical energy
transportation system formed by the connection assets from the Network Operator
to the SNT operating in level 4 voltage (more or equal than 57,5 kV and lower than
220 kV).
• (Colombia) UPME: Refers to the Colombian “Energy-Mining Plan Unit”.
• (Ontario) IESO - Independent Electric System Operator. It is the system operator of
the Ontario Power System37.
31 Alta Dirección Pública’s website: https://adp.serviciocivil.cl/concursos-spl/opencms

32 CNE’s website: www.cne.cl
33 Source: https://www.alcaldiabogota.gov.co/sisjur/normas/Norma1.jsp?i=6858&dt=S
34 Source: http://www.siel.gov.co/Siel/Inicio/Transmisi%C3%B3n/CAPT/tabid/78/Default.aspx?PageContentID=63
35Source:
http://apolo.creg.gov.co/Publicac.nsf/1c09d18d2d5ffb5b05256eee00709c02/b9f13fc31fbf26be05257b79006e4ba
5/$FILE/Creg024-2013.pdf
36 Source: http://www.bogotajuridica.gov.co/sisjur/normas/Norma1.jsp?i=2752
37 IESO’s website https://www.ieso.ca/

• (Ontario) IESO’s Governance and Structure Bylaws: A bylaw relating to the corporate
governance and structure of the Corporation. Last amendments approved in 2016 38.
• (Ontario) IESO’s Board Charter and Code of Conduct: Document approved in 201539.
• (Ontario) IESO’s Board Terms of Reference: Terms of Reference for a Director
approved in 201540.
• (Ontario) IESO’s Board Terms of Reference: Terms of Reference for a Director
approved in 2015.
• (Ontario) IESO’s 2019 Annual Report: IESO’s financial and corporate report 2019 41.
• (Ontario) Ontario Electricity Act 1998: Defines de the main rules regarding the Ontario
Power System42.
• (PJM) PJM: Is a regional transmission organization (RTO) that coordinates the
movement of wholesale electricity in all or parts of 13 states and the District of
Columbia43.
• (PJM) PJM’s governance fact sheet: Describes the main rules regarding PJM’s
corporate governance44.
• (PJM) PJM’s learning center: Website including the description of PJM’s structure,
governance, and responsibilities45.
• (PJM) Operation Agreement: Document that contains provisions that establish how
PJM operates as a regional transmission organization. It defines the roles and
responsibilities of the PJM Board of Managers, the Members Committee, and the
Office of the Interconnection (PJM management and staff) 46.
• (PJM) Open Access Transmission Tariff (Tariff): The tariff is the overall document that
governs the operations of PJM. It includes the provisions governing transmission
service within the PJM region47.
• (PJM) Reliability Assurance Agreement: Establishes obligations and standards for
maintaining the reliable operation of the electric grid 48.
• Agents: As defined in Article N°1 of Law N° 28.832, agents are the set of generation
companies, transmission companies, distribution companies and free users.
38 Source: https://www.ieso.ca/en/Corporate-IESO/Leadership/Board-of-Directors
41 Source: https://www.ieso.ca/en/Corporate-IESO/Corporate-Accountability/Financial-Reporting
42 Source: https://www.ontario.ca/laws/statute/98e15
43 PJM’s website: https://www.pjm.com/
44Source: https://learn.pjm.com/pjm-structure/governance/doing-business-with-pjm-
faqs/~/media/F7537B88AAD14906B48B70409F1D25D1.ashx
45 Source: https://learn.pjm.com/?sc_site=learn
46 Source: https://agreements.pjm.com/oa/
47 Source: https://agreements.pjm.com/oatt/3897
48 Source: https://agreements.pjm.com/raa/17427

• Applicable Laws: All juridical norms and linked precedents that constitute the
Internal Law of the State and may be modified or supplemented by the Government
Authorities.
• Bar prices: Regulated prices calculated yearly by OSINERGMIN and are used to
determine tariffs for regulated users. The regulated bar prices are composed of
generation level and transmission level charges.
• CAN: “Comunidad Andina” (Andean Community). It is an international organization
whose main goal is to achieve an integral, balanced, and autonomous
development, through the integration of the Andean countries 49.
• CAN Decision 536: Sets the general framework regarding regional interconnection
links in the Andean Community50.
• CAN Decision 757: Refers to the validity of CAN Decision 53651.
• COES: “Comité de Operación Económica del Sistema Eléctrico Interconectado
Nacional”. It is the Economics Operation Committee of the Interconnected
Nationwide System52.
• COES Bylaws: Bylaws of Law N° 28.832 the COES approved by the DS 027-2008-EM53.
• COES’ Statutes: COES statutes approved by COES Assembly in November 2020 54.
• COP21: United Nations Conference about Climate Change of 2015 in Paris.
• COP25: United Nations Conference about Climate Change of 2019 in Spain.
• CRSE: Multisector Commission for the Reform of the Electricity Subsector. This
commission is responsible of formulating proposals aimed at the adoption of
measures that guarantee sustainability and development in the activities of
generation, transmission, distribution, and commercialization of electricity55.
• Demand Area: Area defined by OSINERGMIN in which applies the same tolls to all
the secondary and complementary transmission facilities serving that area.
• DGE: “Dirección General de Electricidad del Ministerio de Energía y Minas”. It is the
General Electricity Directorate of the Ministry of Energy and Mines.
• DGEE: MINEM’s General Energy Efficiency Directorate. This unit is responsible in
promoting policies of energy efficiency, the use of renewable energy as well as
conducting energy planning.
• DGH: MINEM’s General Hydrocarbon Directorate. This unit is responsible in formulating
policies in the hydrocarbons sector.
• DS: Refers to Supreme Decree.
49 CAN’s website: http://www.comunidadandina.org/

50 Source: http://intranet.comunidadandina.org/documentos/Gacetas/Gace878.pdf
51 Source: http://www.sice.oas.org/Trade/Junac/Decisiones/DEC757s.pdf
52 COES’ website: https://www.coes.org.pe/Portal/
53 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/DS-027-2008-EM-CONCORDADO.pdf
54 Source: https://www.coes.org.pe/Portal/MarcoNormativo/Estatuto/
55CRSE’s website:
http://www.minem.gob.pe/_detalle.php?idSector=6&idTitular=9330&idMenu=sub9329&idCateg=1756

• DS N° 016-2000-EM: Supreme Decree that sets specific rules regarding the Law of
Electrical Concessions56.
• DS N° 021-2000-EM: Supreme Decree that approves the license agreement of Lot
8857.
• DS N° 072-2000-EF: Supreme Decree that approves Bylaws of Law N° 27.17058.
• DS N° 032-2001-PCM: Supreme Decree enacted in 2001, that specify certain articles
included in Law N° 27.33259.
• DS N° 043-2003-EM: Approves the license agreement of Lot 57.
• DS N°016-2004-EM: Approves the general guidelines regarding the allocation of the
natural gas transport capacity60.
• DS N°016-2004-EM: Approves norms regarding the natural gas transport service61.
• DS N°042-2005-EM: Unique Ordered Text of the Organic Hydrocarbons Law,
approved by the DS N° 042-2005-EM62.
• DS N° 063-2005-EM: Supreme Decree that set rules that Promote the Massive
Consumption of Natural Gas63.
• DS N° 046-2010-EM: Supreme Decree that approves the Secondary Natural Gas
Market Bylaws64.
• DS N° 011-2012-EM: Supreme Decree that set Internal Bylaws regarding CAN Decision
75765.
• DS N° 017-2015-EM: Supreme Decree that modifies and add rules regarding natural
gas transport and distribution activities66.
56 Source: https://cdn.www.gob.pe/uploads/document/file/888149/DS-016-2000-EM.pdf
57Source:
https://www.minem.gob.pe/minem/archivos/file/Hidrocarburos/Legislacion/Contratos%20y%20Convenios%20DG
H%20(Actualizado%20oct.%202010)/CONTRATO%20DE%20LICENCIA%20LOTE%2088/1.%20(CONTRATO)%20DS%20N
%C2%BA%20021-2000-EM.pdf
58Source:
https://www.fonafe.gob.pe/pw_content/reglamentos/20/Doc/ReglamentoFONAFE_Actualizado2019.pdf
59Source:
http://www.minem.gob.pe/minem/archivos/file/Electricidad/legislacion/002subsectorelectricidad/ds032-2001-
pcm.PDF
60 Source: http://extwprlegs1.fao.org/docs/pdf/per91418.pdf
61 Source: http://intranet2.minem.gob.pe/web/archivos/dgh/legislacion/ds018-2004.pdf
62 Source: https://leyes.congreso.gob.pe/Documentos/Leyes/26572.pdf
63 Source: http://intranet2.minem.gob.pe/web/archivos/dgh/legislacion/ds063-2005.pdf
64 Source: https://www.gob.pe/institucion/osinergmin/normas-legales/732270-046-2010-em
66Source: https://sinia.minam.gob.pe/normas/modifican-incorporan-disposiciones-vinculadas-distribucion-
transporte-
gas#:~:text=%2D%20Modifican%20e%20incorporan%20disposiciones%20vinculadas,natural%20y%20emiten%20otr
as%20disposiciones

• DS N° 016-2016-EM: Supreme Decree that modifies the RLCE, the Transmission bylaws
and the Free users’ bylaws67.
• DS N° 019-2017-EM: Supreme Decree that modifies Supreme Decree N° 016-2000-
EM68.
• DS N° 240-2018-EF: Supreme Decree that approves the Bylaws of the Legislative
Decree N° 136269.
• DS Nº 031-2020-EM: Supreme Decree that set the main rules to determine natural gas
Price for electricity generation70.
• DS N° 003-2021-EM: Supreme Decree that aims to Improve the natural gas transport
efficiencies for electricity generation purposes.71
• Electroperu: State-owned generation company72.
• ERCOT: The Electric Reliability Council of Texas operates the electric grid and
manages the deregulated market for 75 percent of the state73.
• ENCC: The National Strategy against Climate Change in Perú.
• FONAFE: “Fondo Nacional de Financiamiento de la Actividad Empresarial del
Estado”. It is the National Fund for Financing the State’s Entrepreneurial Activity,
public-law entity responsible for regulating and managing state-owned
companies74.
• Free Users: Users that are not subject to price regulation for their consumed energy
or capacity. Current regulatory framework defines Free Users as electricity users with
demands greater than 2,500 kW are considered Free Users. In addition, users with a
demand greater than 200 kW up to 2,500 kW can choose to be a Regulated User or
a Free User. Under 200 kV users are subject to a regulated tariff. Free Users can
negotiate a supply contract directly with generators or distributors for their electricity
supply.
• G20/OECD Principles of Corporate Governance: help policy makers evaluate and
improve the legal, regulatory, and institutional framework for corporate governance,
67Source: https://busquedas.elperuano.pe/normaslegales/decreto-supremo-que-modifica-el-reglamento-de-la-
ley-de-conc-decreto-supremo-n-018-2016-em-1408499-11/
68Source: https://busquedas.elperuano.pe/normaslegales/decreto-supremo-que-modifica-el-articulo-5-del-
decreto-supre-decreto-supremo-n-019-2017-em-1529828-
1/#:~:text=N%C2%BA%20019%2D2017%2DEM&text=El%20precio%20%C3%BAnico%20considerar%C3%A1%20los,de
%20gas%20natural%2C%20seg%C3%BAn%20corresponda.&text=El%20proceso%20de%20apertura%20de,OSINERG
MIN%2C%20quien%20oficiar%C3%A1%20como%20veedor.
69Source: https://www.mef.gob.pe/es/por-instrumento/decreto-supremo/18427-decreto-supremo-n-240-2018-
ef/file
70Source:https://busquedas.elperuano.pe/normaslegales/decreto-supremo-que-establece-disposiciones-para-la-
determin-decreto-supremo-n-031-2020-em-1913578-2/
71Source:https://busquedas.elperuano.pe/normaslegales/decreto-supremo-que-mejora-la-eficiencia-en-el-uso-
de-la-cap-decreto-supremo-n-003-2021-em-1924302-2/
72 Electroperu’s website: http://www.electroperu.com.pe/home.aspx
73 ERCOT’s website: http://www.ercot.com/
74 FONAFE’s website: https://www.fonafe.gob.pe/

with a view to supporting economic efficiency, sustainable growth, and financial

stability75.
• GART: OSINERGMIN’s Commission for Energy Rates.
• GHG: Greenhouse Gases.
• Hydrocarbons Transport Bylaws: Bylaws of Law N° 26.221 approved by DS N° 091-
2007-EM76.
• IET: International Electricity Transactions.
• INDECOPI: “Autoridad Nacional de Protección del Consumidor”. It is the National
Consumer Protection Authority, responsible for antitrust electricity regulation and the
protection of consumers77.
• ITC: “Instalación de Transmisión de Conexión”. Refers to facilities not included in the
PIT that interconnect Demand Areas to the SEIN.
• Law N° 25.868: Law that establishes INDECOPI, enacted in 199278.
• Law N° 26.221: Organic Hydrocarbons Law, enacted in 1993 79.
• Law N° 26.572: General Arbitrage Law, enacted in 199680.
• Law N° 26.887: General Law of Corporations, enacted in 200181.
• Law N° 26.734: Law that creates OSINERG, enacted in 199682.
• Law N° 26.876: Electricity Sector’s Antitrust law, enacted in 1997 83.
• Law N° 27.133: Law Promoting the Development of Natural Gas, enacted in 1999 84.
• Law N° 27.133 Bylaws: Bylaws approved by the DS N° 040-99-EM85.
• Law N° 27.170: FONAFE law, enacted in 199986.
75 Source: http://www.oecd.org/corporate/principles-corporate-governance/
76 Source: http://intranet2.minem.gob.pe/web/archivos/ogp/legislacion/ds081-2007.pdf
77 INDECOPI’s website: https://www.indecopi.gob.pe/indecopi
78Source: https://repositorio.indecopi.gob.pe/bitstream/handle/11724/4924/818_RINI_LEG_Decreto_LEY_25868-
1992-Indecopi.pdf?sequence=1&isAllowed=y
79 Source: http://www2.osinerg.gob.pe/MarcoLegal/pdf/LEYOH-%2026221.pdf
81 Source: https://www.smv.gob.pe/sil/LEY0000199726887001.pdf
82Source:
https://www.osinergmin.gob.pe/newweb/pages/Publico/474.htm#:~:text=%2D%20Ley%20N%C2%BA%2026734%20
(31.&text=Ley%20de%20Creaci%C3%B3n%20del%20Organismo,%2D2001%2DPCM%20(09
83 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/LEY-26876-CONCORDADO.pdf.
84 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/LEY-27133-CONCORDADO.pdf
86Source:
https://www.fonafe.gob.pe/pw_content/leyes/19/Doc/4.4.1.1%20Ley%20del%20Fondo%20Nacional%20de%20Fin
anciamiento%20de%20la%20Actividad%20Empresarial%20del%20Estado%20(LEY%20N%C2%BA%2027170).pdf

• Law N° 27.332: Framework Law of Private Investment Regulatory Bodies in Public

Services, enacted in 200087.
• Law N° 27.510: FOSE Law, enacted in 200188.
• Law N° 27.631: Law that modifies Article N° 3 in Law N° 27.33289.
• Law N° 27.699: Law that provides an Institutional Strengthening to OSINERGMIN 90.
• Law N° 27.785: Organic Law that defines the National Control System and the
General Comptroller of the Republic91.
• Law N° 28.749: Rural Electrification Law, enacted in 200692.
• Law N° 28.832: Law of Efficient Development of Electricity Generation, enacted in
200693.
• Law N° 28.840: Law that strengths and modernizes Petroperu, enacted in 200694.
• Law N° 29.158: Organic Law of the State’s Executive Power95.
• Law N° 29.970: Law that promotes energy security and foster the development of a
petrochemical pole in the country’s southern region, enacted in 2012 96.
• Law N° 30.130: Enacted in 2013, the law modifies rules governing Petroperu’s
corporate governance97.
• Law N° 30.225: State Procurement Law, enacted in 2019, establishes the main
guidelines governing the state procurement98.
• Legislative Decree N° 674: Enacted in 1992, this law promotes the private investment
among state-owned companies99.
87Source:
89Source:
91 Source: http://doc.contraloria.gob.pe/documentos/TILOC_Ley27785.pdf
93 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/pdf/LEY-28832-CONCORDADO.pdf
95Source: http://www.pcm.gob.pe/wp-content/uploads/2013/09/Ley-Organica-del-Poder-Ejecutivo_29158-
LOPE.pdf
96 Source: http://www.minem.gob.pe/minem/archivos/Proyecto%20de%20Decreto%20Supremo(5).pdf
98 Source: https://portal.osce.gob.pe/osce/sites/default/files/Documentos/legislacion/ley/2018_DL1444/TUO_ley-
30225-DS-082-2019-EF.pdf
99 Source: https://www.proinversion.gob.pe/RepositorioAPS/0/0/arc/ML_GRAL_PI_DL674/10-D_L_674.pdf

• Legislative Decree N° 757: Enacted in 1991, this law establishes the general
framework that promotes the growth in private investment 100.
• Legislative Decree N° 1.041: Law that updates several norms specified in the Law N°
28.832101.
• Legislative Decree N° 1.221: Law that updates the electricity distribution regulatory
framework102.
• Legislative Decree N° 1.208: Law that promotes the development of Distribution
investment plans103.
• Legislative Decree N° 1362: Law that rules the promotion of private investment
through Public-Private Partnerships104.
• LCE: Law Decree Nº 25844, Law of Electrical Concessions 105.
• LNG: Liquefied natural gas.
• Long-term auctions Bylaws: Bylaws of Law N° 28.832, approved by DS N° 052-2007-
EM106.
• Long-term auctions procedure: Set the specific set of rules regarding long-term
auctions and approved by OSINERGMIN’s Resolution N° 688-2008-OS-CD107.
• MINEM: “Ministerio de Energía y Minas”. It is the Ministry of Energy and Mines.
Responsible of power sector policymaking108.
• Ministers Council Presidency: According to Law N° 29.158, the Ministers Council
Presidency is responsible of coordinating the national and sectorial public policies
promoted by the Government. The council coordinates the relationships between
the different State Powers, constitutional organisms, regional and local governments,
and the civil society. The Council’s char is one of the Government’s ministers 109.
• Ministerial Resolution N° 360-2020-MINEM/DM: Bylaws that pursues the optimization
of natural gas use by creating the Natural Gas Manager.110
• Natural Gas Distribution Bylaws: Bylaws of Law N° 26.221, approved by DS N° 040-
2008-EM111.
100 Source: https://www.proinversion.gob.pe/RepositorioAPS/0/0/arc/ML_GRAL_INVERSION_DL_757/11-D_L_757.pdf

101 Source: https://cdn.www.gob.pe/uploads/document/file/12816/DLeg-1041.pdf.
102Source:
http://www2.congreso.gob.pe/sicr/cendocbib/con5_uibd.nsf/6ABF3FFE2E3E73C8052582430074ABE7/$FILE/DL_122
1.pdf
103 Source: http://extwprlegs1.fao.org/docs/pdf/per160189.pdf
104Source: https://busquedas.elperuano.pe/normaslegales/decreto-legislativo-que-regula-la-promocion-de-la-
inversion-decreto-legislativo-n-1362-1672838-2/
105 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/D-LEY%2025844-CONCORDADO.pdf
107 Source: http://www2.osinerg.gob.pe/Resoluciones/pdf/2008/OSINERGMIN%20No.688-2008-OS-CD.pdf
108 MINEM’s website: https://www.gob.pe/minem
109 Source: Article N° 17, Law N° 29.158.
110 https://www.gob.pe/institucion/minem/normas-legales/1409210-360-2020-minem-dm

• NDCs: Nationally Determined Contributions.

• NTCSE: Security and Quality of Service Technical Norm, approved by DS N° 020-97-
EM112
• NYSO: New York Independent System Operator — the organization responsible for
managing New York’s electric grid and its competitive wholesale electric
Marketplace113.
• ODS: “Sustainable Development Objectives”.
• OECD: Is the Organization for Economic Co-operation and Development, responsible
for shaping policies that foster prosperity, equality, opportunity, and well-being for
all114.
• OECD Guidelines on Corporate Governance of State-Owned Enterprises: 2015 version
provides an internationally agreed benchmark to help governments assess and
improve the way they exercise their ownership functions in state-owned
enterprises115.
• OSINERG: “Organismo Supervisor de la Inversión en Energía”. It was the regulatory
and supervisory agency of the electricity sector. Later, the agency also become the
regulatory and supervisory agency of the mining sector (OSINERGMIN).
• OSINERG Bylaws: Approved by the DS N° 054-2001-PCM116.
• OSINERG’s Dispute Resolution Bylaws: Approved by OSINERG Board Resolution N°
0826-2002/S-CD117.
• OSINERG’s Energy Activities Supervision Bylaws: Approved by DS N° 029-97-EM118.
• OSINERG’s Users Claims Appeal Bylaws: Approved by OSINERG Board Resolution N°
0945-2002/S-CD119.
• OSINERGMIN: “Organismo Supervisor de la Inversión en Energía y Minería”. It is the
regulatory and supervisory agency of the energy sector 120.
112 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/DS-020-97-EM.pdf

113 NYSO’s website: https://www.nyiso.com/what-we-do
114 Source: https://www.oecd.org/.
Source: https://www.oecd-ilibrary.org/governance/oecd-guidelines-on-corporate-governance-of-state-
115
owned-enterprises-2015_9789264244160-en
116 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/DS-054-2001-PCM-CONCORDADO.pdf
117Source:
118Source:
119Source:
120 OSINERGMIN’s website: https://www.osinergmin.gob.pe/SitePages/default.aspx

• OSINERGMIN Resolution N° 108-2009-OS-CD: Procedure that set the rules regarding

the incentives to an efficient firm capacity procurement and an efficient gas
consumption121.
• Perupetro: State-owned company responsible for promoting, negotiating, and
supervising hydrocarbon exploration and production agreements 122.
• Petroperu: State-owned company responsible dedicated to the transport, refining,
distribution, and commercialization of oil-based fuel123.
• Peruvian Constitution: Peruvian Political Constitution, enacted in 1993 124.
• PIT: “Plan de Inversión de Transmisión”. Refers to the Transmission Investment Plan.
• Proinversión: Government agency in charge of promoting the investment of Public
Private Partnerships (PPP) and investments in the energy sector, transport sector, and
other industries125.
• PT: “Plan de Transmisión”. Refers to the Transmission Plan elaborated by COES every
2 years and approved by MINEM.
• PT N° 43: COES’ technical procedure regarding international electricity exchanges 126.
• RLCE: Bylaws of Law of Electrical Concessions approved by DS N° 009-93-EM127.
• RER: “Recursos Energéticos Renovables”. Correspond to renewable energy sources.
RER Law in article N° 3 states that biomass, wind, solar, geothermal, tidal, and hydro
plants under 20 MW qualify as RER.
• RER Law: Legislative Decree Nº 1.002, Promotion of the Investment for the
Generation of Electricity with the use of Renewable Energies128.
• RER Bylaws: Legislative Decree Nº 1.002 bylaws, approved by DS N° 012-2011-EM129
• SGT: “Sistema Garantizado de Transmisión”. Correspond to the Guaranteed
Transmission System under Law 28.832.
• SCT: “Sistema Complementario de Transmisión”. Correspond to the Complementary
Transmission System under Law 28.832.
• SPT: “Sistema Principal de Transmisión”. Correspond to the Main Transmission System
under LCE.
• SST: “Sistema Secundario de Transmisión”. Correspond to the Secondary Transmission
System under LCE.
121Source:
https://www.osinergmin.gob.pe/seccion/centro_documental/PlantillaMarcoLegalBusqueda/Osinergmin-108-
2009-OS-CD.pdf
122 Perupetro’s website: https://www.perupetro.com.pe/
123 Petroperu’s website: https://www.petroperu.com.pe/
124 Source: http://www4.congreso.gob.pe/comisiones/1996/constitucion/cons1993.htm
125
Proinversión’s website: https://www.proinversion.gob.pe/
126 Source: https://www.coes.org.pe/Portal/MarcoNormativo/Procedimientos/Tecnicos
128 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/D.%20Leg.%201002-CONCORDADO.pdf

• SEIN: “Sistema Eléctrico Interconectado Nacional”. It is the Nationwide

Interconnected Electric System130.
• Supreme Resolution N° 006-2019-EM: Creates the Multisectoral Commission to reform
the Electricity sector131.
• Transmission Bylaws: Bylaws of Law N° 28.832, approved by the Supreme Decree 027-
2007-EM132.
• Urgency Decree N° 032-2010: Decree that aims to promote the investment and
financing of new electricity projects133.
• Urgency Decree N° 121-2009: Decree that prioritizes the promotion of specific private
investment projects and Public-Private Partnerships134.
130 Source: https://cdn.www.gob.pe/uploads/document/file/322224/RS_N__006-2019-EM.pdf

131Source:https://busquedas.elperuano.pe/normaslegales/crean-comision-multisectorial-para-la-reforma-del-
subsector-resolucion-suprema-n-006-2019-em-1780974-
11/#:~:text=N%C2%BA%20006%2D2019%2DEM&text=La%20Comisi%C3%B3n%20Multisectorial%20tiene%20la,y%20a
seguren%20su%20desarrollo%20sostenible.
133 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/DU%20032-2010-CONCORDADO.pdf
134 Source: https://cdn.www.gob.pe/uploads/document/file/251373/226750_file20181218-16260-imis9d.pdf

3 Institutional Transformation of COES

3.1 Regulatory framework
The general regulatory framework that governs the Committee for the Economic Operation
of the National Electricity System (COES) is composed by the Law of Efficient Development
of Electricity Generation (Law N° 28.832 of 2006), the COES Bylaws (approved by the DS N°
027-2008-EM) and COES’ statutes, recently updated in November 2020135.
The current COES’ structure exists since the enactment of the Law N° 28.832. Before this law,
COES was composed only by generation and transmission companies. The Law N°28.832
improves the governance structure, by allowing all system’s agents (generators, transmission
companies, distribution companies and free users) to be a member of COES. Under the
current structure, the electric system has experience significant growth; the participation of
agents from all segments has provided a system of checks and balances in COES decision
making. However, a thorough analysis of the current COES institutional framework must be
conducted in order to identify possible adjustments and improvements in its governance,
responsibilities, and other characteristics.
The Law N°28.832 under the articles N°12, N°13 and N°14 establishes COES’ main
characteristics, its public services responsibilities, and the operational functions. Meanwhile,
articles N°15, N°16, and N° 17 define the main bodies that compose the COES. On the other
hand, article N°18 defines the budget and the mechanism in which the budget payments
are allocated among COES’ members. The detailed budget allocation methodology is
specified in COES’ Administrative Procedure PR-AD-08A.
Additionally, the Law N°26.572 defines the main rules regarding arbitrage processes that
apply to controversies among COES’ members and COES governing bodies, and that are
presented to Arbitrage Tribunals.
Finally, the Decision 757 from the Andean Community (CAN), DS Nº 011-2012-EM and the
Technical Procedure PR-43 set COES’ main guidelines and responsibilities regarding the
operation and coordination of international electricity transactions.
A detailed analysis of COES, its functions, and its corporate governance is presented in the
following section.
3.2 Main characteristics regarding COES’s institutional framework

3.2.1 Main features and organization
COES is defined as a non-profit private organization with a public legal status. The committee
is composed by the SEIN’s agents and its decisions are binding for all agents 136. Its structure,
according to Chawla and Pollit137 resembles the structure of an Independent System
Operator (ISO), although it does not fully meet all the characteristics of an ISO138.
135 Source: https://www.coes.org.pe/Portal/MarcoNormativo/Estatuto/

136 Law N° 28.832, article N° 12.2.
137Source: Global Trends in Electricity Transmission System Operation: Where Does the Future Lie, Mallika Chawla
and Michael Pollit, 2014. Chawla and Pollit classify COES as an ISO. The authors cite Steve Thomas’ article
“Unbundling of electricity transmission networks: Analysis of the European Commission’s position” by defining that
an Independent System Operator’s main characteristic is “when there is a clear distinction between organizations
that are responsible for operating the transmission grid in real-time, and those that own and maintain it”.
138 In Comparison to Independent System Operators in USA.

COES is governed by a board of five directors that are appointed by the agents that
participate in the different electricity segments (generation, transmission, distribution, and
free users). COES has three main bodies: The Assembly, the Board of Directors, and the
Executive Direction139.
3.2.2 Main functions
Law N°28.832 defines COES’s main goals and responsibilities. The law classifies COES’ duties
into two different types: i) duties that follow the Public Interest, and ii) operational functions.
On the one hand, Law N° 28.832 in Article N° 12, defines the following duties that follow the
public interest:
a) Elaborate the Transmission Plan proposal under approval by the Ministry of Energy
and Mines.
b) Elaborate the procedures, under approval by OSINERGMIN, related to the system’s
operation and the short-term market management.
c) Guarantee timely access to the information related to the system´s operation,
transmission planning and short-term market management.
d) Guarantee the competition conditions in the short-term market.
e) Procure technology upgrades to assure an efficient compliance of its functions.
On the other hand, Law N° 28.832 in Article N° 14, establishes COES’s main operating
functions:
a) Develop, share, and supervise the execution of short-, medium-, and long-term
operation programs.
b) Program and coordinate the major maintenance of the generation and transmission
infrastructure.
c) Coordinate SEIN’s real time operation.
d) Coordinate the international interconnection lines and the international energy
transactions.
e) Calculate short-term marginal costs.
f) Calculate firm energy and power for every generation unit.
g) Determine and value energy and power transfers among COES agents.
h) Manage the short-term market.
i) Assign responsibilities and determine compensations related to the non-compliance
of the norms established in the NTCSE.
j) Plan and manage the provision of ancillary services.
k) Solve the controversies and divergences due to the Law’s application. However, any
decision taken by COES that affects regulated users can be challenged by them or
their representatives to OSINERGMIN’s Dispute Resolution Tribunal. This tribunal will
decide in last instance. The remaining cases will be solved through arbitrage,
139 Law N° 28.8320, article N° 15.

following Law N° 26.572, and COES’ Statutes, where Ad-hoc tribunal committees are
established and its decisions will be final and applicable to all Agents, regardless of if
they participated in the dispute or not.
3.2.3 Assembly
The Assembly is the supreme body and is made up of representatives of the agents
participating in the electricity sector140. The Assembly’s mains functions are 141:
i. Appoint and remove the Board Chair and the chair and director’s wages.
ii. Approve the annual budget.
iii. Approve or delegate to the Board the selection of external audit.
iv. Discuss the COES’ financial statements.
v. Approve and modify COES’s statutes.
The assembly is composed by four subcommittees: i) Generation companies, ii) Distribution
companies, iii) Transmission companies, iv) and Free Users142. The assembly is composed by
registered members that are either compulsory members or voluntary members.
On the one hand, compulsory members must meet at least one of the following
requirements143:
• Generation companies with overall installed capacity equal or greater than 50 MW.
• Transmission companies that Principal or Guaranteed transmission infrastructure with
voltage level equal or greater than 138 kV and total length equal or greater that 50
km.
• Distribution companies with coincident load equal or greater than 50 MW.
• Free users with maximum contracted load equal or greater than 10 MW.
On the other hand, voluntary members are agents that no meet the latter conditions, but
voluntary decided to be a member of COES. They must stay as a member for at least 3 years
and contribute to fund COES’ budget.
Registered members will be allocated to a specific subcommittee, depending on their
activity (generation, transmission, etc.). Those companies with more than one activity are
assigned to the subcommittee that represents their main activity144. Each subcommittee
selects a main representative and a substitute representative. These officials will represent
the subcommittee’s members in all activities required by the applicable laws.
Representatives are selected by the approval of the majority (50%+1) of the subcommittee’s
members145. In addition, each subcommittee selects one COES director. The selection of
these directors follows the same mechanism than the representatives (by the approval of
50%+1 of the subcommittee’s members)146. The generation and transmission subcommittees
140 Law N° 28.8320, article N° 16.1.

141 Law N° 28.8320, article N° 16.
142 Law N° 28.8320, article N° 16.2.
143 COES Bylaws, article N° 2.
144 COES Statutes, article N° 5.

have specific duties, related to elaborate and present technical and economic studies
required for the proposal of Tariff prices, that are subject to the approval of OSINERGMIN147.
Agreements upon decisions in specific matters are reached through general voting by COES
members. COES member votes in their subcommittee on the topic to be decided, and for
each subcommittee, the approval is calculated as the number of members in favor of the
decision divided by the total members in the committee. The overall approval is calculated
as the average of the approval of each subcommittee. An agreement of a specific decision
is reached if there is an overall approval of at least 2/3 148.
Two Assembly calls per year are regularly organized: the first call within the first trimester and
the second call in November. However, some additional calls are organized if agreed by
the Board of Directors or if requested by at least two directors or the representative of two
subcommittees149.
3.2.4 Board of Directors
The Law N° 28.832 defines COES’ Board of Directors, which is responsible for the compliance
for COES’ main functions. The Board of Directors is composed by five members. Each
subcommittee elects one board member. In addition, the Assembly elects the Chairman of
the Board150. The Director position last 5 years151. However, Directors can be reelected an
unlimited number of times152.
According to the COES Bylaws153, the board members must comply with the following
requisites:
a) Hold a professional degree.
b) Have a minimum of 15 years of experience in the electric sector.
c) While being directors and at least one year after they leave the position, Board
members cannot do the following activities:
i. Be a director or own over 0,5% of one COES’ members equity.
ii. Hold economic and financial ties with COES’ members.
iii. Concurrently work in the public sector.
iv. Have legal or arbitrage conflicts with COES or COES’ members.
v. Hold economic and financial ties with other system operators that execute
transactions with agents in the SEIN.
Directors cannot delegate any of their functions 154. Their main duties are the following:

148 COES Bylaws, Article N° 12.1
150 Law N° 28.832, article N° 16.
151 Law N° 28.832, article N° 17.
152 COES Bylaws, article N° 16.4
153 COES Bylaws, article N° 16 and N° 17.
154 COES Bylaws, article N° 16.4

a) Approve COES organizational structure, approve COES’ wages and staff

requirements proposed by the Executive Direction, and approve the Executive
Direction wages and staff.
b) Supervise, appoint, and remove the Executive Director.
c) Approve and modify the annual budget.
d) Grant powers to COES’ staff to sign agreements.
e) Approve procedures proposed by the Executive Direction before their presentation
for approval to OSINERGMIN.
f) Approve reports and studies following the applicable laws.
g) Resolve reconsideration requests and appeal requests.
h) Present to the Assembly, subject to the Assembly’s approval, changes in COES
statutes, the annual COES report, and COES’ financial statements.
i) Report to COES’ members, MINEM and OSINERGMIN, the main agreements and
events that area related to the system’s operation, short-term market management,
and transmission planning.
j) Provide access to all agents, MINEM and OSINERGMIN the information compiled and
elaborated by COES.
At least 3 Directors must attend to every Board meeting. Agreements upon decisions in Board
meetings are reached if there is at least 50%+1 approval of Board attendees 155. In the event
of a tie, the Board Chair will decide. In case the Board Char is absent to a Board Meeting,
then the eldest director will be appointed as the temporary Chair 156. Board meetings are
held at least once per month although extraordinary meetings could be call by the Chair or
at least 2 Directors157.
Directors are personally jointly and severally liable to COES’ members for any damage or
prejudice that COES, agents or others suffer due to agreements or acts taken by the Board
of Directors that i) do not comply with the applicable law and ii) are taken under gross
negligence and willful misconduct. All the Directors that voted against the agreements or
acts adopted will be not accounted liable158.
Any Director, including the Board Chair can be removed by the Assembly only in the event
of demonstrated incapacity or serious misconduct. Any registered member can request the
removal of a Director by submitting a denouncement to the Executive Director. The causes
that qualify as incapacity or serious misconduct acts are i) approved any expense not
included in the COES’s annual budget, ii) making statements on behalf of COES that affects
COES or its members, iii) unjustified absence to 3 Board meetings, iv) be physically or mentally
unable to act as Director, iv) stop complying with director’s requisites, and vii) use on own
behalf the information that is available due to their position, among other causes 159.
155 COES Statutes, articles N° 40.

156 COES Statutes, articles N° 20 and N° 21.

3.2.5 Executive Direction

The Executive Direction is the body that manages COES. The Executive direction is
composed by the Operating Directorate and the Planning Directorate. The Directorates,
representing the Executive Direction must act independently and impartially, with a
technical criterion and always complying the applicable laws the Statues and COES’
procedures160. The Executive Director is appointed by the Board of Directors 161. The Executive
Director is COES’ responsible representative to the legal, administrative, social, and other
authorities162.
According to the COES Bylaws163, the Executive Director must comply with the following
requisites:
a) Hold an electrical engineering or mechanical engineering degree. Be a member of
the Peruvian Association of Engineers.
b) Have a minimum of 15 years of experience in the electric sector.
c) Do not have any legal or arbitrage conflicts with COES or COES’s members.
d) Comply with the requisites applicable to Directors.
The Executive Director’s main duties are the following164:
a) Propose modifications to the Statutes to the Board of Directors
b) Elaborate and present a budget proposal to the Board of Directors.
c) Elaborate proposals to COES’ procedures required for COES functions and related to
the SEIN operation, the short-term maker management. Present the proposals to the
Board of Directors.
d) Elaborate periodically reports according to the applicable laws.
e) Publish and spread information related to activities involving COES, COES’ members
and SEIN. Provide all requested information by COES’ members.
f) Provide technical support to the Board of Directors.
g) Upload to COES’ website the i) agreements adopted in the Assembly and Board of
Directors, ii) technical procedures, and iii) information regarding system’s marginal
costs, energy injections, energy withdrawals, energy production, materials, and fuel
costs, as well as other technical and operational information.
h) Approve internal regulations and inform the Board.
i) Comply with all Board’ decisions.
j) Subscribe and execute operational and commercial agreements with System
operators from interconnected systems from neighboring countries.

161 Law N° 28.832, article N° 18.
163 COES Bylaws, article N° 26 and N° 27.

k) Nominate work committees for specific tasks, that will cease to exist once the goals
are achieved.
l) Other duties defined by the applicable law.
Operation Directorate
The Operation Directorate is part of the Executive Direction and its functions are mandated
by the Executive Direction165. The Operations Directors is appointed by the Executive
Director, must hold a professional degree, and must have a minimum of 10 years of
experience in the electric sector166.
The Operation Directorate’s main duties are the following167:
a) Coordinate the real time SEINS’s operation and short-term management, complying
with the security and quality standards.
b) Elaborate SEINS’s short-, medium- and long-term operation programs and
communicate them to COES’ members.
c) Supervise and execute the short-term operation programs and communicate any
event that affects the normal operation and short-term market management to
MINEM and OSINERMIN.
d) Forward to OSINERGMIN within a period of 24 hours a supervision report of the daily
dispatch program execution.
e) Coordinate infrastructure’s major maintenance, and order any corrective measures,
if necessary.
f) Calculate SEIN’s marginal costs.
g) Calculate and value the capacity and energy transfers among members that are a
result of the system’s operation at minimum cost.
h) Plan, manage, and value ancillary services provided by agents.
i) Calculate and value transactions among agents in the short-term market.
j) Coordinate the international interconnection lines and the international energy
transactions.
k) Determine and assign specific responsibilities among agents, as well as calculate
compensations due to transgressions to the Security and Quality of Service Technical
Norm.
l) Take any necessary measure, when unexpected events occur that could the
system’s operation under security and minimum cost standards.
m) Bill neighboring system market manages for the energy exported, and bill COES’
member for the energy imported, both originated by international energy
transactions.

167 COES Statutes, article N° 48.2.

n) Manage congestions rents and revenues that are generated due to financial
transmission rights, due to the applicable law.
o) Other duties defined by the applicable law.
Planning Directorate
The Planning Directorate is part of the Executive Direction and its functions are mandated
by the Executive Direction168. The Planning Director is appointed by the Executive Director,
must hold a professional degree, and must have a minimum of 10 years of experience in the
electric sector169.
The Planning Directorate’s main duties are the following170:
• Comply with the existing regulatory framework related to the transmission system
planning, including the efficient development of the transmission system, following
MINEM’s criteria, and methodologies elaborated by OSINERGMIN, approved by
MINEM, and complying with the LCE, RLCE, Law N° 28.9832, the COES bylaws, COES
procedures and other bylaws approved by COES.
• Elaborate and procure specialized studies that are required to support the
transmission plan and complying with the policies and criteria established by MINEM.
• Any other duty mandated by the applicable law.
3.2.6 Dispute Resolution
Registered members can challenge agreements adopted by the Assembly, or decisions
taken by the Board of Directors and Executive Direction. The allowed challenges are as
follows:
1) Challenges to Assembly agreements171:
• Any Registered Member can challenge agreements adopted in the
Assembly that have an effect in their interests, rights, and obligations. The
challenge will be solved by arbitrage.
2) Challenges to decisions taken by the Executive Direction 172:
• Any Registered Member can challenge a decision taken by the Executive
Direction or its Directorate that have an effect in their interests, rights, and
obligations.
• The challenge can be presented either as a reconsideration request to the
Executive Direction or as an appeal request to the Board.
• A member that does not agree with the result of a Reconsideration request,
can present an appeal request to the Board.
• Members that are affected by an appeal requested solved by the Board can
request an arbitrage process. If the decision taken by the Board ratifies the
decision adopted by the Executive Direction, only members that presented

169 COES Statutes, article N° 48.3.

an appeal request on time or intervene in the challenge procedure can

request the arbitrage process.
• Decisions adopted by the Executive Director are binding to all members.
3) Challenges to decisions taken by the Board173.
• Any Registered Member can challenge a decision taken by the Board that
have an effect in their interests, rights, and obligations.
• The challenges can be presented either as a reconsideration request to be
solved by the Board or through the request of an arbitrage process.
• Decisions on challenges are binding to all members.
4) Arbitrage processes174.
• Ad-hoc tribunals are established to solve arbitrages.
• The arbitrage request must include the identification of the registered
member requesting the arbitrage process, the identification of the decision,
subject to dispute and the identification of COE’s body subject to the
challenge.
• All technical controversies are solved by a Conscience Arbitrage, while non-
technical controversies are solved by a Legal Arbitrage. Both sides must
agree in the type of arbitrage. If sides do not agree, the arbitrage will be
technical.
• The Tribunal arbitral will be composed by 3 members. Each side appoints a
member and informs the other side, that will have to approve the
appointment. Selected members will appoint the third member, that will
preside the Tribunal. Tribunal members will be nominated by the Arbitrage
Centre of the Lima Chamber of Commerce, entity that will be responsible in
solving any discrepancy regarding the nomination, challenge inhibition or
substitution of a Tribunal member.
• The Tribunal’s decisions are final and unappealable for all members, either
participants or non-participants.
• Arbitrages must comply with the Law N° 26.572.
• Although COES’s statues do not specific who pays the Tribunal’s expenses,
according to Law N° 26.572, in case there is no previous agreement on who
pays, the Tribunal members must define who will be the responsible in paying
the expenses. Generally, the side who losses pays the expenses.
3.2.7 Budget
COES’s budget is funded by the contributions of all registered COES’ members. The budget
is proposed by the Executive Direction, revised by the Board and subject to approval by the
Assembly175. Neither OSINERGMIN nor MINEM are involved in the budget approval process.

174 COES Statues, article N° 55.
175 COES Statues, articles N° 20, N° 28, and N° 48.

The contributions from members, is determined in proportion to the following amounts

recorded in the previous year176:
a) Power and energy injections of Generators, valued at the Basic Peak Power Price
and at the Short-Term Marginal Cost, respectively.
b) The total revenues derived from the provision of the transmission service by
Transmission companies.
c) Withdrawals of power and energy from Distributors and Free Users, valued at the
Basic Peak Power Price and at the Short-Term Marginal Cost, respectively.
3.2.8 International electricity transactions
Peru has signed several agreements with neighboring countries related to international
electricity transactions. The agreements are the following:
1. Agreements between Peru and Ecuador:
• International exchanges are currently allowed between Peru and Ecuador,
but only to transfer energy in events of emergency.
• CAN Decision 536 allowed the development of an Interconnection line in 220
kV between both countries. Current transmission capacity limited exchanges
of maximum 90 MW.
• CAN Decision 536 was replaced by CAN Decision 757, The latter norm sets
the main rules regarding international exchanges between Peru and
Ecuador. Following CAN Decision 757, COSs elaborated the Technical
Procedure N°43 (International electricity exchanges), that sets the main
guidelines, responsibilities, and duties to COES and its members to undertake
electricity exchanges with Ecuador.
• An auction regarding a new transmission line, aiming to reinforce the existing
transmission capacity between Peru and Ecuador, was announced in
October 2020177. The line in 500 kV will connect La Niña (Peru) and Frontera
(Ecuador) busbars.
2. Agreements between Peru and Brazil:
• Preliminary reports have been conducted to evaluate the energy exchange
potential between both countries.
• In 2008, an energy integration agreement was signed between the Ministries
of Energy from both countries.
3. Agreements between Peru and Chile:
• Work groups have been created to evaluate a potential interconnection
transmission line between Tacna (Peru) and Arica (Chile).
• An international transmission project was included in the 2021-2030 Peruvian
Long Term Indicative Transmission Plan.
4. Agreements between Peru and Colombia:

177Source:
https://www.proyectosapp.pe/RepositorioAPS/0/2/JER/LT_500KV_PIURA/Aviso_de_Convocatoria__16_y_17-10-
20__-_EL-11__ada_12-10-20_.pdf

• According to OSINERGMIN, there are no viable interconnection transmission

lines between both countries. However, a transmission project that would
connect Peru and Colombia through Ecuadorian territories is possible.
5. Agreements between Peru and Bolivia:
• No cooperation agreements have signed up to date.
COES’s main duties regarding international interconnection transactions are defined in
COES’ Technical Procedure N°43:
• Coordinate the operation of the international lines and manage the International
Electricity Transactions (IET)-
• COES can sign international agreements with other system operations that include
the following activities and/or clauses:
o Coordinate the planning of operation, maintenance, and management of
the interconnected systems, including the coordination of electricity load
demanded by importers.
o Coordinate the operation and maintenance of the busbars located near the
borders.
o Interruptability in electricity exchanges.
o Definition of operating rules regarding international links.
o Access to international electricity links.
o Procedures for the Exchange of information and records.
o Measurement systems.
o Dispute resolution procedures.
o Force majeure events
o Agreement’s termination causes.
o Confidentiality
3.3 Diagnosis
After the detailed analysis of COES’ existing institutional framework was finalized, a set of
several existing elements were identified, that show that possible improvements could be
made to COES’s structure, duties, and characteristics. This set of elements will be carefully
evaluated to elaborate possible improvement proposals.
3.3.1 Corporate governance
A system operator with a higher degree of independence will be a relevant player in the
future development of the Peruvian energy sector. Even though the modifications included
by the Law N° 28.832 (2006) contributed to significant improvements in COES’ performance,
there are still some improvement opportunities that should be explored, considering that
higher level of competition in the Peruvian electricity sector must be promoted, as well as
leading the Peruvian market to a new regulatory framework.
According to FERC’s order 888 published178 in 1996, an “Independent System Operators’
governance should be structured in a fair and non-discriminatory manner”. Moreover, an
178 Source: https://scholar.harvard.edu/whogan/files/iso0696.pdf

Independent System Operator “should provide open access to the transmission system and
all services under its control at non-pancaked rates pursuant to a single, unbundled, grid-
wide tariff that applies to all eligible users in a non-discriminatory manner”. An Independent
System operator must guarantee that competitive conditions, to foster the entry of new
players and technologies. On the other hand, a system operator with and unbalanced
corporate governance, where some members will have more influence in COES’ bodies
than others, could biased COES’ decisions potentially in favor to specific groups of interests,
as well as favor incumbent agents over new agents.
For instance, in the elaboration process of a new procedure, conducted by COES’ Executive
Direction, and under the final approval of OSINERGMIN, the opinion of specific incumbent
members could have more weight than observations presented by new players (such as
energy storage developers), and the latter agents could be aggrieved. Moreover, in the
transmission planning process, leaded by COES, some transmission improvements in the
national territory could be selected over international links, In the former alternative, local
incumbent players could be benefit, while in the latter alternatives, operation costs could
be reduced, providing benefits to all final users.
Through the influence in COES’ functions, such as the elaboration of procedures, short-term
market management, dispute resolution, incumbent players could build barriers to prevent
the entry of new players, as well as reducing the competitive conditions in the sector. In
addition, considering that not all agents are COES’ members, the interest of all industry’s
players, particularly small agents such as small customers, or new agents (e.g., aggregators,
flexibility providers, etc.), is not represented in COES.
The following section will present the main weakness in COES’s current corporate
governance that could affect the Committee’s unbiased decisions. Starting from the
identified set of weaknesses, improvements proposals will be elaborate to assure a more
independent System operator.
1. Some members have more influence that others in COES’ decisions.
As described in section 3.2.3, under the current voting system for each Subcommittee
considers, each Registered member has one vote. Agreements in the Assembly are first
voted in each Subcommittee and then the approval percentage is calculated for each
Subcommittee (considered all registered members); then the subcommittee approvals are
averaged to calculate the overall approval.
Figure 3-1 shows the current COES’ members for each subcommittee and classified as either
private companies or state-owned companies.

Figure 3-1: Subcommittee members
Under the current voting system, some members can have more influence in the decisions
taken by Subcommittees and the Assembly than others:
• The Government, through FONAFE, controls the Distribution Subcommittee,
considering that 10 out of the 13 members are under its control. Therefore, most
decisions and agreements in the Distribution Subcommittee are taken by FONAFE
with little to no participation of privates.
• Some companies are holdings that control more than one registered member in
either a same committee or in different committees. For instance, ENEL controls 3
corporations that are members of the Generation subcommittee and 1 corporation
in the Distribution company, hence having 3 votes in the former subcommittee and
1 vote in the latter subcommittee. Other existing holdings that have more than 1 vote
are Inkia Energy, Engie, Solarpack and the ISA group 179. The presence of these
holdings has not had any significant effect in the decisions and agreements adopted
in COES, mainly because there are only few holding companies and thus, the
influence of their subsidiaries in the adoption of agreements is limited. Nevertheless,
there is no complete certainty that it could not have any undesired effect in the
future.
• Considering the existing voting system, there are incentives for companies to register
multiple corporations in COES, where each corporation controls a different
infrastructure project. For example, Solarpack controls 3 power plants 180, each of
them through a different corporation and all of them registered as separate entities
in COES.
179The existing regulatory framework (Law N° 26.876) only consider restrictions on horizontal integration). Vertical
integration is allowed but subject to the approval of the Antitrust Tribunal (INDECOPI).
180 The different entities are Tacna Solar S.A.C, Panamericana Solar S.A.C. y Moquegua FV S.A.C.

Furthermore, the current voting structure is not flexible enough to represent agents that
operate new technologies. For example, if a storage developer is interested in becoming a
COES member, in which subcommittee will participate: Generation? Free users? The same
dilemma will apply to demand aggregators and/or flexibility providers. The absence of new
agents in COES will lead to an underrepresentation of these agents’ interests in the decisions
taken by COES different bodies.
Finally, the voting system differs from the budget allocation. On the one hand, the influence
each agent has on COES decisions will depend on the number of members the agent
controls. On the other hand, budget payments are allocated in proportion to each member
revenues registered in the short-term market. This difference could provoke that a small
generation company controlling a small amount of installed capacity but under different
corporations can have more influence than a larger company that controls a large amount
of power plants, but under only one legal entity. This, in turn, could create incentives to
members that contribute to a significant share of COES’ budget and feel underrepresented,
to exert their influence through indirect mechanisms (such as delaying their payments to
fund COES' budget).
2. Not all agents are COES members.
As described in section 3.2.3 there are two types of Registered Members: Compulsory
Members and Voluntary Members, where the latter can voluntary decide to be a member
but must stay as a member for at least 3 years and must fund a share of COES’ annual
budget. There are no sufficient incentives for small agents to be a COES member: the
expected costs (budget payments) will outweigh the possible expected benefits (influence
in COES decisions).
In fact, there are not many small agents that are current members in COES. Up to date there
are 77 members in the Free Users Subcommittee, when, according to MINEM, by 2018 there
were over 1,700 free users participating in the market181.
The lack of incentives for small agents to be a member of COES, has driven to an
underrepresentation of small players in the decisions and agreements adopted by COES’s
Assembly and Executive Direction. An adequate representation of small members is crucial
to the development of new resources, such as distributed generation182.
Moreover, by not being a member, small agents cannot challenge the decisions taken by
COES’ bodies, and therefore could not defend their interests. For example, a new storage
developer that is not a member of COES, could not challenge to COES’ Executive Direction,
the contents in a new procedure regarding, for example, the short-term operation.
3. COES Board is not completely independent from COES members.
Directors are appointed by each Subcommittee (each subcommittee is elects one Director
while the Board Chair is elected by the Assembly). Although the Director position last 5 years,
Directors can be reelected an unlimited number of times. In addition, Director cannot have
any financial or commercial ties with COES members. However, there are no sufficient
incentives that prevent Directors to act on behalf of the Subcommittee that elected them.
Even though Directors do not have any binding mandate with the Subcommittee that
181Source: Estadísticas del Ministerio de Energía y Minas, 2018.

http://www.minem.gob.pe/minem/archivos/Anexo%2011%20Numero%20de%20Clientes%20Mensual%20por%20Sis
temas%202018.pdf
For instance, in Chile by January 2021, there are almost 1,300 MW in installed distributed generation capacity.
182
Source: https://www.revistaei.cl/2021/02/09/capacidad-instalada-de-pmgd-parte-el-ano-con-1-282-mw-
operando-en-el-sistema-electrico/

appointed them, Directors would tend to avoid any conflicts with the companies that
compose this Subcommittee, to stay in their position and be reelected once the term ends.
The Directors duties have a direct effect in the energy sector’s development and operation,
such as the approval of technical procedures to be presented to OSINERGMIN, solve
reconsideration and appeal requests, supervise the Executive Direction, among others.
Considering the importance of Directors’ responsibilities, a total independence of Directors’
performance is crucial to comply with non-discriminatory and efficiency criteria in the
system’s planning and operation. A degree of dependence of Directors in COES members,
added to possible overrepresentation of some agents in COES’ decisions, could potentially
lead to bias COES acts.
Up to date the identified weaknesses have not caused any negative effects in COES
operation. The existing problems in Peruvian’s electricity market are mainly caused by
uncoordinated and poor planned public policies that have led to overinvestment in some
segments and underinvestment in other segments, than by a failed governance in COES.
However, COES’ performance should not depend on Board members’ probity and ethics,
but instead should be ruled by an institutional framework, that independently of who belong
to the Board, would encourage, and guarantee a complete independence in Directors’
actions and decisions, from any external pressure from agents. To achieve this, it is significant
to move forward to a System Operator with a more independent corporate governance.
The existing COES can participate and provide all the knowledge and experience to support
the transition to this new corporate governance structure.
As described in section 3.2.6, COES’ bodies are responsible for solving disputes related to the
applicable law and regarding COES’ duties. Some of COES’ functions that are subject to
discrepancies, are the system’s operation, short-term management, and transmission
planning. Any decision taken by COES that affects regulated users, is excluded from this
dispute resolution mechanism, and they can be challenged to OSINERGMIN’s Dispute
Resolution Tribunal.
To encourage a correct transition to a new regulatory framework in the Peruvian electricity
sector, a clear, transparent, and non-discriminatory mechanism is needed.
After a thorough revision of the existing Dispute Resolution mechanism was conducted, the
following aspects where identified that must be carefully examined to propose
modifications.
1. Directors and Executive Director can act simultaneously as judge and party in
discrepancies:
The existing Dispute Resolution mechanisms allows Registered Members to challenge COES’
decisions that affect their interests, rights, and obligations. Affected parties can challenge
(through reconsideration and appealing requests) the decisions adopted by the Board or
Executive Direction. Eventually, members can request an Arbitrage process that would lead
to the establishment of Ad-hoc tribunals that would decide in last instance. The latter also
applies to decisions and agreements adopted in the Assembly; registered members can
challenge through an Arbitrage process these decisions.
Even though the Dispute Resolution mechanism considers, as last recourse the intervention
of an independent Arbitrage Tribunal, the whole process has several stages in which COES’
bodies are both judge and party in controversies involving their actions.
An example are challenges presented to COES involving “the assignation of responsibilities
and determination of compensations related to the non-compliance of the norms

established in the NTCSE”. The non-compliance of NTCSE norms can be caused by decisions
taken by the Executive Direction when coordinating the system’s operation. The Executive
Direction is in charge of assigning responsibilities and allocating compensation payments.
Nevertheless, Hence, the Executive Director will be also responsible to resolve, in a first
instance, challenges presented by members regarding responsibilities and compensations
allocation. Hence, the Executive Director will be both part and judge of the controversy.
For instance, in 2019, 119 reconsideration requests were presented to the Executive Direction,
91 appeal requests were presented to the Board, and only 3 arbitrage processes were
presented to the Tribunal 183. The low percentage of challenges presented to the Tribunal in
comparison to reconsideration and appeal requests, might show that either the Dispute
Resolution satisfied both involved parts or either the expenses involved in an Arbitrage
Process (requiring the establishment of an Ad-Hoc Tribunal), or its lack of technical
competences would discourage its request by members.
Moreover, it is important to evaluate how Ad-hoc tribunals are established, and instead of
having temporal tribunals, to create a permanent Independent Expert Panel that could
solve any discrepancies in the energy sector. Most of discrepancies presented to Arbitrage
Tribunals are technical and required a specific set of knowledge and skills, therefore needing
tribunal experts with profound experience in the energy sector. In addition, these experts
must not hold any conflicts of interests with the arbitrage sides. The latter requirements are
hard to meet considering that Tribunal experts with experience mostly work in the energy
industries and therefore have ties with the agents involved.
3.3.3 COES’ functions
Finally, the system operator must have the necessary responsibilities that allow it to guide the
Peruvian energy sector to a new future energy sector, pursuing to and increase energy
security while meeting efficiency, justice, and equity criteria as well as complying with
Peruvian commitments in greenhouse gases emissions.
On the one hand, COES must guarantee competitive conditions in the different future
markets that encourage a non-discriminatory participation of all incumbent and new
players. On the other hand, as the system operator, COES must have the relevant function
to assure the security and quality of supply, while coping with the variability of variable
renewable sources and load participation.
The following COES’ responsibilities were identified and must carefully be evaluated before
proposing possible improvements.
1. SEIN operation and market management
COES’ organization structure, as shown in Figure 3-2 delegates to a single entity the system’s
operation and short-term market management (Operations Directorate).
Currently, COES conducts the dispatch considering the loads, power plants’ characteristics,
fuel prices, hydro availability, the system´s restrictions, security criteria, among other
elements. Once the dispatch is conducted, marginal costs are calculated in every node,
following the definition set in the LCE 184. Once marginal costs are calculated, COES
calculates energy transfers at marginal costs among the agents, considering power plants
injections and users withdrawals.
183 Source: COES annual report 2019. https://www.coes.org.pe/Portal/Publicaciones/Memorias

184 Definition N°5 in LCE defines marginal costs as “Cost of supply of an additional unit of electricity in each busbar”.

The consolidation of system operation duties and market management responsibilities are
justified by the existing regulatory framework: the results obtained by the system operation
are used as inputs to estimate marginal costs and manage the short-term market.
However, a different COES structure would be needed if the energy sector moves forward
to a new electricity framework, involving the modernization of generation, transmission, and
distribution segments. New functions and capabilities will be required if new market-based
mechanisms are incorporated (following the example of CAISO, NYISO, ERCOTT, PJM,
Spanish market, British market, among others), such as bid-based dispatches, capacity
auctions, ancillary services auctions, among others. The skills and capabilities required to
coordinate new market-based mechanisms are completely different of the current
capabilities that are required to manage the short-term market. New capabilities are
needed such as the coordination of multiple agents, market clearance and resettlement
responsibilities, among others. Furthermore, improvements to the IT structure will be required
to manage a significant increase in the information that will be shared due to the real-time
interaction of multiple agents.
The existing framework involves a strong interdependency between the system operation
and the short-term market management. The future framework will probably have several
markets that although they will be affected by the system operation, will perform more
independently. The activities related to market coordination and system operation should
be delegated to different areas, where each area should be highly specialized in their
responsibilities.
Moreover, the current functions delegated to the Operations Directorate do not include
competition monitoring responsibilities. The incorporation of new market-based
mechanisms, possibly including the participation of different generation and load-based
resources in the provision of energy, power, and ancillary services. An active competition
surveillance will be required to prevent market dominance behavior by incumbent or new
players. These responsibilities are not currently conducted either by COES, OSINERGMIN or
INDECOPI185. A careful evaluation of who should have these duties, either COES,
OSINERGMIN, or a different entity, is carried out in this report.
INDECOPI is the entity in charge of monitoring market competition. However, this entity oversees all sectors and
185
not only the energy sector and therefore, could not have the specific technical capabilities to understand the
complexities involved in the electricity sector.

Figure 3-2: COES organizational structure

Source: COES
2. Transmission planning
The Law N° 28.832 defines several Public Interest functions assigned to COES, including the
“Elaboration of the Transmission Plan proposal under approval by the Ministry of Energy and
Mines”.
As it will be fully described in the following chapter the transmission plans are elaborated
every 2 years by COES, revised by OSINERGMIN and approved by MINEM.
To guarantee a complete transparency in the planning process, currently a Planning
Transmission Council is established, composed by a representative of generation
companies, distribution companies, and free users, and two representatives of transmission
companies. This council oversees the planning process and participates in each of the
process’ stages and has a final say in the final proposal.
The transmission plan is very technical and detailed and has successfully conducted by
COES. Therefore, this process should remain under COES conduction, and no significant
changes should be made.
However, as it will be fully explained in the following chapter, the existing framework lacks
strategic energy plans that not only plan the expansion of the transmission system, but as
well the development (at least in an indicative way) of generation capacity, the
development of international transmission links, and new expansions in natural gas
infrastructure. This strategic planning process should i) consider a holistic and less detailed
approach, ii) consider a long-term horizon (30 years) and iii) should pursue the maximization
the net social welfare, considering operation and investment costs, the reduction in
greenhouse gases emissions, the compliance with local emissions commitments, achieve
regional development and energy independence, among other goals. The strategic
process should be conducted by a different entity (than COES) and should provide all the
necessary inputs to all planning and development processes that are conducted on each
of the different segments.
3. Operation of International Transmission Links.
Current regulatory framework only set rules regarding the operation and management of
international energy transactions between Peru and Ecuador, given that is the only existing
international link.

COES functions defined by Law N° 28.832, and regarding international transmission links,
consist in “Coordinating the international interconnection lines and the international energy
transactions”. Additionally, DS N° 011-2012-EM and PT N° 43 set COES’ main responsibilities in
international interconnections, mainly related to the coordination and operation of
international links and the management of international energy transactions.
Currently a transmission line reinforcing the interconnection between Ecuador and Peru is
under auction186. This project was a result of the 2013-2022 transmission plan, elaborated by
COES, considering projects presented by agents and finally revised by OSINERGMIN.
The coordination and operation of international links as well as the management of
international transactions are functions that should be responsibility of COES. However, the
planning of new international links should be first included a long-term energy planning
process, conducted by a different entity. An additional analysis of this function will be
included in the following chapter.
3.4 International revision of ISOs

This section consists in analyzing benchmark markets with Independent System Operators:
PJM and CAISO in USA, IESO in Canada, CEN in Chile, and AEMO in Australia. European
markets were not analyzed because most of them are operated by Transmission System
Operators (TSOs). In markets operated by TSOs, most of the transmission system is owned and
operated by a single entity, that also acts as the system operator. Adopting a similar scheme
in Peru would require the consolidation of all transmission assets, currently controlled by
multiple agents in only one agent, introducing several challenges to the Peruvian market 187.
Therefore, an ISO scheme, where the system operator does not own assets in the electricity
market, is a better fit to the Peruvian electricity market.
The analysis will be focused on the following topics: i) corporate governance, ii) restrictions
in the participation of vertically integrated companies in ISO’s decision making, iii) dispute
resolution mechanisms, iv) system operation and market management units and v) market
monitoring activities. Based on the described topics a set of proposals and
recommendations will be presented in the following section.
3.4.1 FERC’s Order 888
In 1996, considering the interest of several utilities in establishing Independent System
Operators to operate power pools, the FERC in its Order 888, proposed a set of principles
that should provide the main guidelines regarding the governance and structure of
Independent System Operators. FERC was interested in encouraging other markets to create
independent system operators; thus, it was important to provide guidance how ISOs should
be established. According to FERC, the basic principles that should govern an Independent
System Operator (ISO) are the following:
1. The ISO’s governance should be structured in a fair and non-discriminatory manner.
2. An ISO and its employees should have no financial interest in the economic
performance of any power market participant. An ISO should adopt and enforce
strict conflict of interest standards.
186 The project is a transmission line in 500kV that connects La Niña busbar (Peru) and Frontera busbar (Ecuador)
187 Currently there are multiple transmission companies operating in Peru.

3. An ISO should provide open access to the transmission system and all services
under its control at non-pancaked rates pursuant to a single, unbundled, grid-wide
tariff that applies to all eligible users in a non-discriminatory manner.
4. An ISO should have the primary responsibility in ensuring short-term reliability of

grid operations. Its role in this responsibility should be well-defined and comply with
applicable standards set by NERC and the regional reliability council.
5. An ISO should have control over the operation of interconnected transmission

facilities within its region.
6. An ISO should identify constraints on the system and be able to take operational
actions to relieve those constraints within the trading rules established by the
governing body. These rules should promote efficient trading.
7. The ISO should have appropriate incentives for efficient management and
administration and should procure the services needed for such management and
administration in an open competitive market.
8. An ISO’s transmission and ancillary services pricing policies should promote the
efficient use of and investment in generation, transmission, and consumption. An ISO
or an RTG of which the ISO is a member should conduct such studies as may be
necessary to identify operational problems or appropriate expansions.
9. An ISO should make transmission system information publicly available on a timely

basis via an electronic information network consistent with the Commission’s
requirements.
10. An ISO should develop mechanisms to coordinate with neighboring control areas.
11. An ISO should establish an Alternative Dispute Resolution process to resolve disputes
in the first instance.
Principles N° 1 and N° 2 refer to ISO’s governance. On the one hand, the governance must
not be structured in a discriminatory manner. On the other hand, the system operator and
its employees must not have any financial and economic interests in any power market
participant.
Regarding the operator’s functions, Principle N° 4 defines that the ISO’s primary responsibility
is to ensure short-term reliability of grid operations. However, ISOs should also have control
over the operation of interconnected transmission facilities within its region (Principle N° 5),
promote the efficient use and investment in generation transmission and consumption
(Principle N° 8), develop mechanisms to coordinate with neighboring control areas (Principle
N° 8), among other functions.
Finally, Principle N° 11, states that ISOs should have an Alternative Dispute Resolution (ADR)
process to solve disputes in a first instance. This ADR process is common in ISOs in US electricity
markets.
FERC’s set of principles should be kept in mind when defining the new framework that will
govern the future COES. Furthermore, an international revision of independent system
operators’ governance and structure was conducted. The international analysis can help
identifying best practices that can be adopted to the Peruvian context. The analysis will
focus on the independent system operator’s governance and main functions. In addition,
an analysis regarding how disputes among market players are resolved, will be conducted.

The independent system operators that will be presented are:

• California Independent System Operator (CAISO): entity that oversees the operation
of California's bulk electric power system, transmission lines, and electricity market
generated and transmitted by its member utilities.
• PJM: Regional transmission organization (RTO) that coordinates the movement of
wholesale electricity in all or parts of 13 states and the District of Columbia (all of them
in USA).
• Independent Electric System Operator (IESO): It is the system operator of the Ontario
Power System in Canada.
• National Electricity Coordinator (CEN): is the coordinator and independent operator
of the National Electrical System in Chile.
• The Australian Energy Market Operator (AEMO): It is system operator of the electricity
and gas markets across Australia.
The Californian market and the regional transmission network operated by PJM are
international benchmarks on how modern electrical interconnected systems should work.
On the one hand PJM has developed a variety of market-based mechanisms that have
encouraged the development of multiple technologies and the entry of new participants in
a vast geographical network connecting 13 states (and the District of Columbia) in USA’s
northwest region. On the other hand, the Californian market has ambitiously pursued the
integration of massive capacity of intermittent renewable sources to achieve state-wide
emissions reductions goals. Both markets are managed by ISOs that follow FERC’ Order 888
and are an international reference on how modern system operators perform.
Moreover, the Canadian experience (Ontario Power System), is analyzed to provide
examples on how an Independent System Operators, controlled by the state, performs.
Furthermore, the Chilean experience, with the analysis of the National Electricity
Coordinator, can provide regional references on the framework governing an Independent
System Operator. The Chilean experience is particularly interesting considering that the
regulatory framework governing the system operator suffered multiple changes in recent
years: previously the former system operators’ structure, governance and responsibilities
resembled COES’ existing characteristics, but have no shifted to a completely independent
system operator.
Finally, the Australian experience, show the example of a market and system operators that
coordinates electricity and gas markets. The Australian National Electricity Market, as well as
the Ontario Power System, has a lot of governmental influence.
3.4.2 Corporate Governance
The following table shows the main characteristics regarding the System operator’s structure
and corporate governance.

Table 3-1: Benchmark Independent System Operators Benchmark.
National
California (USA)188 PJM189 (USA) 190 Interconnected Australian National
Market Ontario (Canada)191 System (Chile)192 Electricity Market193
• CAISO • PJM • Independent • National Electricity • Australian Energy

System Electric System Coordinator (CEN) Market Operator
Operator Operator (IESO) (AEMO)
• CAISO is a non-profit • PJM is a membership • Non-profit corporate • CEN is as a non- • AEMO is non-profit
organization public organization, entity. profit private company limited by
benefit corporation. meaning that it • IESO states that is not organization with a guarantee, with
• CAISO is composed provides services on a an agent of the public legal status. government and
by the Board of nonprofit basis194 to Provincial • CEN is composed by industry members.
Directors and the customers that are Government and acts the Board Members, • AEMO is composed
Executive members of PJM. independently from the Executive by the Board
management • PJM’s has two-tier the Ministry of Energy. Director, and the Members, the
(Leadership). governance structure: • IESO is composed by employees. Executive Leadership
• Additionally, CAISO i) the PJM Board and the Board of Directors, and AEMO’s
has the EIM ii) the Members the management members.
Governing boding, Committee. ISO (leadership) and • AEMO’s members
responsible for functions are Panels (Technical are split between
directing the Energy conducted by the Panel and Dispute government (federal
Imbalance Market of executive Resolution Panel) and state) and
the Western management (Office industry (market
Interconnected of Interconnection). participants and
System. • On the one hand service providers).
ISO’s main • Finally, there is a PJM Board is Members participate
features and Department of Market responsible in ensuring in the nomination
organization Monitoring, that PJM operates the process of Board
independent group grid safely and reliably Directors (by
that reports directly to and creates and nominating
CAISO’s governing operates fair energy candidates or vetoing
board. markets. proposed
• On the other hand, candidates), are
the Members involved in
Committee, on which stakeholder
each member has a consultations,
representative, participate in working
provides advice to forums, can provide
the board by comments in the
proposing and voting proposal of AEMO’s
on changes and new annual budget and
programs, as well as can vote on
monitoring PJM’s
operation, the
performance of the
188The analysis was taken from CAISO’s Bylaws, CAISO’s Corporate Governance Principles, CAISO’s Decision Board
Selection Policy, CAISO’s Five-year 2015-2019 Financial Summary, and CAISO’s Quarterly Financial Report 4Q-2020.
189 Regional interconnected system including 13 States and the District of Columbia.
190 Source: PJM’s governance fact sheet and PJM’s learning center.
Source: Ontario Electricity Act 1998, IESO’s Governance and Structure Bylaws, IESO’s Board Charter and Code of
191
Conduct, IESO’s Board Terms of Reference, IESO’s 2019 Annual Report and IESO’s website.
192 Source: General Law of Electrical Services and Independent System Coordinator’s Bylaws.
193 Source: AEMO Constitution and AEMO’s Board Charter.
194 PJM is defined as profit neutral, meaning total revenues and expenses must equal each other over the long term.

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Operation resolutions in General

Agreement, among Meetings195.
others. The committee
is made up of five
sectors representing
Generation Owners,
Transmission Owners,
Electric Distributors,
Other Suppliers and
End Use Customers.
• Finally, PJM develop
day to day solutions
through a stakeholder
process: through the
organization of
committees, task
forces and user
groups, the process
provide ongoing
forums for issue
resolution through
discussion and
negotiation. PJM
serves a mediator in
the process.
• 5 Board Members • 10 Board Members • Between 8 and 10 • 5 Board Members • Between 5 and 10
members, plus the members (currently
CEO. there are 10).
Board • The members must
Composition include the Chair and
the Managing
Director.
• 3 years • 3 years • 2 years • 5 years • Terms are defined by

Directors’ the Energy Ministers196
duration and must not exceed
4 years.
• Unlimited reelection • Unlimited reelection • Unlimited reelection • Members can be • One further
reelected only one consecutive term is
• Board members time. allowed.
may be reappointed • Only in specific
Reelection? for successive terms cases, an additional
not exceeding two consecutive term
years each. would be allowed, if
the Energy Ministers
195Votes casted by members are weighted averaged (a 60% weight is considered for Government members and
a 40% weight is considered for Industry members).
196Energy Ministers stands for ministerial forums for the Commonwealth, states and territories and New Zealand to
work together on priority issues of national significance and key reforms in the energy sector. Formerly named as
the Council of Australian Governments (COAG) Energy Council, the Energy Ministers comprise two main forums:
Energy National Cabinet Reform Committee (ENCRC) and the Energy Ministers’ Meeting (EMM). The Energy Ministers
have oversight of energy market institutions responsible for the operation of national energy markets, including
AEMO.

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considers there are

special circumstances
to warrant the
reappointment.
• An independent • Three Board • There is a • Members are • The nomination

executive search firm members are elected Nomination proposed by mechanism has the
is hired to seek out each year. The Committee that specialized following steps:
candidates for Nominating corresponds to headhunting firms 1. The Board
consideration by the Committee identifies Human Resources and elected by a identifies the
Board Nominee qualified Board and Governance Nominations desired skills of the
Review Committee. candidates and Committee. Committee new director and
• The candidates are proposes them to the • If the Board is invited (Composed by CNE’s whether the new
ranked by a Nominee PJM Members to nominate Executive Secretary, director meets the
Review Committee Committee for individuals for an advisor of the independence
and that will end up in election at the PJM appointment, the Senior Public criteria.
a ranked list that is Annual Meeting. Human Resources Management 2. Members are
forwarded to the • Nominees are and Governance Agency, the chair of given the
California Governor approved with a Committee will seek the Experts Panel and opportunity to
for consideration. simple majority in a out qualified the chair of the nominate
• The Nominee Review sector-weighted vote. individuals to Antitrust Court) candidates. At the
Committee is • The Nominating recommend to the same time, the
composed by Committee is made Board for nomination. vacancy is
representatives of six up of eight members: • If no such invitation is advertised, and a
sectors: one representative forthcoming, the search firm
1. Participating elected from each of Human Resources engaged by AEMO
Transmission the five sectors – and Governance starts the search
Owners. Committee will process.
generation owners,
2. End-users and provide the Chair with 3. Following the
Nomination transmission owners,
load-serving its recommendation creation of a long
mechanism entities. electric distributors, on what additional list of candidates
3. Public interest other suppliers, and skills, experience and by the search firm,
groups (such as end-use customers – attributes are an Independent
consumer and three Board necessary. Energy
advocates, and members, one of Appointments
environmental whom serves as the Selection Panel197
groups). non-voting chair. (selection panel)
4. Generators, Each member serves determines a short
marketers, and a one-year term. The list. Short-listed
other energy committee typically candidates are
providers. interviewed by the
employs a consulting
5. Publicly owned selection panel,
firm to assist in
utilities which makes
6. Entities outside of identifying qualified recommendations.
the ISO balancing candidates. 4. The Board
authority that considers the
engage in power recommendations.
transactions with At a Special
the ISO balancing General Meeting,
authority. AEMO’s members
consider the
recommendations
and approve a
submission to the
Members of the selection panel are nominated by the government (3 members) and by industry participants (2
197
members).

National
Energy Ministers.
Alternatively,
members may refer
the matter back to
the selection panel
for further
consideration.
5. The Energy
Ministers considers
the
recommendations
and approves the
appointment of
the new director.
Alternatively, they
may refer the
matter back to the
selection panel.
• The whole process is
overseen by the
Board Nomination
Committee
(composed by Board
Members).
• Elected by the • PJM Chair (named • Elected by the

board members . PJM CEO) is elected board members. • Elected by the • The Chair is an
by the board but sits Nominations Independent Director
at the board as a Committee. that is nominated by
Board chair non-voting member. the Energy Ministers.
• The Chairman of the
Board must not be the
CEO of AEMO.
• Yes, there is a • No • No • Yes, there are two • Yes, members (either

representative of state representatives government or
publicly owned utilities in the Nominations industry members)
in the Nominee Committee (the CNE's can nominate
Review Committee. Executive Secretary candidates.
State entities and the advisor of the
participate in Senior Public
the Management
nomination Agency).
process? • The Nominations
Committee are also
responsible in
removing a Board
Member.
• Members of the • No • Yes, Board members • Yes, the Nominations • Yes, the final
Governing Board are are appointed by the Committee is appointed is
State entities selected by Ministry of Energy. responsible of conducted by the
participate in appointment by the appointing the Board Energy Ministers.
the final Governor of the State Members and there
appointment? of California and are two state
subject to representatives in the
confirmation by the Nominations

National
Senate of the State of Committee (the CNE's

California. Executive Secretary
and the advisor of the
Senior Public
Management
Agency).
• No member of the Members of the • There are some • Members cannot • The Board must
Governing Board shall board have no Terms of Reference, concurrently have comprise a majority of
be affiliated with any affiliation with or approved by the another job, except Independent
actual or potential financial stake in any Board, which sets out unpaid jobs in non- Directors.
participant in any PJM market the skills, experience, profit corporations or • Board as a whole
market administered participant. and attributes that entities or academic should include the
by the Corporation. Four members must the Board believes or teaching following skills and
• Board should have expertise and individual Directors responsibilities. experience: i)
include as many of experience in and the Board • Members cannot strategic expertise, ii)
the qualifications corporate leadership collectively should have any shares or accounting and
listed below: at the senior have. The Board seeks rights in any company finance, iii) legal
1. Electric industry management or to ensure that the subject to the experience, iv)
expertise. Board level, or in the Directors have a mix coordinator of CEN. managing risk, v)
2. Market’s professional disciplines of skills and • Members must have managing people
expertise. of finance or experience to provide experience in the and achieving
3. General accounting, appropriate electric sector and change, vi)
corporate/legal/fin engineering, or utility leadership and meet the experience in similar
ancial expertise. law and regulation. strategic direction to characteristics that organizations and
4. Public interest One member must the IESO. allow them to be a industries, vii)
expertise. have expertise and • In addition, Board good fit to the information
• All potential experience in the Members must have position. technology, and viii)
candidates must operation or concerns several restrictions, economics and
possess a proven of transmission- such as not have any public policy.
reputation for dependent utilities. financial interests in • Furthermore, the
Board
excellence in their One member must market participants, Board Selection Panel
Members’
areas of expertise, have expertise and not be a government must ensure the Board
qualifications
forward-looking experience in the employee. as a whole has
and requisites
leadership operation or planning • Finally, Board significant experience
capabilities, and of transmission Members mut follow in i) operation of the
optimally should systems. strict code of conduct Australian National
reflect a diverse One member must and conflict of interest Electricity Market, ii)
background. have expertise and guidelines. operation of the
experience in the various gas markets in
area of commercial Australia, iii)
markets and trading understanding of the
and risk planned reforms in
management. electricity and gas in
Australia, iv) energy
system planning,
among other relevant
experience.
• A director is
considered an
Independent Director
if it is a non-executive
Director who is not a
member of
management and is
free of any business or
other relationship that
could materially
interfere with the

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exercise of their
unfetter and
independent
judgment or could
reasonably be
perceived to do so.
• Independent
Directors must comply
with the following
criteria:
1. Not be
associated directly
with a Member of
AEMO.
2. Is employed or
has previously
been employed in
an executive
capacity in AEMO
or in a member in
a recent period of
6 months.
3. Is a material
supplier or
customer of AEMO
or a Member.
4. Has a material
contractual
relationship with
AEMO or a
member other
than Board
Member.
• The Board’s main • Board members are • The Board is • The Board is • The Board is
duties are to: responsible for: responsible for: responsible for responsible in
1. Reviewing and 1. Maintaining 1. Reviewing with supervising and managing the
approving the ISO PJM's Management: the enforcing that CETN business of AEMO.
strategic plans, independence strategic fully complies with its • Some of the
financial and, by exercising environment; the responsibilities and Board’s main
objectives, plans their prudent emergence of new duties. responsibilities are:
and actions, business judgment, risks and • The Board is also 1. Approve
2. including annual ensuring that PJM opportunities and CEN’s judicial and AEOMO’s
operating and fulfills its business the implications of non-legal corporate
capital budgets obligations and such risks and representative. strategies, annual
Board and material new legal and opportunities for • The Board is budget, fees,
Members’ project proposals. regulatory the IESO’s strategic responsible in defining major capital
responsibilities 3. Monitoring requirements. direction. CEN’ structure and expenditures and
corporate 2. Ensuring that 2. Approving staff requirements, as financial plans.
performance PJM maintains the strategic plans that well as defining the 2. Oversee and
against the reliability of the consider the IESO’s wages of the monitor
objectives set in power grid and legislative objects, Executive organizational
the strategic and operates a robust, major risks and management. performance and
business plans and competitive, and opportunities and • The Board must also the
operating and non-discriminatory overseeing the inform the Electricity implementation of
capital budgets. electric power management of and Fuel the AEMO’s
4. Reviewing and market, preventing those risks. Superintendence, as strategic goals and
approving material any market 3. Appointing, well as the National objectives.
changes and participants from monitoring, and Energy commission,

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transactions having undue assessing the any infringement of 3. Oversee the

related to the ISO. influence over the performance of existing laws integrity of AEMO’s
5. Ensuring that operation of PJM. the Chief Executive committed by accounting and
appropriate Officer (“CEO”). participants under corporate
systems are in 4. Charging the coordination and reporting systems,
place and in use to CEO with the inform any antitrust including the
identify, manage general events to the National external audit.
and monitor management and Economic Prosecutor. 4. Appoint (and
principal risks of the direction of the • The board is also where necessary
ISO business. business and affairs responsible in replaces) and
6. Assessing of the IESO. informing to the assesses the
compliance with 5. Overseeing the Electricity and Fuel performance of
appropriate appointment and Superintendence, any the Chief Executive
policies, standards, training and potential risk in the Officer (CEO),
and regulatory monitoring the payment chain develops
requirements. performance of, among market succession plans
7. Selecting, and succession participants, for the CEO and
monitoring, and planning for Senior • The Board must oversees
evaluating at least Management. present CEN’s budget succession plans
annually, and if 6. Monitoring the proposal to the for the executive
necessary, integrity of the National Energy leadership team.
replacing, the IESO’s internal Commission. 5. Monitor the
8. President and control and • The Board Chair culture of AEMO
Chief Executive management must lead the Board and approves
Officer. information meetings, inform the AEMO’s code of
9. Overseeing the Systems. CEN’s executive conduct to
ISO Department of 7. Approving the director and underpin the
Market Monitoring annual Business employees the main desired culture
on all matters Plan, including agreement adopted within AEMO.
related to its core budgets, of the in Board meetings, 6. Monitors
monitoring duties, IESO and and oversee the compliance with
which are defined monitoring its compliance of the ethical, legislative,
in the ISO FERC- financial agreements. and regulatory
approved tariff. performance to requirements.
10. Assuming seek to ensure the 7. Oversee the
responsibility for the financial viability of processes for
Board governance the IESO and the identifying
and disclosure efficient and significant risks
practices. effective use of its facing AEMO, and
resource. that appropriate
and adequate
control, monitoring
and reporting
mechanisms are in
place.
• The officers • The PJM • The CEO is • The Executive • Board members
(executive management, appointed by the Director is appoint the CEO
management) are including the CEO is Board of Directors. appointed by the among the existing
ISO’s appointed by the appointed by the PJM Board and must members.
management Board. Board. have at least 4
favorable votes
within the Board.
• CAISO’s revenues • PJM expenses are • IESO is mainly • CEN’s budget, • AEMO is funded
ISO’s budget come mainly from recovered from its financed by system including the wages through several fees
funding Grid Management members primarily fees. of Board Members that are paid by
Charges, which are based on fixed, long- and CEN’s industry participants

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paid for service users term rates in PJM's • The IESO charges employees is on a cost-recovery
(market participants)- Open Access an administrative funded by a Public basis.
Grid Management Transmission Tariff. fee (in $ per MWh Service Charge. This
Charges are classified • The main agents withdrawn) to charge is paid by all
in three categories: that directly finance operate the end-users in
1. Market services PJM expenses are wholesale proportion to their
related to the Real- Load Serving entities electricity market energy
time and Day and generation and manage the consumption (kWh).
Ahead markets. owners. high voltage power
2. System system in Ontario.
operations related There are two
to the real time separate rates for
dispatch and the the IESO
balancing Administration Fee,
authority. one applied to
3. Congestion domestic
revenue rights transactions and
charges. another to export
transactions. The
rate is set by the
Ontario Energy
Board.
The international analysis shows the influence that agents have on system operators’
governance. One the one hand, the Canadian and Californian experiences provide
examples of government’s influence in the ISO’s corporate governance. While in CAISO,
even though market participants participate in Board members’ nomination, the final
appointment is decided by the State Governor. In IESO, new Board members are nominated
by the Board but are appointed by the Ministry of Energy. On the other hand, the Chilean
example shows little to no influence of market participants in the ISO’s governance, while
the Government’s influence is limited. In the Nominations Committee that elects new Board
Members, only 2 out of 5 members are government officials, the remaining members are
independent. Nevertheless, under the Chilean governance framework, the ISO has little
accountability to the different agents in the electricity sector.
In the Australian National Energy Market, although market participants can approve the
candidates to board seats, the final appointment decision is taken by government officials
(Energy Ministers). In all the described cases, the executive management is appointed and
overseen by the Board, hence there is a great influence of the Board in the functions
executed by the system operators.
The analysis of PJM shows that is has a similar governance structure to COES. There is a
members committee where each market participant has a representative. The committee
is made up of 5 sectors (generation, transmission, distributors, other suppliers, and end-users).
The committee votes to select Board Members and decides upon major changes and
initiatives. However, the governance structure has several characteristics, not existing in
COES, that pursue the participation of all market agents in a non-discriminatory approach:
• Some of Member committee’s roles are to recommend and advice PJM in the i) the
creation and operation of a robust, competitive, and non-discriminatory electric

power market, and ii) ensuring there is no undue influence over PJM’s operations by
any member or group of members.
• The governance structure has a collaborative stakeholder participation process
where market participants through committees, task forces and user groups provide
for issue resolution through discussion and negotiation. PJM serves as a mediator,
empowering competitors to reach agreement and move forward. Regarding the
committees, there are several permanent committees to advice on specific matters
such as the Market Implementation Committee (develops proposals to advance
and promote competitive wholesale electricity markets), the Operation Committee
(review system operations) and Planning Committee (related to system planning
strategies and policies) as well as non-permanent committees and task forces to
address specific issues. The initiatives proposed by these committees are reviewed
and decided by the Members Committees.
Although PJM’s governance framework aims to prevent the influence of specific
group of members over the ISO’s decisions; recent reports have identified that
incumbent players have an advantage in the collaborative stakeholder process
and, hence, could influence decisions adopted. The influence of specific agents
could affect the adoption of market design changes that accompany the rapid
evolution of market trends198. Further changes to the governance framework are
required to solve the described issues.
The study conducted to the international ISO’s show that, generally the ISO’s funding
mechanism has no significant influence on ISOs’ governance, as most of the funding comes
from fees and tolls, charged either to end users or market participants through service fees.
A significant government’s influence on ISOs’ governance is not recommended to the
Peruvian context, considering the high number of companies (in the generation and
distribution segments) that are state-owned. The Chilean example provides a good
experience on how an ISO governed by market participants shifts to a completely
independent system operator. Although there is government influence in CEN’s
governance, its influence is balanced by independent representatives. CEN’s transformation
could be a valid path to be considered to implement to COES. Finally, PJM shows an
alternative path that could be implemented to the Peruvian institutional framework. This
path would consist in maintaining COES’ core structure but modifying specific characteristics
to assure the “there is no undue influence over COES’ operations by any member or group
of members”. The implementation of a robust stakeholder process in COES governing
procedures, where registered members and non-registered process can participate and
provide inputs to design new rules, guidelines, and procedures, could encourage a non-
discriminatory participation of all market agents and foster market competition.
3.4.3 Vertically integrated restrictions and its effects on corporate governance
The markets under analysis have different restrictions regarding the participation of vertically
integrated utilities in the governance of system operators.
In CAISO, market participants are represented in the Nominee Review Committee, panel
that ranks Board Member candidates that are finally presented to the Governor. According
to the Board Selection Policy, market participants are grouped into six different classes: i)
transmission owners, ii) end-users and load-serving-entities, iii) public interest groups, iv)
generators, marketers and other energy providers, v) publicly owned utilities and vi) entities
More additional information, please read Christina Simeone’s report: https://kleinmanenergy.upenn.edu/wp-

198
content/uploads/2020/08/PJM-Governance-Reforms-1.pdf

outside of the ISO balancing authority that engage in power transactions with the ISO
balancing authority. Market participants can only belong to one of these classes. Therefore,
the overinfluence of an integrated utility in CAISO’s governance is mitigated as participants
with businesses in more than one segment can only choose one segment to be represented
in.
In PJM, vertically integrated utilities coexist with unbundled players in the different wholesale
markets. PJM members are grouped into five sectors (transmission owners, generation
owners, distribution companies, end-user customers and other suppliers). Members that
qualify to more than one sector (including vertically integrated utilities) must select only one
sector, that best represents their voting interests. In fact, currently there are several parent
companies that have more than one subsidiary that participate in different electricity
segments: these subsidiaries are all PJM members but only one of them has voting rights 199.
In Ontario, although there are utilities that have business in more than one segment (i.e.,
Hydro One operates in the transmission, distribution, and retail segments), the influence of
market participants in IESO’s governance, is very low, considering they do not participate in
the nomination and appointment of the Board and management.
In Chile, the existing regulatory framework (LGSE) established restrictions regarding vertical
integration in the electricity sector 200. Nevertheless, the restrictions on vertical integration
have no effect on CEN’s corporate governance, considering that agents do not participate
in the nomination of the CEN’s Board members or management.
Finally, in Australia the electricity and gas market rules allow companies to perform activities
in more than one segment. In fact, there are several companies that jointly perform business
in the generation and retailing segments201. There are several companies that are controlled
to the same parent company that are registered members in AEMO. The presence of
subsidiaries that belong to a same company can give more influence on a specific market
participant over others in specific decisions (such as voting on a resolution). However, the
responsibilities delegated to registered members are limited (for instance, members can
nominate or veto a candidate to the board, but the final decision is taken by the Energy
Ministers).
3.4.4 Dispute Resolution Mechanisms
California (USA)202:
The regulatory framework that governs CAISO’s functions, contemplates an Alternative
Dispute Resolution Mechanism (CAISO ADR Procedures). This procedure applies to all
199 Source: https://www.pjm.com/about-pjm/member-services/member-list

200 The LGSE establishes the following restrictions:
1. Restrictions to transmission companies: Transmission companies will not be allowed able to perform activities
in the generation and distribution segment.
2. Restriction to companies operating in other segments:
• Companies that participate in other segments (such as generation or distribution) are not
allowed to control over 8% of the total investment value of the national transmission system.
• Generation and distribution companies (as a whole) are not allowed to control over 40% of the
total investment value of the national transmission system.
201 Source: https://www.aemc.gov.au/sites/default/files/2019-09/Final%20determination.pdf
202 Source: CAISO’s Dispute Resolution Procedures.

disputes between parties arising under the CAISO documents 203, excepting those regarding
the CAISO Tariff stated as final and those matters that are limited by the law 204. CAISO ADR
Procedures are conducted by CAISO Alternative Dispute Resolution Coordinator (CAISO
ADR Coordinator), who is designated by CAISO’s CEO.
The dispute resolution mechanism considers the following stages:
1. Good-faith negotiations: In a first instance, parties will make good-faith efforts to
negotiate the dispute, before invoking the CAISO ADR Procedures. Each party must
designate and individual with authority to negotiate the matter in dispute in such
negotiations. If the dispute is not resolved through good-faith negotiations, any of the
involved parties may submit in writing a statement of claim to the other disputing
party and CAISO ADR Coordinator, commencing the CAISO ADR Procedures.
2. Mediation: After the submission of the statements of claim, a mediation process can
begin if at least 75% of the parties agree 205:
• The CAISO ADR Coordinator will provide the parties a list of potential
mediators (7 candidates). The selection of the mediator among the potential
candidates will be selected by the parties by a striking process: parties will
alternately strike mediators until the last candidate is remaining, being the
latter the selected mediator206.
• The mediation process may include referring the dispute directly to a
technical body for resolution or an advisory opinion or referring the dispute
directly to FERC. If the disputing parties have not succeeded in negotiating a
resolution within 30 days of the initial statement of claim, any party can
commence an arbitration process207.
3. Arbitration:
• A party seeking arbitration shall provide notice of its demand for arbitration
to the other disputing parties and the CAISO ADR Coordinator
• In disputes involving claims of under USD $1,000,000, the disputing parties shall
select an arbitrator from a list containing the names of at least ten (10)
qualified individuals supplied by the American Arbitration Association. The
selection of the arbitrator among the potential candidates will be selected
by the parties by a striking process: parties will alternately strike mediators until
the last candidate is remaining, being the latter the selected arbitrator.
203CAISO documents are the CAISO Tariff, CAISO bylaws, and any agreement entered between CAISO and a
Scheduling Coordinator, a Participating Transmission Owner, or any other Market Participant pursuant to the CAISO
Tariff.
204The Alternative Dispute Resolution procedure does not apply to disputes arising under contracts which pre-date
the CAISO Operations Date and disputes as to whether rates and charges set forth in this CAISO Tariff are just and
reasonable under the Federal Power Act.
205 In disputes involving 3 parties, only 2 must agree.
206 In the event the Office of the Interconnection is one of the parties to the dispute, the Alternate Dispute Resolution
Coordinator shall distribute the names of all qualified mediators on the Alternate Dispute Resolution Coordinator’s
list. The persons on the proposed list of mediators shall have no official, financial, or personal conflict of interest with
respect to the issues in controversy, unless the interest is fully disclosed in writing to all participants in the mediation
process and all such participants waive in writing any objection to the interest.
207 Unless, by mutual agreement, the parties agree to extend the time.

• In disputes involving claims of over $1,000,000, the parties in the dispute can
agree on a single arbitrator or they can choose an arbitrator from a list
prepared by the American Arbitration Association. If parties do not agree on
the arbitrator, each one will select one, and the two selected arbitrators will
appoint a third member.
• Arbitrators cannot have any direct financial or personal interest in the
outcome of the arbitration, and any existing or past financial, business,
professional, or personal interest that can create an appearance of bias.
• Unless the arbitrators shall decide otherwise, the costs of the time, expenses,
and other charges of the arbitrators shall be borne by the parties to the
dispute, with each side on an arbitrated issue bearing its pro-rata share of
such costs, and each party to an arbitral proceeding shall bear its own costs
and fees.
• Arbitration processes are binding but can be appealed by disputing parties.
A party may apply to the FERC or any court of competent jurisdiction to hear
an appeal of an arbitration award only upon the grounds that the award is
contrary to or beyond the scope of the relevant CAISO Documents, United
States federal law, including, without limitation, the FPA, and any FERC
regulations and decisions, or state law.
PJM (USA)208:
The rules regarding dispute resolution mechanisms are defined in Schedule 5 within the
Operation Agreement. The dispute resolution mechanism considers the following stages:
1. Good-faith negotiations: In a first instance, parties having a dispute governed by one
of the related PJM agreements209, will undertake good-faith negotiations. Each party
to a dispute shall designate an executive with authority to resolve the matter in
dispute to participate in such negotiations.
2. Mediation: If disputes are not resolved through good-faith negotiation, then they are
subject to non-binding mediation.
• A party to the dispute shall notify the Alternate Dispute Resolution
Coordinator in writing of the existence and nature of the dispute prior to
commencing any other form of proceeding for resolution of the dispute. The
Alternate Dispute Resolution Coordinator will provide the parties a list of
potential mediators (7). The selection of the mediator among the potential
candidates will be selected by the parties by a striking process: parties will
alternately strike mediators until the last candidate is remaining, being the
latter the selected mediator210.
• The mediator’s main responsibilities are to: i) require the parties to meet for
face-to-face discussions, with or without the mediator, ii) act as an
208 Source: PJM’s Operation Agreement.

209PJM agreements consider the Operation Agreement, the Open Access Transmission Tariff, and the Reliability
Assurance Agreement.
Coordinator shall distribute the names of all qualified mediators on the Alternate Dispute Resolution Coordinator’s
list. The persons on the proposed list of mediators shall have no official, financial, or personal conflict of interest with
respect to the issues in controversy, unless the interest is fully disclosed in writing to all participants in the mediation
process and all such participants waive in writing any objection to the interest.

intermediary between the disputing parties, iii) require the disputing parties to
submit written statements of issues and positions, iv) if requested by the
disputing parties at any time in the mediation process, provide a written
recommendation on resolution of the dispute.
• The disputing parties shall meet in a good faith attempt to resolve the dispute
considering the recommendation of the mediator. If the disputing parties are
unable to resolve the dispute at or in connection with this meeting, then: (i)
any disputing party may commence such arbitral, judicial, regulatory, or
other proceedings as may be appropriate as provided in the PJM Dispute
Resolution Procedures. The recommendation of the mediator, and any
statements made by any party in the mediation process, shall have no further
force or effect, and shall not be admissible for any purpose, in any
subsequent arbitral, administrative, judicial, or other proceeding.
3. Arbitration:
• Arbitrations will be binding if they meet the following criteria: i) governed by
one of the Related PJM Agreements that has not been resolved through the
mediation procedures, (ii) involving a claim that one or more of the parties
owes or is owed a sum of money, and (iii) the amount in controversy is less
than $1,000,000.00. The disputes that do not meet these criteria will be non-
binding.
• The arbitration process will begin after a party or parties to a dispute send a
written demand for arbitration to the Alternate Dispute Resolution
Coordinator. The demand for arbitration shall state each claim for which
arbitration is being demanded, the identification of all involved parties, the
relief being sought, a summary of the grounds for such relief and the basis for
the claim.
• The parties in the dispute can agree on a single arbitrator or they can choose
an arbitrator from a list prepared by the Alternate Dispute Resolution
Coordinator211. If parties do not agree on the arbitrator, each one will select
one, and the two selected arbitrators will appoint a third member.
• Binding arbitrations will be final and judgment on the award may be entered
in any court having jurisdiction. The decision of the arbitrators may be
appealed solely, within a year, on the grounds that the conduct of the
arbitrators, or the decision itself, violates the law, statutes, rules, and
regulations.
• Unless the arbitrators shall decide otherwise, the costs of the time, expenses,
and other charges of the arbitrators shall be borne by the parties to the
dispute, with each side on an arbitrated issue bearing its pro-rata share of
such costs, and each party to an arbitral proceeding shall bear its own costs
and fees.
Ontario (Canada)212:
Coordinator shall distribute the names of all qualified arbitrators on the Alternate Dispute Resolution Coordinator’s
list.
212Source: IESO’s Governance and Structure Bylaws and Market Manual 2: Market Administration: Dispute
Resolution.

IESO has a Dispute Resolution Panel, responsible to mediate disputes between i) IESO and
any market participant, ii) the IESO and any person who has been denied authorization by
the Corporation to participate who has been denied authorization to participate in the IESO-
administered markets or to cause or permit electricity to be conveyed into, through or out
of the IESO-controlled grid; and iii) between market participants.
The Dispute Resolution Panel is composed of 3 or more members, each of them holding the
position for a term of 5 years. Members cannot serve for more than two consecutive terms.
Members are appointed by the Board of Directors, out a list of nominees that are selected
by one or more expert arbitrators employed by the Board. Members must comply with
several qualification requirements, including: i) be independent of IESO, ii) have no material
interest in, or be a director, officer, or employee of, any market participant; and iii) have
both experience in the arbitration or mediation of disputes and a level of knowledge of the
tech.
1. Good-faith negotiations: Good faith negotiations are the first stage in attempting to
resolve a dispute and this is initiated by the serving of a notice of dispute on the
respondent only. If this process fails to resolve the dispute, the parties may initiate the
more formal stage of the dispute resolution process. When good faith negotiations
fail to reach a resolution, the applicant may proceed and file the notice of dispute.
2. Mediation: The mediation stage of the dispute resolution process is triggered by the
service and filing of a response to the initial filing of a notice of dispute.
• The Mediator is appointed by the Secretary of the Dispute Resolution Panel.
• If the mediation is successful, the terms of the settlement will be included in a
settlement.
• If the mediation is not successful, or the parties have agreed to dispense with
mediation, or the time for mediation has expired and not been extended by
the parties, the dispute will move to the arbitration process.
3. Arbitration:
• When mediation fails to resolve a dispute, or where mediation does not apply
(either in accordance with the market rules or by agreement of the parties),
the parties proceed to the arbitration stage.
• An award of the arbitrator is final and binding on the parties to the dispute,
subject only to any rights of appeal or review prescribed by applicable law.
• The arbitrator is selected by the disputing parties from a list of three
candidates that are members of the Dispute Resolution Panel.
National Electrical System (Chile) 213:
In Chile, CEN is not responsible for dispute resolution, but instead, there is an Experts Panel, a
specialized collegiate body, responsible in resolving discrepancies in the electricity sector.
The Expert Panel is a unique innovation, not common in electricity markets in the world. The
Panel members are technical and independent professionals that solve discrepancies that
arise in the electricity and gas industries. The panel consists of seven professionals; five of
them must be engineers or graduated in economics, foreign or national, and two lawyers,
of a vast professional or academic career and demonstrating domain in technical,
economic, and legal issues of electrical sector with a minimum of three years’ work
213 Source: Experts Panel Bylaws.

experience. The Experts Panel’s members are appointed by the Antitrust Court 214
(independent tribunal) and their term lasts 6 years. The Panel’s chair is elected by its
members.
The main discrepancies in the electricity sector, that the Expert Panel can resolve, are the
following:
• Discrepancies that arise between CEN and the companies subject to its coordination
in relation with internal procedures, instructions, and any other act of coordination of
system operation and of the electric market emanating from CEN, in fulfilment of its
functions.
• Discrepancies regarding ancillary services, such as the results of the ancillary services
report prepared by CEN, and the valuation of ancillary services declared deserted.
• Valuation of rights related to land use, such as those related to land acquisition, its
use and enjoyment, expenses and compensation paid for the establishment of
voluntary or forced easements, among others.
• Discrepancies regarding the transmission segment planning, valuation, tariff setting,
and technical inputs.
• Discrepancies regarding the distribution segment such as toll setting, facilitates
valuation, determination of new replacement value, and determination of operating
costs.
• Demand projections for the auction report, prepared by the CNE.
• Disagreements on supply contracts for regulated customers, between the
Commission and any party to the contract.
Decisions made by the Experts Panel are binding and cannot be refuted in any other
instance. In any conflict between two parties, the Experts Panel must decide in favor of just
one of them, with no option of intermediate solutions.
The procedure governing de dispute resolution will depend on the agents involved
(example: market participants, National Energy Commission (CNE) or CEN, among others)
and the nature of the discrepancy.
Regarding discrepancies involving CEN or CNE and market participants and related to
technical reports or plants, the latter ones will first submit comments and observations to the
plans, and if they are not addressed by CEN or CNE or they do not meet the market
participant’s challenges, then the latter ones will present a discrepancy to the Expert Panels.
The Experts Panel Budget is approved by Undersecretary of Energy and is funded by all end
users through a postage stamp charge.
Australian National Electricity Market:
On the one hand, the National Electricity Rules set the framework for dispute resolution
Mechanisms in the electricity market, while the National Gas Rules set the framework for
dispute resolution mechanisms in the gas markets.
214Please read the Chilean Antitrust Court’s definition in Chapter 2.

In the National Electricity Rules a Dispute Resolution Mechanism is detailed for disputes
between two or more Registered Participants215 regarding the following matters:
• The application or interpretation of the National Electricity Rules
• The failure of any Registered Participants to reach agreement on a matter that is
required to be met, according to the National Electricity Rules.
• The proposed access arrangements or connection agreements of an applicant for
connection to a distribution network or transmission system.
• Payments concerning any obligation under the National Electricity Rules.
In the National Gas Rules a Dispute Resolution Mechanism is detailed for disputes between
eligible persons regarding the following matters:
• The application or interpretation of the National Gas Rules or natural gas procedures
• A liability or alleged liability under the National Gas Rules or the natural gas
procedures.
• A matter that is solved by the Dispute Resolution Mechanism by agreement of parties
in dispute.
A Dispute Resolution Adviser (WEMDRA216), appointed by the Australian Energy Regulator
(AER) is responsible in accompanying the Dispute Resolution Mechanism. The mechanism
comprises two stages:
1. Stage 1: Dispute Management Systems: This stage empowers parties in dispute to
resolve issues by their own through commercial negotiation and, if required, provides
a mechanism to escalate the dispute (to the following stage). During this stage, the
Dispute Resolution Adviser is available to assist by acting as mediator, facilitator or by
providing a non-binding expert view of the issues in disputes.
2. Stage 2: In this stage, disputes can be decided by an expert or an expert panel
(Dispute Resolution Panel). The Dispute Resolution Panel is composed of three
members of if agreed by parties, of one or two members. The experts are selected
by the Adviser from a pool that is maintained for this purpose and that is an expert in
the field to which the dispute relates, or experience in dispute resolution techniques.
Regarding disputes in the electricity market, all Registered Participants must have a Dispute
Resolution System, consisting in a “operational provision inside a company that manages
disputes. It is a balance of legal compliance and good commercial efficiency” 217. In
addition, all participants must have a Dispute Resolution System Contact.
Main findings,
The international revision shows different Dispute Resolution procedures.
On the one hand ISOs in California, PJM, and Ontario, follow the principles established in
FERC Order 888. The procedures involve, in first instance a good-faith negotiation process,
followed by a mediation and if agreement has not been reached, ends in an Arbitration
process. The arbitration process in CAISO and PJM is conducted by independent arbitrators
215Correspond to participants in the National Electricity Market. A registered participant can either be a generator,
a small generation aggregator, customers, network service providers, reallocator, traders, metering coordinator,
market ancillary service providers, and agents that intend to participate in the market.
216 WEMDRA stands for Wholesale Energy Market Dispute Resolution Adviser.
217 Source: Guidance notes for a dispute management system under NER.

that are selected by parties in dispute from a list of potential candidates. In Ontario, the
arbitrator is selected among members from the Dispute Resolution Panel that is appointed
by IESO’s board. The described processes follow a clear procedure with non-ambiguous rules
that include independent arbitrators, and hence reducing the risk of having an arbitrator
acting as judge and party of a dispute. This risk is not completely mitigated in IESO, although
the arbitrator is selected by the parties in dispute, the candidates are appointed by IESO’s
board. Australia follows a similar procedure to ISOs in USA, by considering a first stage
comprising negotiation among parties in disputes and that could eventually lead to a
dispute resolution process conducted by a Dispute Resolution Panel. The latter is selected by
a Dispute Resolution Adviser that is appointed by the energy regulator.
On the other hand, the Chilean example shows how a permanent independent and
technical collegiate body can act as a Court in the disputes between the regulator, the
system operator and market participants. The Chilean experiment has proven to be
successful as the awards conducted by the Experts Panels have been rarely challenged by
market participants in judicial courts and has been recognized to be unbiased and based
on technical evidence.
As previously mentioned, all these examples include good practices that can be implanted
to the Peruvian context, by reducing potential conflict of interests and providing clear rules
in how disputes will be resolved, to reduce additional challenges that could be presented
by the different agents.
3.4.5 Functions and divisions
California (USA):
CAISO’s functions are conducted by the following areas:

• EIM Governing body: Balancing the Energy Imbalance Market of the Western
Electricity Interconnection218. The EIM Governing Body is composed by a five-
member body with delegated authority from the Board of Governors on rules specific
to participation to the EIM. Designed by regional stakeholders, members of the
governing body are nominated by a committee of western stakeholders.
• Transmission Planning & Infrastructure Development Division: This division is responsible
for transmission planning, infrastructure contracts, operations engineering services,
and generation interconnection processes. The division is led by the Vice President in
Infrastructure and Operational Planning. One of the main functions in this division is
elaborating the Transmission planning process, where CAISO performs technical
studies, and with stakeholders develops an annual comprehensive transmission plan
that examines the ISO controlled grid and reliability requirements and identifies
mitigation solutions.
• System operation and market services: The division is responsible for California’s bulk
electric system operations, real-time engineering, and market services. The division is
led by the Vice President in Operations.
• Market Policy and Performance: Led by the Vice President of Market Policy and
Performance, the division includes Market & Infrastructure Policy, California
Regulatory Affairs, Market Analysis & Forecasting, and Market & Integration Studies.
218The Energy Imbalance Market is a real-time energy market of the Western Interconnection system. This system
includes not only the balancing area operated by CAISO but also balancing areas out of CAISO’s authority.

• Market Monitoring: Market monitoring is performed by the Department of Market

Monitoring (DMM). The area is overseen by the Market Monitoring Oversight
Committee, an independent group that is elected and reports directly to CAISO’s
governing board. This department monitors efficiency and effectiveness of California
ISO markets. In addition, DMM provides recommendations for market design and
operational inputs, as well as reviewing potential detrimental market behavior.
DMM’s main functions are i) monitor market performance and identify potential anti-
competitive market behavior or marker inefficiencies, ii) identify ineffective market
rules or ISO operational practices and recommend changes to improve wholesale
competition and efficient market outcomes, iii) provide analysis on market
performance with particular focus on the structural competitiveness and efficiency
of the wholesale markets and the effectiveness of bid mitigation rules to remedy the
potential exercise of market power, iv) evaluate the effectiveness of the markets in
signaling needed investment in generation, transmission, and demand response
infrastructure and identify any potential barriers that impede the market's ability to
provide needed investments, v) collect information regarding market rule violations
and refer to FERC for enforcement, vi) coordinate and assist with referrals,
investigations and inquiries by other regulatory and legal entities, and vii) provide
independent advice to California ISO CEO and Board on market related matters.
All CAISO’s function expecting the Energy Imbalance Market (EIM) are performed in the
same company but by different areas.
PJM (USA):
FERC’s guideline set the minimum functions that must be performed by PJM:
• Tariff administration and design: Must administer its own transmission tariff and employ
transmission pricing that promotes efficient use and expansion of transmission and
generation.
• Congestion management: Must develop and operate market mechanisms to
manage transmission congestion.
• Planning and expansion: Must be responsible for planning and directing transmission
expansions and upgrades that enable efficient, reliable, and non-discriminatory
transmission service, coordinating its planning with appropriate state agencies. The
planning process at PJM includes analyzing and coordinating planned upgrades
(such as new transmission lines), connecting new power plants to the existing system
and planning PJM's connections with neighboring transmission systems.
• Ancillary services: Must be the backup provider, if others exit the market, of FERC-
mandated ancillary services, such as regulation and frequency response, reactive
supply, voltage control and operating reserves.
• Interregional coordination: Must ensure the integration of reliability practices within
interconnection and market interface practices among regions.
• Parallel path flow: Must develop and implement procedures to address parallel path
flows within its region and with other regions .
• OASIS: Must be the single-site administrator for the Open Access Same-Time
Information System, covering all transmission facilities under its control; must
independently calculate two capabilities – total transmission capability and
available transmission capabilities.

• Market monitoring: Must provide objective monitoring of the markets it operates to

identify market design flaws, market power abuses and opportunities for efficiency
improvements, and propose appropriate actions.
Regarding wholesale markets, PJM manages multiple markets, such as real time and day-
ahead markets, capacity markets, ancillary services markets, and financial transmission
rights transactions.
Most of the described functions are performed by the PJM’s Office of Interconnection.
However, PJM has other subsidiaries, such as PJM Environmental Services Inc., responsible to
provide the reporting and data tracking services of both emissions and renewable energy
credits, and PJM Settlement, Inc, responsible in handling all market settlements, billing issues,
credit management and financial settlements for the wholesale electricity market and other
transactions conducted by PJM members. Moreover, the market monitoring functions are
delegated to Monitoring Analytics, an Independent Market Monitoring. Monitoring Analytics
is defined as an independent contractor and not an employee of PJM or any of its
subsidiaries or affiliates. Monitoring Analytics has a service agreement with PJM
Interconnection.
Finally, as described in previous sections, market participants, through committees,
taskforces and groups provide a forum for members to share their positions and resolve
difficult issues, regarding daily functions as well as the ISO’s governance structure.
Ontario (Canada):
Some of IESO’s duties, as defined in the 1998 Ontario Electricity Act are the following:
1. Exercise the powers and perform the duties assigned to it under the act, the
regulations, directions, the market rules, and its license.
2. Enter into agreements with transmitters to give it authority to direct the operation of
their transmission systems.
3. Direct the operation and maintain the reliability of the IESO-controlled grid to
promote the purposes of the Act.
4. Participate in the development by any standards authority of criteria and standards
relating to the reliability of the integrated power system.
5. Establish and enforce criteria and standards relating to the reliability of the integrated
power system.
6. Work with the responsible authorities outside of Ontario to co-ordinate the IESO’s
activities with the activities of those authorities.
7. Operate the IESO-administered markets to promote the purposes of the Act.
8. Engage in activities related to contracting for the procurement of electricity supply,
electricity capacity, electricity storage, transmission systems or any part of such
systems and conservation resources.
9. Engage in activities related to settlements, payments under a contract entered
under the authority of the Act and payments provided for under the Act or the
Ontario Energy Board Act, 1998.
10. Engage in activities in support of the goal of ensuring adequate, reliable, and secure
electricity supply and resources in Ontario.
11. Forecast electricity demand and the adequacy and reliability of electricity resources
for Ontario for the short-, medium-, and long-term.

12. Conduct independent planning for electricity generation, demand management,

conservation, and transmission.
13. Engage in activities to facilitate the diversification of sources of electricity supply by
promoting the use of cleaner energy sources and technologies, including alternative
energy sources and renewable energy sources.
14. Engage in activities in support of system-wide goals for the amount of electricity to
be produced from different energy sources.
15. Engage in activities that facilitate load management.
16. Engage in activities that promote electricity conservation and the efficient use of
electricity.
17. Assist the Board by facilitating stability in rates for certain types of consumers.
18. Exercise the powers and rights and to perform the duties and obligations assigned to
it under the Ontario Fair Hydro Plan.
Planning, market design, resource and transmission procurement, real-time operations and
engineering are conducted in the Planning, Acquisition and Operations area.
Regarding planning functions, IESO conducts a long-term planning process where it regularly
evaluates future demand and supply, using the resulting forecasts as the basis to assess short-
medium- and long-term resource and transmission requirements. Through IESO’s Annual
Planning Outlook (APO), the operator provides a long-term demand forecast, and an
assessment of whether resources will be ready and sufficient to meet that demand.
Market monitoring is delegated to the energy regulator (Ontario Energy Board). The Ontario
Energy Board, through the Market Surveillance Panel, monitors, investigates, and reports on
activities and behavior in the IESO-administered markets in Ontario's electricity sector. Its
main duties are the following:
• Monitoring activities and behavior and recommending remedial action.
• Investigating market activities and the behavior of specific energy companies or
energy-related agencies (for example, if they are suspected of gaming or abusing
their market power) and making recommendations related to the results of its
investigations.
• Reporting on the results of its monitoring and investigations.
The Market Surveillance Panel is supported by the IESO’s Market Assessment Unit to monitor
the market on a daily basis in order to identify inappropriate or anomalous conduct by
market participants, or other activities having an adverse impact on market efficiency or
effective competition.
National Electrical System (Chile)219:
The Independent Coordinator of the National Electrical System (CEN) is the coordinator and
independent operator of the electrical system.
CEN is responsible of commanding the operation of all electrical system’s installations,
including generation and transmission assets. The operation of the electrical system must be
coordinated to:
219 Source: Independent System Coordinator’s Bylaws

• Maintain the system’s security.

• Guarantee the most economical operation of all installations in the electrical system.
• Guarantee open access to all transmission systems, as established in the law.
These goals lead the operator’s actions towards having an efficient, optimally operated,
and dimensioned electrical system, which runs under a tariff scheme based on marginal
costs. Moreover, the CEN manages the supply of ancillary services that support a reliable
and economic operation of the system.
Some of CEN’s main functions are the following 220:
1. Coordinate the operation of all infrastructure connected to the National Electrical
System, according to the technical norms and the applicable laws, including i)
requesting the delivery of information to coordinated companies in a promptly
manners. CEN can also audit the submitted information, ii) elaborating operation
and maintenance programs, iii) providing instructions to coordinated companies for
the system’ operation purposes, and iv) enforcing the compliance of the technical
norms, in order to achieve the established operation standards and including the
provision of ancillary services.
2. Elaborate the Ancillary Services reports.
3. Conduct periodical Audit to installations under the control of coordinated
companies and inform the Electricity and Fuel Superintendence of those installations
that do not meet the required standards.
4. Define technical procedures regarding CEN’s functions.
5. Coordinate and determine the economic transfers between companies under
coordination, as well as adopting any required measure to guarantee the payment
chain continuity.
6. Authorize the connection of others to interconnected transmission systems and
enforcing the compliance of operation standards and requirements.
7. Market monitoring: analyze the competitive conditions and identify potential
antitrust actions, informing them to the National Economic Prosecutor.
8. Responsible for coordinating the technical and economic operation of international
interconnections with the purpose of maintaining reliability and quality of service and
pursuing and optimal use of energy resources in the national territory. CEN must also
inform the National Energy Commission of all new international interconnection
projects as well as their impacts to the system.
9. Elaborate periodical reports with an analysis for the system operation’s performance.
10. Elaborate annual transmission expansion proposals, subject to the approval of the
National Energy Commission.
11. Elaborate auction terms and conduct auctions for new transmission asset.
12. Conduct research and development aiming to improve the operation and
coordination of the interconnected system.
13. Request to the National Energy Commission the elaboration or modification of
technical norms.
220 Not all CEN’s functions are presented in this section.

14. Provide support to the Nomination Committee in their functions.

The function related to the system operation and market management are conducted in
different divisions. While the former functions are responsibility of the Operations Division, the
latter duties are conducted in the Markets Division. In addition, planning responsibilities are
executed in the Planning and Grid Development Division. All these divisions are under the
Executive Director’s management.
Regarding Market Monitoring functions, they are conducted in the Market Monitoring Unit,
specialized area that directly reports to the Board of Directors and is not under the Executive
Director’s influence.
Australian National Electricity Market:
Some of AEMO’s duties, as defined in the AEMO Constitution are the following:
1. Responsible for market operation of the National Electricity Market (NEM) and the
WA Wholesale Electricity Market (WEM).
2. System operation and security of the NEM interconnected grid, Western Australia’s
Southwest Interconnected System, and the Victorian Gas Declared Transmission
System.
3. Conduct national integrated electricity system planning.
4. Provide transmission services in the Victorian electricity transmission network.
5. Operation of wholesale gas markets services in several gas markets.
6. Facilitating of Full Retail Contestability (FRC)221 for electricity and gas in eastern and
south-eastern Australia and gas in Western Australia
According to AEMO’s 2020 annual report performs 30-ring fenced functions.
Regarding planning functions, AEMO conducts a long-term plan that provides an integrated
roadmap for the efficient development of the National Electricity Market (NEM) in a 20 year-
horizon and considers coupled sector such as gas and transport.
Finally, market monitoring is delegated to the Australian Energy Regulator (AER). This entity is
responsible monitoring the wholesale market and its performance every two years and
analyze if:
• There is effective competition.
• There are existing characteristics in the market that may be detrimental to
competition.
Main findings,
The analysis to the reference ISO can lead to diverse findings.
On the one hand all ISOs studied have system operation, market management and planning
functions. In all ISOs that were studied these functions are conducted in a same entity
although in some of them, under different areas of divisions (CEN, CAISO). PJM has unique
characteristics, although market management and system operation is performed in PJM
Office of Interconnection (main company) it has subsidiaries that are responsible for specific
functions, such as emissions and renewable credits readings (PJM Environmental Services
Inc.) and market settlements and transfer billings (PJM Settlement Inc.).
221 Full Retail Contestability refers to the freedom for end users to choose their own electricity provider.

All ISOs conduct transmission planning processes, in some ISOs these processes are either
subject by the approval of regulators or state agencies (CEN, IESO, PJM) or are conducted
with the participation of stakeholders (CAISO, AEMO). These processes (excepting AEMO)
also involve planning international interconnection expansions. In Australia, AEMO conducts
long-term energy plans that consider coupled sectors such as gas and transport.
Moreover, most of analyzed ISOs have responsibilities regarding managing the operation
and settlement of international interconnection exchanges.
Finally, in all the markets that were studied, there is a Market Monitoring Unit. While PJM,
CAISO and CEN have an own market monitoring unit that report directly to the Board of
Directors, in Ontario Power System and the Australian National Electricity Market the market
monitoring unit (Market Surveillance Panel) is within the regulator, although IESO has a
Market Assessment Unit that assists the Market Surveillance Panel in the required tasks.
In conclusion, the international revision can provide the following examples to the Peruvian
market:
• A specialized market monitoring unit is a common tool in international markets to
ensure conditions that guarantee the existence of competitive markets.
• Separating system operation functions to market management duties in distinct
areas or different companies is not a general rule of thumb. Some markets have
created separated specialized units while some others have not.
• All studied ISOs conduct transmission and systemwide planning functions, however,
these planning functions are subject to the approval of the regulator or include the
participation of stakeholders.
3.5 Proposals
The Consultants recommend the following proposals to modify COES’ corporate
governance, dispute resolution functions, and other functions.
3.5.1 Corporate governance
The diagnosis conducted in previous sections show a Governance that is too dependent on
incumbent players. However, the existing model, where agents are members of the system
operator has worked considerably well in the past decades. Therefore, the recommendation
is to improve the existing institutional framework, by increasing COES’ level of independence,
but maintaining the existing structure. The proposal consists in the following:
Board members: The number of Board members would be increased from the current 5
members to 7 members. The board would be composed of 4 dependent members (each
of then representing one sector), 1 one independent that would act as the Board Char
member and 2 additional independent members. All members must comply with specific
qualifications such as:
• Have at least 20 years of work experience in the electricity sector.
• Hold a professional degree in economics or engineering.
• No ties with public and private entities.
• Do not have held public office in at least 6 months prior to the director’s
appointment.
• Do not have worked in a COES’ registered member in at least 3 months prior to the
director’s appointment.

• Do not have worked in a public or private entity (no ties with public and private
entities in the sector, have a minimum level of experience, among other).
Selection of 4 dependent members: The 4 dependent members would remain to be
selected by Subcommittees (one each).
Selection of the Board Chair:
• An independent executive search firm would be hired to seek out 5 candidates for
the Board Chair position. The Board Chair must have expertise in at least one of the
following fields: i) finance and audit, ii) human resources and governance and iii)
electricity market design. The executive search firm would be required to submit a
reporting describing the search procedure and the reasons behind the selection of
the candidates for the Board Chair position. The report would be posted in COES’
website and available to any interested party.
• The selection of the Board Chair would be voted by the Assembly, in a similar
procedure of the existing voting mechanism: for the selection of each independent
member, each subcommittee would vote among the 5 candidates, resulting in
subcommittee voting preferences (in %) for each of the candidates. Then, for each
of the candidates, a simple average of the voting preferences (in %) given by each
subcommittee would be calculated, and the candidate with the highest average
voting preference would be elected as the Chair. This voting procedure should be
conducted every time a Chair is appointed.
Selection of the 2 additional independent members:
• An independent executive search firm is hired to seek out 5 candidates for each of
the 2 remaining positions. Each independent must have expertise in at least one of i)
finance and audit, ii) human resources and governance and iii) electricity market
design. Collectively with the Board Chair, the independent directors would have
expertise in the three mentioned capabilities. The presence of these members would
aim to guarantee that non-registered agents, such as small companies and new
members, are adequately represented in the board. Similarly, to the report of the
selection of Board Chair, the executive search firm would be required to submit a
reporting describing the search procedure and the reasons behind the selection of
the candidates for each of available positions, and the report would be posted in
COES’ website.
• The first selection of the 2 independent members would be voted by the Assembly,
in a similar procedure of the existing voting mechanism: for the selection of each
independent member, each subcommittee would vote among the 5 candidates,
resulting in subcommittee voting preferences (in %) for each of the candidates. Then,
for each of the candidates, a simple average of the voting preferences given by
each subcommittee would be calculated, and the candidate with the highest
averaged voting preference would be elected as the Board member. However, on
an ongoing basis, the incumbent board would be responsible in selecting the 2
independent members, each of them selected out of the 5 candidates proposed by
the independent executive search firm. The selection process would be led by the
acting Board Chair and will include the participation of the members that are leaving
the Board. The Board will be required to submit a report that state the reasons behind
the selection of the independent members among the proposed candidates. The
report would be posted in COES’ website and available to any interested party.
The Board would select the Vice Chair from among the two additional independent
directors in a yearly basis. In case a conflict arise that requires the Chair to step down, the

Vice Chair would act as a temporary Chair and the Board would start the process to select
a new Board Chair, following the procedure described in previous paragraphs.
On the one hand, dependent members would be elected for a period of 4 years and can
only be reelected for one additional consecutive period (members can serve for additional
periods, but they must not be consecutive to the two already served periods). On the other
hand, independent members can be reelected for up to two additional consecutive
periods. Members are appointed in staggered terms. 3 members and the Board Chair are
elected first, and then 2 years later the remaining 3 members are elected.
Once members end their term and leave the Board, will not be allowed to work in any
electricity sector agent (private or public) for at least 6 months. During this period, outgoing
Members will continue to receive a monthly remuneration equivalent to 1/3 of a Board
member’ wage and will be allowed to work in the Academia.
At least 5 Board members must attend to Board meetings to have the minimum quorum to
adopt agreements, thus, ensuring that agreements are not adopted only by Board members
representing a specific sector. Board meetings should be held every 2 weeks, while
additional meetings could be called if requested by the Board Chair or the majority of Board
members. The objective behind having regular board meetings is to ensure all Board
members are fully aware of COES’ functions and performance and hence can decided in
a responsible and fully known manner.
Including restrictions to vertical integration in the electricity study is out of the scope of this
study. However, changes to the voting scheme in each subcommittee to reduce the
influence of holding companies should be implemented. Following the example in PJM,
parent companies with more than one subsidiary registered as a member in COES, either in
a same subcommittee or in a different subcommittee, should only be allowed to have one
member with voting rights. Thus, the influence is COES’ governance of vertically integrated
companies as well as parent companies that registered different corporations in COES, can
be reduced.
The proposed governance framework will help to prevent COES Board to take biased
decisions influenced by a specific subgroup of market agents. However, considering that
PJM’s existing governance is under debate, future changes to PJM’s governance should be
carefully monitored as they could provide valuable lessons to the Peruvian framework.
COES’ budget
COES members should not have the final say in COES’s budget. The Consultant’s proposal
considers the following Budget approval scheme:
• Executive Director presents a budget proposal to the Board, the Board approves it
or requests amends.
• Once the proposal is approved by the Board, the proposed budget is presented to
OSINERGMIN, that is responsible in approving it or amending it, after asking for
clarifications or justifications to COES, if necessary.
• If there is any discrepancy in how the final budget is approved by OSINERGMIN, COES
can challenge it to the Independent Expert Tribunal (which is proposed in the next
section).
• Finally, the budget is funded by all end users through a postage stamp charge.
As mentioned in section 3.3, under the existing framework, COES’ members could exert
pressure over COES’ governance by postponing their committed payments to fund COES
budget. Allocating the budget funding to all users through a postage stamp charges

reduces the risk of agents having indirect influence over COES’ governance through the
budget funding. Postage stamp charges would be included in the monthly bills along with
the billing of energy, capacity, tolls, and other regulated charges. Under this scheme, end
users would be discouraged to postpone or delay their budget payments: if end users do
not pay the postage stamp charges, they would not be paying part of their bills and thus,
could face penalties or be subject to energy supply cuts. On the other hand, considering
that the budget is funded by all end users, having OSINERGMIN as the entity responsible in
approving the budget provides the required balance to prevent the approval of
unreasonably high budgets. Finally, the presence of the Expert Tribunal to decide on any
discrepancy between COES and OSINERGMIN on the budget, ensures the participation of
an independent third party to solve any conflict between both parties.
3.5.2 Dispute resolution
The Consultant’s proposal considers the creation of an Independent Expert Tribunal,
responsible in solving disputes between COES’ bodies and market agents, disputes between
OSINERGMIN and COES or market agents, and disputes arising by agents.
This Independent Tribunal will be permanent and composed by 5 members. The
qualifications of these members must be diverse. The selection of the 5 members should be
ideally conducted by an independent Ad-hoc committee responsible of selecting the
experts through a technical and impartial selection process. However, after analyzing the
Peruvian sector as well as having several conversations with different private and public
agents, it is concluded that currently there are no existing entities that are completely
unbiased of either the acting government or the private sector. Thus, as long as there are no
agents that are recognized by all the industry agents as fully independent and unbiased,
the proposed selection of the 5 tribunal members is the following:
• An independent executive search firm would be hired to seek out 3 candidates for
each of the 5 member’s position. Each member must have expertise in at least one
of the following fields: i) legal, ii) economics iii) electricity markets, and iv) natural gas
markets. Collectively, the experts would have expertise in the four mentioned fields.
To comply with the requirements, members must hold an engineering, economics
and/or lawyer degree and a minimum work experience of 10 years.
• The independent tribunal member position is a full-time job and would last 6 years.
Members will not be allowed to have another concurrent job or have ties with an
agent in the electricity or natural gas sector (although members will be allowed to
be involved in the Academia). One of the requirements for eligible candidates, is to
not have worked in any private or public entity involved in the electricity or natural
gas sector for at least 6 months prior to their nomination. In addition, once members
end their term, they will not be allowed to work in any company in the energy sector
for at least 6 months.
• A Nomination Committee composed by 4 members would be responsible of the
selection of each member among the proposed candidates. The nomination
Committee would be composed by i) COES Board Chair, ii) COES Board Vice Chair,
iii) INDECOPI’s Chair (or a representative appointed by INDECOPI’s Chair), and iv)a
representative appointed by OSINERGMIN. In the event of a tie in the selection of a
member, the Nomination Committee’s Chair would decide. COES Board Chair and
the representative appointed by OSINERGMIN would take turns as the as the
Nomination Committee’s Chair and COES Board Chair would first act as the Chair.
• Initially, all 5 members of the Independent Expert Tribunal would be selected.
However, on an ongoing basis, 3 members would be selected in stagger terms: 3

members would be elected first and then 3 years later, the 2 remaining members
would be selected.
Following the Chilean example, the decisions adopted by the Independent Tribunal must be
final and binding for all involved parties. A specific norm should be elaborated stating the
specific set of discrepancies that can be presented to the tribunal (not all controversies will
be allowed to be presented to the tribunal), as well as the procedure how discrepancies will
be presented and the different steps in the resolution process. Agents that would like to solve
discrepancies that that are not specified in the referred norm, would have to request an
arbitrage process. This arbitrage process would follow the norms established in the existing
regulatory framework and that are described in section 3.2.6. Moreover, parties (including
COES) that are involved in a controversy that only affects them and no other third party,
could also request the conduction of an arbitrage process instead of requesting a solution
by the Independent Tribunal. However, the request of the arbitrage process must be agreed
by all involved parties, and they must pay the ad-hoc tribunal’s expenses, as specified in
section 3.2.6.
The Independent Tribunal’s budget should consider the expert’s wages, defined by law, and
funded by all end users through a postage stamp charge.
3.5.3 Functions and divisions
The international revision does not provide any strong evidence in favor of separating the
market management functions from the system operation responsibilities. Under the current
framework it is not required to separate the functions into separate entities. In the future, the
decision of separating these functions under separate divisions will depend on the number
of market-based mechanisms that will be incorporated and the complexity of these
mechanisms.
If it is decided that these functions continue to be conducted under the same entity,
additional resources should be allocated to each specific area, to cope with the multiple
challenges that will arise with the entry of new players and new market-based mechanisms.
A Market Monitoring Unit focused in identifying and evaluating anti-trust behavior should be
created. Following the ISOs in USA and Chile, this market monitoring unit should report
directly to COES board. However, this market monitoring unit would only conduct analysis
and elaborate descriptive reports. COES’ Market Monitoring Unit would be focused on the
wholesale market and would provide all relevant information and inputs to INDECOPI’s
Antitrust Commission, responsible for overseeing the competition conditions in the electricity
market, among others. Any ruling to correct, mitigate, or punish antitrust behavior will be
performed by INDECOPI’s Antitrust Tribunal 222. INDECOPI could still initiate investigations even
though issues are not raised by the Market Monitoring Unit.
222 According to the Law 25.868, some of INDECOPI’s bodies are the following:
• The Directive Council, responsible for leading and supervising all INDECOPI’s activities. It is composed by 5
members, all appointed by the Government.
• The Consulting body, that emits opinions if request by the Directive Council’s chair.
• The General Secretary, acting as the CEO.
• Two tribunals (Antitrust and Intellectual Property), responsible in solving in a last instance matters involving
competition and intellectual property violations.
• There are 6 Commissions, responsible in solving in a first instance all matters related to competition and
intellectual property. The Commissions are: i) Antitrust Commission, ii) Commission that focus in removing
bureaucratic barriers, iii) Dumping and subsidy Commission, iv) Unfair Competition Commission, v)

In addition, COES’ Market Monitoring unit could provide information to OSINERGMIN,

electricity sectors regulatory entity, regarding any issue in regulatory and tariff processes as
well as identifying market design problems and suggestion potential solutions.
All the decisions adopted by INDECOPI’s Antitrust Tribunal could be challenged by agents
to the Independent Expert Tribunal.
Regarding planning, as it will be described in the following chapter, Strategic Integrated
Energy Plans will be elaborated by a technical specialized unit in MINEM. The Strategic
Integrated Energy Plans will be detailed in the following chapter, and they will include the
participation of all stakeholders, including electricity companies, public entities, large
consumers, academia, associations grouping small consumers, among others.
These plans would provide the main guidelines to be considered in the Transmission Plans
and Transmission Investments Plans that would be executed by COES. COES is the adequate
entity to conduct these plans given its technical expertise and knowledge of the market.
The transmission plans could also consider any international link, depending on the
guidelines established in the Strategic Plans.
Commission that oversees the commercial barriers and duty charges, vi) Commission of bankruptcy
procedures, and vii) Commission of Consumer protection.
• Management.

4 Integration of Energy Planning

4.1.1 Generation Segment
The Law of Electrical Concession (LCE), enacted in 1992, sets the mains rules regarding the
generation segment. LCE defines a new market structure and imposes a new tariff process.
The main goals behind the law consisted in creating a stable environment to promote the
investment of new generation capacity, and therefore, expanding the supply coverage.
The tariff structure considers short-term energy prices set by marginal costs and capacity
payments that encourages the provision of new power capacity. Under the new regulatory
framework (1992), the generation segment is decentralized, unregulated, and subject to
competition.
The Law of Efficient Development of Electricity Generation (Law N° 28.832), enacted in 2006,
introduces additional changes to the generation segment. One of the law’s main goals is to
promote the provision of energy supply through efficient energy tariffs. This law maintains the
basic economic principles of LCE, for the determination of generation prices and promote
competition in the wholesale market. Furthermore, Law N° 28.230, introduces competitive
bidding processes as the main tool to meet distributors’ consumers demand at the lowest
possible price, increase supply adequacy, and encourage the development of new power
plants. Law N° 28.832, the Long-term auctions’ Bylaws and the Long-term auctions’
procedure set the main guidelines regarding the Long-term auctions to supply regulated
users.
Lately, in the last decade, several out-of-market laws were enacted pursuing public policy
objectives and promoting the development of targeted generation technologies. The
Legislative Decree N° 1.002 (RER Law), and the RER’s Bylaws promotes the development of
renewable energy sources. Meanwhile, the Urgency Decree N° 032-2010 and the Supreme
Resolution introduce long-term auctions that promote the development of large hydro
power plants. Moreover, the Law N° 29.970, Law N° 29.970’s Bylaws, the Urgency Decree N°
121-2009 and the Legislative Decree N° 1.041, were published promoting the development
of cold reserve capacity, aiming to increase the security of supply. Finally, the promotion of
natural gas use in the generation sector through the development of the CAMISEA project
and the enactment of specific laws regarding the production and transport of Natural Gas
from CAMISEA fields has fostered the development of gas-based power plants.
4.1.2 Transmission Segment
Main norms
The regulatory framework for the electricity sector has experienced several modifications
through the last few decades.
In terms of transmission, the main laws and bylaws that have driven the main aspects for the
current transmission system rules are the LCE and its bylaws (DS N° 009-93-EM known as
“RLCE”), Law N°28.832 and the Transmission Bylaws.
The LCE establishes norms that rule for electricity generation, transmission, distribution, and
commercialization. For transmission systems, the main characteristic of this law is that
transmission activities can be developed by both local and foreign actors when they fully
accomplish the local laws. A definitive concession is needed when facilities impact on real
estate goods.

The LCE also establishes the open access definition, which means that concessionaries are
forced to allow third parties to connect to their transmission facilities when requested.
Regarding transmission tariffs, they are regulated by OSINERGMIN.
In addition, through the RLCE, MINEM sets two categories for the transmission systems, the
Main Transmission System (“SPT”), and the Secondary Transmission System (“SST”).
The Law N°28.832 aimed to improve the main rules settled in the LCE. This law introduced two
new categories for the transmission systems: The Guaranteed Transmission System (“SGT”)
and the Complementary Transmission System (“SCT”). These new systems correspond to
which started its commercial operations after this law proclamation and are additional to
the existing SPT and SST under the LCE norms.
This law also establishes that the SGT facilities are part of the Transmission Plan and result of
a public bidding process that allows the concessionary to commercially operate its
transmission facilities for 30 years. By the end of this period, all the facilities must be returned
to the State at no cost, excepting remanent Reinforcement costs223. However, two years
before the contract expiration date, COES evaluates the convenience to keep using the
facilities. In this case, MINEM can include such facilities in the next public bidding process.
In terms of open access, DS N° 018-2016 stablishes that third parties accessing to the SGT with
facilities that are not part of the Transmission Plan, should previously request a technical
compliance for the connection facilities to COES.
In these cases, the SGT concession owner will oversee the implementation/construction,
operation and maintenance of the facilities required to maintain the system´s electrical
continuity, while the third party must assume the expansion costs and the subsequent
compensations.
For an investment retribution, will be applied the same criteria as an SGT Reinforcement,
without investment amount limitations. Therefore, the SGT concession owner will bid at least
an 80% of the investment value to acquire goods and services to execute the Reinforcement
works, and the remaining 20% could be externally hired or directly developed by their own.
The Transmission Plan is a mandatory process that occurs every two years. The main aspects
of the Transmission Plan´s elaboration process is embraced by DS 027-2007-EM, that also
include guidelines for the bidding processes and tariff compensations for the Guaranteed
and Complementary systems. Several LCE´s modifications can be also found in this decree.
The RM 129-2009-MEM-DM establishes the “Criteria and Methodology for the Transmission
Plan”, together with its modifications established by the MINEM´s Ministerial Resolution RM
051-2018-MEM-DM. DS 018-2016-EM (that introduce modifications to the LCE and the DS 027-
2007-EM) is also relevant for the current Transmission Plan elaboration process.
It is worth to mention that there was a first approach of public bidding from which private
companies were awarded with long term concessions before Law N° 28.832 was enacted.
This situation occurred with the promulgation of the DS N° 059-96-PCM, known as Unique
Ordered Text or “TUO”.
Three private companies were awarded with concessions: Consorcio Transmantaro S.A. in
1998, Red Eléctrica Perú S.A. in 1999 and Eléctrica ISA Perú S.A. in 2001. These contracts are
valid for around 30 years each one. Law N°28.832 established that these contracts will be
223According to Law N° 28.832, a Reinforcement is a facility complying with the following conditions: (a) It is included
in the Transmission Plan (PT); and (b) it does not exceed the amount of 30 million dollars in facilities up to 220 kV,
and it does not exceed the amount of 60 million dollars in 500 kV facilities.

part of the SGT by the end of their concession period if COES determines that the use of such
facilities are still necessary224.
In addition, in 2002 the private company Red de Energía del Perú S.A. was awarded with a
concession that allows the management and operation of the state-owned companies
ETECEN and ETESUR. Such companies represented around a 70% of the total transmission
lines in terms of extension by 2001. In a similar way to TUOs contracts, this concession was
awarded for a 30-year period, and it is known as a “RAG” contract, since its investment,
operation and maintenance costs are remunerated by a Guaranteed Annual
Remuneration.
Existing Transmission System
The transmission of electricity is performed through the National Interconnected Electrical
System or “SEIN”, and in a much lower extend through the Isolated Systems or “S.S.A.A.”
In terms or voltage, two levels can be recognized in the transmission systems: the high
voltage systems (60 kV, 138 kV or 220 kV), and the very high voltage systems (higher than 230
kV, in this case 500 kV).
As mentioned above, the transmission system at present consists in 4 different categories:
•The Main Transmission System or "SPT" Commercial operation

started before Law N°
•The Secondary Transmission System or "SST" 28.832 was enacted
•The Guaranteed Transmission System or "SGT" Commercial operation

started after Law N°
• The Complementary Transmission System or "SCT" 28.832 was enacted
The SPT is a part of the transmission system, common to a set of interconnected system
generators, that allows an electricity exchange. Also allows generators to trade capacity
and energy at any system busbar.
The SST is a part of transmission system intended to transfer electricity from a SPT busbar to a
distributor or end consumer, or to transfer electricity from a generation plant to a SPT busbar.
The SST allow generators to trade both power capacity and energy in any system’s busbar.
The SGT is composed by the Transmission Plan facilities whose both concession and
construction are the result of a public tender process. Such SGT facilities are still state-owned,
but a private company owns the concession for a fixed period.
The SCT consists in transmission facilities whose construction is the result of one or many
agents own initiative (generation companies, transmission companies and/or Free Users).
SCT can also be the result of facilities approved in the Transmission Investment Plan (PIT) by
OSINERGMIN225. The SCT can be part of the Transmission Plan or not. In the last case, if the
facilities meet exclusively the energy demand needs and have been prioritized by the
MINEM, these facilities will be part of a bidding process similarly to what occurs with the SGT
facilities.
In terms of remuneration, the four categories mentioned above have in common that both
compensations (payments made by generation companies) and tariffs (paid by any other
224 In fact, once these concessions’ periods end, the infrastructure will be auctioned following the SGT framework.
225 These plans will be explained in section 4.2.4.

final user) seek to cover all annual investment, operation, and maintenance costs.
Concessionaries whose facilities allow energy to be transfer to a Free User or allow
Generators to inject energy to the SEIN, can subscribe free negotiation contracts.
4.1.3 Natural Gas Sector
Main norms
The general regulatory framework that governs the natural gas sector is composed by the
Organic Hydrocarbon Law (Law N° 26.221, enacted in 1993, and consolidated by the Unique
Ordered Text approved by the DS N° 042-2005-EM) and the Law Promoting the Development
of Natural Gas Industry (Law N° 27.133).
Law N° 26.221 set the main rules regarding hydrocarbon activities in Peruvian territory,
assigning to the State the responsibilities in promoting hydrocarbons activities, under
competition and open access activities, and therefore, pursuing national development and
consequently, the social welfare. MINEM is responsible in elaborating, approving, proposing,
and applying the sector’s policies, as well as oversight Law N° 26.221’s compliance and
dictate relevant norms.
On the other hand, Law N° 27.133 sets specific conditions regarding the promotion and
development of the natural gas industry. The law’s goals are to foster competition and
promote the diversification of energy sources that would contribute to an increase in the
reliability of energy supply, as well as bolstering the competitiveness of the national industries.
Other laws that govern the sector are the Law that Reinforces Energy Security (Law N°
29.970), Law N° 27.133’s Bylaws (approved by DS N° 040-99-EM), the Natural Gas Distribution
Bylaws (approved by DS N° 040-2008-EM), the Hydrocarbons Transport Bylaws (approved by
DS N° 081-2007-EM), and the Rules that Promote the Massive Consumption of Natural Gas
(approved by DS N° 063-2005-EM), among others.
Regulated and non-regulated activities
The natural gas Industry comprises five activities: i) exploration, ii) production, iii)
transportation, iv) distribution, and v) commercialization. Traditionally, the natural gas
transference from one point to another is made through supply networks, pipelines, or virtual
gas pipelines, that are designed to attend a diverse type of users. These networks are
exclusively made to provide gas through domiciliary networks at a residential level or
through networks links to the main distribution network for industrial supply.
The first four activities mentioned above require important investments to afford the supply
systems installation costs. It is also assumed a set of risks, such as failure in the exploration
processes and risks in the security management, among others. In parallel, these investments
have the particularity to be irrecoverable and specific to the core business, since is not
possible to convert or relocate to other type of use the installed infrastructure in case the
operational companies abandon the service. Such investments are constituted in irreversible
stranded costs, whose trigger an essential asymmetry between established companies and
the potential incoming companies. This situation occurs since it acts as it were entrance
barriers, which allows companies to enjoy some degree of monopoly power, especially in
transportation and distribution, making them activities subject to price regulation.
According to Law N° 26.221, exploration, production and process are non-regulated
activities that are conducted in a competitive market. Wellhead prices are not subject to

tariff setting by OSINERGMIN226. Moreover, transport and distribution activities of Compress

Natural Gas and Liquefied Natural Gas through virtual pipelines 227, and targeting residential,
industrial, commercial and transport consumers, are also conducted in a competitive
market. In theory, the State should not intervene in this market, although the government did
intervene in the development of the CAMISEA project.
Natural gas transportation and distribution activities through pipeline networks are subject
to tariff regulation by OSINERGMIN. These include the transportation through pipelines from
CAMISEA to City Gate in Liema – Lurin, operated by the company “Transportadora de Gas
del Perú” (TGP); the distribution system through pipeline networks in Lima and El Callao,
operated by the company Calidda, and the distribution system through pipeline networks
in the Ica department operated by the Contugas company.
Other regulated activities are those concessions granted by the Peruvian State, whose
objective is to promote the use of Natural gas228 and the Natural Gas Use Massification
project229.
4.2 Planning processes and new infrastructure development initiatives

4.2.1 Climate change mitigation plan
In terms of climate change, Perú has implemented different guidelines to cope with
environmental issues, taking part of international commitments and elaborating local plans
to reduce GHG emissions.
The National Strategy against Climate Change (ENCC) is a document that was leaded and
published by the Ministry of Environment (MINAM) in 2015, that seeks to accomplish the
international commitments assumed by Perú in front of the Framework Convention of the
United Nations about Climate Change in 2015.
The ENCC aims to provide the tools to orientate and promote the national actions in terms
of climate change, in order that the different involved actors can apply them into the local
action plans. In this way, the public entities and governmental sectors can be able to apply
measures allowing to provide good and services to citizens through effectively, economic
and quality processes.
On the other hand, the Nationally Determined Contributions (NDCs) were submitted in 2016
after as a vehicle to the involved countries to set their actions to face negative impacts of
climate change and set mitigation measures for GHG emissions. The NDCs aimed to ensure
However, the regulatory framework ruling the CAMISEA project, sets price caps for license agreements between
226
Perupetro and natural gas producers, regarding the production proved reserves (such as the Lot N° 88). This will be
explained in Chapter 0.
Virtual pipelines are natural gas transport systems composed by compression plants, modular compress natural
227
gas transport units, and consumption or distribution facilities, such as Vehicular Natural Gas stations.
228These concessions are the natural gas distribution system through the pipeline network of the north concession
that covers the cities of Huaraz, Lambayeque, Chimbote, Trujillo, Chiclayo, Cajamarca, and Pacasmayo, that is
operated by Gases del Pacífico. As well as the natural gas distribution system through pipelines network of the
southwest concession that covers the cities of Arequipa, Moquegua, Tacna and Ilo, operated by Gas Natural
Fenosa Perú. These concessions will be supplied from the Melchorita Plant to the respective cities under the virtual
pipelines concept, which consists of transporting LNG in tanker trucks to the regasification plants strategically
placed in such cities and from there they will be distributed through underground pipelines to supply the residential,
industrial, commercial, and vehicular demand.
This project supplies compressed natural gas to the cities of Abancay, Andahuaylas, Huamanga, Huanta,
229
Huancavelica, Huancayo, Jauja, Cusco, Juliaca, and Puno. For this purpose, there is a public-state association
contract signed with the company Transportadora de Gas Natural Comprimido Andino (TGNCA).

national wellbeing and sustainability and seek to implement a global effort to limit the
temperature increase.
In this sense, Perú has stablished mitigation and adaptation goals by year 2030. Mitigation
measures were designed to promote both public and private investment to contribute to a
low-carbon and sustainable development. The goal is to reduce GHG emissions in a 20% by
2030, plus an additional 10% reduction subject to the availability of international financing.
Energy, industrial processes, waste agriculture, forestry and other land use are fields in which
is planned to implement mitigation measures, while adaptation measures (new practices,
technologies and/or services) includes the fields of fishing and aquaculture, health,
agriculture, water, and forests. Some of the mitigation measures considered in the energy
sector are the promotion of renewable sources, energy efficiency initiatives, encouraging
the development of distribution generation, among others.
Another important milestone regarding climate change is the Framework Law about
Climate Change (Law N° 30754) that was enacted in 2018 by the Ministry of Environment.
This law seeks to offer a possibility to the State to increase the efficiency of the public
expenses for these purposes.
This law and previous initiatives provide a general guideline to make an approach about
how different fields, and local and national authorities should be aligned to accomplish
international commitments and local goals to reduce GHG emissions.
4.2.2 National Energy Report
In terms of historical information, the MINEM´s General Direction of Energy Efficiency (DGEE)
has released on a yearly basis a National Energy Report, which shows the energy fluxes from
different sources, including balances for primary sources (such as natural gas, petroleum,
coal, hydro energy, wind, solar, among others) and secondary sources (such as B5 diesel,
liquified gas, electricity, distributed gas, among others), energy consumption levels,
transformation centers (such as electrical power plants, petroleum refineries, natural gas
processing plants, among others), statistics about emissions generated by the different
energy consumers, and economic energy indicators.
The latest available document is the National Energy Report 2018 230. This report only provides
an analysis of the historical information and does not involve any planning processes in the
energy sector.
4.2.3 Generation Capacity development
The generation segment is unregulated and subject to competition. Power sector reforms
(1992) expected private investors to independently pursue investments in generation
infrastructure, following market signals.
However, as previously described, Peruvian Governments have taken a leading role by
promoting out-of-market-laws pursuing public policy objectives, including an increase in
security of supply fuel and geographical diversification, the development of renewable
energy sources, among others.
In the last decade four different competitive bidding processes have been held promoting
the participation of generation companies, competing to subscribe long-term electricity
supply agreements (energy and/or power). These processes ensure, on the one hand, that
regulated users can procure their energy requirements through long-term agreements, and
on the other hand, they foster the development of new generation capacity. Nevertheless,
230 https://sinia.minam.gob.pe/documentos/balance-nacional-energia-2018

these processes were not necessarily coordinated, did not follow the same public policies
goals, and did not necessarily pursue economic efficiency.
The main characteristics regarding the competitive bidding process are summarized in the
following table:
Table 4-1: Competitive bidding processes
Electricity auctions
to supply energy Renewable energy
to promote the Cold reserve
Auction and power to sources auctions231
development of auctions232
regulated users
hydro power plants
• Law N° 28.832. • Law N° 28.832 • RER Law • Law N° 29.970.

• DS Nº 052-2007-EM • Urgency Decree • DS Supremo 012- • DS N° 038-2013-
• OSINERGMIN N° 032-2010 2011-EM EM.
Procedure N° 688- • Supreme • Auction terms • Urgency Decree
Norms that 2008-OS-CD Resolution N° 064- N° 121-2009.
govern the • Auction terms 2010-EF • Legislative Decree
auction terms • Ministry Resolution N° 1.041.
N°564-2010-
MEM/DM
• DS Nº 003-2011
• DS Nº 008-2011-EM
• Guarantee the • Guarantee the • Promote the • Increase system's

efficient supply of efficient supply of development of adequacy.
regulated end regulated end renewable energy • Promote the
users, promote the users, promote the sources. development of
development of development of • Auctioned energy new thermal
new power plants, new hydro power is determined capacity and raise
promote plants, diversify the considering: i) system’s reserve
competition, and power supply. future expected margin.
Auction’s goal
take advantage of electricity demand,
economies of scale. ii) objective RER
share in the
generation mix, set
by MINEM, and iii)
RER energy already
awarded.
• Decentralized • Centralized • Centralized • Centralized

process. process conducted process. process.
• Each distribution by Proinversión. • MINEM evaluates • MINEM evaluates
Entities
company is • Proinversión is every 2 years the every 2 years,
involved in
responsible for load responsible for conduction of a considering the
the process
forecast, setting elaborating the new auction, proposal by COES
power auction terms and defines the total and the opinion of
requirements233, defining the power energy required OSINERGMIN the
231Renewable energy sources (RER) are defined in the Legislative Decree N° 1.002. RER Law in article N° 3 states
that biomass, wind, solar, geothermal, tidal, and hydro plants under 20 MW qualify as RER.
232 According to the definition included in the auction terms, Cold reserve plants corresponds to thermal power
plants that are available to supply energy and power when supply scarcity events occur or due to operational
efficiency.
233Although Distribution Companies are responsible in defining their power and energy requirements, Law N° 28.832
sets several boundaries regarding power and energy procured through energy auctions. At least 75% of demand

regulated users
hydro power plants
and conducting the requirement to be and the conduction of a

auction organize its auctioned. percentage to be new auction.
own auctions. • Distribution auctioned to each • MINEM defines the
• Distribution companies (mainly technology. location in which
companies must state-owned • Auctions is the project needs
inform MINEM and companies) are the announced by to be developed,
OSINERGMIN their final off-taker. OSINERGMIN. the required
intention to However, some • MINEM is capacity and the
conduct an auctions include responsible in commercial
auction. Electroperu (state elaborating the operation date.
• Auction terms are company) as a auction terms. • Auctions are
elaborated by retailer that buys • A committee conducted by
distribution the energy from composed by 2 Proinversión.
companies and bidders and members (one • MINEM,
approved by supplies distribution appointed by representing the
OSINERGMIN. companies. OSINERGMIN and State signs the
• Off-takers are the other one contracts with
distribution appointed by awardees, although
companies to MINEM) conducts final off-takers are
supply the the auction. all end users.
regulated • MINEM,
consumers (and representing the
some free State signs the
consumers) in their contracts with
concession areas. awardees, although
final off-takers are
all end users.
• Between 5 and 20 • Last auctions • Last auction • Maximum

years. considered a 15- considered a 20- duration: 20 years.
Contract • Last auctions have year contract year contract • All auctions held
period set an auction period. period. have set a 20-year
period between 5 contract period.
and 10 years.
from regulated users must be supplied through contracts longer than 5 years (article N° 4.4.). In addition, Distribution
companies must conduct auction process 3 years ahead, to avoid withdrawals not backed up by contracts (article
N° 5.1). Finally, Distribution Companies must hold auction processes with an anticipation under 3 years only for 10%
for their regulated demand (article N° 5.2).
On the other hand, Law N° 28.832 establishes that Distribution Companies must procure the energy demanded by
the distribution companies through two ways (article N°3):
1) Agreements subscribe through competitive bidding processes.
2) Agreements negotiated bilaterally; including prices must that not exceed the bar prices.
Regarding bar prices (the generation component), the capacity price is calculated as the expansion cost of
generation to supply peak demand (as described previously), the regulated energy price is a weighted average
of expected future marginal costs. These future marginal costs are calculated by the regulator with a computer
model. Then, these prices are adjusted if they differ over 10% of the average price of agreements awarded through
competitive bidding processes.
Although current regulatory encourage distribution companies to contract the total load of their regulated users,
several distribution companies have required to withdraw energy not backed up by contracts. These withdrawals
are valued at bar prices and are allocated to generation companies according to their firm energy and physical
sales.

regulated users
hydro power plants
• Auctions must be • Auctions must be • MINEM evaluates • MINEM evaluates

conducted at least conducted at least every 2 years the every 2 years the
3 years ahead of 3 years ahead of conduction of a conduction of a
the beginning of the beginning of new auction. new auction.
the supply234. the supply235. • However, only 4 • 3 auctions have
• Last auctions • Last auction was auctions have been been held (last one
have been held held between 5 held. Last auction in 2013)
between 5 and 6 years ahead of their was held in 2014. • Power plants
years ahead of their supply starting date. • Last auction awarded must start
Lead time supply starting date. considered a lead operating within 2
time of over 1,5 years starting from
years between the the auction
auction results were finalization date.
announced and
the referential
Commercial
Operation Date set
for awardees.
• Power. • Power. • Energy

• The distribution • Proinversión sets a • Participants bid an • Power
company sets a required capacity energy amount (in • Generators bid
required capacity to be auctioned MWh) and a capacity amount
to be auctioned (the auction held in monomic price (in (MW)and a
(Last auction 2011 required a USD/MWh that capacity price
required a total total capacity of includes energy (US$/kW-month).
capacity of 300 500 MW). and power
MW). • Generators bid payments.
• Generators bid capacity amount • Bidders must
capacity amount (MW) a peak hour specify the delivery
(MW) a peak hour energy price (in point, a minimum
energy price (in USD/MWh) and a amount of energy
What is
local non-peak hour they are willing to
auctioned?
currency/kWh) and energy price (in be awarded, and
a non-peak hour USD/MWh). Energy the plant’s capacity
energy price (in prices are that is backing the
local associated to the bid.
currency/kWh). energy that will be
• Energy prices are supplied to the
associated to the committee power.
energy that will be
supplied to the
committee power.
• Power bided by
generators includes
a “fixed required
234According to Law N° 28.832. However, article N° 5.2 allows Distribution companies to conduct auctions less than
3 years ahead of their supply requirements for a required power less or equal than 10% of the forecasted load of
their regulated end users.”
235According to Law N° 28.832. However, article N° 5.2 allows Distribution companies to conduct auctions less than
3 years ahead of their supply requirements for a required power less or equal than 10% of the forecasted load of
their regulated end users.”

regulated users
hydro power plants
power” and a
variable power. The
variable power
corresponds to the
20% of the fixed
required power.
• Bids are ordered • Bids are ordered • Bids are ordered • Bids are ordered
from lowest to from lowest to from lowest to from lowest to
highest according highest according highest according highest according
to their Weighted to their Weighted to bid according to to the bid
Average offered Average offered the bided monomic according to the
prices: prices: prices. bided capacity
corresponding to corresponding to • All bids are prices.
the weighted the weighted awarded from • The participant
average of peak average of peak lowest to highest with the lowest
hour energy prices hour energy prices until the required offered capacity
and non-peak hour and non-peak hour energy is met. prices is the winner
energy prices. energy prices. • Bids submitted of the auction.
• All bids are • All bids are cannot surpass a
awarded from awarded from maximum monomic
Awarding
lowest to highest lowest to highest price, set for each
mechanism
until the required until the required technology by
capacity is met. capacity is met. OSINERGMIN and
• The weighted • Bids submitted kept in secret.
average offered cannot surpass a • Auctions include 2
price of new hydro maximum price, rounds: Non-
projects considers that is defined by winning bidders can
a 15% discount.236 Proinversión and participate in a
• Bids submitted kept in secret. second round, by
cannot surpass a bidding a price
maximum price, lower or equal to
that is defined by their bided price in
OSINERGMIN and round one.
kept in secret.
• Includes a take or • Includes a take or • Take or pay of the • Take or pay of the
pay level of power, pay level of power, injected energy at awarded capacity.
corresponding to corresponding to their awarded • Bidder are
the awarded fixed the awarded monomic price. guaranteed an
capacity. capacity. This • Bidder are annual capacity
• Take or pay levels means that guaranteed an revenue consisting
Take or pay? are passthrough to awardees receive annual revenue in the sum of i)
end users in the remuneration consisting to the capacity sales in
regulated energy corresponding to plant’s injected the short-term
tariffs. the awarded energy multiplied market and ii)
capacity, although by the awarded auction terms
not effectively monomic price. calculated as the
demanded. Revenues come awarded capacity
236This discount was included to promote the development of new hydro capacity. The discount is only considered
in the awarding mechanism. If hydro plants that are bidding are among the winners of the auction, their offered
prices will be the awarded prices.

regulated users
hydro power plants
• The contracts also from energy and price multiplied by

consider a take or capacity sales in the awarded
pay level of energy, the short-term capacity.
corresponding to market and a
the contracted complementary
capacity times the revenue funded by
number of hours per a postage stamp
month times 0.7. This payment paid by
means that at least all end users.
the 70% of the
energy associated
to the contracted
capacity must be
paid, even though
not effectively
demanded.
• Take or pay
payments are
passthrough to end
users in regulated
energy tariffs.
• Allows the • Limited only to • Limited only to • Limited only to

participation of new hydro power new RER projects. new thermal plans
new and existing projects. projects.
capacity. • Thermal plants
• New projects are must be dual (able
encouraged to to operate using
Who participate in diesel or gas).
participates? auctions. New
hydro power plants
have incentives to
participated as
they receive a
special evaluation
in the awarding
mechanism237.
• Last auction had a • Last auction had a • Last auction had a • Last auction had a
total duration of 4,5 total duration of 5,5 total duration of 5 total duration of
months between months between months between over 1 year
Process Auction terms were Auction terms were Auction terms were between Auction
duration published and the published and the published and the terms were
auctions results auctions results auctions results published and the
were announced. were announced. were announced. auctions results
were announced.
The results from the different auction processes have been the following:
• Electricity auctions to supply energy and power to regulated users:
237For instance, a discount is applied to prices bided by new hydro projects but only for evaluation purposes (the
projects if they win the auction would still be paid at their offered price).

o A total of 9 electricity auctions to supply regulated users had been held since
the Auction process introduction in 2009, and over 3,600 MW have been
awarded in these competitive bidding process. In 2009, weighted awarded
prices ranged between 36 US$/MWh and 38 US$/MWh, while weighted
awarded prices awarded in the 2015 between 32 US$/MWh and 38
US$/MWh238.
o In addition, the auction processes have encouraged the development of
mainly hydro plants and gas-fired plants. Over 1.500 MW in new projects
(around 50% gas-based and 50% hydro) have participated in the auction
processes239. The participation of renewable energy sources (solar
photovoltaic and wind farms) has been practically null. The barriers imposed
in the auction terms (bidders cannot bid power over the firm power
recognized by the regulator240) inhibit the participation of variable energy
sources.
• Electricity auctions to promote the development of hydro power plants:
o 2 auctions have been held and a total of 650 MW in new capacity have been
awarded with weighted average awarded prices ranging between 45
USD/MWh and 50 USD/MWh241.
o However, most of the awarded projects were either delayed (the
commercial operation date of a power plant backing up 200 MW contracted
capacity was postponed) or were not developed (a hydro plant backing 60
MW in contracted capacity)242.
o Existing generation overcapacity added to take or pay levels have burdened
the retailer (Electroperu).
• Renewable energy sources auctions:
o 4 auctions have been held, promoting the development of new renewable
projects (over 1,200 MW243).
o However, auctions cease to be hold in 2014.
• Cold reserve auctions:
In addition, in the interim period 2006-2009, a temporary auction regime was implemented in order to have a
238
smooth transition to the new comprehensive power supply auctions regulations.

239Source: Consultoría para Perfeccionamiento del Mecanismo de Incentivo en Generación Eléctrica Mediante
Licitaciones de Suministro, Uribe Ingenieros E.I.R.L, 2017.
240The existing laws establish that generators cannot contract in all the PPAs an amount of power (and energy) that
surpasses the total amount of firm power (and firm energy) recognized to the generators’ plants plus the power
(and energy) procured to other generators. Current regulatory framework recognizes null firm capacity to solar and
wind plants. Hence, these technologies must procure power to other generators to participate in these auctions.
241There was an additional auction consisting in developing a hydro plant (CH Molloco), however the auction did
not consider the subscription of a long-term energy contract. In addition, there was an additional auction targeting
the developing of hydro plants that was cancelled in 2017.

o 3 auctions have been held, promoting the development of 5 new plants,

adding over 900 MW in new capacity in regions with low power security244.
o New projects are dual plants (operate either with diesel or gas). Auctions
considered a first phase where plants were developed as diesel-based and
a second phase where plants could operate with natural gas, transported by
the South Gas Pipeline. However, considering that the pipeline has not been
developed yet, plants are operating only with diesel, and therefore are only
dispatched as peaking power plants.
o The new projects revenue is allocated to all end users through postage stamp
payments. Awarded prices in auctions have registered a premium between
20% (7.657 US$/kW-month) and 105% (12.379 US$/kW-month) over the
regulated capacity price. Therefore, end users are paying these premium
prices.
4.2.4 Transmission Planning
There are two main planning processes to expand the electrical transmission system, either
through the construction of new facilities or expanding existing facilities. It is worth to mention
that for existing facilities expansions, the concession´s owner has the preferential right to build
the extension. If this right is not claimed, such construction will be part of a public tender.
Public tenders can be either performed by MINEM or Proinversión, as MINEM´s request.
Transmission Investment Plan or “PIT”
The PIT is a set of investments (either new or network upgrades) that includes transmission
facilities outcoming from a planning study that applies criteria defined by OSINERGMIN for a
10-year horizon. Such facilities are required to be operational during the next Tolls and
Compensation adjustment period (PIT is updated every 4 years). The PIT was established by
the RLCE in 1993.
The expansion planning study is mandatory and must be developed by each concessionary
(SST or SCT) whose remuneration are exclusively paid by the demand. Standard costs
defined by the OSINERGMIN must be applied to the study.
In summary, PIT are investment plans that summarize a group of investment initiatives
approved by OSINERGMIN, that have been proposed by transmission agents whose energy
supplies exclusively to the demand.
Transmission Plan or “PT”
The PT aims to identify any transmission facilities required to be added to the SEIN, according
to the demand or the generation expansion considering a 10-year horizon. The PT includes
all transmission facilities up to the limit to other installations that exclusively supply energy to
a certain user or generator. It also includes high voltage and very high voltage facilities
interconnected with neighboring countries and interconnection with isolated systems.
The PT was established in Law N° 28.832, while the bylaws to develop this plan were
determined in the RLCE (DS 027-2007-EM and its modification through DS 018-2016-EM) and
the Criteria and Methodology for the Transmission Plan Development Standards or the
“Standards” (RM 129-2009-MEM/DM, including its latest modification introduced in RM 051-
2018-MWM/DM).
244 Source: Spreadsheets supporting OSINERGMIN’s Resolution N°021-2020-OS/CD (May 2020 Bar Tariffs setting).

The PT and the study that entails to it is developed by COES, reviewed by OSINERGMIN, and
approved by MINEM through the General Electricity Board. Once approved, the PT starts to
govern from January 1st of the following year after the plan is approved and is valid for 2
years.
As previously mentioned in Section 3.3.3 to guarantee the participation and transparency of
the entire PT process, COES names a Transmission Planning Advisory Committee or “CAPT”,
integrated by representatives of the different segments, that is involved in every stage of the
PT development and updates and can give an opinion until the final PT proposal.
The development of the Transmission Plan can be divided into four stages:
1. The first stage starts with COES requesting compulsory information to all the SEIN
agents and isolated systems agents. In addition, any interested party willing to
develop generation, transmission, distribution, or demand projects must provide the
requested information. COES can also request complementary information and
notify OSINERGMIN in case of non-compliance. OSINERGMIN has the authority to
apply fines and sanctions in this case. In terms of information, agents can invoke their
right of confidentiality of the provided information (including technical information).
COES with the previous OSINERGMIN´s authorization can consider the confidentiality
request and apply this criterion.
2. The second stage consists in the elaboration of a Diagnosis Report, which includes
the study of the system performance considering a 10-year horizon. It aims to identify
supply/demand balances problems, supply restrictions and non-economic operative
conditions. It also identifies security and quality of service risks and non-compliances.
In addition, from 2018 onwards the PT includes the Transmission Connection Facilities
or “ITC”, which are facilities not included in the PIT and interconnect Demand Areas
to the SEIN. PIT information is also included in the study.
3. After COES collects all the requested information, in a third stage of the PT
elaboration process all the agents can propose solutions to the findings submitted in
the Diagnosis Report, but they also can identify problems or aspect not included in
this report.
4. The final stage is the PT elaboration and submission. COES at this point has considered
all the information and projects submitted by agents, ITC facilities and information
coming from the Investment Plan (PIT). The PIT results were included in the diagnosis
report of the PT and the PT development itself through the DS 018-2016-EM.
The PT brings two main results: The Binding Plan and the Long-Term Plan.
• The Binding Plan considers all the projects whose execution is needed to begin while
the PT is in force (2 years). New projects, expansion projects for existing facilities (or
“Reinforcements”) and ITC facilities are included in this plan. Concessionaries have
a preferent right to perform any Reinforcement. If this right is not claimed, the
Reinforcement will be included in the next public bidding process. To be considered
a Reinforcement, it must be part of the PT, with an investment lower than US$ 30
million for up to 220 kV facilities, and US$ 60 million for 500kV facilities. The construction
of the facilities included in the PT become to be part of the SGT, which are a result of
a public bidding process and awarded with a 30-year period concession. Such
contracts are BOOT type (Build, Own, Operate and Transfer), so the concession
owner is responsible of the facilities design, financing, construction, operation, and
maintenance.
• On the other hand, the Long-Term Plan includes all the non-binding projects that will
be reviewed and reconsidered in future PT updates.

4.2.5 Natural Gas operation, transport, and distribution

Main Natural Gas Fields
Peruvian natural gas is produced in three main fields: North Coast and North Zocalo Gas
Field, Aguaytía Gas Field, and CAMISEA Gas Field.
4.2.5.1.1 North coast and North Zocalo Gas fields:
Located in the Pirua and Tumbes departments. Natural gas is mainly produced as an oil
subproduct; hence gas production costs are low. This gas field has several lots and is
operated by the following companies: GMP (Lot I), Petrolera Monterrico (Lot II), Sapet (Lot
VI and VII), Petrobras Energía del Perú (Lot X) and Olympic (Lot XIII) in the North Coast zone
and Petrotech (Lot Z-2B) in the North Zocalo zone. Although the energetic potential is
important for both departments, the market development has been limited 245. This is
sustained only in the thermal electricity production, that at the same time, has been
restricted by the hydroelectric plants’ competition. In any case, the proven hydrocarbon
reserves within the zone are also small, that would not allow a large-scale exploitation for the
internal regional market supply246. The main buyer of these gas fields is the company ENEL
Generación Piura through its 301.6 MW thermoelectric simple- cycle power plant Malacas247.
Figure 4-1: North coast and North Zocalo Gas fields.

Source: Perupetro and MINEM.
245The productive pits of these gas fields are located close to the potential consumption area. Because of their
proximity, some of the electricity plants, refineries, processing plants and urban areas use their production. However,
the consumed volumes are low, under 40 million feet per day, in part due to the lack of promotion of the natural
gas use in several consumer sectors. As a result, an important part of the extracted gas is reinjected back to the pits
due to the low demand of thar zone.
246According to the MINEM´s Annual Hydrocarbon Book, in December 2019, 0.69 trillion Cubic Feet were obtained
from proven, probable, and possible natural gas reserves.
Source: http://www.minem.gob.pe/minem/archivos/LARH%202018.pdf
247It must be specified that in the electrical market the Malacas power plant have a higher variable cost compared
to all the thermoelectric plants within the Chilca´s generation hub, which somehow, restricts the development of
larger thermoelectric plants in this zone.

4.2.5.1.2 Aguaytía Gas Field

This gas field is operated since 1996 by Aguaytía Energy del Perú S.R.L., after the transfer
done by Maple Gas Corp., who had awarded the natural gas exploitation through a bidding
process in 1993. It is in the 31-C lot in the Curimaná province, Ucayali department 248. This lot
aims to attract the local market, nevertheless, the largest buyer is the company Termoselva
S.R.L through its Aguaytía thermal plant, with effective capacities of 78.2 MW, 78.4 MW and
156.6 MW for each turbine249.
Figure 4-2: Aguaytía Natural Gas Field

Source: Grupo Energético Aguaytía.
4.2.5.1.3 CAMISEA Gas Fields

The CAMISEA zone includes four lots under exploitation: Lot 88, operated under license by
Pluspetrol, located in the department of Cusco, which includes the San Martin and Cashiari
fields; lot 56, also operated under license by Pluspetrol, located in the department of Cusco,
which includes the Pagoreni and Mipaya fields, lot 57, operated by Repsol and CPNC,
located between the departments of Cusco, Ucayali and Junín, which includes the
Kinteroni, Mapi and Mashira pits, and lot 58 operated by CNPC, located in the department
of Cusco. Lots 88, 57 and 56 were assigned by license contracts for the exploration and
exploitation of hydrocarbons, signed with Perupetro.
• Lot 88: At the beginning of year 2000, the Peruvian Government drove forward
bidding processes for the lot 88 exploration and the Malvinas plant operation.
Related to the first event, through the DS N° 021-2000-EM (published in the official
248The 31-C lot has proven LNG reserves of 0.148 million barrels in December 2018, with an overall natural gas
production of 70 million cubic feet per day. The natural gas processing with condensed is 65 million cubic feet per
day of dry gas and 4.4 million barrels per day.
249Among the main clients, this gas field allows to reduce the imports of this fuel, as well as the use of wood and
kerosene. The production of natural gasolines entails producing clean and solvents fuel production, and other
products.

journal on December 7th of 2000), a License Contract was approved for the
hydrocarbon’s exploitation in lot 88, signed between Perupetro S.A and the Pluspetrol
consortium. This consortium awarded the contract for the lot 88 gas fields for a 40-
year period. On august 5th of 2004 the CAMISEA gas plant was inaugurated
(Malvinas, Cusco).
• Lot 57: On November 19th of 2003, the DS N° 043-2003-EM was published, which
approved the License Contract for the hydrocarbon’s exploration and exploitation
in lot 57, signed between Perupetro S.A. and the consortium constituted by Repsol
Exploración Perú and Burlington Resources Perú Limited (now CNPC). In October of
2000, the natural gas transportation and distribution was allocated to the
Transportadora de Gas del Perú S.A (TGP) consortium, in other words, the concession
of the natural gas and LNG transportation systems the coast and the distribution
system through gas piping networks in Lima and Callao was transferred to Tractebel,
which created the company GN de Lima y Callao S.A.
• Lot 56: In 2004, the consortium formed by Pluspetrol won the auction of lot 56, which
gas could be exported with no restriction (lot 88 was already agreed). In 2006, Hunt,
SK and Repsol, associated with Marubeni, diversified the market by creating Peru-
GNL to export liquified natural gas (LNG).
• Lot 58: In the year 2000 the lot 58 was awarded, operated at present only by CNPC.
It is in the Cusco department, adjacent to the lots 88 and 56 in the CAMISEA Area.
Currently, this lot is under exploration, and it is expected that new natural gas reserves
could be confirmed.
Figure 4-3: CAMISEA project

Source: Perupetro and OSINERGMIN
Exploration and production of hydrocarbons

As defined by the Organic Hydrocarbon Law (Law N° 26.221, enacted in 1993),
hydrocarbons are state-owned. The State grants Perupetro, a state-owned company the
duty to i) promote the investments in hydrocarbon exploration and production activities and
ii) negotiate, sign, and supervise exploration and production license agreements subscribed
with private investors.
The exploration phase granted through concession agreements has a total duration of 7
years (although it could be extended) while the production phase has a total duration of 40

years. The production is taxed by royalties paid to the State250. Perupetro can negotiate
concession agreements though bilateral negotiations or through competitive bidding
process. MINEM is responsible of estimating the natural gas reserves in an annual basis.
In 1999, the Law Promoting the Development of Natural Gas (Law Nº 27.133) introduced
initiatives aiming to promote the development of natural gas industry. Regarding proved
reserves (CAMISEA fields) the law instructed the following rules:
• Minimum obligation imposed on licensees of proved reserves, regarding the
commercialization of natural gas in the national market.
• Price policy with price caps for natural gas sold in the internal market.
• Non-discrimination rules among different users.
Development of gas fields and gas pipelines
The development of new gas fields and pipelines have been fostered mainly by the
Governments’ interest in promoting specific projects, rather than a systemic planning
involving the developing of the natural gas industry.
The development of the CAMISEA Project was conducted after the Consortium Shell/Mobil
announce in 1998, their decision to cease their participation in the development of the
project’s fields251252. CAMISEA fields already had proved reserves, and then an auction
process was easy to be organized. Therefore, the government elaborated a promotion
strategy to exploit the CAMISEA reserves and incentivize the creation of an internal gas
market. In addition, to ensure that the transport system that would transfer the gas extracted
from CAMISEA fields would be profitable, the Law N° 27.133 established a Main Grid
Guarantee mechanism that ensure the transport concessionaire a minimum level of
revenues253, and therefore hedge the potential risk of not having enough natural gas
demand.
The auction process was conducted by the CAMISEA Special Committee and under the
guidelines set by MINEM. The production of the CAMISEA fields were awarded to the
CAMISEA Consortium, operated by Pluspetrol Perú Corporation. Meanwhile, the natural gas
transport and distribution concession was awarded to Transportadora de Gas del Peru S.A.
although the awardee was required to sell the distribution assets. In 2012 the distribution
concession was finally sold to Tractebel, who created Gas Natural de Lima y Callao S.A.
The transport activities were granted under a 33-year concession agreement and in BOOT
(Build, Own, Operate and Transfer). The contract duration can be extended to 60 years. The
entity that granted the concessions was the State, represented by MINEM.
Furthermore, the State subscribed an agreement with the LNG Terminal, controlled by Peru
LNG, to export natural gas.
250 Source: Law N° 26.221, article N° 47

251 Gas fields had already proved reserves and were ready to move on to the production phase.
252According to Ricardo Leyva Flores and Ronald Martínez Correa in the report “Apuntes sobre la regulación
económica del Transporte de Gas Natural por Ductos“, “the consortium Shell/Mobil announce their decision to not
continue developing the project mainly due to the lack of solution proposals of pending issues, added to the non-
existence of an internal gas market that would make the project profitable. Moreover, the consortium alleged that
during the negotiations, many discrepancies regarding natural gas sale prices to generation companies, the
proposal to have a vertically integrated company as well as potential exports to Brazil remained unsolved.
Source: http://revistas.pucp.edu.pe/index.php/derechoadministrativo/article/view/13525
253 At that date there was no internal gas market and no existing consumption.

In recent years, encouraged by the Congress, and pursuing i) to massify the consumption of
natural gas to promote social development and ii) increase the energy security, Peru has
promoted the development of the South Gas Pipeline. This pipeline considered the supply
from CAMISEA fields to the southern Peru. The project’s promotion was accompanied by the
Law N° 29.970, regulatory modification that promotes the development of petrochemical
and capacity generation infrastructure. Following the development of the South Gas
Pipeline, cold reserve power plants were auctioned (see section 4.2.1). The South Gas
Pipeline was awarded to the Consortium Odebrecht-Enagas, but later the auction process
was declared null, after Odebrecht, involved in corruption scandals, failed to reach the
financial closing of the loans required to finance the project 254.
Proinversión will conduct a new auction to award the pipeline. Although the auction’s
schedule has not been published yet, the preliminary auction terms set a 34-year BOOT
concession agreement.
Finally, the Government has shown interest in developing additional natural gas
infrastructure, such as a new pipeline that would connect the CAMISEA fields with the
northern regions of Peru255.
4.3 Diagnosis
Non-effective and uncoordinated planning processes in the different energy segments has
led to a non-optimal development of new infrastructure, affecting the right price formation
in the Peruvian electricity market. The main causes that were identified are described in the
next sections.
4.3.1 Planning processes are conducted by multiple agents
There are multiple agents that intervene, either directly or indirectly in the different planning
processes (in transmission and natural gas) or in initiatives that encourage the development
of new infrastructure (e.g., in generation). These agents could have different goals and
incentives that are not necessarily aligned with goals and incentives from other agents. The
main stakeholders identified are the following:
• Generation segment: Although the generation segment, private investors
independently pursue investments in generation infrastructure, the Government and
other agents have intervened multiple times in the sector’s development through
different types of competitive bidding processes. On the one hand, each distribution
company conducts competitive bidding process to procure the demand of
regulated users under their concessions. These processes have promoted the
development of new generation capacity. On the other hand, the Government,
through public entities such as MINEM, Proinversión or OSINERGMIN, has conducted
several auctions targeting specific technologies (renewable energy sources, hydro
power plants and cold reserve), not complying with the technological neutrality
criterium (given that these auctions are not allowing the participation of any type of
technology) and pursuing different goals (generation resources diversification,
promotion of renewable sources, security of supply).
• Regarding the transmission segment, the planning and development of new
capacity has been mainly led by COES, through the elaboration of transmission plans
that are approved by OSINERGMIN. Nevertheless, multiple agents participate in the
254Source: https://busquedas.elperuano.pe/normaslegales/precisan-fecha-de-terminacion-de-la-concesion-del-
proyecto-resolucion-suprema-n-004-2017-em-1486526-1/
255 Source: https://elcomercio.pe/economia/peru/comienzan-estudio-gasoducto-norte-peru-173976-noticia/

planning process, either by proposing new infrastructure, elaborating Transmission

Investment Plans, or developing through their own initiative, transmission investments.
• Finally, natural gas planning has been led by state entities, through the enactment
of different laws by the Congress, the elaboration of public policies by the
Government, the subscription of exploration and production concession agreements
by Perupetro and the conduction of auctions by Proinversión.
Conducting multiple and parallel planning processes and new capacity development
initiatives not necessarily leads to an optimal expansion of the system and the corresponding
efficient resources allocation. Each of the different players participating in these processes
have different goals and interests that are not necessarily aligned neither they will ensure a
social equilibrium solution (i.e., maximization of the social welfare). For instance,
Proinversión’s goal (conduction auctions to develop new infrastructure) is not necessarily
aligned with MINEM’s objectives (comply with the work plan established by the Government)
nor COES’s goals (comply with its members/SEIN interests).
One example is the framework regarding the decentralized electricity auctions to supply
energy and power to regulated users, conducted by distribution companies. Each
distribution company is responsible for holding its own tender process, and the applicable
laws provide incentives to hold auctions with several years ahead of their energy
requirements256. The rationale behind conducting auctions with anticipation is to promote
the development of new projects. Nevertheless, the longer the anticipation, the higher the
uncertainty regarding future load requirements. Moreover, decentralized auctions have led
distribution companies to over contract their expected energy and power requirements.
Considering that distribution companies passthrough their energy procurement costs to final
users and the power purchasing agreements included take or pay payments, the over
contracting of energy and power have negative effects on regulated users. Furthermore,
under the current scheme, there are no clear incentives for distribution companies, to
promote competitive bidding processes that purse a reduction in average awarded energy
prices.
In addition, the State has led multiple tender processes to encourage the development of
new capacity. As mentioned before, each process has been pursued following different
goals that are not necessarily consistent with the objectives set in the other processes. For
example, cold reserve auctions aim to increase the security of supply and do not target to
economic efficiency metrics (neither environmental nor sustainable metrics). Moreover,
there has not been any apparent coordination in all the different auction processes that
have been conducted. In addition, the assumptions that were considered in these processes
(such as high growth rates in the electricity demand) were not met. All previous reasons have
led to a current oversupply in generation capacity, having negative effects in generation
and end users257 .
Considering the existing generation capacity oversupply, no new Renewable Energy
Sources Auctions have been announced since 2014. Among the possible reasons, the
remuneration scheme considered for RER plants and the current low marginal costs levels
Distribution companies can keep a retail margin for the energy procured in auctions conducted over 3 years
256
ahead of the energy requirement date. The retail margin will depend on the number of years in anticipation the
auction was conducted and will no surpass 3%. (Law N° 28.832, article N° 10).
Part of the energy payments agreed in the contracts subscribed through the competitive auctions are take or
257
pay, and hence are paid by end users, regardless of if the energy is delivered or not. Consequently, the generation
capacity oversupply is not for free, and it is paid by the society.

due to the existing oversupply, would lead to an increase in tariffs paid by end users 258 if RER
auctions are performed.
Furthermore, there is no apparent coordination between the different energy segments. The
development of new natural gas infrastructure does not take fully into account the
development of new generation capacity or either coordinated with the expansion of the
transmission system. For example, one of the goals behind the development of the South
Gas Pipeline was to increase the security of supply in the southern regions of Peru. However,
this goal can also be met by the reinforcement of the transmission system connecting central
Peru with southern Peru. The development and construction of the 500 kV transmission line
Mantaro-Marcona-Socabaya-Montalvo could eventually solve the security issues in the
south of Peru and therefore no new natural gas infrastructure would be needed.
The lack of an effective comprehensive energy sector planning, conducted by one entity,
was previously pointed as the source of multiple problems such as insufficient transmission
expansion, weak coordination of hydropower and natural gas expansion, and weak
coordination with social and environmental objectives259. Currently, the absence of
integrated energy planning has led to overinvestment in some areas and underinvestment
in other areas, and therefore, leading to an inefficient development of the whole energy
sector.
It is important to evaluate the development of a referential coordinated energy planning
process (considering long-term horizons and indicative results), conducted by one entity,
and including the participation of the different stakeholders, that would set the main
guidelines to the different planning processes that are currently conducted in each of the
energy segments. This planning process should jointly consider the expansion of the
transmission, generation (only indicatively), natural gas segments, as well as the construction
of interregional transmission links.
4.3.2 There is no systematic planning process pursuing consistent public policies under a
long-term view
As it was expressed in the last section, there is currently no planning process that follow
consistent goals and criteria under a long-term view. At present time, Peru has not
elaborated a long-term energy plan that allow to show different scenarios for energy
demand and supply forecasts. In this sense, it is important for the electricity sector to include
systematic studies showing which are going to be the energy sources to be used for the
electricity production in the long-term, including renewable energy sources and an
estimation about the role that gas reserves will have on electricity generation.
In addition, there is apparently no coordination between public policies in the energy sector
and countrywide goals (such as greenhouse gases reduction objectives). The World Bank in
a 2012 report, stated that “there is a weak coordination between the country’s energy plans
and its social and environmental objectives. This has become particularly important since,
258Bidder are guaranteed an annual revenue consisting to the plant’s injected energy multiplied by the awarded
monomic price. Revenues come from energy and capacity sales in the short-term market and a complementary
revenue funded by a postage stamp payment paid by end users. Therefore, if marginal costs in the short-term
markets are low, the postage stamp payment paid by end users would tend to increase.
259Source: International experience with private sector participation in power grids: Peru case study, World Bank,
2012.
https://openknowledge.worldbank.org/bitstream/handle/10986/23616/International00ds000Peru0case0study.pdf
?sequence=1&isAllowed=y

in recent years, a set of political conflicts associated with social and environmental issues
have become a serious constraint to the development of transmission projects.260”
Although many initiatives in the generation segment have been implemented, pursuing
Government public policies, they do not follow long-term goals but rather follow policies
encouraged by acting governments. For instance, the last Renewable Energy Sources
auction was held in 2014, even though the RER law states that MINEM would evaluate the
conduction of new auctions every 2 years. Moreover, the last successful auction targeting
new hydro power plants was held in 2011261.
Regarding the transmission segment, the planning process has followed consistent criteria,
and has successfully been conducted in the last 10 years. Although, the planning process’
methodology has been modified, the main structure behind the process has remained fixed
and following the transmission regulatory framework. Transmission plans are very detailed
and technical, and hence they required to be leaded by a technical entity such as COES.
However, the transmission planning process only considers a medium-term horizon (10 years),
and a short-term binding plan (2 years)
Therefore, a long-term strategic energy planning process conducted by a single entity,
could be required. As described in the previous chapter, this strategic planning process
should i) consider a holistic and less detailed approach, ii) consider a long-term horizon (30
years) and iii) should pursue the maximization the net social welfare, considering operation
and investment costs, the reduction in greenhouse gases emissions, justice and equity
metrics, the compliance with local emissions commitments, achieve regional development
and energy independence, among other goals.
4.3.3 Transmission Plan and Transmission Investment Plan should merge into one plan
The Peruvian Government has introduced several modifications to the energy regulatory
framework during the past decades that have impacted on transmission systems by
increasing the participation of private companies. In 2018, seventeen private transmission
companies were part of the SEIN262, while in 2006 were only six private transmission
companies operating in the SEIN263. Even if today the main concessionary companies
involved in transmission are mainly private, public companies are still participating in the
market through transmission facilities owned by distribution companies.
Considering the existing categories for the transmission system (SPT, SST, SGT and SCT), whose
remuneration are regulated by the authority, BOOT contracts or concession contracts, they
all have in common that the received payment recognizes the total amount of investment,
operation, and maintenance costs.
In terms of the transmission planning, the system´s expansion includes projects coming from
one or several agents own initiatives, projects that come from the OSINERGMIN´s
Transmission Investment Plan (PIT) and projects included in COES’s Transmission Plan (PT).
Either way, all the interested parties must comply the requirements set by the authority. For
260Source: International experience with private sector participation in power grids: Peru case study, World Bank,
2012.
https://openknowledge.worldbank.org/bitstream/handle/10986/23616/International00ds000Peru0case0study.pdf
?sequence=1&isAllowed=y
261There was another auction promoting the development of hydro power plants (CH Molloco), but the tender
process did not consider the subscription of a long-term energy contract, and therefore, its characteristics differ
from those analyzed in this report.
262 Source: Statistical Electricity Yearbook 2018 - MINEM
263 Source: Statistical Electricity Yearbook 2005 - MINEM

example, parties willing to execute a project in the SCT must request a certificate of
compliance to COES based on a pre operability study.
Regarding PIT, this is an investment plan that summarizes a group of investment initiatives
approved by OSINERGMIN that have been proposed by transmission agents whose energy
supplies exclusively to the demand. The PIT planning horizon is 10 years, and it is introduced
in the Tolls and Compensation adjustment period (every 4 years).
On the other hand, the PT is the transmission expansion planning that is performed every 2
years by COES and approved by the MINEM considering a 10-years horizon.
DS 018-2016-EM in 2016 introduces the PIT approved by OSINERGMIN (Secondary and
Complementary Transmission Systems) into the PT analysis, aiming to optimize the system
technically and economically.
The Transmission Connection Facilities or “ITC” were incorporated to the PT elaboration
process in 2018 when the RM 051-2018-MEM-DM was enacted. As mentioned before, the
ITCs are facilities that are not part of the PIT and interconnect the existing SEIN´s Demand
Areas. All the demand areas will be gradually incorporated in the future PT updates until
year 2023.
Considering the current laws and regulations in force, it can be seen an effort to integrate
the information included in the different studies involved in the transmission planning
processes. However, PIT and PT are not synchronized in time and this situation could interfere
the integration with the ITCs, it will also difficult or at least delay the connection of future
power plants into SCT or SST.
It seems that it could be possible to integrate all the transmission planning efforts in one single
process to reduce the update cycle of the transmission plan and to increase the optimality
of the results.
4.3.4 Data requirements
Another important point to be considered in the Transmission Plan elaboration process is the
data included for the demand forecasting. This data includes: Vegetative Loads (small loads
if compared to the entire system, but represent an important proportion as a whole), Special
Loads (every existing load relatively larger, such as industrial, mining o metallurgic
companies but grows gradually depending on expansions), Incorporated Loads (from
Isolated Systems incorporated to the SEIN), and Large Projects Loads (new investment
projects including industrial, mining and metallurgic projects, between others, that are
foreseen to be operative within the time horizon of the study).
From the current regulatory framework, it can be concluded that the requested data for the
PT elaboration by COES is compulsory for expansion processes only. In addition, agents can
claim that the provided information is confidential, including technical aspects. The lack of
information to new actors that is not public could be an entrance barrier to the transmission
market. It is necessary to eliminate confidential claims on technical data for planning
purposes, particularly, if a transparent planning process is expected to be carried out.
On the other hand, current fines and sanctions seems to be insufficient (fines for energy
amounts between 100 and 2.000 MWh, fluctuate between US$ 6.600 and US$132.000). This
could be a negative incentive for the involved agents to provide the requested information
even if this a compulsory condition. It is worth to consider either higher fines or simply
excluding from planning and grid connection those projects whose information does not
comply the requirements set by the authority.
Finally, it is important to highlight that the PT is a very sound 10 years horizon technical –
economic analysis process fully oriented to electric transmission planning, where the

generation offer alike the demand are input data, so not subject to optimization. Therefore,
it is not suitable to define an optimal generation expansion plan where different
technologies are considered as alternatives. It is not either the tool to compare gas pipelines
projects with transmission lines projects. For the kind of analysis required to integrate gas and
electricity energy sources other kind of model must be used. As mentioned, a long-term
strategic energy planning process conducted by a single entity, could be used, that would
set the main guidelines and framework to the PT.
4.4 International Revision

4.4.1 Long-term energy plans in Chile
Energy Efficiency
The energy integration plans in Chile have three main strategies: The Long-Term Energy
Planning (PELP), the Transmission Expansion Plan, and the recently approved Energy
Efficiency Law.
In February 2021, the Law N° 21.305 about Energy Efficiency was approved. This law
establishes that the Ministry of Energy, with the collaboration of other concerning zonal
ministries, shall elaborate an Energy Efficiency National Plan (PEE) every five years that can
be updated on a yearly basis.
This new law pursues a rational and efficient use of the energy resources, promoting the
energy management for large consumers such as mining, cement, and pulp and paper
companies, as well as including the real estate and automotive industry, among others.
Large consumers (consuming over 50 Tcal/year) will be classified as “Consumers with Ability
of Energy Management” and will have to develop an annual report of their energy
consumptions and implement their own energy management systems.
New edifications (residential, commercial, among others) shall include an Energy
Qualification to inform its energy consumption levels and efficiency.
In terms of transportation, this law seeks to stablish energy efficiency standards for new
imported vehicles and promote the use of electric cars.
Another important milestone is that green hydrogen is declared as a fuel and the Ministry of
Energy will have the attributes to norm and treat it as an energy source.
This law expects to reduce energy consumption in 7% by year 2035 and, thus, reduce
greenhouse gases emissions.
Greenhouse gases emissions
The main sources generating greenhouse gases emissions in Chile come from the energy
sector, as shown in Figure 4-4:

Figure 4-4 Greenhouse Gases Emissions in Chile

Source: PELP Update Information Report (IAA 2020) - Ministry of Energy
From the 78% of the greenhouse gases emissions coming from the energy sector, a 32%
comes particularly from the electricity sector, followed by the transport sector with a 24%,
industrial sector with a 14% and 7% for edifications. Considering the emissions’ distribution, is
crucial to include mitigation measures in the electricity sector to meet a carbon neutral goal.
Chile aims to be a carbon neutral country before 2050 by applying six key measures:
• Sustainable industry (thermal solar systems, electrification of drive systems (copper,
industrial, commercial, and mining in general), thermal electrification, biogas
generation).
• Green hydrogen (motion use, load transportation)
• Electromobility (public, commercial, and private transportation)
• Sustainable edification (electrical residential, public, and commercial heating
systems, thermal refurbishment in vulnerable homes, energy qualification for existing
homes and solar PV distributed generation).
• Gradual coal power plants shutdown.
• Energy efficiency (2.5% energy management systems, minimum standards for 100 HP
motors).
The actions to be taken for each measure have two main objectives: better energy use
through energy efficiency actions, thermal isolation, and technological adaption; and
energy uses provided by renewable energy sources. As a result, over 80% of such measures
are based on electrification, with a 39% of indirect measures through storage and green
hydrogen.
The coal power plant shutdown process to lower greenhouse gas emissions started in 2019
and it is predicted that around 1,9 GW will be permanently closed by 2024, which represents
nearly 31% of the existing coal power installed capacity. This is one of the main measures to
be taken to reach the carbon neutral goal. This process will require the replacement of such
power plants by renewable energy sources, which at the same time requires a more robust
and modern transmission infrastructure and a more flexible electrical system that guarantees
safe operation conditions.

Figure 4-5 shows the current installed capacity in the National Electrical System (SEN). The
importance of having long term energy planning in the Chilean electricity sector is relevant,
considering that the existing generation mix, currently dominated by thermal and hydro
plants, is shifting to a renewables-based mix. The incorporation of renewable sources requires
significant reinforcements in the transmission system.
Figure 4-5: Existing Installed Capacity

Long-terms energy planning (PELP)

The PELP is a planning process performed by the Ministry of Energy of Chile, which was
established in the General Law of Electrical Services (LGSE, article 83°). The elaboration of
this plan considers different energy expansion scenarios for both energy generation and
consumption, for a time horizon of at least 30 years.
The Long-Term Energy Planning Bylaw was approved through the Decree N° 134, issued in
January 2017, which establishes, between other aspects, that the Ministry of Energy must
execute this process every five years. In addition, the Ministry of Energy can yearly update
the demand forecast, macroeconomics scenarios and other background information
considered in the different scenarios by the current normative. This update is performed
through the Update Information Report (IAA).
The first PELP process for the 2018-2022 period was carried out in 2017, with the participation
of 262 citizens, including natural and legal persons from all over the country. The PELP has
been updated through IAA in two opportunities in years 2019 and 2020 respectively, in whose
are considered the integrated optimization analysis between electrical transmission and
generation, coal power plants shut-down process, investment costs and fuel prices updates,
etc.
Today, the 2023-2027 PELP process is under development, according to the current
normative that established that this process should start at least 24 months before the existing
PELP expires (PELP 2018-2022).
The results shown in the IAA are considered by the National Commission of Energy (CNE) for
the corresponding Transmission Expansion Plan process, accomplishing with the LGSE and
the Transmission Planning Bylaws.

The energy forecasts that arise from the PELP and its updates consider the current energy
contexts and the country’s goals and sectorial commitments. These forecasts mainly allow
to:
• Define and evaluate the country’s goals and commitments, such as renewable
energies adoption, neutral carbon goals, among others.
• Evaluate and analyze the effects of adding new technologies for the sustainable
development of the energy matrix.
• Guide the energy sector and provide signs of territorial localization for the
development of energy projects.
• Guide the annual transmission expansion process and provide records to the CEN for
the elaboration of that proposal.
The planning process must include different energy supply and demand forecast scenarios,
considering the identification of Development Doles 264, distributed generation, international
energy exchanges, environmental policies, and energy efficiency, among others.
Main PELP’s modelling inputs
The LGSE´s article 83° establishes that “The energy Planning process shall include demand
and supply projection scenarios”, in this sense, the PELP 2018-2022 report considers five
different energy scenarios. These scenarios must allow to supply the demand projections in
an efficient manner according to present forecasted trends, in terms of price and costs,
physical energy resource availability, expected use of energy, technological changes
prospective and territorial and environmental constraints.
At the same time, these scenarios consider six main factors with uncertainty which are
relevant for the electricity sector expansion. These factors are:
1. Social willingness for projects: the social willingness is considered as an uncertainty
factor for an electricity generation project execution, particularly for the
development of thermal generation technologies all over the country, and
hydroelectric and wind projects in the south zone of the system.
2. Energy demand: this is a factor that will have a high impact on the development of
the energy sector. The most relevant long-term determining factors are electric
climatization, electromobility, energy efficiency and economic growth.
3. Technological changes in storage batteries: the development and costs for
electricity storage technologies through lithium-ion batteries is other factor
considered as relevant for the energy sector development and it has a great
uncertainty degree.
4. Environmental externalities costs: the external and local environmental externalities.
and its internalized cost that the energy sector will have in the long term is a factor
representing a high degree of uncertainty.
264
According to Article 85 of the LGSE, development poles are “geographically identifiable zones of the country,
located in regions in which the National Electrical System is situated, where power generation resources from
renewable energies are found, whose utilization by means of a single transmission system results of public utility due
to their economic sufficiency to the power supply, complying with environmental legislation and territorial
regulations".

5. Investment costs in renewable technologies: the investment cost that renewable

technologies will have in the future will have a high impact and uncertainty in the
development of the energy sector.
6. Fossil fuels prices: the prices future trajectory of fossil fuels used for electricity
generation is a factor with a high uncertainty.
The group of factors mentioned above give as a result five different scenarios that have the
same probability to occur. This energy scenarios are the following:
Table 4-2: Scenarios analyzed

Source: Long-Term Energy Planning Process 2018 – Ministry of Energy
Factor Scenario A Scenario B Scenario C Scenario D Scenario E
1. Social willingness + Cost and Free + Cost and + Cost + Cost
for projects Coal CCS Coal CCS
(Intensity of coal (High) (Low) (High) (Medium) (Medium)

power plants
shutdown process)
2. Energy Demand Low High Medium Low High

3. Technological High Low Medium Medium High
changes in storage
batteries
4. Environmental Present +High Present Present +High
externalities costs
5. Investment cost Low Low Medium High Low
in renewable
technologies
6. Fossil fuel prices Medium High Low Low High
Each factor is categorized by different impact levels:

Table 4-3: Description of different factors

Source: Long-Term Energy Planning Process 2018 – Ministry of Energy
Factors Levels Description

1. Social willingness Free No extraordinary technology costs related to development opposition.
for projects + Cost Higher investment cost due to development opposition (higher
construction timings), specially for hydro and wind projects in the south
zone.
+ Cost and Same as “+Cost” level but with a higher social opposition to projects
Coal CCS based on coal. Higher investment costs at this level assume the same cost
as a coal power plant using CCS (Carbon Capture and Storage)
technology.
2. Energy demand Low Considers a “referential” economic growth and a high penetration of
energy efficiency measures.
Medium Considers a “referential” economic growth and projected parameters
based on current trends (energy efficiency, electric climatization, etc.)
High Considers an optimistic economic growth, high penetration of light
vehicle and electric buses, and climatization in house with high
electrification levels.
3. Technological Low Large-scale lithium-ion batteries investment costs follow a “high265” path.
changes in storage Medium Large-scale lithium-ion batteries investment costs follow a “referential”
batteries path.
High Large-scale lithium-ion batteries investment costs follow a “low” path.
4. Environmental Present Costs based on current values according to the taxes imposed by the
externalities costs Law N° 20.780 that establishes taxes266 to the emissions coming from fixed
sources.
+High Supposes a higher level than the present values in terms of valorization of
global and local externalities.
5. Investment cost Low Renewable energy generation technologies follow a “Low”267 trend.
in renewable Medium Renewable energy generation technologies follow a “Referential” trend.
technologies High Renewable energy generation technologies follow a “High” trend.
6. Fossil fuels prices Low Fossil fuels prices follow a “Low”268 trend.
Medium Fossil fuels prices follow a “Referential” trend.
High Fossil fuels prices follow a “High” trend.
The PELP´s most recent update study, carried out in 2020 include the following assumptions
and inputs:
• Updated information about the coal power plants shut down plan.
• Three different trends for the energy demand forecast: low, medium, and high (one
includes carbon neutral measures).
“High” and “Low” scenarios come from the forecasted prices by BNEF (Bloomberg New Energy Finance)
265
considering a 14-hours storage system, while the “referential” scenario is a simple average of the two previously
mentioned scenarios.
266 Carbon tax in Chile is 5 USD/tonCO2eq
“High”, “Low” and “Referential” trends are based on information about the Operation and Maintenance Costs
267
and the Non-fuel Variable Costs of the following technologies: solar PV, solar CSP, offshore wind, biomass, biogas,
coal, natural gas combined cycle, natural gas open cycle, diesel, geothermal, hydro run-of-river, batteries, and
hydro pumping.
268Fossil fuels include coal, diesel, fuel oil and LNG. Cost projections are based on prices forecasts coming from
international entities, such as the Energy Information Agency, World Bank, International Monetary Fund, BNEF and
McDaniel & Associates Consultants Ltda.

• Yearly update and forecast for fossil fuels prices.

• Yearly update and forecast for generation investment costs.
• New nodes (from 18 to 24) added to a simplified transmission network model that
represents each region in which the SEN is operating, allowing to develop a joint
optimization model for generation and transmission facilities investments.
• Generation and transmission projects declared under construction.
• Thermal units’ parameters considering technical minimum for coal and gas power
plants.
• Maximum storage capacity.
The energy and electricity demand are forecasted considering three different trends: low,
medium, and high. The low trend considers: a “Reference Scenario 269”, PIB270 with a low
tendency, update of copper production, and a normal distributed generation growth. The
medium trend includes: a “Reference Scenario”, PIB with a medium tendency, update of
copper production, the Electromobility Strategy 271, and a normal distributed generation
growth. Finally, the high trend considers: a “Carbon Neutral Scenario”, PIB with a high
tendency, update of copper production, and an optimistic distributed generation growth.
Main PELP’s modelling outputs
Figure 4-6 shows the forecasted installed capacity in the SEN in the last IAA report, for each
modelled scenario considering a 30-year horizon (2020-2050 period).
Figure 4-6: Results: Installed capacity

Source: PELP Update Information Report (IAA 2020) – Ministry of Energy
On the one hand, the expected installed capacity by 2035 shows a high penetration of solar
and wind sources across all scenarios, and the retirement of an important part of coal-based
power plants. Additionally, some scenarios show that storage capacity additions are
expected. On the other hand, modelling results by 2050, show the entry of concentrated
solar plants as well as further storage capacity additions.
269The “Reference Scenario” is based on known information regarding current policies, strategies, and plans, while
the “Carbon Neutral Scenario” is based on the neutral carbon goal by 2050 that requires more debating and
reflecting to define desired standards. Both are based on the document “Carbon Neutrality in the Energy Sector|
National Energy Consumption Forecast 2020”, developed by the Ministry of Energy in 2019.
https://energia.gob.cl/sites/default/files/pagina-basica/informe_resumen_cn_2019_v07.pdf
270 PIB is the gross domestic product informed by the Ministry of Finance for the 2018-2050 period.
271 https://energia.gob.cl/sites/default/files/estrategia_electromovilidad-8dic-web.pdf

As the electricity sector contributes to an important quantity of greenhouse gasses emissions,

it is foreseen that emissions will tend to decrease between 2020 and 2040, along with
increasing shares of clean energy sources in the generation mix. The different scenarios
consider different trends for the coal-based power plants and demand growth rates.
Figure 4-7: Results: CO2 emissions

Source: PELP Update Information Report (IAA 2020) – Ministry of Energy
Transmission Expansion Plan

The Transmission Expansion Plan is governed by the LGSE, which stablishes that this process
must be performed on a yearly basis by the National Commission of Energy (CNE),
considering at least a 20-year time horizon. It is also established in the LGSE that the National
Electrical Coordinator (CEN) must send a transmission expansion proposal to CNE within the
firsts 15 days of every year.
The Transmission Expansion Plan process leads to international public tender processes
convened by CNE for the construction of new facilities and expansion of existing facilities of
the national and zonal transmission systems.
This Planning must include expansion works needed for existing transmission facilities of the
national system, Development Poles, zonal transmission system and dedicated transmission
lines used by public service´s distribution concessionaries for regulated clients, or that are
necessary to supply such energy.
This process must also include inputs from the long-term energy planning (PELP) developed
by the Ministry of Energy, considering272: (a) minimization of supply risks (such as costs
increase, fossil fuels or energy facilities unavailability, natural disasters, extreme hydrological
conditions); (b) creation of new conditions that promote supply and ease competition in
order to supply the demand at a minimum cost; (c) facilities that are economically efficient
and necessaries to the electrical system development for the different energy scenarios
defined by the Ministry of energy in the PELP; (d) the possibility of modifying the existing
transmission facilities that allow to perform the needed expansions in an efficient way.
272According to Article 87° of LGSE. Source:

https://www.bcn.cl/leychile/navegar?idNorma=258171&idParte=0&idVersion=

Figure 4-8: Entities involved in planning process.

The Planning study performed by CEN considers a 20-year projection for the energy and
power demand using stochastics tools and surveys to large consumers. For the supply
forecast, CEN considers the information derived from the latest PELP, using the most relevant
assumptions for the long-term generation plans works, such as investment costs, energy
generation potentials by zone, and the assumptions for the long-term energy scenarios
formation.
In this sense, the assumptions from the PELP are considered as an input information for the
optimization models. The energy scenarios from the PELP are adjusted by CEN defining its
generation and energy storage expansion capacities, as well as its localization in the
different SEN´s busbars to shape the Generation Scenarios for the Transmission Planning.
The transmission Planning process led by CNE must include several steps, within which are
included analysis of technical feasibility, expansion projects valorization (investment,
operation, and maintenance costs) and economic analysis.
As seen in Figure 4-8, the Annual Transmission Plan developed by CNE, uses as inputs the
following information:
• On the demand side, the scenarios are built considering the PELP scenarios for the
long-term. For the short- and mid-term, CNE uses projects declared under
construction and the latest available demand forecasting developed by CEN, and
own sources.
• On the generation side, the scenarios are built considering the PELP scenarios for the
long-term. For the short- and mid-term, CNE uses projects declared under
construction, those which have environmental and connection permits, and the
power plants awarded with a regulated energy supply contract.
• In the case of transmission, the scenarios consider a detailed representation of the
existing transmission system, the expansion projects under construction, and the
previous approved transmission plan.
• The projects to be evaluated come from CEN´s Transmission Expansion Proposal, and
initiatives proposed by generation, transmission and distribution companies, or large
customers. CNE can add new proposals at this stage.

• Each proposed expansion project is evaluated in its own merit, comparing the net
present value of the system´s operational cost reduction due to the project
construction (B: Benefit) with the project´s net present values of CAPEX and OPEX (C:
Cost). A project is considered economically feasible if B is larger than C in half + 1 of
CNE´s evaluation scenarios.
• If there are more than one economically and technically feasible projects that solve
the same problem, it is chosen the one that has the largest average Benefits in all the
scenarios.
It is worth to mention that the Transmission Expansion Bylaw is currently under public
consultation. In this sense, until now CEN has considered it owns development criteria and
methodologic elements that has been included in previous recommendations.
4.4.2 Integrated energy plans in Colombia
National Energy Plan (PEN)
Within the energy field in Colombia, two main plans can be identified: The National Energy
Plan and the Generation and Transmission Expansion Plan.
The National Energy Plan (PEN) is a long-term plan developed by the Energy-Mining Plan Unit
(UPME), which is part of the Ministry of Energy and Mining.
This document defines the key objectives for the energy sector development based on the
policies ideas proposed in the PEN, as a result of the analysis of the new developments in the
international market, and of the long-term links between the Colombian energy sector and
its economy, emphasizing the hydrocarbon sector in case of petroleum prices impact. It
considers the international compromises such as the ODS (Sustainable Development
Objectives), COP21, and COP25.
The most recent plan is the PEN 2020-2050 that was published in 2019 and considers all the
consuming energy sectors such as transportation, industrial, commercial, residential, among
others. The main energy consumers in year 2018 are shown in Figure 4-9:

Figure 4-9: Energy consumption by sector

Source: National Energy Plan 2020-2050 (Consultation document) – UPME
On the other hand, in terms of energy supply, in 2018 the main sources participating on the
energy market were the following:
Figure 4-10: Participation of energy sources on supply structure

Source: National Energy Plan 2020-2050 (Consultation document) – UPME
From the graph above, the main energy sources in terms of energy supply are Diesel mix
(21%), gasoline mix (18%), electricity (17%) and Natural gas (16%).

In terms of electricity, the National Interconnected System (SIN) has an installed capacity of
17.72 GW. The main energy sources in terms of installed capacity in 2018 are shown in Figure
4-11.
Figure 4-11: Installed capacity in the SIN

Source: Statistical Bulletin of Mining and Energy 2018 – UPME
The electricity is mainly supplied by hydroelectric sources, the majority coming from dams
and secondly from run-of-river power plants. Coal and gas represent an important part of
the electricity sources.
In terms of energy forecasts, the PEN proposes different hypothesis about the energy supply
and demand evolution, using joint simulations of different scenarios. For such purposes, there
are four key action areas that could determine the possible patterns of the energy supply
and demand:
• Opportunities on the energy sector (energy efficiency and non-conventional
renewable energy sources or FNCER)
• Transformation on mobility
• Environmental and climatic policies
• Demographic trends, economic growth, and price dynamics of the energy sources.
There are two scenarios that were considered for energy sector forecasts: the 266 Scenario
and the New Bets Scenarios.
The 266 Scenario273 is related to a compromise to reduce the greenhouse gasses emissions,
with a goal of a 20% reduction by 2030. Therefore, this scenario seeks to promote the use of
non-conventional energy sources both to electricity generation and consumer sectors. The
price policy would suffer a structural change and its design would aim to fix efficient prices
for end consumers.
266 Scenario represents the commitment established in COP21 to reach a maximum of 266 million tons of CO 2
273
emissions by year 2030.

On the other hand, the New Bets scenario has the same approach as the 266 Scenario but
considering a greater ambition and commitment from the government in environmental
issues, which translates into goals requiring greater efforts and large investments. In this case,
the goal would be to reduce greenhouse gasses emissions in a 30% by 2030 and would
establish new air quality standards by 2050. It would seek a high penetration of renewable
energy and electricity on fields such as transportation.
To accomplish international and local GHG emissions reduction commitments it is expected
a deep transformation on the energy matrix that will allow electricity and natural gas to
increase their share in the energy supply. These energy sources will replace the current
dominant sources such as mixed diesel and gasoline. Thus, electricity and in consequence,
renewable energy sources, could be the energy source with the higher growth in the next
30 years. All these requirements are included in the PEN planning process,
Transmission and Generation Expansion Planning274
Regarding the expansion planning of the transmission system, UPME is the entity in charge of
the Transmission and Generation Expansion Plan, updated on a yearly basis.
This plan aims to properly supply the electrical energy demand, by performing a long-term
analysis based on information about current electrical infrastructure, projects under
construction and energy demand forecasts. This process is developed every 3 to 5 years and
reviewed on a yearly basis.
The process involves two planning processes, the generation expansion plan, and the
transmission expansion plan, both developed at the same time:
1. Generation expansion plan: On the generation expansion plan side, UPME identifies
the required projects to supply the forecasted energy demand. At the beginning of
this process a dispatch model is prepared to feed the transmission planning process.
Once the generation expansion needed to supply the forecasted demand is
identified, the expansion of existing generation assets is analyzed through the
Reliability Charge275 scheme. Then, other expansion requirements are identified in
addition to those under the scheme previously mentioned.
2. Transmission expansion plan: Based on the dispatch model, an expansion plan for
the National Transmission System (STN) is developed to identify the necessary
requirements of the network in the long-term. Such requirements are considered to
estimate the expansion of the Regional Transmission Systems (STRs). Then, an
evaluation of the requirements for the medium- and short-term is performed. For all
time horizons, a set of requirements is established, and for each of them, several
alternatives are evaluated through technical and economic analyses. Each analysis
includes a cost-benefit evaluation that provides a recommendation for every
identified requirement.
274According to the “Energy Planification Methodologies in the Peruvian State -Second Report: Institutional Design
Proposal” 2015 Report. Source: https://www.minem.gob.pe/minem/archivos/3%20Anexo%20-
%20INFORME%202%20-%20PROCESO%20DE%20PLANIFICACION%20PROPUESTO.pdf
275The Reliability Charge Mechanism consists in auctions of Firm Energy Obligations which commit generating
companies to supply energy to the market at a fixed price during periods of scarcity, in exchange of a known and
stable remuneration during a certain period. Existing generators can bid energy for annual contracts while new
projects can bid energy for up to a 20-year period. The energy volumes that generator can bid for each power
plant cannot surpass a certain quantity, named Firm Energy, and consist in the generation of these power plants in
a dry year. This mechanism pursues to guarantee adequacy in energy system.

The main results of the Generation and Transmission Expansion process are an indicative
Generation Expansion Plan and a compulsory Transmission Expansion Plan. Then, UPME
prepares a preliminary integrated document including both plans. This integrated plan is
given to the CAPT276 and to market agents for consultation. After having formal feedback,
UPME develops a final reviewed version that is presented to the Ministry of Energy and Mines
for its approval. Finally, the plan is adopted by the Ministry of Mines and Energy, and the
entire planification process provides two detailed plans as an output:
• An indicative Generation Expansion Plan that includes the necessary investments to
be developed in the long-term and the marginal costs related to these investments.
• A Compulsory Transmission Expansion Plan that is used as a market signal for the STRs.
Once the transmission plan is approved, UPME initiatives a tender process for every identified
expansion investment. The auctions of the expansion infrastructure are conducted by UPME.
The latest available plan that includes the 2019-2033 period, considered the demand
forecast report277 that is performed every 4 months by UPME, an analysis of the STN in terms
of the connection of the latest Reliability Charge´s awarded power plants, and an analysis
of the STRs according to the Resolution CREG 024 of 2013 278.
4.4.3 Other indicative and regional plans
Other plans performed in Colombia include: The Indicative Electrical Energy Coverage
Expansion Plan (PIEC), the Sustainable Rural Energization Plans (PERS), and the Indicative
Natural Gas Supply Plan:
• The PIEC is a plan to evaluate the required investments to reach universal access in
electricity coverage. The sets objectives to increase the electricity service coverage
in the short-term (next 5 years) and it is updated every 4 years. It identifies every
necessary project to be performed in the national or regional transmission system and
estimates the impacts of such expansions in tariffs. This plan aims to guide authorities
and market agents.
• The PERS are regional plans developed based on the PIEC. Every PERS is focused on
the energization needs of a certain region or community.
• The PIAGN is a referential plan performed by UPME for the development of the gas
sector, seeking to guide investors and policies makers. It is focused on the expansion
of the gas market but also in the interaction with other national energy markets. It
defines the strategy for the next 10 years for the gas supply including its costs,
capacity, and reliability. It must consider the efficient use of energy sources and
propose alternatives that allow to minimize investment and supply costs.
276CAPT, integrated by agents representing generation, distribution and transmission companies, large consumers,
and energy traders, supervises that all the applied criteria, methodologies, strategies, and information provided by
the UPME are compatible. These recommendations can be rejected by the UPME and in this case, must publish
their arguments through an official document.
277Refers to the “Energy and Maximum Capacity Demand Forecast in Colombia” report that is performed by the
UPME, that includes a macroeconomic and sectorial analysis, and energetic analysis. Source:
http://www.siel.gov.co/siel/documentos/documentacion/Demanda/Proyeccion_Demanda_Energia_Jul_2019.pd
f
278This Resolution stablishes that the Network Operator is responsible of the elaboration of an expansion plan of the
system under its operation, investments, operation, and maintenance of its Regional Transmission Systems (STRs) or
Local Distribution Systems (SDLs). This Network Operator must provide information to be added to the annual UPME´s
SIN´s Transmission Plan.

4.5 Comprehensive Planning Proposal for Peru

In terms of environmental concerns, Perú has demonstrated a high interest on reducing its
GHG emissions. In this sense, today it can be seen a general guideline about how to
implement mitigation measures, but there is a lack of more specific measures and detailed
action plans about how to reach the 20% GHG emissions reduction goal by 2030.
In this sense, Chile and Colombia has performed long-term energy plans through the PELP
and PEN, respectively. These plans provide a long-term view regarding the energy demand
and supply by modelling different scenarios that can provide clearer view about the energy
future. Even if these plans are not mandatory as input information for electricity generation
and transmission expansion plans, they allow to provide a medium- and long-term view
about the role of the different energy sources on the energy field and more specifically, in
the electricity market.
Peru at present does not have an integrated planning process for the use of energy sources
for the medium- and long-term. Facing a modern and efficient economy, it is necessary to
address the global warming concerns into energy efficiency efforts and a shift from energy
sources based on fossil fuels to more sustainable ones.
On the other hand, Perú is a rich country in terms of renewable energy (especially in hydro,
wind, and solar sources), and natural gas. In this sense, it is important to solve the dilemma
about which will be the role of natural gas on the electricity market and how it will be aligned
with the renewable sources penetration to reach sustainable goals.
It is unavoidable that the country will seek to make a transformation from fossil fuels to
renewable energy sources, either for electricity generation and to reach a higher electricity
penetration on fields in which higher GHG emissions are released, such as transportation,
industry, mining fields and even for residential, commercial, and public use.
It is important for Perú to elaborate an energy plan which allow to set medium- and long-
term goals (such as renewable energy targets and GHG emissions reductions) that could
show how to allocate the different energy sources to supply the energy demand in a safe,
economic, and sustainable way. This plan must include different realistic scenarios and
goals.
A comprehensive energy planning includes a long-term plan, and at the same time, this
plan needs to be aligned with generation and transmission expansion plans, as strategic
energy plans can provide indicative guidance regarding how the generation segment is
going to be developed under different assumptions in the long-term that could impact on
the future, such as load growth, social willingness for projects, technological costs, fuel prices,
externalities costs, micro and macroeconomic factors, among others.
Summarizing, a comprehensive energy planification should include at least the following:
• The elaboration of a long-term energy plan, following the Chilean PELP. In Peru, this
report would be released every 6 years and updated every 2 years, considering a
30-year time horizon. This process should be conducted by the MINEM, assigning this
task to MINEM’s General Energy Efficiency Directorate (DGEE). DGEE is the existing
governmental entity responsible in conducting energy planning. However, a new
unit, defined by MINEM could also be created. The unit responsible in conducting the
planning process must have enough technical independence from MINEM’s
governance to comply with its functions. Moreover, the unit’s budget should be
defined independently of MINEM’s budget. However, MINEM would have control
over the unit’s corporate governance, as it would be MINEM the responsible entity in
appoint the unit’s professionals.

• Integrated planning processes although would be conducted by a specialized

government entity, would include the participation of multiple stakeholders that
would propose inputs to the process, such as OSINERGMIN, generation companies,
transmission companies, distribution companies, large end users such as mining
companies, association of small consumers, academia, local communities, project
developers, among others. MINEM’s specialized unit would be responsible in
moderating the stakeholder process, by providing several instances for all
participants to provide their views and opinions regarding the future scenarios and
development paths of the electricity and gas sectors.
• The final scenarios to be chosen in the planning process, although will consider the
opinions of all stakeholders, would be based on objective and coherent factors and
metrics. The set of factors and metrics should be defined by law (i.e., clearly
established in a Bylaw) and should lead to the definition of multiple scenarios
(between 3 and 5) to be used in the planning process. The set of scenarios should be
defined considering at least the following metrics:
o Load growth, taking into consideration of growth in load per capita, the
development of new mining projects and new big loads (such as data
centers and desalinization plants), and the effects of energy efficiency
initiatives.
o Fuel prices.
o The inclusion of new technologies such as batteries and distributed energy
resources and the adoption of new loads such as electric vehicles and
electric heat pumps.
o Cost trends for conventional and new technologies.
o Metrics that reflect the social willingness for projects
o Environmental externalities.
• This plan must solve, among other, the issue about what the role of gas will be in the
energy and electricity market. The use of a co-optimization model of the electricity
and gas markets would be required. Following the Chilean experience, the model
should only consider a simplified transmission network (15-30 nodes) and a simplified
gas network, allowing to develop a joint optimization model for generation,
transmission, and gas facilities investments.
• The output information arising from this plan, would be used as an input to the existing
Transmission Plan (PT).
• In terms of transmission planning, it should exist a single process that integrates the
existing plans (PT and PIT), developed by COES, and approved by OSINERGMIN. In
the integrated transmission plan, each proposed expansion project is evaluated in
its own merit, comparing the net present value of the system´s operational cost
reduction due to the project construction.
• New facilities and reinforcements on the SGT should be auctioned in the same way
as the current auction process for the SGT (30-year concessions), including
transmission systems of public companies.

• In the case of reinforcements carried out by transmission system´s owners, the

investment value should be cleared by the auction process while the annuity of the
annual investment value should be defined according to the tariff study in force,
while the operation and management costs should be re-calculated by
OSINERGMIN every four years together with the tariffs studies.
4.6 Additional proposals

Additional changes to the existing regulatory framework, involving a coordinate planning in
the energy sector, are the following:
• As mentioned, the conduction of uncoordinated technology-focus auctions has led
to oversupply in the electricity sector. Therefore, any future auction targeting the
specific development of a technology should take into account the main results of
long-term energy plans, that should provide evidence that the future auction is
required. In addition, the planification of new targeted technology auctions should
consider the participation of all relevant stakeholders.
• Auctions that are currently conducted by each of the distribution companies to
supply electricity to regulated users should be merged into a single process involving
all distribution companies. This process should be led by a single entity (e.g.,
Proinversion) and should consider inputs provided by distribution companies, such as
forecasted load, monthly, hourly load profiles, and locational distribution. By having
one process, distribution companies could transfer the excess contracted capacity
to distribution companies with contract requirements, and thus, reducing the
currently over contracting levels. The single tender process should auction contracts
with different durations, to provide distribution companies with a portfolio of
contracts with different terms. Finally, incentives to conduct auctions with several
years ahead should be reduced, reducing the chances of over estimating energy
requirements. Reducing the contract duration should also be evaluated.

5 Dynamization of the Natural Gas Market

5.1 Natural Gas Prices
The general regulatory framework ruling over the natural gas sector is described in 4.1.3. This
section includes additional regulatory analysis, to understand how prices are formed and to
identify the main causes behind the non-existence of a secondary gas market today.
The analysis is focused on the prices of the gas produced and transported from the CAMISEA
Fields (specifically Lot 88), considering that this gas supplies most of the internal demand.
The regulation governing the CAMISEA project is different from the norms set to rule natural
gas activities in other fields. On the one hand, Law N° 26.221279 establishes that exploration
and production of natural gas are non-regulated activities and therefore, natural gas prices
are set freely. However, the existing regulatory framework ruling the CAMISEA project, sets
price caps for license agreements between Perupetro and concessionaires that extract gas
from proved reserves (such as the Lot N° 88). Moreover, the regulatory framework ruling the
CAMISEA transport system established a revenue mechanism to guarantee the pipeline’s
viability and financial sustainability through guaranteed revenues 280. The latter mechanism is
not included in the Hydrocarbons Transport Bylaws, the main set of rules governing natural
gas transport systems.
The natural gas price from CAMISEA is determined based on three components:
1. The price at the wellhead, which maximum caps has been defined in the exploitation
license contract for lot 88, but in the rest of the fields the prices are fixed according
to the international market prices. The maximum base price was set in US$ 1.0/MM
BTu for electricity generators and US$ 1.8/MM BTu for the rest of clients. Updated to
2020 the prices are US$ 1.6993/MM BTu and US$ 3.0587/MM BTu to electricity
generators and other clients, respectively.
2. The price or tariff for the transportation service from CAMISEA to City Gate (main
pipeline)
3. The Single Distribution Rate (known as “TUD”). The TUD includes the efficient costs of
the company in the operation and distribution maintenance and commercialization
related to i) maintenance, ii) design of the typical internal facilities, (iii) inspection,
supervision, and enabling of the internal network, (iv) five-year review of the internal
facility, and (v) promotion for the connection of residential consumers.
From these three prices, both transportation rate and the TUD are established by
OSINERGMIN through their respective tariff setting procedures. The regulatory period is every
two years for the transportation activity, and every four years for the distribution activity.
Together with the latter, the company's five-year investment plan and the promotion plan
are also approved, which includes the clients who are beneficiaries of the promotion
expenses. Each component of the final price of CAMISEA gas is detailed below, considering
its rate structure mechanism and evolution, as well as its regulatory framework in the case of
transportation rates and the TUD.
279 Source: Law N° 26.221, article N° 77.

The mechanism, named Main Grid Guarantee (or GRP), aimed to cover with additional payments the differences
280
between originated between i) the revenues that should have been perceived considering the guaranteed
capacity, and ii) the actual revenues considering actual gas consumption. The GRP mechanism was designed
because no significant gas consumption was initially expected. However, the significant development of gas-based
power plants increases the actual gas consumption and contribute to the end of this mechanism.

5.2 Price determination in CAMISEA’s transport and distribution networks

5.2.1 Transport tariffs
CAMISEA´s transportation system tariffs are determined according to the long-term average
cost concept, which is obtained as the quotient of the concession bidding process service
cost and the total demand of the evaluation period. For this purpose, it is considered the
updated values criteria at a 12% discount rate per year. The determination of the tariff is
based on keeping the economical-financial balance of the concessionary company, so is
sought that the estimated incomes are equal to the company costs throughout the life of
the project, being this an approximation to the average long-term cost. All this with the
purpose to avoid high costs during the first years of service.
The Natural Gas transportation tariffs through the pipeline network are fixed by OSINERGMIN
every two years, coming into effect in May of each year. Prices were initially set under 0.8
US$/MM Btu and are currently near 1 US$/MM Btu.
5.2.2 Distribution tariffs
The regulation scheme for the natural distribution through pipeline networks tries to adjust
the tariff incomes to the regulated costs of the concession company and, with this, it seeks
to guarantee the economic-financial balance of the company. The process of rates fixing
in natural gas distribution involves two stages: in the first, the level that guarantees the
economic-financial balance of the regulated company is determined, while in the second,
the allocation of the level of rates to each defined tariff category.
The level of tariffs is determined through the establishment of an efficient model company
or a referential company, that allows the distribution tariffs remunerate the efficient costs of
the company, and thus, accomplish with the requirements and parameters established by
the GN Distribution Regulation through pipeline networks.
The tariff processes start with the presentation of the tariff proposal by the concessionaire, in
this case of Calidda (for Lima and Callao) and Contugas (for Ica), tariffs are determined for
several categories that depend on the user's consumption level.
Fixed Costs are the result of a combination of the audited costs and the market efficient
costs, while the operation and maintenance costs result from the modelling of an efficient
company that serves the market of the concessionary company.
5.3 Natural gas market and current context

The analysis of the gas market is focused on lot 88, the main supplier of gas to the internal
market, and the one that has been causing inflexibilities in the wholesale generation market.
The current natural gas supply and transportation contracts scheme signed either by
producers and/or transporters and free users and distributors contain guarantee
mechanisms (take or pay or take or ship clauses) which provide them certainty in their future
revenues. The take or pay or take or ship clauses consider billing gas volumes that do not
necessarily coincide with the actual volume consumed. Hence, consumers, mainly
generation companies, have available surplus281 when not consuming all the contracted
volumes.
As previously mentioned, well head prices are limited to price caps. To make the production
of lot 88 viable, price caps were set to encourage the development of an internal market.
The dispatch of power plants is decided by COES and not by generation companies. Therefore, even if
281
generation companies would like to consume all the contracted natural gas, it does not depend on them.

The price caps encourage the development of new thermal plants, also bolster by high
growth rates expectations in electricity demand. However, the demand did not grow as
expected, and added to the conduction of auctions targeting hydro power plants and
renewable energy sources, as described in Chapter 4, led to an oversupply of generation
capacity.
On the other hand, the rules set by DS N° 016-2000-EM, allows gas-based plants to not fully
declare their total natural gas costs282. The oversupply of generation and the take or pay
contracts of the generators with Transportadora de Gas Peru, have prompted the
generators to not include all their fuel costs in their declared natural gas prices, by only
declaring the variable component. Although the declaration of only a percentage of total
gas costs has led to lower energy prices for consumers (mostly from the free market), it also
has caused burdens on generators. The presence of several gas plants declaring low or even
0 US$/MWh variable costs has distorted the price formation in the energy market and added
to the existing capacity oversupply, has led to a steep reduction in marginal costs, almost
close to 0 US$/MWh in rainy seasons. This situation led to the presentation of claims by a
group of generators that ended in a Supreme Court judgment in September 2020 on behalf
of Luz del Sur (one of the affected companies). The Supreme Court judgement declared the
existing price declaration scheme as unconstitutional. Following the Supreme Court’s
judgement, MINEM published DS Nº 031-2020-EM entrusting the development of the new gas
variable costs declaration methodology to COES, subject to the approval by OSINERGMIN.
On March 22nd, OSINERGMIN published a preliminary version of the new cost methodology,
that obliges gas-based generators to declare as variable costs, their total natural gas costs,
regardless, if the costs are fixed (take or pay) or variable.
To try to solve the existing issues, a Secondary Natural Gas Market was planned to be
implemented. In 2010, DS N° 046-2010-EM was approved, setting the main rules regarding
the Secondary Natural Gas Market. According to DS N° 046-2010-EM was approved, a
Secondary Natural Gas Market is defined as and exchange platform where natural gas can
be traded among consumers: selling consumers can trade production and/or transport
capacity to buying consumers283. In this norm, rules are established where Bidding
Consumers can transfer their surpluses through a centralized mechanism of electronic
auctions to demanding consumers. However, the secondary market was never
implemented. Along the way, several decrees have been issued, extending, or suspending
its application. Recently, in December 2020, through the Ministerial Resolution N° 360-2020-
MINEM/DM, the Bylaws that pursue the “Optimization of Natural Gas Use and Create the
Natural Gas Manager, were approved. These Bylaws established modifications to the
regulation of the Natural Gas Secondary Market set by the DS N° 046-2010-EM and specify
its prompt application, by setting a 45-day deadline to OSINERGMIN to elaborate the
procedures ruling over the Secondary market, and a 2-year deadline to MINEM to determine
the Secondary Market manager. Meanwhile, no market manager is defined, the MINEM ‘s
Hydrocarbons General Direction would act as the temporary Market Manager.
In conclusion the natural gas market currently operates under the following conditions:
• Currently there is no secondary market operating through electronic auctions. Only
few bilateral agreements between consumers are signed. However, the existing
contracting scheme that not fully allows the subscription of a larger number of
bilateral agreements.
DS N° 016-2000-EM, article N° 5. The rules set by this norm were modified by DS N° 019-2017-EM, although gas-
282
based plants continue to only declare the variable component of their gas costs.
283 DS N° 046-2010-EM, article N° 2.

• Contracted gas volumes were subscribed under the modality of firm volume or
interruptible (non-firm). However, the current consumption of generation companies
is lower than the volumes agreed in the contracts. Therefore, there is lot of unused
gas volumes in the market.
• Finally, the COVID pandemic has reduced the natural gas consumption even more,
driven by a reduction in natural gas consumption by power plants and the industrial
sector. The COVID pandemic has also reduced the Daily Reserved Capacity284 used
among the contracting companies. Figure 5-1 and Figure 5-2 show natural gas sales
and Daily Reserved Capacity, respectively, between September 2019 and
September 2020.
Figure 5-1: Natural gas firm sales and actual consumption– Internal market
Source: OSINERGMIN
Figure 5-2: Daily Reserved Capacity in contracting companies

Source: OSINERGMIN
284The Daily Reserved Capacity is the maximum volume of natural gas that the Concessionaire is forced to transport
to the Electric Generator in an Operating Day, as agreed in the Transport Contract with Firm Service subscribed.
Source: Definition 2.1, OSINERGMIN Resolution N° 108-2009-OS-CD.

5.4 Diagnosis
This section includes the most relevant aspects that would facilitate more dynamism in the
natural gas sector.
5.4.1 An increase in the consumption of natural gas by power generators
Figure 5-3 shows the natural gas distribution among the different agents. The largest natural
gas consumer is the power sector. The reduction of natural gas consumption in
thermoelectric generation is due to the existing oversupply in generation capacity.
Therefore, to increase the consumption of natural gas by generators, load growth should be
encouraged, through the promotion of new mining projects and/or the electrification of
other energy vectors such as transport and heating (cooling).
Figure 5-3: Natural Gas Distribution through pipeline networks

Sources: GFGN-OSINERGMIN, MINEM
5.4.2 Massifying natural gas consumption that would raise interest in bilateral agreements
There are two types of natural gas mass consumption initiatives: Lima and Callao and the
massification initiatives in the center regions of Peru.
Regarding Lima and Callao, Calidda has been increasing the number of consumers served.
As shown in Figure 5-4, by September 2020, Calidda had already more than 1.000.000
customers, in comparison to the last tariff regulation, over the company’s forecasts in their
current 5-year plan.

Figure 5-4: Clients served by Calidda.

Source: Own elaboration based on Calidda quarterly reports
Regarding the interior regions of Peru, the massification of gas consumption began to take
place by the end of the year 2017. The current problems encountered are that prices paid
by end users in these regions are higher than those paid by Lima and Callao users. The higher
prices are due to transportation costs, considering that natural gas is liquefied and
transported by tankers to these regions. Therefore, natural gas is not attractive to end users
in comparison to other delivered fuels (such as Liquified Petroleum Gas).
Raising consumption in these regions would increase interest in signing bilateral agreements
with generation companies. Thus, if Integrated Energy Plans would lead to increasing gas
consumption as a desired outcome, then it would be necessary to develop a scheme that
encourages natural gas consumption use in these regions.
5.4.3 Natural gas declaration, and firm capacity requirements
The new price declaration procedure would impact the price of short-term energy
(upwards), while the consumption of natural gas between generators would probably
remain the same. However, the merit order among generation plants in the generation
dispatch would change. Heat rates from gas-based plants are currently irrelevant in the
merit order due to the high percentage of fixed costs (due to take or pay levels) that are not
included in the declared variable costs. With the implementation, of the new price
declaration procedure, heat rates would be relevant and therefore the most efficient gas-
based plants will be first in the merit order dispatch. However, the most inefficient plants
would still have to pay their take or pay contracts, even though they would probably reduce
their generation output. In this scenario, the plants are going to require a greater dynamism
to be able to resell their transport capacity cost, thus a proper secondary market is needed
because of up to date only bilateral agreements are carried on (i.e., lack of market liquidity).
Another aspect that has been reviewed are the restrictions imposed for generators to
receive capacity payments. The subscription of firm transport capacity agreements was a
requirement to back up their firm power that was subject to capacity revenues. This led
generation companies to sign firm transport agreements (and hence take or pay contracts)
with natural gas transport companies. Thus, generators were incentivized to contract high
levels of firm transport capacity to ensure they receive higher capacity payments, regardless
of if they consume natural gas or not, and thus, leading to inefficient levels in contracted
capacity. To reduce the incentives among generators to have higher levels of firm transport
capacity, on January 29 of 2021, MINEM published DS N° 003-2021-EM that reduces the
transportation contracting capacity (Daily Reserved Capacity) required to back up firm

power, by a Contracting Reference Factor (FRC). The FRC is the value that represents the
minimum percentage in natural gas transport contracting capacity and is calculated an
expected operating scenario for the generation of gas-based power. Reducing the Daily
Reserved Capacity required to receive capacity payments, will foster generators to sell their
excess contracted capacity to other consumers. The publication of the DS N° 003-2021-EM
does not modify the agreements signed between generators and natural gas transport
providers. The goal behind the MINEM’s publication is to give greater flexibility to gas-based
power plants and at the same time, ensure transportation availability for the set of
thermoelectric generators, by simplifying the transfer of capacity between generation units
or other consumers through the auction mechanism that will be provided in the Secondary
Natural Gas Market.
5.4.4 The Secondary Market of the Natural Gas
As mentioned, DS N° 046-2010-EM was enacted in 2010, approving the Regulation of the
Secondary Natural Gas Market. DS N° 046-2010-EM sets the main rules over transactions
incurred in the Secondary Market, regarding natural gas capacity or firm transport capacity.
However, to date it has not been implemented.
The need for a secondary market is caused by the generation sector that currently has
contracted a supply capacity of 561 million cubic feet per day that is currently not entirely
used. Over 262 million cubic feet per day in contracted volumes are not used in rainy seasons
while 140 million cubic feet per day are not used in dry seasons. Additionally, natural gas
reinjections have been increasing in last years. During 2019 natural gas production reached
1,299.27 million cubic feet per day, while the gas production in lot 88 reached 682.53 million
cubic feet per day, although 248.94 million cubic feet per day 285 were reinjected into the
gas fields because they could not be consumed.
Although, as previously described, there is an existing secondary market currently under
operation, it mainly works through bilateral agreements with the following characteristics:
• Sellers transfer the available capacity to buyer: In this type of agreements, there is a
commitment between the seller and the buyer to transfer a total capacity amount
in a certain time period. The agreement only considers the total amount in the whole
horizon; no transfers per day are previously agreed and they are defined afterwards.
If the seller does not comply with the committed capacity after the contract period
ends, it will incur in liability payments or penalties. On the other hand, the buyer will
be committed to take or pay, regardless of the consumption of the contracted
capacity.
• Sellers must offer capacity and buyer must accept it: In this type of agreements, there
is a prearranged commitment in which the seller will be committed to offer their
available capacity and the buyer will be able to decide whether to accept it or not.
• Both parts can be either sellers or buyers: Agreements where each part is able to
either offer available capacity or show interest in buying available capacity. In these
agreements each of the parts can be either a buyer or a seller.
• The terms of the agreements are generally for the same period as the subscribed
transport service contracts since the latter contracts are the basis to make available
the excess capacity.
285 Source: NG balance, November 2019. PERUPETRO.

• Although in these types of agreements both buyers and sellers will have benefits,
since the former is procuring capacity to consume gas and the seller in selling
capacity that will not be used but paid; it is common that the seller requests a
guarantee, such as a letter bond, to ensure payments by the buyer.
• The price is free, any price can be agreed even if it is higher than the tariff charged
by the carrier to the offering consumer. Likewise, discounts can be made so that the
buyers have the incentives to take the available capacity.
• Considering there are no general rules that govern these types of agreements, most
of the rules regarding the transaction are defined in the agreement (i.e., over the
counter agreements).
As much as consumers have tried to dynamize the commercialization of the contracted

capacities, the secondary market continues to have important deficiencies:
• Consumers are not allowed to trade their committed capacity with producers.
Bilateral sales currently only consider the transfer of transportation capacity.
• Additionally, the negotiation of distribution capacity is not allowed in the secondary
market. End users with contracted distribution capacity tend to have withdrawal
nodes that are unique to them, hindering the possibility to trade the capacity with
other users.
5.5 Revision of recent proposals

The diagnosis presented in the previous sections has raised multiple issues that are required
to be dealt with to promote an efficient use of natural gas.
Recent studies have evaluated different regulatory modifications to adopt in the natural gas
market and the wholesale electricity sector. In 2020, a report elaborated by Carlos Batlle,
Pablo Rodilla, Paolo Mastropietro y Manuel Uribe, named “Políticas para Fomentar la
Competencia en el Mercado Mayorista de Electricidad en el Perú” proposes regulatory
modifications pursuing an efficient use of natural gas in the wholesale electricity market. The
report focuses in two proposals: i) increase the periodicity in the natural gas price
declarations presented by gas-based power plants to determine their variable cost for
dispatch purposes286 and ii) modify existing gas supply contract’s clauses, in particular
regarding the clauses that define the destination node. The recommendations are
accompanied by the proposal of implementation of a liquid secondary natural gas market
where generators can effectively trade their excess contracted supply.
5.6 Proposals
The following sections will include the proposals to dynamize the natural gas market. The
recommendations will be mainly short- and medium-term proposals in dynamizing the
market. The proposals will not intend to address the multiple issues in the existing regulatory
framework, described in previous sections. Some of these issues are currently under
evaluation or discussion by regulators such as the declaration of variable costs by gas-based
plants. Other issues were not considered under the scope of the Consultants such as
proposals to modify the gas distribution tariffs of generators and other users. Nevertheless,
286 Currently gas-based power plants submit their natural gas price declarations once a year.

we do acknowledge that additional changes must be implemented in the natural gas

market, but they should be addressed in future studies.
The proposal presented in this Chapter is focused in implementing an electronic natural gas
secondary market, and the creation of a Market Manager, based on the regulatory
framework already developed, existing since 2010, and recently revised by the regulatory
authorities. The Market Manager, as it will be described, will have to coordinate with COES
and will be overseen by OSINERGMIN and MINEM:
In particular, the recommendations will be based in the following aspects:
• Bolster an increase in natural gas consumption (based on the results of the Integrated
Energy Plans).
• Standardize gas supply and transport agreements.
• Implement the secondary natural gas market.
5.6.1 Bolster an increase in natural gas consumption.
According to the 2018 annual report on hydrocarbon resources, prepared by MINEM’s
Hydrocarbon General Directorate287, by 2018, the proved reserves were over 10 trillion cubic
feet, allowing a consumption of over 16 years288.
As described, natural gas consumption is driven by i) a growth in electricity demand and ii)
a rise in consumption in natural gas by the industrial and residential sectors. The former driver
is due to the existing generation mix, where over 35%289 of the energy generated comes from
gas-based plants, and therefore, a growth in electricity load, encouraged for instance by
new mining projects, would require additional electricity generation, that could eventually
be supplied from higher gas-based generation. The latter driver would depend directly on
the demand growth of the industrial and residential sectors and is closely related to the gas
massification initiatives that have been conducted in recent years.
According to the analysis in Chapter 4, the future role of gas should be defined in the
Integrated Energy Plans; an holistic approach should be considered to analyze the
development of natural gas infrastructure, by not only taking into account the future natural
gas requirements, but also considering the development of the electricity sector, and future
trends, such as the electrification of transport and heat, decarbonization goals, among
others.
Nevertheless, the following general recommendations are presented in case the
massification of natural gas consumption in industrial and residential sectors is pursued:
• Revise the criteria in which quinquennial investment plans conducted by gas
distribution companies are proposed and approved, aiming to include flexibility
in their expansion plans. Quinquennial plans are mandatory, and their non-
compliance could lead to fines, therefore, the incentives by distribution
companies are to propose a conservative plan. For instance, the quinquennial
plan 2018-2022 was too conservative, in terms of new investments, in comparison
to the quinquennial plan 2014-2018. The implementation of intermediate plans
Source: Libro Anual de Recursos de Hidrocarburos (al 31 de diciembre de 2018) – MINEM. Number only considers
287
proved reserves of Lot N° 88, 57 and 56.

288 Considering an annual consumption of 0.6 trillion cubic feet.
289 Source: 2020 Annual statistics, COES.

(between each quinquennial plan) would provide enough flexibility to

distribution companies to adjust their forecasted expansion and could incentivize
these companies to raise their ambitions.
• Continue implementing incentives to massify natural gas consumption, to

promote the adoption of residential and industrial users. Initiatives such as
BonoGas (in which a payment is provided to users to finance the installation of
natural gas infrastructure in households) should continue to be implemented.
5.6.2 Standardize gas supply and transport agreements.

Although natural gas supply and natural gas transport agreements tend to have similar
clauses and characteristics, there are specific clauses that are not present in all contracts
(for instance, not all supply agreements have carry forward290 and make-up clauses291)
Standardizing agreements will contribute to a greater efficiency in trading excess supply and
transport capacity, as agents would concentrate their attention in executing trading
transactions rather than negotiating specific clauses in bilateral agreements292. However,
before standardizing the agreements, a consensus among the sector’s agents must first be
achieved, regarding the key terms to be included in the standardized contracts.
Standardizing agreements will probably require the inclusion of new clauses that would add
flexibility to the agreements, but that not all agents will be willing to add. The consensus
among the sector’s agents must consider the best practices in international gas industries.
These key terms must be the basis of any contract that will be signed and must be consistent,
clear, and equally applicable in any agreement. Some of the standardize contracts
recommended are the following:
a. Firm Commitment agreements: where each buyer pays what commits to purchase,
regardless of if it consumes the committed volume (or use the transport capacity) or
not (take or pay). These types of agreements usually consider lower prices that other
type of agreements.
b. Interruptible agreements: where both parties commit in purchasing (selling) the

agreed volume (or transport capacity) of gas, but this commitment could be
interrupted due to specific causes included in the agreement’s causes.
c. Firm Commitment agreements but subject to conditions: where firm supply is

guaranteed, excepting specific events or conditions (such as in scarcity scenarios or
for several days within a year).
Carry forward is a is a provision in GSPAs by which a Buyer, that takes more than its take or pay gas (depending
290
on what is agreed in the contract: more commonly above ACQ) in any given Calendar Year, is allowed under
conditions defined in the contract, to offset this volume against its ability to undertake the same volume of gas in
subsequent years. Source: https://www.iene.eu/articlefiles/Long-Term%20Gas.pdf
291Make-Up Gas is gas for which a buyer has paid under its take or pay obligations but not taken and may have
rights to receive in subsequent years for no further charge or at reduced prices, in the form of credit, after it has
taken gas in excess of an agreed threshold volume (usually next year’s take or pay volume). Source:
https://www.iene.eu/articlefiles/Long-Term%20Gas.pdf
292Source: Consultancy for standardizing the contracts for supply and pipeline transportation of natural gas in
Colombia
http://apolo.creg.gov.co/Publicac.nsf/1aed427ff782911965256751001e9e55/b08163e441e36e350525792f006eb02
3/$FILE/CIRCULAR063-2011%20ANEXO-1.pdf

d. Option contracts: where firm supply is guaranteed only when specific conditions are
met, such as scarcity events.
5.6.3 Implementing the secondary natural gas market.

A perfectly liquid secondary natural gas market would contribute to drive generators to
include their full fuel gas costs in their variable cost declaration. Generators, having as an
alternative the sale of the gas to another consumer, would consider this opportunity cost in
their gas price declaration.
The liquidity of the natural gas market depends on the capacity of buyers and sellers to sell
significative volumes of gas. Therefore, the liquidity will depend on the number of buyers (or
sellers) willing to buy (or sell) natural gas supply or natural gas transport capacity. Transparent
and precise prices, known to all agents will encourage the participation of more agents and
hence, promote a more efficient allocation of the available gas.
The implementation of a secondary market does not aim to remove the existence of take
or pay agreements but rather promote an adjustment market, where users with excess
contracted capacity tend to transfer the excess to users with a deficit in contract capacity.
A liquid secondary market would not only allow the participation of generators, but also
industrial users, segment that still has a large potential development. The implementation of
the secondary market would promote and efficient use of both supply and transport
capacity293.
The prepublication of the Bylaws that pursue the “Optimization of Natural Gas Use and
Create the Natural Gas Manager” improves the guidelines that govern the natural gas
secondary market, established in the DS N° 046-2010-EM, regarding the trade of gas
contracts. Among the changes, the referred Bylaws introduce the Market Manager, different
from the Market Administrator, and whose main function is to manage the information
regarding natural gas agreements. The main characteristics of the secondary market
included in the Bylaws are the following:
1. Improvements to the Bylaws ruling over the secondary market:
• Regarding gas agreements, the term “production” is replaced by “supply”
and “transport” to “transport capacity”.
• Originally, the secondary market would only include auctions considering 24-
hour time frames. However, considering that generators will be relevant
auction buyers and sellers, the modifications to the Bylaws now include
weekly, monthly, and quarterly contracts. This modification is in the right
direction, considering the generation seasonality, due to the hydrological
influence in the generation mix, generators could have excess gas in rainy
months (as mentioned in section 5.4.4, in 2019, 248.94 million cubic feet per
day were reinjected due to low consumption), and therefore are more willing
to sign monthly contracts to sell their excess capacity.
293For instance, A.F. Correljé in “Markets for Natural Gas” and Andrej Juris in “The Emergence for Markets in the
Natural Gas Industry” state that secondary markets can promote an efficient allocation of natural gas capacity.
Please read :
https://documents1.worldbank.org/curated/en/713751468739147642/127527322_20041117170610/additional/multi
-page.pdf and https://www.sciencedirect.com/topics/economics-econometrics-and-finance/natural-gas-
market/pdf

• The Market Administrator will first attend gas distribution concessionaires when
they act as buyers.
• The Market Administrator will also be allowed to propose regulatory
modifications to increase the Secondary Market’s efficiency.
• The implementation of the secondary market considers a two-year transient
period where MINEM’s General Hydrocarbon’s Directorate would act as
temporary Market Administrator.
• The Market Administrator must permanently publish in its website all relevant
information regarding the secondary markets trade and operation, to
provide information to buyers and sellers.
2. Creation of a Market Manager:
• The new resolution introduces a Market Manager, different from the Market
Administrator and whose role is to manage and spread the information
regarding the dispatch operations of supply and transport capacity in the
natural gas market, pursuing a more efficient allocation and use of natural
gas infrastructure.
• Some of the Market Manager’s functions are to verify national natural gas
supply availability and transport capacity availability. The Market Manager
must verify the short-, medium- and long-term supply and transport capacity
availability, as well as monitor and collect the consumption and transport
usage in a weekly, monthly, and annual basis.
• The Market Manager must also estimate supply and demand of all
consumers, producers, and transport concessionaires, including gas exports.
The estimation must be based on existing nominations as well as estimates of
future requirements.
• Furthermore, the Market Manager must publish all relevant operational
information in the natural gas market.
• The Market Manager could have additional functions.
Based on the recent modifications, there are several aspects that need to be modified to
improve the performance of a future secondary market.
On the one hand, the Market Manager should not only be focused in collecting and sharing
information but should also have the Market Administrator’s functions. On the other hand,
according to the Bylaws that pursue the “Optimization of Natural Gas Use and Create the
Natural Gas Manager”, MINEM’s General Hydrocarbon’s Directorate would act as
temporary Market Administrator. However, MINEM’s Directorate is not the right entity to
assume the temporal role, an independent entity (either private or public) should instead
act as the Market Manager.
Regarding the Market Administrator’s functions, that should be performed by the Market
Manager, it should at least include the following:
• Make publicly available all the dispatch information (and any other relevant
information) of the natural gas distribution and transport companies, regardless of
these companies are connected to the transport system or not.
• Make publicly available all the information of agents that would participate in the
secondary market as well as the simulation and operation model that is used for the
dispatch of the transport and distribution systems. The publication of this information

would allow all market agents to verity the real time decisions that are taken by the
market manager.
• Guarantee an efficient and transparent operation, in real time of the secondary
market.
• Allow the participant and interaction, in real time, off all sellers and buyers to
participate in the secondary market.
• Guarantee competitive conditions of any industry agent, that is interested in
participating in the secondary market.
• Ensure that all industry agents can access real time information regarding the
transport and distribution systems dispatch and the prices that are cleared in the
market.
• Ensure transparency in the procedures that are used to determine the market prices
in all short-, medium-, and long-term transactions that are conducted in the
secondary market.
• Elaborate, update, and publish all the national and international indicators, as well
as any relevant statistic, that are used in supply, transport, and distribution
agreements.
• Apply all corresponding fines to agents that do not comply with the rules and
procedures that govern the secondary market.
The best approach to allow the trade of excess contracted capacity is through an electronic
auction-based market, that would guarantee reliability and transparency of the system.
In addition, the inclusion of interruptible contracts in the secondary market should be
carefully evaluated. Buyers and sellers tend to undervalue non-firm agreement and could
lead to a non-efficient allocation of available capacity. Furthermore, giving the non-firm
nature, interruptible contracts do not encourage the development of new gas infrastructure,
because they do not provide the required guarantees that the new infrastructure’s
investment will eventually be recovered.
Figure 5-5 shows the market participants and how they would interact through the MECAP
(Spanish acronym that stands for Independent Gas Market Manager).

Figure 5-5: Secondary natural gas market participants.

Source: Own elaboration based on Calidda quarterly reports
The information Exchange between COES and the Secondary Natural Gas Market Manage
should be constantly and in real-time in order to ensure an efficient and reliable operation
of both electricity and gas markets. The supply and transport capacity nominations must be
done following COES’ operation programs (daily, weekly, and monthly operation programs).
The following proposal shows how the information between COES, and the Market Manager
should be conducted:
Nomination of
available gass
Determination volume Validaion of
(Trasport Gas tranport
of available contracts and Confirmation of
Dispatch concessionar) program
gas to be nominated gas gas of volume
information (Supplier,
traded in the Offered gas volumes (Gestor de Gas
(COES) transport
secondary volumes in the (Market Natural)
market secondary Manager) concessionare)
market
(Sellers)
Figure 5-6: Information Flow between COES and Market Manager
Auctions should comply with the following principles:

a) Efficiency: the conduction of auctions should lead to an efficient price
formation of the auctioned products.
b) Publicity: complete information on most relevant products and services

should be provided to all agents through the correct mechanisms.

c) Neutrality: the auction design should not allow or encourage any

discriminatory practices to any market participant.
d) Objectivity: awarding criteria should be impartial.
e) Simplicity and transparency: Awarding mechanisms must be clear, and

publicly available to all participants, to avoid any ambiguity.
The recommend auction is an ascending clock auction. The auctioneer starts by calling a
lower price and asking buying bidders to state the quantities they wish to buy at such a price.
If the quantity offered to be bought exceeds the target quantity to be sold, the auctioneer
names a higher price, and again asks buying bidders the quantities they want to procure at
the new price. This process continues until the quantity offered matches the quantity to be
sold or until excess demand is negligible. Auctions should be conducted for at least the
following standardized contracts:
• Firm Commitment agreements
• Firm Commitment agreements but subject to conditions
• Option contracts
All agreements subscribed in the secondary market should be registered, and should
contain at least, the following information:
• Agreement name.
• Signing date.
• Name of signing parties.
• Agreement modality (firm, interruptible, firm but subject to conditions, option
contracts).
• Energy committed.
• Price agreed.
• Contract start date.
• Contract end date.
• Other information requested by OSINERGMIN,
The operation of the secondary market would be conducted in an electronic platform, that
should provide access to all buyers and sellers, as well as store all the relevant information.
Finally, the role of the Market Manager is to promote and manage the trading of natural gas
supply and transport capacity in the secondary market, and eventually, include the trading
of the primary market. To achieve this goal, the market manager must have the right
incentives, such as an adequate remuneration. The manager should perceive a
remuneration considering the following components:
• Capital investment recovery costs.
• Recovery of efficient costs of operation and maintenance.
• Margin over efficient costs of operation and maintenance. The remuneration could
include symmetric incentives, such as penalties and premiums that would drive the
Market Manage to improve its efficiency.
An alternative is to auction all the services related to the Market Manager and award them
to the lowest bidder.

6 Modernization of Public-Owned Electricity

Companies
The regulatory framework that governs state-owned companies is mainly composed by the
1993 Political Constitution, the Law of Electrical Concession (LCE), LCE Bylaws, the Electricity
Sector’s Antitrust law (Law N° 26.876), and the Law that creates FONAFE (Law N° 27.170),
In 1993, a new Political Constitution was drafted, setting as main foundations a social market
economy assigning to the State a leading role294 in education, health, security, public
service, and infrastructure industries. Under this new framework, an economy pluralism
principle is instated, and the State could conduct either direct or indirect business activities,
but through a subsidiary approach295.
In addition, in 1992, LCE was enacted, which established the unbundling of generation,
transmission and distribution segments, the creation of a competitive wholesale power
market and system operator and granting of concessions and creates a legal and regulatory
framework for the sector.
The Law N° 26.876 delegates to INDECOPI the responsibilities in monitoring anticompetitive
behavior among agents. One the other hand, the Law N° 27.710 creates FONAFE, a public
institution in charge of the management of the sector state-owned electricity companies.
Other relevant laws are the FOSE Law (Law N° 27.510), the Rural Electrification Law (Law N°
28.749), Law of Efficient Development of Electricity Generation (Law N° 28.832), The
Legislative Decree N° 1.221, and the Supreme Resolution N° 006-2019-EM.
6.2 Privatization process

Before major regulatory reforms were conducted in the electricity market, most of the
activities were undertaken by vertically integrated regional companies, controlled by the
State. Only some of these companies had a minor participation of private investors (for
example, 15% of the distribution company Sociedad Eléctrica del Sur Oeste S.A (SEAL) was
controlled by private shareholders).
The modernization process began with unbundling of generation, transmission, and
distribution segments. Then, separate state-owned entities were created to conduct each
of the unbundled activities.
Unfunded companies due to subsidize electricity tariffs, lack of investment in new capacity,
infrastructure destruction and low electricity coverage (only 48,4% in 1992) where the main
reasons that supported a privatization process296. Within this process, tariffs were raised up to
300% to reflect real public service costs (without subsidies), as well as the enactment of
antitrust laws to prevent uncompetitive behavior in each segment.
294According to the 1993 Constitution, article N° 58, free private investment is allowed, and a social market
economy is established. Under this framework, the State leads the development of the country mainly acting the
promotion employment, health, education, public service, and infrastructure.
295According to the 1993 Constitution, article N° 60, economic pluralism is instated. Public and private property
coexists. The state, only allowed by the applicable laws, can conduct subsidiary business activities, encourage by
public and interest and social benefit. Business activities, either public or private, are subject to the same applicable
laws.
296Source: El proceso de privatizaciones en el Perú durante el período 1991-2002. CEPAL. Instituto Latinoamericano
y del Caribe de Planificación Económica y Social – ILPES.

The privatization process began with Electrolima, a state-owned vertically integrated

company serving Lima, with a population of over 7 million. Electrolima was separated into
three companies: EDEGEL (generation company), EDELNOR (distribution company), and
EDELSUR (distribution company, later renamed Luz del Sur). The privatization of Electrolima
was completed in 1994.
In addition, a special privatization process was conducted for the public distribution
companies Hidrandina, Electro Centro, Electro Nor Oeste and Electro Norte. The main goal
behind this process was to allow the entry of local private investors (Peruvian investors or
companies) where, with an initial 30% of the total shares could take control of these
companies, and by only submitting an initial payment corresponding to 10% of the total
shares. In a second phase, after three years of the initial operation, the acquiring
company/investor was required to buy another 30% of the equity. Through an international
competitive auction, the process was awarded to José Rodriguez Banda (JORSA), who took
control of the described companies. Awardees were required to form a joint venture with
an international company that could help privatizing the company. Nevertheless, the
process was unsuccessful and after two years the companies returned to state ownership.
Other failed privatization attempts where EGASA, generation company located in Arequipa,
and EGESUR, generation company in Tacna. The cause behind the failure of these processes
where mainly technical and social297.
The whole privatization process had as a result the following private companies:
i. Generation companies: EDEGEL, ETEVENSA, CAHUA, EGENOR and Empresa
Eléctrica de Piura,
ii. Distribution companies: EDELNOR, Luz del Sur, EDE Cañete, EDE Chancay and
Electro Sur Medio.
iii. Transmission companies: ETECEN and ETESUR, through 30-year concession

agreements.
On the other hand, the companies that remain under public ownership by 2020, are the
following:
i. Generation companies: EGASA, EGEMSA, EGSEUR, Electroperu, and San Gabán.
ii. Distribution companies: ADINELSA, Electro Oriente, Electro Puno, Electro Sur Este,
Electro Ucayali, Electro Centro, Electronoroeste, Electronorte, Hidrandina,
Electrosur, and SEAL.
Electro Centro, Electronoroeste , Electronorte, and Hidrandina are part of an administrative

corporation named Distriluz.
The privatization results are shown in Table 6-1, while the location of private and public
distribution companies is shown in Figure 6-1.
There was strong regional opposition regarding the privatization of these companies, forcing the government to
297
cancel the privatization process.

Table 6-1: Privatization report

Source: CAF-Perú- Análisis del sector eléctrico (2003)
Offer Expected State

Closure Company Awardee Participation
Million Commitment Investment ownership Observations
date %
US$ Million US$ %
No
August Inversiones
EDELNOR 60.00% 176.49 Investment 150 36,45% -
1994 Distrilima
commitments
No
August Ontario
Luz del Sur 60.00% 212.2 Investment 120 0.00% -
1994 Quinta
commitments
No
May
CAHUA Sipesa 60.00% - Investment 0 0.00% -
1995
commitments
Nov Commitments
EDEGEL Generandes 60.00% 524.40 100 MW 42 0.00%
1995 concluded
Dec No
Inversiones With
1995 EDECHANCAY 60.00% 10.36 Investment - -
Distrilima EDELNOR
commitments
Jan Consocrio Commitments

ETEVENSA 60.00% - 280 MW 120.1 38.22%
1996 Genralima concluded
Ago Inversiones Commitments

EGENOR 60.00% 228.2 100 MW 42 0.00%
1996 Dominion concluded
Jun No
1995 EDECAÑETE Luz del Sur 100.00% 8.62 Investment - 0.00% -
commitments
Nov Cons. Electr Commitments

EEPSA 60.00% 19.66 80 MW 40 39.95%
1996 Cabo Blanco concluded
Nov ELECTRO SUR Cons. Hica Commitments

98.20% 25.64 Infrastructure 25.64 36.87%
1997 MEDIO Inversiones concluded
Jan Hydro
Conces Transmission Commitments
1998 TRANSMANTARO Quebec - 85.00% 179 15%
sion Lines concluded
GyM
Dec ELECTRO NORTE

1998 ELECTRO 22.12 69.99%
No
NOROESTE Grupo Gloria 22.89 70.00%
30.00% Investment - -
ELECTRO (JORBSA) 32.69 70.00&
commitments
CENTRO 67.88 64.69%
HIDRANDINA
Jan Red Electrica Conces Transmission Commitments

REDESUR 85.00% 74.49 15.00%
1999 de España sion Lines concluded
April BOOT Tx lines:

2001 Oroya-
Carhuamayo-
Paragsha- Conces Transmission Commitments
ISA 82.06% 65.41 17.94%
Derivación sion Lines concluded
Antamina &
Aguaytia-
Pucallpa

Offer Expected State

Closure Company Awardee Participation
Million Commitment Investment ownership Observations
date %
US$ Million US$ %
Jun-
No
1992 – Grifos Petroperú 4 taps left
Several 100.0% 38.8 Investment - -
Sec (78) for sale
commitments
1992
Aug No
Shares ales in
1992 Solgas 82.10% 7.55 Investment 5.00 0 -
BVL
commitments
Feb No
Petrotech
1993 Petromas Concession 200 Investment 65.00 0.00% 30 years
International
commitments
Nov Petrolera Glenpoint No

1993 Transocenainca Erterprises 100.00% 25.25 Investment - - -
Inc. commitments
Jun No
Refinería La Refinadores
1996 60.00% 180.50 Investment 50.00 40.00% -
Pampilla del Perú
commitments
Ago No
Petrolube (Pit Mobil Oil del
1996 98.40% 18.56 Investment - 0.00 -
Lubricantes) Perú
commitments
Oct No
Pluspetrol
1996 Lote 8 y Lote 8x Concession 142.20 Investment 25 0 28 years-
Perú Corp
commitments
Dic Perez No
1997 Lote X Companc Concession 202.00 Investment 25 - 30 years
del Perú commitments
Dic Petroperú – Consorcios

Concession 32.99 - 5.55 - 15 years
1997 Terminales Norte Terminale
Dic Petroperú –
Vopak –
1997 Terminales Concession 32.99 - 6.33 - 15 years
Serlipsa
Centro
Dic Petroperú – Consorcios

Concession 32.99 - 6.91 - 15 years
1997 Terminales Sur Terminales
Feb Gas de Plustpetrol- 37.24

Concession Production 1,600.00 - (*) Royalties
2000 CAMISEA Hun-SK (*)

Figure 6-1: Distribution companies. Source: SIDEC, Peru.
6.3 Public and private companies’ performance

The implementation of the new regulatory framework and the privatization process has led
to a significant increase in electricity coverage and a reduction in energy technical and
commercial losses.
For instance, while in the beginning of the 90’s energy losses by distribution companies
averaged nearly 20%298, in 2019, losses were in average 9%, as shown in Table 6-2.
Table 6-2: Distribution Companies average Losses (2019)

Source: Commercial information – December 2019 - OSINERGMIN
Distribution Losses (%)

company
Average Peru 9.0%
EMSENSA 16.5%
Electro Tocache 14.4%
Chavimochic 13.9%
ADINELSA 13.0%
298Source: Evaluación Ex Post del Impacto de la Regulación de las Pérdidas de Energía en el Perú, OSINERGMIN,
2017.
https://www.osinergmin.gob.pe/seccion/centro_documental/Institucional/Estudios_Economicos/DEP/Osinergmin-
GPAE-Documento-Evaluacion-Politicas-002-2017.pdf

Distribution Losses (%)

company
Electro Dunas 12.8%
Electronorte 11.7%
Electronoroeste 11.2%
Electrocentro 11.2%
Hidrandina 11.2%
EDELSA 10.9%
Electro Puno 10.7%
Electro Oriente 10.5%
Electro Sur Este 10.4%
EMSEUSAC 10.0%
SERSA 9.5%
Enel Distribución 9.3%
Electro Pangoa 9.1%
Electro Ucayali 8.3%
Electrosur 8.2%
SEAL 7.8%
Luz del Sur 6.5%
COELVISAC 3.1%
Regarding distribution companies, although most of them are state-owned, the two largest
companies, in terms of clients served, are private. Several of the state-owned companies
are small and medium size.
Table 6-3: Clients served by Distribution Companies by 2019

Source: SIDEC, Peru.
Share (%) of total clients

Company Ownership # Clients
served
Enel Distribución Private 1.441.381 19%
Luz del Sur Private 1.164.945 15%
Hidrandina (Grupo Distriluz) State-owned 928.694 12%
Electrocentro (Grupo Distriluz) State-owned 825.367 11%
Electro Sur Este State-owned 561.579 7%
Electronoroeste (Grupo Distriluz) State-owned 504.172 7%

Electro Oriente State-owned 465.266 6%
Seal State-owned 441.317 6%
Electronorte (Grupo Distriluz) State-owned 391.175 5%
Electro Puno State-owned 304.717 4%
Electro Dunas Private 245.987 3%
Electrosur State-owned 170.149 2%
Electro Ucayali State-owned 96.225 1%
Adinelsa State-owned 72.228 1%
Meanwhile, in the generation segment, state-owned companies, once the largest

companies in terms of installed capacity, have lost share in the total capacity mix on behalf
of private companies. Most of the new generation capacity has been developed by private
companies.
Table 6-4: Main Generation companies by 2019
Source: COES. Note: Not all generation companies are included in this table.
Generation Installed capacity Share (%) in SEIN’s

Ownership
Company (MW) installed capacity
Engie Private 2.675.04 20%
Kallpa Private 1.696.10 13%
Enel Generación Private 1.562.40 12%
Electroperú State-owned 1.027.07 8%
Fénix Private 575.00 4%
Statkraft Private 442.37 3%
Egasa State-owned 235.53 2%
Celepsa Private 220.00 2%
Egemsa State-owned 191.80 1%
San Gabán State-owned 110.00 1%
Egesur State-owned 58.63 0%
In fact, most of the investments in the energy sector come from private investors, as shown
in Figure 6-2.

Figure 6-2: Energy sector investments in Million US$

Source: MINEM – Executive Report 2019
Table 6-5 and Table 6-6 shows the Revenues, EBITDA299, Return on Assets (ROA,) and Return
on Equity (ROE) of generation and distribution companies, respectively. Profitability metrics
differ significatively among state-owned companies.
Table 6-5: Revenues, EBITDA, ROA, and ROE of state-owned generation companies in 2019
Source: Own elaboration based on information reported by companies.
Return on Assets Return on Equity

Generation Revenues EBITDA EBITDA Margin
(ROA) (ROE)
company Million S./ Million S./ (%)
(%) (%)
Electroperu 1,726.07 599.17 34.7% 13.21% 20.40%
EGASA 169.53 109.39 64.5% 7.46% 10.57%
EGEMSA 114.12 76.54 67.1% 6.36% 7.11%
San Gabán 90.76 35.97 39.6% 6.10% 7.74%
EGESUR 41.62 11.74 28.2% 2.66% 6.87%
Table 6-6 Revenues, EBITDA, ROA, and ROE of state-owned distribution companies in 2019
Source: Own elaboration based on information reported by companies

Distribution Revenues EBITDA EBITDA Margin
(ROA) (ROE)
(%) (%)
ADINELSA 66.51 26.32 39.6% 4.82% 10.32%
Electro Oriente 581.11 88.37 15.2% 3.47% 8.83%
Electro Puno 227.09 38.36 16.9% 4.80% 11.46%
EBITDA corresponds to Earnings before interests, taxes, depreciation, and amortization. Return on assets is the
299
quotient between net income and total assets. Return of Equity is the quotient between net income and
Shareholder’s equity.


Distribution Revenues EBITDA EBITDA Margin
(ROA) (ROE)
(%) (%)
Electro Sur Este 459.61 119.66 26.0% 7.29% 15.65%
Electro Ucayali 188.09 32.83 17.5% 9.06% 15.71%
Electrocentro 614.71 198.99 32.4% 8.97% 21.05%
Electronoroeste 696.72 194.48 27.9% 15.94% 39.88%
Electronorte 400.43 72.15 18.0% 6.22% 11.37%
Electrosur 202.35 28.08 13.9% 4.65% 12.28%
Hidrandina 1,025.87 241.47 23.5% 11.41% 19.23%
SEAL 560.36 112.81 11.0% 12.07% 25.27%
6.4 FONAFE’s main characteristics

FONAFE (National Fund for Financing the State’s Entrepreneurial Activity), is a public-law
entity responsible for dictating norms and managing state-owned companies, following the
rules established by the Law N° 27.170 and its Bylaws (approved by the DS N° 072-2000-EF).
FONAFE’s bodies are established by the DS N° 072-2000-EF. FONAFE has a Board of Directors
and an Executive Direction. The Board of Directors is composed by:
• The Minister of Economy and Finance who is the Board Chair.
• The Ministers Council’s Chair.
• The Minister of Transport and Communications.
• The Minister of Housing, Construction and Sanitation.
• The Minister of Energy and Mines.
• The Minister whose sector is assigned Proinversion.
FONAFE’s Executive Director, is appointed by the Ministry of Economy and Finance 300. The
Executive Director is FONAFE’s legal representative and responsible in conducting the
agreements adopted by the Board301.
The Law N° 27.170’s set FONAFE’s main functions302:
• Approve the Budget of companies that have the majority of shares owned by
FONAFE.
• Approve the management norms in the companies that have the majority of shares
owned by FONAFE.
300 Bylaws of Law N° 27.170, article N° 13.

302 Law N° 27.170, article N° 3.

• Exercise the ownership of the shares representing the capital stock of all companies
in which the State participates and manage the resources derived from its ownership.
• Appoint the representatives that will participate in the shareholders meetings of those
companies in which FONAFE own shares.
As described in FONAFE’s functions, companies under its control must transfer the totality of
their distributable net income, corresponding to the percentage owned by FONAFE, and
following the dividends policy. In fact, FONAFE’s own budget is mainly funded by the
dividends coming from the companies under its control as well resources obtained from any
capital reduction in these companies303.
FONAFE has taken the recommendations proposed by OECD in the White Paper regarding
the Electricity Distribution segment and is currently undertaking a work plan pursuing
sustainability, efficiency, and profitability of the companies under its control. The main goals
are setting the norms and guidelines regarding the following topics:
1. Risk, governance, sustainability, and compliance: Establish norms and guidelines
regarding:
• Corporate governance: Principles regarding management best practices,
information sharing, transparency, among others. Moreover, it sets the
relationships between the board, shareholders, management, and other
stakeholders.
• Corporate internal control: Oversight and measurement controls of the
company’s performance, in order to i) guarantee companies’ goals are met,
ii) define work plans to achieve them, and iii) implement preventive actions
to avoid deviations on targeted strategies.
• Corporate social responsibility: Ensure stakeholders interests are met,
considering ethical, transparency, environmental, economic, and social
metrics.
2. Best corporate practices: Main guidelines regarding the best corporate practices
following FONAFE’s standards. The best practices are a set of actions adopted by
the companies that follow principles, goals and procedure pursuing and
improvement in the companies’ performance and regarding:
• Business networks.
• Project management.
• Work health and security.
• Process management.
• Integrated systems.
• Transparency.
• Agreements in business management.
3. Societal management: Establish norms and guidelines regarding:
• Dividend policy.
• Non-controlling interest.

• Shareholder’s meeting.
• Changes in shareholder’s structure.
4. Strategic management: Align the strategic plans elaborated by companies under
the control of FONAFE, with the strategic plants elaborated by FONAFE and with the
strategic plans elaborated by the Government. All the strategic plans should be
elaborated and presented in a homogenous format, to encourage transparency.
5. Operational and budget management: Control of activities and goals set per year,
to check if they are aligned with the Company’s strategic and operational plans and
the guidelines set by FONAFE. Budget management has been led by FONAFE and
has been focused on the optimization of financial resources and ensuring the
operational strategic goals are met. Budget management is the quantitative part of
the operational plan. Each company’s budget is included in the National Budget
System and must comply with the guidelines, directives, manuals, and plans set by
FONAFE.
6. Financial management: Improve integrity, precision and promptness in financial
information provided by the companies. Monthly financial statements are important
for FONAFE’s decision-making process. Financial management should consider and
efficient administration of both financial resources, including adequately handling
financial assets and liabilities, an efficient debt structure, risk control and operation
profitability.
7. Corporate, human resources and organizational structure management: Establish
norms and guidelines regarding:
• Management tools,
• Culture, knowledge, ethics, and work atmosphere.
• Wages and compensations.
• Recruiting and hiring process.
• Staff professional development.
• Collective bargaining processes.
8. Corporate management: Establish norms and guidelines regarding:
• Information and communication technologies.
• Documentation management.
• Communication and corporate image management.
• Corporate structures.
• Logistic management regarding corporate procurement and supply chain.
• Non-financial assets management.
• Donations.
• Insurance procurement.
9. Controversies resolution and liabilities, and non-compliance management: Establish
norms and guidelines regarding:
• Controversies resolution mechanisms.
• Actions regarding the non-compliance of directive guidelines.

• Several liabilities related to damages and prejudices to the company’s assets.

• Information shared to FONAFE regarding sanctions.
6.5 Diagnosis
This section includes the most relevant barriers that prevent state-owned companies to
increase their efficiency and raise their investment level. The diagnosis presented in the next
sections, is mainly focused on public distribution companies. Reforms in state-owned
distribution companies are more urgent than in public generation companies. Many
distribution companies continue to be state-owned, and these companies are increasing
their number of clients served, therefore they require to continue investing in network
expansion and upgrades. On the other hand, state-owned generation companies could
focus only in maintaining their existing assets, without jeopardizing the supply to end users,
as other investors would invest in new projects to supply the growing demand.
6.5.1 Main barriers identified in the White Paper on the Electricity Distribution Segment
In 2009, OSINERGMIN assigned the elaboration of a White Paper on the Electricity Distribution
Segment to a Consortium composed by Mercados Energéticos and Universidad de
Comillas304. The paper’s diagnosis shows low levels of investment and financing of public
distribution companies. Additionally, the profitability metrics of state-owned companies is
considerably lower than those of private companies. Moreover, the paper states that
although the existing regulatory framework to determine distribution rate process (VAD305),
has worked in several countries, it should be subject to modifications in Peru, considering
that the tariff setting process is conducted for a set of “typical sectors” representing the
general conditions of the companies and does not consider the specific characteristics of
each of the Peruvian distribution companies. Among the main barriers that were identified
are:
• Legal barriers to companies to increase their financial leverage and issue debt.
Hence distribution companies do not have the enough resources to invest in network
upgrades and expansion.
• Political pressure that prevents company to be managed independently.
The White Paper, starting from the assumption that no further privatization of state-owned
companies would be conducted, hence, it proposes several recommendations to improve
the management of public companies.
Some of the recommendations proposed are to encourage corporate governance and
management following a private business approach. The study proposes distribution
companies to be grouped into corporations, each of them with a legal status that allows it
to operate autonomously and independent of the government.
In addition, the report recommends conducting structural and legal changes pursuing that
public companies can compete in equal conditions with private companies. Therefore, the
304Source: Libro Blanco del Marco Regulatorio de la Distribución Eléctrica, Mercados Energéticos e Instituto de
Investigación Tecnológica de Universidad de Comillas, Noviembre 2009.
http://www2.osinerg.gob.pe/Novedades/20091126_Libro%20Blanco_CD_ME-IIT.PDF
305The Added Value of Distribution (VAD, for its acronym in Spanish) is a regulated tariff defined by the Authority.
The regulated customer pays a tariff defined by the authority, calculated based on the distribution costs of a
theoretical ideal company operating efficiently, a regulatory scheme generally known as “yardstick competition”.
This tariff scheme aims to emulate the competition with an efficient entrant concessioner, avoiding monopolist rates
and returns for distributors.

incentives and signals to companies should be mainly based on efficiency metrics,

regardless of if the company is either state-owned or private.
6.5.2 Insufficient resources to fund investment plans and barriers to the execution of
investment plans
Currently, state-owned companies have several barriers to use financial resources and
allocate them to new investments:
• As mentioned in the previous section, public companies have legal barriers to raise
debt, and therefore do not have direct access to financial markets. By raising debt,
companies can finance new investments today and repay their debts in the future
with revenues expected to be obtained, with a high degree of certainty, through
tariff payments. With no access to debt, public companies cannot take efficient
decisions involving investments and therefore new investments are either postponed
or not done.
• In addition, and as defined by the existing laws, FONAFE retrieves the percentage of
distributable net income of state-owned companies, according to the shares owned
by FONAFE306. State-owned companies cannot independently decide on the
allocation of the cash-flow generated by their operations. Moreover, state-owned
companies cannot take inter-temporal decisions on when and how much of the
resources can be allocated in new investments, and thus, are unable to efficiently
expand or upgrade their networks.
• Moreover, FONAFE must approve the investment and operative budgets. Therefore,
the budget approval process is slow and inefficient; state-owned companies must
comply with several administrative procedures elaborated by FONAFE to spend
resources, leading to a slow execution of approved budgets.
• Finally, the existing State Procurement Law (Law N° 30.225) introduces additional
barriers to state-owned companies to undertake their investment plans. Under the
State Procurement Law, investments undertaken by distribution companies must
follow the guidelines and procedures defined for public procurement, same
procedures required for any other public entity. Distribution companies must acquire
technical equipment with specific technological and quality standards, that are not
comparable to office equipment required by, for example, a local municipality.
Under the public procurement system, purchases of new equipment and the
procurement of services by distribution companies are slow and inefficient.
Furthermore, under the public procurement system, equipment and service providers
are not always financially solvent, and do not necessarily guarantee quality in their
services.
Considering these barriers, state-owned companies are uncapable of investing in new
infrastructure. This is specifically troubling for distribution companies that are unable to invest
in network expansion and upgrading that could increase the quality of supply to satisfy the
minimum levels required by the authorities.
Following the White Paper’s recommendations, regulatory changes were introduced to
promote investment among state-owned distribution companies. In 2015, before the 2017-
2021 distribution rate process, the Legislative Decree 1.208 was enacted. This Decree
promotes the development of Investment Plans by distribution companies controlled by
FONAFE as well as their financing. The Decree introducing the following changes:
306 The distributable net income will depend on the dividend’s policy established.

• Each distribution company controlled by FONAFE will present to OSINERGMIN before

each VAD rate process a Long-term electrical planning study that includes a
Distribution Investment Plan for the tariff process period (4 years).
• The Distribution Investment Plan will consider reinforcement, expansion, energy
efficiency, security of supply, technological innovation related investments as well as
any other investment that is necessary to improve efficiency and efficacy of existing
distribution networks.
• OSINERGMIN must approve the Distribution Investment Plans presented by
companies controlled by FONAFE and include the investment annuities in the VAD
rate process.
A trust is created and managed by FONAFE to fund the Distribution Investment Plans. The
trust will initially be funded by the investment annuities considered in the VAD rate process 307.
In the event the resources coming from the investment annuities will not be enough to fund
the required investments considers in the plans, FONAFE will be allowed to use part of the
dividends retrieved from the distribution companies under its control.
However, up to date the Distribution Investment Plans have still not been implemented. In
the 2017-2021 rate process, distribution companies elaborated their Distribution Investment
Plans. Once the plans were submitted, MINEM instructed OSINERGMIN to elaborate a
methodology to standardize all investment plans. OSINERGMIN elaborated methodology
report in 2016, and then MINEM published a norm proposal in 2017. However, up to date no
final norm has been published validating the criteria and methodology set by OSINERGMIN.
Hence, the Distribution Investment Plans were not validated and not included in the 2017-
2021 process.
6.5.3 Excessive control, regulation, and supervision of public entities over distribution
companies.
Another barrier that prevents state-owned companies to operate efficiently is the excessive
control, regulation, and supervision of public entities. On the one hand, the Government,
through OSINERGMIN sets the distribution tariffs. On the other hand, through FONAFE, the
Government oversees the operation of the state-owned, companies. FONAFE is also
responsible in setting the main guidelines that rule over public companies. Finally, the
General Comptroller of the Republic controls the legality of administrative acts and
safeguards the correct use of public funds, and therefore has an opinion in operational and
budget processes of state-owned companies.
The intervention of multiple public entities leads to an excess of bureaucracy that ends up
introducing obstacles and slowing down the decision-making process and the efficient
management of public companies.
In addition, FONAFE and state-owned companies do not have enough political
independence. Most of directives and management positions are taken by trusted members
of the acting governments. Hence these positions tend to change when new governments
are elected, creating instability and discontinuity in the companies’ management.
Furthermore, as described in section 6.4, strategic plans proposed by state-owned
companies must be aligned with the strategic plans elaborated by FONAFE and those
307The inclusion of investment annuities in the VAD process does not make sense, considering that the VAD process
is conducted assuming a “model company” based on an efficient company created from scratch, while the
investment plans are elaborated based on the real company.

elaborated by the Government. Although these entities are all public, it is extremely difficult
to align the interests of three different entities that pursue different objectives.
Finally, FONAFE has promoted a set corporate governance best practices, regarding the
companies’ administration, the improvement of the relationship between board,
shareholders, management and other stakeholders, and the adoption of decisions that add
value and stimulate a sustainable growth. Nevertheless, these practices are not being
effectively implemented. FONAFE’s current role as the main shareholder in state-owned
companies and as the controller of these companies adds excessive and unnecessary
bureaucracy.
6.5.4 Other additional barriers
Additional barriers that were identified are obstacles to lay off employees in state-owned
companies. There are several differences in the staff capabilities between employees in the
public sector and the private sector, mainly due to lower wages (due to budget limitations).
There average age of public employees (over 55 years) is higher than in the private sector
and could be an indicator that public companies are not attractive enough to younger
hires, or there are barriers to lay off older employees.
6.6 International revision of companies with partial or total ownership by the states
This section consists in analyzing state-owned companies in Colombia (Codensa and
Empresas Públicas de Medellín) and Chile (Codelco) to understand its governance and
management. The international revision will be used as a reference for the evaluation of
different alternatives to either modernize state-owned companies or allow the participation
of private investors.
6.6.1 The case of Codensa in Colombia
Codensa, a Colombian distribution company is a great example on how a company jointly
owned by public and private investors can operate efficiently and under a solid financial
structure.
Codensa was previously owned solely by Bogotá Energy Company (In Spanish, Empresa de
Energía de Bogotá or EEB). EEB, a state-owned company, controlled by the Bogotá Capital
District308, had activities in generation, transmission, and distribution segments. However,
several regulatory changes and decisions adopted by the company, allowed private
investors to enter the company’s ownership. The changes on the company’s structure were
promoted by Bogota’s major, and were driven by financial distress: its debt leverage was
too high, mainly due to the delay and over costs in the construction of some key investment
projects, such as Guavio hydroelectric power plant with an installed capacity of 1,250 MW.
The enactment of Law N° 142 of 1994 (Household Utility Services Law) and the publication of
the Bogota District Council Agreement N°1 of 1996, modified EEB’s legal structure. The
company was modified from Industrial and Commercial State-owned Company to a Stock
company. In 1997, the Shareholders meeting approved the plan presented by the
management, regarding a restructuration of the company’s structure and functions. The
company was divided into different corporations, each of them conducting activities in a
different segment: Codensa will be responsible for electricity distribution (in Bogotá and
several areas of Cundinamarca), while Emgesa will be responsible for generation activities.
Finally, EEB will continue to perform the transmission business. Enel purchased participation
in both Codensa and Emgesa.
308Bogotá Capital District is the political, economic, administrative, and industrial center of the country. The Capital
District is a territorial entity, with the administrative status of a Department in Colombia.

Codensa’s ownership structure is presented in the following figure:
Figure 6-3: Codensa’s ownership.

Source: Codensa’s 2019 Annual Report
Codensa is currently owned by Enel Americas, subsidiary of Enel S.p.A. and Grupo Energía
Bogotá. There are other investors that have a minor participation in the ownership. The
company has issued two types of shares: voting common shares and non-voting preferred
shares. While the former type of shares allows their owner to participate and vote in the
Shareholders’ meetings, the latter type of shares do not. However, the owners of the latter
shares have the right to receive a dividend to be paid in preference to that corresponding
to ordinary shares, among other advantages.
Currently Grupo de Energía controls all non-voting preferred shares while Enel Americas
control the majority of common shares. Thus, Grupo de Energía Bogotá has the majority of
shares that receive dividends (51.3% v/s 48.3% by Enel Americas and 0.4% by other
shareholders), while Enel Americas controls the vote rights (56.7% v/s 42,8% by Grupo de
Energía Bogotá and 0.5% by other shareholders)309.
The company’s shareholders have different characteristics. On the one hand, Grupo Energía
Bogotá S.A, is a joint stock corporation, listed in the Colombian Stock Exchange and whose
majority shareholder is a public entity (Bogotá Capital District with 65.68% of total shares).
The company is incorporated as a mixed public services company which, in the framework
of Colombian law, is autonomous in administrative, equity and budgetary terms, and does
business under the private law regime. Grupo Energía Bogotá is the financial controller,
perceiving over 50% of the company’s dividends. Grupo Energía Bogotá’s corporate policies
are based on international standards and good practice, especially the principles of the
309A similar organizational structure exists in Emgesa. While Grupo de Energía Bogotá has most shares that receive
dividends (51.3% v/s 48.5% by Enel Americas and 0.1% by other shareholders), Enel Americas controls the vote rights
(56.4% v/s 43,6% by Grupo de Energía Bogotá and 0.1% by other shareholders).

Organization for Economic Co-operation and Development (OECD), considering the

“OECD Guidelines on Corporate Governance of State-Owned Enterprises”, and the
“G20/OECD Principles of Corporate Governance”310. The controlling shareholder, Bogota’s
Capital District, is a highly capable, technically, and financially controller. On the other hand,
Enel Americas is a private company, listed in the Chilean Stock Exchange, and whose main
controller is the Italian multinational Enel S.p.A., an international energy company, that
controls and operates multiple distribution companies in Europe and Latin America. Given
its expertise, Enel controls the operation of Codensa.
Regarding Codensa’s corporate governance, and according to the company’s statutes, at
least 25% of the board members must be independent. Independent members cannot have
ties (different from director duties) with the controlling shareholders, the company and any
company’s subsidiary. Currently 2 out of 8 board members are independent.
Codensa is consistently improving its operational metrics as shown in Table 6-7. In 2020 the
company registered an historic decrease in its SAIDI 311 and SAIFI indicators312. Energy
average losses remain low, as the company has implemented a Technical Inspection plan,
focused in revising the adequate performance of measurement equipment. Table 6-8 shows
Codensa’s financial results. The company has consistently improved its financial results.
Furthermore, Codensa’s total investments have also increased consistently in the past years:
the company has invested in strengthening and upgrading the distribution network.
Table 6-7: Codensa 2020 operational metrics
Source: Enel, 2020 results report
Operational metrics 2020 2019 Variation (%)
Energy sales (GWh) 14,521 15,200 -4.5%
Average Losses (%) 7.6% 7.7% -0.05%
SAIDI 556 813 -31.6%
SAIFI 8.9 12 -24.6%
Table 6-8: Codensa 2020 financial metrics

Source: Enel, 2020 results report
Financial metrics
2020 2019 2018
(MM Colombian pesos)
Revenues 5,713,741 5,464,557 5,059,809
EBITDA 1,881,583 1,838,293 1,556,956
EBITDA Margin (%) 32.9% 33.6% 30.8%
Net Income 842,530 822,757 608,641
Investments 1,018,407 923,466 852,498
310The principles are i) an effective corporate governance, ii) establishing equitable rights among shareholders, iii)
provide the rights incentives for investments and the relationship with the stock market, iv) take into account the
role of stakeholders and interested parties, v) provide transparent information, vi) provide specific functions to the
management council.
311SAIDI is the System Average Interruption Duration Index and is the average outage duration for each customer
served.
312SAIFI is the System Average Interruption Frequency Index and is the average number of interruptions that a
customer would experience.

6.6.2 The case of Empresas Públicas de Medellín in Colombia

Empresas Públicas de Medellín (EPM) is a public company, owned, and controlled by the
Municipality of Medellín. The company, created in 1955, provides various public services
(energy, water, and gas) and is the biggest public service company in Colombia.
The company is organized under the figure of “state industrial and commercial company”
and serves around 3.6 million inhabitants.
EPM has historically been one of the best performing utility in Colombia and has business
across different services (such as the electricity sector, including generation, transmission
and distribution, telecommunications, and water supply). In addition, the company has
expanded to other Latin American countries (Chile, Mexico, Salvador, Guatemala, and
Panama).
All EPM’s property rights are hold by the Municipality of Medellín, and therefore this
municipality is entitled to retrieve the company’s net income. The Municipality of Medellín is
represented by the city’s major that, following the company statutes and the norms
established in Law N° 142, is responsible in appointing the company’s CEO, appointing the
Board of Directors, and acting as the Board Chair. EPM’s main bodies are presented in the
following figure:
Figure 6-4: EPM’s corporate governance.

Source: EPM
Even though the company is a public corporation, it has developed a transparent corporate
governance. The Board of Directors although is appointed by the city’s major, acts
independently following the corporate governance policies and complying with corporate
social responsibility criteria. According to the Interamerican Development Bank in its 2012
report, the city’s major does not interfere significantly in the company’s management.

Furthermore, the Medellin’s inhabitants consider EPM as their own company, independently
of the political cycle. The company is managed under long-term goals that are decoupled
from the Municipality’s officials. In addition, according to ONG Transparencia por
Colombia313, the company foster the participation of all stakeholders in its management,
encouraging dialogue and transparency in its management. The existing social pressure
over the company has prevented major political influences affect the company’s
management. However, the company still is highly dependent on the city’s officials,
considering that the management and board is directly appointed by the city’s major.
The company is a great example of its solid financial structure, operational management,
and international presence. In addition, the company would require a highly capable,
technically, and financially controller, such as the Medellín Municipality. It is not clear if local
governments in Peru have these capabilities.
6.6.3 The case of Codelco in Chile
Codelco (Spanish acronym that stands for Corporación Nacional del Cobre) is a mining
Chilean state-owned company. Codelco is the world largest copper mining company, in
terms of copper volume produced per year. The Chilean state owns the total of the
company’s shares.
In 1971 a constitutional reform transferred the most significant mining operations to the state.
The operation and management of these mining operations required a company capable
of handling them. Hence, Codelco was created. Later, in 2009, regulatory modifications
included changes to the company’s corporate governance. The Law N° 20.392 modified
the company’s statutes. The new statutes, following OECD Guidelines on Corporate
Governance of State-Owned Enterprises, modified the Board of Directors’ composition.
Codelco’s board members are appointed by the President of Chile, however, different
entities participate in the proposal of candidates:
• 3 board members are directly selected and appointed by the President of Chile.
• 4 members are appointed, each of them selected out of 3 candidates proposed by
the Senior Public Management Agency.
• 2 members are appointed from 5 candidates proposed by representatives of the
company’s workers.
The Board Chair is appointed by the President of Chile (included in the 3 members directly
selected and appointed by the President). Board member’s terms last 4 years. Members are
appointed in staggered terms allowing a partial renewal of the Board. The statues define
several requirements and incompatibilities for board members. The Board is responsible of
appointing and dismissing the Executive Director, as well as holding civil and criminal
responsibilities for their actions. Moreover, the board is responsible for approving the
companies’ three-year business plan, investments, and main contracts. The three-year
business must consider all strategic decisions under a long-term horizon (20 years or more).
Board meetings can be hold with at least 7 attending Board members. Decisions will be
adopted by 50%+1 votes of the attending members and the Board Chair will act as
tiebreaker. The quorum requirements and the voting mechanism prevents members directly
selected and appointed by the President of Chile of taking all decisions by themselves.
313Source: https://www.epm.com.co/site/home/sala-de-prensa/noticias-y-novedades/resultados-transparencia-
por-colombia.

On the other hand, the Executive Director is responsible in executing the agreements
adopted by the Board and supervising the operational, managing, and financial duties of
the company. The board delegates several of their functions to the Executive Director.
Through a Supreme Decree, the company’s budget is approved by the Ministry of Finance
and Ministry of Mining. The company is supervised by the Financial Market Commission, entity
that supervises all companies that are listed in the Chilean stock market. In addition, the
General Comptroller of the Republic controls the legality of administrative acts and
safeguards the correct use of public funds.
Although multiple organizations oversee and control the management of the company,
Codelco is recognized as an international company that operates transparently and
efficiently. The nomination of board members by different stakeholders has led to an
independent board, composed by professionals (rather than government officials), and has
decoupled of the political cycle. Hence, Codelco has become a state-owned company,
rather than a “government-owned” corporation. Finally, decision making is conducted
under a long-term horizon, considering long-term investments and the company’s
development.
6.7 Modernizing distribution companies

As described in previous sections, the main barriers that prevent an efficient operation of
state-owned companies are:
• Insufficient available resources to fund investment plans and a slow execution of
approved budgets.
• Excessive control, regulation, and supervision of different public entities over public
distribution companies.
• Obstacles in labor laws.
The following sections will include the proposals of different alternatives to overcome the
three barriers. Two sets of proposals will be presented that will be separated based on the
type of investments distribution companies do. Distribution companies focus their
investments on the following:
i. Investment in the expansion and upgrade of Complementary Transmission Systems
(SCTs).
ii. Investment in distribution networks (medium and low voltage systems).
The investment in both type of systems is mandatory to the distribution companies and is
determined in two regulatory processes that are independent from each other. The
compliance of these investments plans is compulsory for all distribution companies (either
public or private).
The long-term proposals that will be presented in the following sections are separated
according to the following scheme:

Concessions
1.Transmission through BOOT
agreements
100% private
owned
Distribution
companies
2.1 Allow private
Mixed model
Investment
Concessions
2.Distribution through BOOT
agreements
Indendepent
2.2 Maintain
corporate
public ownership
governance
Figure 6-5: Set of alternatives proposed to modernize state-owned companies.
6.8 Analysis of alternatives to modernize the operation, management and development

of transmission systems currently owned by state-owned companies
As explained in Chapter 4 the transmission system at present consists in 4 different categories:
the Main Transmission System (“SPT”), and the Secondary Transmission System (“SST”) defined
in the RLCE, and the Guaranteed Transmission System (“SGT”) and the Complementary
Transmission System (“SCT”), defined in the Law N°28.832.
Regarding the development and expansion of SST systems, Transmission Investment Plans
(PIT) are conducted by distribution companies every 4 years and approved by OSINERGMIN.
Four PITs have already been approved: 2009-2013, 2013-2017, and 2017-2021.
The expansion planning study is mandatory and must be developed by each concessionary
(SST or SCT) whose remuneration are exclusively paid by the demand through the medium
voltage and low voltage tariffs. Standard costs defined by the OSINERGMIN must be applied
to the study. Distribution companies, private and public, are subject to fines if they do not
comply with the PIT. The fines are applied if committed investments in a year are not
performed. The fines are significant but tend to be appealed by distribution companies and
are solved through long judicial processes.
6.8.1 Main problems
The execution of SCT investment plans by state-owned distribution companies have suffered
major delays and have been significantly slower than those executed by private companies.
According to a report elaborated by OSINERGMIN “Supervisión del Cumplimiento del Plan
de Inversiones de Transmisión (PIT)314”, by the end of 2020, private distribution companies
have an 81.4% progress in the execution of their investment plans, while state-owned
companies had only a 15.4% progress.
314 https://www.osinergmin.gob.pe/empresas/electricidad/transmision/plan-inversiones

Figure 6-6: Progress of investment plans by state-owned and private companies

Source: OSINERGMIN
Moreover, state-owned companies are not expected to execute on time the investments
committed in the 2017-2021 PIT, that should be ready by April 2021.
State-owned companies encounter multiple barriers that prevent them to conduct their
investments, including the following:
• National Debt System315
• National Control System316
• Approval process of multiannual investment programs317
• Procedures to elaborate budgets, leverage plans and dividend policies that are
elaborated by FONAFE to control its companies.
In addition to the barriers that prevent the execution of investment plans by public
companies, there are additional issues that discourage the execution of investment plans,
such as the investment costs defined by OSINERGMIN do not reflect the real investment costs
that would be incurred by distribution companies.
To overcome the described problems, beginning in 2013, private and public companies
request to MINEM the incorporation of SCT infrastructure to be included in the auctions
processes that are conducted by Proinversión. These infrastructures were expected to be
auctioned under a Public Private Partnership, where awardees would subscribe a BOOT
agreement with the Peruvian government under a 30 year-term. Therefore, under this
315Corresponds to the set of bodies, norms and procedures that pursue an efficient management of the leverage
of public entities and organisms. The National Debt System is composed by the National Public Indebtedness
Directorate, the Vice minister of Finance, and the Executive Entities that manage public funds.
316 Corresponds to the set of bodies, norms, and procedures responsible on conducting and performing a
decentralized control on government entities. The control is over the administrative, budget, operational and
finance entities.
317State administrative system focused in guiding the use of public funds targeted for investment and the effective
provision of public services. The General Directorate on Public Budget is the responsible entity in analyzing the
Multiannual investment programs, defining budget limits, and elaborating the Budget Project, that is presented to
the Congress for its approval.

mechanism the ownership would remain under the state, but its operation and control would
temporally be transferred to a private entity. Some of the transmission infrastructure assets
that have been auctioned under the described scheme are the following:
• Transmission line in 220 kV, Friaspata - Mollepata and Orcotuna Substation 220/60
kV. This transmission asset originally corresponded to be developed by Electro
Centro S.A. (state-owned company). The auction process concluded in 2014.
The line was awarded to the company ISA-Transmantaro.
• New Substation Córpac 220 kV and Transmission line in 220 kV Industriales-
Córpac. This transmission asset originally corresponded to be developed by Luz
del Sur (private company). The auction process was cancelled due to changes
included by OSINERGMIN in the PIT.
• Substation Chincha Nueva 220/60 kV and Substation Nazca Nueva 220/60 kV.
This transmission asset originally corresponded to be developed by Electro Dunas
S.A. (state-owned company). The auction process concluded in 2021. The project
was awarded to the ISA group.
• Transmission line in 138 kV Puerto Maldonado - Iberia and Substation Valle del
Chira in 220/60/22.9 kV. This transmission asset originally corresponded to be
developed by Electro Sur Este S.A.A. and Electro Norte S.A. (both state-owned).
Auction currently under progress.
6.8.2 Granting concessions to Secondary and Complementary Transmission Systems
The proposal consists in granting under BOOT concessions the Secondary and
Complementary Transmission systems controlled by state-owned companies. The
concession agreements would be based on the existing applicable laws and would consider
the following:
• Concession of Secondary and Complementary Transmission systems controlled
by state-owned companies under 30-year BOOT agreements.
• The auctioning of these systems will be conducted by Proinversión.
• Proinversión should define the remuneration mechanism and its indexation
formula.
• The auctioning of the new Complementary Transmission infrastructure would be
executed through public tenders.
• The upgrade and improvement of existing SST and SCT systems would be
auctioned following similar procedures to those currently implemented in the
auctioning of SGT systems. In the case of reinforcements carried out by
transmission system´s owners, the investment value should be cleared by the
auction process while the annuity of the annual investment value should be
defined according to the tariff study in force, while the operation and
management costs should be re-calculated by OSINERGMIN every four years
together with the tariffs studies.
• Tolls or transmission tariffs would be cleared in the auctions and included in tolls
that are set by OSINERGMIN, following the procedures considered in the
Transmission Plans.
• As explained in Chapter 4 the elaboration of PIT would be done by COES, under
the revision of OSINERGMIN and final approval of MINEM.

• All proposed changes should be implemented to have as less effects on final

tariffs as possible.
• Companies that would have these concessions could also hold concessions in
distribution networks, as described in section 6.9.4.
Regarding existing SST and SCT systems, the proposal considers grouping these systems into
regional clusters and auction them in public auctions. Grouping these systems into regional
clusters could increase their attractiveness, and thus, encourage the participation of
international transmission operators. The auctions would grant to the awardees the
concessions of these systems under a 30-year BOOT agreement, following ETECEN and
ETESUR’s examples. These companies were controlled by the state and operated the trunk
transmission system in the north (ETECEN) and in the south (ETSEUR) when the systems were
still not interconnected. In 2001 these companies controlled over 70% of the network (in terms
of length). After the concession term ends, they would return to be under public control.
A tentative proposal of the regional clusters is presented in the following tables:
Table 6-9: North System

Source: OSINERGMIN
Complementary System
Company Secondary System (km) Total (km)
(km)
ELECTRO ORIENTE 542 0 542
ELECTRONOROESTE 517 0 517
ELECTRONORTE 229 154 382
ELECTROCENTRO 443 889 1,331
ELECTRO UCAYALI 13 21 34
HIDRANDINA 1,131 367 1,498
TOTAL 2,875 1,430 4,305
Table 6-10: South System

Source: OSINERGMIN
Complementary System
Company Secondary System (km) Total (km)
(km)
ELECTRO PUNO 168 0 168
ELECTROSUR 200 0 200
ELECTRO SUR ESTE 559 86 644
SEAL 245 280 525
TOTAL 1,172 365 1,537
The process would be conducted by Proinversión and would have the following
characteristics:
• The auction methodology, to be determined by an investment bank.
• The annual remuneration value that would be perceived by the auction winner
and its price indexation formula. Existing annual remuneration should not be
increased.
• Bidders would bid an upfront payment amount to the State in exchange of the
annual remuneration they would perceive for the concessions-term. The auction

winner would be the bidder with the highest offers. Bids must be greater than a
minimum value, to be determined by Proinversión.
• A binding investment plan considering the 2017-2021 and 2021-2025 PIT.}
Finally, all concessionaries of existing and new infrastructure should have to comply with a
set of standards such as availability of infrastructure) and their non-compliance would be
subject to fines, and therefore, encouraging optimal maintenance.
Table 6-11 shows a summary of the main advantages and disadvantages of the proposal:
Table 6-11: Advantages and disadvantages of privatization process
Advantages Disadvantages
The state would continue to perceive

most of the distributed dividends, that
Assets could increase their “market value”.
could be negatively perceived by the
private investors.
Private investors would bring additional funding
Social perception could see the
resources to expand and upgrade the distribution
concessions as a “privatization in disguise”
networks.
Conflicts could arise between the
Distribution assets remain state-owned. operational controller (private) and the
economic controller (state)
Could encourage an efficient operation.
Probably a private operator would increase the quality
of supply
6.9 Analysis of alternatives to modernize state-owned distribution companies

This section presents the evaluation of different alternatives aiming to modernize distribution
state-owned companies. These alternatives do not include the transmission assets owned
and operated by distribution companies, already analyzed in the previous section, but
instead, infrastructure in low and medium voltage 318. The alternatives consider either the
participation of private investors under different ownership structure, or by modifying the
companies’ governance.
6.9.1 Grouping distribution companies into clusters
Before describing the different alternatives to modernize distribution companies, shown in
Figure 6-5, the Consultants propose to group state-owned distribution companies into
clusters depending on their geographical location. This recommendation will apply to all
alternatives and aims to improve the companies’ efficiency and governance. The specific
goals behind grouping distribution companies are the following:
1. Increase the size of distribution companies and thus, increase the interest of
experienced international operators of distribution companies.
2. Take advantage of economies of scale.
3. Reduce end users’ tariffs.
4. Improve corporate governance by including Independent Directors with experience
and reputation.
Figure 6-7 shows the client served per public distribution company:
318 In this proposal, primary substations are considered as transmission assets.

Figure 6-7: Clients served by state-owned distribution company in 2019.

Source: OSINERGMIN
An example of potential clusters, considers the following group of distribution companies:

• EDENOR, composed by ENOSA, ENSA, and ELOR
• EDECENTRO, composed by ECSA, HDNA, and ELUC
• EDESUR, composed by ELSE, SELA, ELSUR, and EPUNO
The scheme of clusters that is presented was defined based on the geographical location
of the companies, the number of clients served, and the operational and financial metrics.
The goal behind this example is to show three similar groups in terms of operational and
financial metrics. However, the definitive composition of clusters should be carefully defined,
where each cluster should have a balanced mix of companies serving clients in rural areas
and companies located in densely populated areas. In addition, the definitive clusters
should also take into account existing group of companies such as the Distriluz; in the
presented example this group of companies is separated into different clusters but could
eventually be included completely in only one cluster.
The number of clients served per group of companies in the example presented is shown in
Figure 6-8. Clients served per group of companies ranges by nearly 1.4 million to over 1.8
million.
The proposal of grouping the companies into regional clusters will have no effect on how
tariffs are set. Either the existing tariff setting methodology, or any remuneration
methodology recommended by the consultants in the Thematic Line N° 3 will be continued
to be conducted on the original companies (before being grouped). The main effects in
grouping the companies are in how the companies will be managed, operated, and
funded, and if applicable, how these companies will be sold or transferred to private
investors (depending on the alternatives that will be presented).

Figure 6-8: Clients served by group of state-owned distribution companies in 2019.

Source: Own elaboration based on OSINERGMIN sources.
The 2019 operational and financial metrics per group of companies is shown in Figure 6-9,
Figure 6-10, and Figure 6-11, while the 2019 Income Statements are presented in Table 6-12,
Table 6-13, and Table 6-14.
Figure 6-9: 2019 Operational and financial metrics of companies grouped as EDENOR
Source: OSINERGMIN. Note: SAIDI and SAIFI only correspond to those attributable to the distribution
companies.
Figure 6-10: 2019 Operational and financial metrics of companies grouped as EDECENTRO
Source: OSINERGMIN: Note: SAIDI and SAIFI only correspond to those attributable to the distribution
companies.

Figure 6-11: 2019 Operational and financial metrics of companies grouped as EDESUR
Source: OSINERGMIN: Note: SAIDI and SAIFI only correspond to those attributable to the distribution
companies.
Table 6-12: 2019 Income statements of companies grouped as EDENORTE

Source: OSINERGMIN
Thousand
Thousand Soles
Company US$
ENOSA ENSA ELOR TOTAL TOTAL
Revenues 696,718 400,428 581,106 1,678,252 466,181
Costs 537,355 351,864 546,061 1,435,280 398,689

Operational
159,363 48,564 35,045 242,972 67,492
income
Net Income 105,783 36,548 42,985 185,316 51,477
Table 6-13: 2019 Income statements of companies grouped as EDECENTRO

Source: OSINERGMIN
Thousand
Thousand Soles
Company US$
ECSA HDNA ELUC TOTAL TOTAL
Revenues 641,708 1,025,873 188,089 1,855,670 515,464
Costs 514,501 851,800 161,903 1,528,204 424,501

Operational
127,206 174,074 26,186 327,466 90,963
income
Net Income 118,002 114,576 18,017 250,595 69,610
Table 6-14: 2019 Income statements of companies grouped as EDESUR

Source: OSINERGMIN
Thousand
Thousand Soles
Company US$
ELSE SEAL ELPU ELSUR TOTAL TOTAL
Revenues 459,605 560,359 227,085 202,345 1,449,394 402,609
Costs 382,555 474,484 205,620 186,500 1,249,159 346,989

Operational
77,050 85,875 21,464 15,845 200,234 55,621
income
Net Income 72,410 69,432 20,825 13,904 176,571 49,047

The following sections will include different alternatives to modernize state-owned distribution
companies: i) privatizing the companies, ii) allowing mixed public-private ownership, iii)
granting concessions, and iv) modernizing companies under state ownership. All the
alternatives will be proposed on the group of distribution companies.
6.9.2 Continue with the privatization process
One alternative is to continue with the privatization process initiated in the 90’s. As described,
multiple companies were either sold to private investors or they were granted through
concessions. Several regulatory initiatives were enacted to pursue the privatization process,
such as the Legislative Decree N° 674 (Law Promoting the Private Initiative in State-Owned
Companies), the Legislative Decree N° 757 (General Law to Promote Growth in Investment)
and the Political Constitution of 1993.
On the one hand, the Law Promoting the Private Initiative in State-Owned Companies,
enacted in 1991, state as a national interest the promotion of private investments in state-
owned companies, and established the modalities in which private investment would be
promoted.
On the other hand, the General Law to Promote Growth in Investment aims to guarantee
free initiative in private investments in all economic sectors, as well as establishing the main
rights, guarantees and duties for all entities that invest in Peru, either natural or legal, and
national or international.
Finally, the Political Constitution of 1993 defined the main guidelines regarding private
investment. In its article N° 58, the Constitution states that “Private investment is free and is
conducted under a social economy market. The state guides the country’s development
and acts mainly by promoting employment, health, education, security, public services and
infrastructure”. On the other hand, article N° 59 establishes that “The State stimulates wealth
creation and guarantees freedom in work, and freedom of companies, commerce and
industries. The exercise of these freedoms must do no harm to the moral, health nor public
safety. The State promotes small enterprises in all their modes”. While article N° 58 establishes
that the State will act mainly through the promotion of public services and infrastructure,
article N° 59 promotes the business, commerce, and industry activities. Therefore, the
Peruvian government’s duties are modified from business oriented to a market subsidiary
role.
Considering this regulatory initiative implemented in the early 90’s, one alternative to
modernize state-owned companies would be to continue with the privatization approach,
by allowing the purchase of the total shares in distribution public companies, by private
investors. However, the privatization process conducted in the early 90s, provide valuable
lessons to keep in mind: i) privatization can create social rejection and unrest (case of EGASA
and EGESUR) and ii) privatization processes could not meet the expected goals due to lack
of knowledge of the Peruvian market (case of Distriluz).
Table 6-15 shows a summary of the main advantages and disadvantages of privatizing
distribution state-owned companies:

Table 6-15: Advantages and disadvantages of privatization process
Could cause social discomfort

The State would receive over $ 3,500 million319. (communities reject the privatization of
local distribution companies)
Negative experience (failed privatization
processes due to a lack of knowledge of
Increase and improve public service coverage
the market such as Distriluz privatization
process).
Negative experience of an incorrect used
Electricity tariffs could decrease due to economies of
of collected funds or inadequate
scale
valuation of sold assets
Reinforces productive capacity State gives away its assets
Inadequate political context (atomized
Improves international competitiveness Congress and government not available
to purse its plans and programs.
Improves the country risk perception
6.9.3 Allowing mixed private-public ownership

The following alternatives consist in promoting several regulatory modifications aiming to
include the participation of private investors in state-owned distribution companies.
Therefore, these proposals would follow a mixed ownership: companies would jointly be
owned by private investors and the state.
Private investors acquire non-controlling participation

One recent example is the experience of Petroperú. Through the enactment of Law N°
30.130, private investors could participate in the development of the project that
modernized the Talara Refinery (up to 49% of the total ownership). A similar approach for
public distribution companies is presented as follows:
• 49% of the total shares of each of the distribution companies’ group would be sold
to private investors, either by direct negotiation with interested buyers or by
conducting a secondary sale in the Peruvian Stock Market.
• 49% of the total shares would be owned by private investors. These investors could
appoint board members, in correspondence with their participation and participate
in the companies’ management.
• The inclusion or private investors would allow the entry of additional cash resources
that would be targeted to finance investments in distribution networks.
• The companies will continue to be controlled by the state. However, private investors
would have a say in the companies’ operation and management, and therefore,
contribute to improve its efficiency.
Table 6-16 shows a summary of the main advantages and disadvantages of including non-
controlling private investors:
319 Estimated as 10 times the EBITDA registered by state-owned distribution companies.

Table 6-16: Advantages and disadvantages of including non-controlling private investors
Private investors would inject additional funds to the Social discontent due to partial
companies privatization
Several regulatory modifications would be
required to allow private investors. It
Distribution companies would be capitalized, and the would require a consensus among the
asset’s valuation would be increased. political spheres, and it would probably
lead to long times to agree on its
implementation.
Companies would remain state
controlled. Therefore, the government
Assets remain under the control of the State. would continue to have an opinion on the
operation and management of the
companies.
FONAFE would lose influence over distribution
companies as it would not be electing all Board
Members.
Private investors acquire operational controlling participation

Another viable alternative is to include private participation through the issuance of different
type of shares, following Codensa’s example in Colombia. Two types of shares would exist,
those that would have economic rights (right to receive a dividend) and voting rights),
named common shares and those that would only have economic rights, named non-
voting preferred shares. Then, considering private and public ownership, the following shares
would exist:
1. Publicly owned common shares.
2. Publicly owned non-voting preferred shares.
3. Privately owned common shares.
4. Privately owned non-voting preferred shares.
Owners of non-voting preferred shares would have the following rights, according to
General Law of Corporations (Law N° 26.887):
• Perceive net income distribution through dividends or the liquidation of the
company’s equity.
• Receive semestral information regarding the company’s main activities and
management functions.
• Challenge agreements that vulnerate their rights
• Separate from the company in cases specified by the law and the company status.
• Specific rights in capital raise events320.
On the other hand, common shares have voting rights, allowing the owners to participate in
the election of board members and in the adoption of shareholders agreements.
This proposal will consist in selling to private investor a majority percentage of common
shares, while retaining under state-ownership most of non-voting preferred shares. Therefore,
320 The specific rights are to subscribe shares with voting rights or non-voting rights in case of Capital Raise events.

the operational control of the company will be hold by private investors, while a majority of
the net income distributed through dividends would continue to be perceived by the State.
Table 6-17 shows a summary of the main advantages and disadvantages of including
Table 6-17: Advantages and disadvantages of including controlling private investors
Private investors would inject additional funds to the Social discontent due to partial
companies privatization
Companies would acquire the experience provided
by private operators, that could contribute to a more
agile decision-making process and company’s
management.
Several regulatory modifications would be
required to allow private investors. It
Distribution companies would be capitalized, and the would require a consensus among the
asset’s valuation would be increased. political spheres, and it would probably
lead to long times to agree on its
implementation.
Companies would remain state
controlled. Therefore, the government
Assets remain under the control of the State. would continue to have an opinion on the
operation and management of the
companies.
FONAFE would lose influence over distribution
companies, mainly being limited to appointing Board
members and defining guidelines on the company
management.
6.9.4 Granting concessions

This proposal will consider the concession model implemented for ETECEN and ETESUR under
a Public Private Partnership. ETECEN and ETESUR concessions was the first process that
included private investors, under the privatization process conducted in the 90’s. A public
tender was organized, and these concessions were awarded to private investors. The
concession contract included a Guaranteed Annual Remuneration, which aimed to pay
the transmission system’s investment, operation, and maintenance. This remuneration
scheme was different to the one included in the Law of Electrical Concession and provided
a stable source of income for the ETECEN and ETESUR’s transmission systems over the
concession period. The Guaranteed Annual Remuneration considered in the auction
process was of US$ 58.6 million.
Following ETECEN and ETESUR’s example, distribution companies would be auctioned in a
public tender. Bidders would offer initial payments and the winner would be decided based
on the biggest initial payments. The auction winner would sign a concession agreement.
Thus, the state would perceive a one-time upfront payment by the auction winner. After the
30 year-period ends, the concession would be returned to the State and a new auction
could be conducted. The existing concessionaire should comply with minimum indicators (
quality of supply metrics and customer services indicators) to be able to participate in the

following auction. Concessionaires would be required to operate, maintain, and eventually

expand and upgrade their networks to satisfy the quality of supply standards 321.
ETECEN and ETESUR concession contracts have the following characteristics that could be
applied to this model:
• Distribution companies would remain under public ownership. What is transferred is
the operation, and management of the distribution assets for a limited period of time.
• Concession agreements consider Legal stability agreements: both parties must

agree on changes on the concession contract. Thus, regulatory certainty is
guaranteed to private investors so they can undertake their committed investments.
The auction process would be conducted by Proinversión322, government agency in charge

of promoting the investment of Public Private Partnerships and investments in the energy
sector, transport sector, and other industries. The auctions would be ruled under the existing
regulatory framework, mainly composed by the Legislative Decree N° 1362 and the Supreme
Decree Nº 240-2018-EF.
Operators of distribution companies would continue to be required to comply with the
regulations dictated by OSINERGMIN, including tariff settings (such as the VAD tariff setting
that considers the remuneration of assets for a 30-year period at the existing rate of return of
12%; or any other future tariff methodology to be determined) and eventually the
compliance of mandatory investment plans (currently not mandatory). However, changes
in the distribution regulations should be implemented (or at least announced) before the
auctions are conducted. Private operators that would manage and operate the companies
would have to assume assets and liabilities of the company staff.
Table 6-18 shows a summary of the main advantages and disadvantages of including non-
Table 6-18: Advantages and disadvantages of granting concessions
Social perception could see the

concessions as a “privatization in disguise”
321
Under current regulatory framework (VAD tariff setting) distribution companies compete against an “efficient
model company”. Tariffs consider the cost of building and operating the company at the minimum price, fulfilling
the quality and safety standards of a company. Thus, distribution companies are not obliged to undertake
investment plans but must have the obligation to supply clients in their concession area and hence, are obliged to
undertake investments to satisfy load growth and the increase of clients served, while maintaining quality of supply
standards.
322According to the Legislative Decree N° 1362, Proinversión is a technical organism, adhered to the Ministry of
Economy and Finance and with technical, functional administrative, economic, financial, and legal autonomy.
Proinversión’s main functions are the following:
• Design, conduct, and conclude private investment promotion processes, developed through Public-
Private Partnerships.
• Intervene in the agreement subscription phase.
• Provide technical support to public entities in the different development phases in Public-Private
Partnership projects.
• Proinversión also apply dissuasive mechanisms to prevent public entities desist in developing their projects.

Private investors would bring additional funding Conflicts could arise between the
resources to expand and upgrade the distribution operational controller (private) and the
networks. economic controller (state)
The reforms required to implement the
Distribution assets remain state-owned. concession framework would require a
long time to be discussed.
Could lead to an increase the efficiency in planning,
operation, maintenance due to private incorporation
and would remove the necessity to have FONAFE as a
relevant entity.
Probably a private operator would increase the quality
of supply
6.9.5 Modernize companies under state ownership

The final alternative is to maintain the companies under state ownership but modernize its
management, financing, and operation. One approach to achieve a higher efficiency of
state-owned distribution companies is to promote the reorganization and modernization of
these companies, following the international experience (Codelco in Chile and Empresas
Públicas de Medellín in Colombia). The modernization and reorganization for each
distribution company would consider the following characteristics:
• Economic independence to pursue the company’s social object.
• Financial independence.
• Administrative independence.
• The establishment of annual and quinquennial goals set by MINEM.
Through legal changes, a reorganization plan would be conducted aiming to modify the
patrimonial, financial, legal, and sustainability framework that influence the companies’
operations. The reorganization would also aim to establish an adequate corporate
governance.
As described in Section 6.5, there are several financial and budget barriers that prevent
state-owned companies to finance and undertake their investment plants. The following
recommendations aim to reduce the described barriers:
1) Changes in the financial and budget framework
To overcome the barriers described in previous paragraphs, this proposal considers the
following measures to modify the existing financial and budget approval and execution
process:
• Financing of investment projects that do not require fiscal funds or the endorsement
of the state should not be considered as part of the public Indebtedness in the
national debt system.
• Dividend’s policy should be modified. Dividends distribution should take into
consideration the forecasted cash flows and not be based solely on the distributable
net income. By considering the expected cash flows, and assigning priority to
planned investments, before distributing dividends, companies could have enough
cash to finance their investment plans.
• The budget approval process should be modified. OSINERGMIN has influence over
the budget approval process through the tariff setting and the Investment Plans. The
additional approval process by FONAFE causes delay in the budget’s approval and
execution. Therefore, FONAFE should be excluded from the budget approval

procedures as well as from the administrative controls. These changes would require
the modification of several norms, in particular: i) Article N° 3 of Law N° 27.170, ii)
article N° 10 of the Supreme Decree Nº 072-2000-EF, and iii) article N° 18 of the
Supreme Decree Nº 072-2000-EF.
• The purchase of equipment and procurement of services should be undertaken in
an independent system from the public procurement system. The execution of
investments must be more efficient and undertaken in a timely manner.
Implementing an independent procurement system, that considers the unique
characteristics of the distribution sector, such as the requirement of highly technical
equipment and services that are not comparable to the goods and services required
by other public entities, is a necessary condition to foster the efficient operation of
public distribution companies. This independent procurement system should
guarantee minimum competitive conditions such as: i) terms of reference should be
elaborated and sent to potential providers specifying minimum requirements that
are approved ex-ante by the General Comptroller of the Republic, ii) at least three
different potential providers should be invited to present bids, iii) procurement should
be awarded to the provider that complies with the minimum requirements and bids
the lowest prices. Finally, for those purchases or procurements that exceed a specific
amount, the state-owned company should elaborate a report specifying why the
awarded bidder was selected.
The General Comptroller of the Republic would continue to be responsible in overseeing
and supervising the adequate allocation and spending of public resources, following the
rules established in the Organic Law that defines the National Control System and the
General Comptroller of the Republic323 (Law N° 27.785).
2) Changes in the corporate governance framework
As previously stated, the existing governance of state-owned companies needs to be
modified and improved. The appointment of board members should be based on technical
and professional criteria rather than based on political factors. The role of an independent
Ad-Hoc committee, responsible for the selection of Directors could be considered.
The example of Codelco in Chile provides valuable lesson on how an efficient and
transparent corporate governance could be implemented in state-owned distribution
companies. EPM’s example in Colombia is also valuable. However, the implementation of a
323
The main object of the Law N° 27.785 is to promote the appropriate, timely and effective exercise of government
control, to prevent and verify, through the application of principles, systems and technical procedures, the correct,
efficient and transparent use and management of State resources and assets, the honest development of the
functions and acts of the authorities, as well as the fulfillment of goals and results obtained by the institutions subject
to control, in order to contribute to the welfare of the Nation. The entities that are overseen by the National Control
System are:
a) The central government, its bodies, and entities, including the Executive Power, the armed forces, the
national police, and their institutions.
b) The Local and Regional Government and companies under their control.
c) The entities managed by the Legislative and Judicial Power as the Public Ministry.
d) Autonomous organisms created by the Constitution and people and institutions created under public law.
e) Regulatory entities of public services as well as overseeing entities that supervise the commitments
subscribed in privatization agreements.
f) State-owned companies
g) Private entities that receive or manage state-owned assets and resources.

model based on EPM’s structure would be hard to implement in Peru. A local government
such as a Municipality would not be idoneous entity in controlling and managing a local
distribution company, considering the technical and management capabilities that would
be required.
Regarding Codelco, although most of board members are elected by the acting
government, the presence of workers guilds and decisions in the election of some board
members provide some independence in the company’s governance and oversees that
best corporate governance practices are complied.
This proposal considers a shareholder’s meeting chaired by the Minister of MINEM and a
Board of Directors with the following characteristics:
- Five independent members appointed by FONAFE out of three candidates (for
each board position) proposed by an Ad-hoc committee.
- One of the board members would be appointed as the Board Chair position that
would be a full-time job.
- The candidates should meet predefined professional qualifications and work
experience.
- Board members position should last for 2 years, with the chance to be reelected
for one additional term.
- Members can me removed the Shareholders in case of severe noncompliance
of annual goals, or any serious misconduct.
- The Board should define the dividends policy, approve investment plants, among
others.
The implementation of these set of initiatives would require a wide range of normative
modifications, such as the norms that rule over the funding and business activities (Law N°
27.710) and norms regarding the board members’ appointment.
Table 6-19 shows a summary of the main advantages and disadvantages of modernizing
state-owned companies:
Table 6-19: Advantages and disadvantages of modernizing state-owned companies
Advantages Disadvantages/ Challenges
Would require the enactment of a new

law. This would lead to a long period of
discussion in the Congress and would
Board of directors would be more independent of the
require consensus among the political
acting government, guarantying more continuity in the
spheres.
company’s management.
The executive power must have a strong
will to promote the proposed changes.
Probable opposition by FONAFE to the

proposed modifications
Political influence over state-owned
Companies could undertake their investment plans companies although will be reduce, will
remain to exist.
Distribution assets remain state-owned.
Tariffs would probably fall.

Improvement of the quality of supply due to the
investment plans

6.10 Selection of the best alternative and proposals

After analyzing the different alternatives to modernize the state-owned companies, the
following recommendations are presented:
• Under the existing legal framework, all the alternatives presented are valid and
feasible options to overcome the existing barriers and modernize state-owned
companies.
• However, some alternatives could have a higher percentage of social rejection than
others. Considering past experiences, implementing a complete privatization of
state-owned companies would generate a high level of social unrest, in particular,
by those communities that are served by those companies.
• Regarding the transmission assets that are owned and operated by distribution
companies, the proposal is to grant them to private investors through concessions.
The existing regulatory framework already allows the implementation of this
alternative, and these assets would remain state-owned.
• Regarding distribution assets owned and operated by state-owned companies the

most adequate alternative is the concessions model, allowing the operation by
private companies but maintaining their property under public ownership. This model
would have the highest success rate regarding the required regulatory changes to
allow its implementation. Granting concessions to private operators would generate
new funds to the State. The concessions model is already a successful scheme
implemented in Peru in the transmission and generation segments 324. However, like
any change, the implementation process would require enough time, given that
decisions should be adopted by top government officials, and therefore could take
a longer time than expected. Thus, a feasible solution is to first move forward in
modernizing companies under public ownership, as described in section 6.9.5, (by
implementing changes into the financial and budget framework as well as the
corporate governance framework) while gradually elaborating the scheme that
would allow granting concessions to private companies to operate distribution
companies. Implementing a two-stage process (modernize and then grant
concessions), would improve the operation and management of companies before
the entry of private agents, and hence, could increase the potential value of these
companies before the auction process is conducted, raising potential bids. The first
stage, consisting in the modernization of the companies, would be a necessary
condition to be completed before conducting the second stage. In case the
concession schemes fail, modernizing state-owned companies would already have
shown progress as improving the operation and management of public companies
would have already began. However, the solely modernization of state-owned
companies would not be sufficient to guarantee that the distribution companies will
be operated efficiently and financially sustainable. Therefore, the undertaking of a
second stage is still required. Moreover, if companies remain under public control,
324 The hydro power plants CH Yuncan, CH Santa Teresa and CH San Gaban were granted in concessions.

significant and challenging legal changes would be required to undertake to reduce

the FONAFE and the government’s control over state-owned companies.

7 Strengthening of market regulation and

supervision/monitoring
Market regulation, supervision and monitoring activities have been governed by the
OSINERG Law (Law N° 26.734), the Framework Law of Private Investment Regulatory Bodies
in Public Services (Law N° 27.332), Laws N° 27.631 and N° 27.699, as well as OSINERG’s Bylaws
(approved by DS 054-2001-PCM), OSINERG’s Dispute Resolution Bylaws (approved by
OSINERG Board Resolution N° 0826-2002/S-CD), OSINERG’s Energy Activities Supervision
Bylaws (approved by DS 029-97-EM), OSINERG’s Users Claims Appeal Bylaws (approved by
OSINERG Board Resolution N° 0945-2002/S-CD).
OSINERG was created in 1996 by the Law N° 26.734 as a Supervisory Body of Energy
Investment. OSINERG responsibilities consisted in oversighting, supervising, and sanctioning
the energy market, duties that were previously conducted by MINEM.
Later in 2000, after the enaction of Law N° 27.332, OSINEG was merged with the Electricity
Tariff Commission (CTE), a decentralized institution of MINEM. With the merger, OSINERG
additionally assumed regulatory functions in the electricity and hydrocarbons market.
OSINERG’s dispute resolution responsibilities are detailed in OSINERG’s Dispute Resolution
Bylaws, while electricity and hydrocarbon supervisory functions are specified in OSINERG’s
Energy Activities Supervision Bylaws. Furthermore, Law N° 27.631 modifies OSINERG’s
regulatory functions while Law N° 27.699 strengthens OSINERG’s institutional framework.
Finally, in 2007, OSINERG also assumes the responsibility of monitoring the mining sector and
is renamed as OSINERGMIN.
7.2 Main characteristics regarding OSINERGMIN’s institutional framework.

7.2.1 Main features and organization
OSINERGMIN is the regulator of the energy sector, in charge of electricity and natural gas
price/tariff setting and the supervision, monitoring, and sanctioning of the legal and
technical standards in the electricity market and in the transportation and distribution of
natural gas.
OSINERGMIN has a clear and detailed governance structure and are self-governing to
define their technical guidelines, analysis and evaluations, and its objectives and strategies.
The regulator’s autonomy is legally established by Law N° 27.332 (2000), which stipulates that
the regulatory institutions will have administrative, functional, technical, economic, and
financial autonomy325.
OSINERGMIN´s main bodies are i) the Board of Directors, ii) the Executive Director, iii) the
General Management, iv) the Commission for Energy Rates (GART), v) the Dispute Resolution
Tribunal, vi) the User’s Claim Council, and vii) the Collegiate bodies326.
325 Law N° 27.332, article N° 2.

326 OSINERG’s Bylaws, articles N° 49.

7.2.2 Guidelines, goals, and main functions

Main guidelines
According to OSINERG’s Bylaws, OSINERGMIN must act according to the following
principles327:
i. Guarantee Open Access: OSINERGMIN must guarantee open access to electricity
and hydrocarbon supply to all regulated and public service users.
ii. Neutrality position: All OSINERGMIN’s acts in supervision, monitoring and regulatory
functions must assure a neutral stance, in order to prevent that any agents are
favored over others.
iii. Nondiscriminatory acts: All acts and decisions taken by OSINERGMIN must not be
discriminatory against any agent.
iv. Decisions based on a Cost-Benefit analysis: Decisions taken by OSINERGMIN must be
based on a Cost-Benefit Analysis, considering short- and long-term costs and
benefits.
v. Transparency: All decisions taken by OSINERGMIN must be supported by clear criteria
known by all agents.
vi. Impartiality: Decisions taken on events o cases with similar characteristics must have
a similar outcome.
vii. Autonomy: OSINERGMIN does not depend on any other State entity or institution.
OSINERGMIN’s decisions are governed by the applicable laws and technical
backup.
viii. Subsidiary: OSINERGMIN will only intervene on energy markets if there are no existing
competitive conditions that could assure that all regulated and public service users’
interests are met.
ix. Effects caused by decisions: OSINERGMIN must evaluate all the effects its decisions
will cause on other topics related to the energy sector.
x. Efficiency and effectiveness: OSINERGMIN will pursue and efficient allocation of
resources and the minimization of social costs.
xi. Promptness: All procedures and deadlines involved in OSINERGMIN’s decisions must
be public. OSINERGMIN must solve all controversies and divergences related to its
decisions as prompt as possible.
OSINERGMIN’s goals
According to OSINERG’s Bylaws328, its main goals are the following:
a) Ensure electricity’s supply reliability and quality.
b) Ensure the compliance of electrical, hydrocarbon pipelines and natural gas distribution
networks’ concession agreements.
c) Ensure that users have access to electricity and natural gas supply, under the best
conditions considering quality and opportunity standards and under regulated tariffs in
compliance with the applicable laws.
327 According to OSINERG’s Bylaws, articles N° 4-15.

328 OSINERG’s Bylaws, article N° 19.

d) Promote the efficient development, operation and modernization of electricity and

hydrocarbon infrastructure.
e) Ensure the strict application of technical and legal provisions regarding the conservation
and protection of the environment in the electricity and hydrocarbon segments.
f) Supervise the permanent and promptness in investments as well as other responsibilities
originated by private investment processes conducted by energy state-owned
companies.
g) Other goals according to the applicable laws.
OSINERGMIN’s main functions
Law N° 27.322 and OSINERG’s bylaws set OSINERGMIN’s functions. The main duties are the
following329:
a) Supervisory function: It includes the power to verify the fulfillment of the obligations
of supervised agents, the established sectoral regulations and in the contracts under
the scope of competence of OSINERGMIN. The main supervisory functions are the
following330:
i. Supervise the quality, efficiency, in the provision of electricity and
hydrocarbon service.
ii. Supervise the compliance of all norms set by OSINERGMIN.
iii. Ensure the strict application of technical and legal provisions regarding the
conservation and protection of the environment in the electricity and
hydrocarbon segments.
b) Regulatory function: It includes the power to set tariffs for public electricity and
natural gas services under its scope, which includes resolving, as the only
administrative body, the review actions that the interested parties interpose.
OSINERGMIN is responsible for setting the following tariffs331:
i. Bar (nodal) tariffs.
ii. Public electricity service tariffs.
iii. Principal and secondary transmission tariffs.
iv. Hydrocarbon transport tariffs.
v. Natural gas and electricity distribution tariffs.
c) Normative function: It includes the exclusive power to dictate, in the scope and in
the field of its respective competence, the regulations on the procedures under its
responsibility; including special administrative procedures that govern the
administrative processes related to the supervisory, specific supervisory and
sanctioning functions. The main normative functions are the following332:
i. Define tariffs and regulatory schemes and their application mechanisms.
329 Law N° 27.322, article N° 3, later updated by Law N° 27.631 & OSINERG’s Bylaws, article N° 19.
330 Law N° 27.322, article N° 3, and OSINERG’s Bylaws, article N° 34.

ii. Elaborate participation mechanisms of interested parties in the elaboration

of procedures and norms.
iii. Define rules that will govern procedures that are presented to OSINERGMIN,
such as users’ complaints, dispute resolutions, among others.
iv. Define OSINERGMIN’s organizational structure.
v. Set the main guidelines regarding electricity, hydrocarbon, and natural gas
public service procurement procedures.
d) Fiduciary and sanctioning function: It includes the power to carry out actions leading
to impose sanctions on agents for breach of obligations established in the sectoral
regulations under the scope of OSINERGMIN; as well as for non-compliance with
regulations issued by the regulatory body. OSINERGMIN can also denounce to
INDECOPI non-competitive behavior among agents in the energy sector.
e) Dispute resolution function: this includes the ability to reconcile competing interests
between agents within their sphere of competence, and between them and
large/free users or independent consumers of natural gas. Further details are
included in section 7.2.5.
f) User complaints solution function: it includes the power to resolve, in the second
administrative instance, the appeals filed by regulated users of electricity and natural
gas services against those resolved by the distribution companies that provide such
services. The main complaints that can be presented are regarding the following
aspects:
i. Service installation and activation.
ii. Service suspension or termination.
iii. Quality of service.
iv. Billing.
v. Billings regarding termination or reconnection services
vi. Measurement and billing errors.
vii. Compensation due to outages.
g) Specific supervisory function: it includes the power to verify the fulfillment of the
obligations established in the contracts derived from the processes of promotion of
private investment, related to the activities under the scope of OSINERGMIN.
Supervisory and sanctioning function can be exercised ex officio, or by denunciation of part.
The sanctions will be imposed by the General Management.
7.2.3 Board of Directors
Law N° 27.332 defines OSINERGMIN’s Board of Directors, as the agency governing body. The
Director position last 5 years333. The Board of Directors is composed by five members that are
proposed as follows334:
1. Two members proposed by the Ministers Council’s Presidency. One of these members
will be the Board’s Chair.
333 Law N° 28.832, article N° 17.

334 DS N° 032-2001-PCM, article N°3.

2. One member proposed by MINEM.

3. One member proposed by the Ministry of Economy and Finance.
4. One member proposed by INDECOPI.
Each of the Directors’ appointment must be endorsed by the President of the Ministers
Council, MINEM and the Ministry of Economy and Finance, who can also remove a Director.
The Board’s Chair also acts as OSINERGMIN’s Executive Director.
According to Law N° 27.332335, the board members must comply with the following requisites:
a) Have a minimum of 5 years of work experience.
b) Have high professional standing and suitability.
c) Directors must comply with the following requirements:
i. Cannot hold over 1% in the equity of energy companies supervised by
OSINERGMIN. In addition, Directors cannot act as Directors, legal
representative, consultants of employees of energy companies that are
supervised by OSINERGMIN.
ii. Have been sanctioned or removed through administrative process or due to
intentional crime.
iii. People who are unable to act as Directors due to a legal mandate.
iv. Directors, managers or representatives or bankrupted corporations.
v. Have legal incompatibilities to hold directing positions in entities controlled by
the state.
Some causes that could lead to a Director’s removal are unjustified absence to 2
consecutive Board meetings, be physically or mentally unable to act as Director, hold legal
impediments, among others336.
Directors cannot delegate any of their functions 337. Their main duties are the following338:
a) Appoint the Board’s Vice-president.
b) Approves OSINERGMIN’s General Manager, following the Board’s Chair proposal.
c) Appoint the members of the Collegiate bodies.
d) Appoint the members of the User’s Complains Council.
e) Plan, lead and supervise OSINERGMIN’s functions.
f) Approve OSINERGMIN’s Organization and Functions Bylaws.
g) Present to the Ministers Council’s Presidency, OSINERGMIN’s budget proposal.
h) Approve the annual report and financial statements.
i) Approve the sale, purchase, and swap of OSSINERGMIN’s assets to pay debts.
j) Accept donations and transfers to OSSINERGMIN.
335 Law N° 27.332, article N° 7 and N° 8.


k) Resolve reconsideration requests presented to the Board.

l) Resolve appealing requests regarding decisions taken by the General Management.
m) Dictate, in the scope and in the field of its respective competence, the regulations
on the procedures under its responsibility.
n) Submit proposals to the authorities, new norms regarding electricity and
hydrocarbon activities.
o) Set, revise, and modify energy, transmission, and distribution tariffs.
p) Set, revise, and modify hydrocarbon and natural gas transport and distribution tariffs.
q) Approve the New Replacement Value for electricity distribution, electricity,
transmission, and natural gas distribution assets.
r) Procure technical studies to propose a new Discount Rate, currently in 12% as defined
in LCE.
s) Set the Load-shedding cost.
t) Set the Basic Capacity Price
u) Set, revise, and modify energy tariffs paid by regulated users.
v) Set the Objective Firm Planning Reserve and the Random Unavailability rate.
w) Support in the privatization process of the energy sector.
7.2.4 General Management and Commission for Energy Rates
On the one hand the General Management is the executive body responsible for
OSINERGMIN’s daily management, the execution of the agreements adopted by the Board
of Directors and the adoption of the guidelines by OSINERGMIN’s chair.
On the other hand, the Commission for Energy Rates is responsible of proposing to the Board
the energy tariffs, following the applicable laws339.
The General Manager is mainly responsible for340:
a) Comply and enforce the compliance of agreements adopted by OSINERGMIN’s
Board of Directors and the guidelines set by the Boards’ Chair.
b) Lead, supervise and control the activities and functions delegated to OSINERGMIN,
following the guidelines set by the Board.
c) Act as OSINERGMIN’s legal, administrative, and judicial representative.
d) Sign agreements with national and international entities and people, that are
aligned with OSINERGMIN’s goals.
e) Provide powers to others act on behalf of OSINERGMIN, and in compliance with the
boundaries imposed by the Board or the Board’s chair.
f) Propose staff’s wages to the Board.
g) Elaborate annual reports, budgets, and financial statements, subject to the approval
of the Board.


h) Provide to the Board all the information required for them to fulfil their duties.
i) Request periodical information to all the energy sectors’ agents, as well as
supporting technical, economic, and financial documentation.
j) Evaluate the periodical information submitted by COES and agents regarding the
system’s operation.
k) Approve OSINERGMIN’s Regulatory Billing Manual and present them to the Board
Chair.
l) Execute coercion acts, according to OSINERGMIN’s duties.
m) Impose sanctions and or fines due to the non-compliance of legal and technical
requirements related to concession agreements or related to norms dictated by
OSIENRGMIN.
n) Solve reconsideration requests presented by agents that challenge decisions taken
by the General Management involving sanctions or fines.
The Commission for Energy Rates is mainly responsible for 341:
a) Propose to the Board the approval of tariffs or compensations.
b) Evaluate the requests or complaints presented by agents or COES related to tariffs
setting and present them to the Board.
c) Evaluate the qualification requirements of consulting companies in the elaboration
of technical studies.
d) Revise and evaluate the studies presented by energy concessionaries.
e) Elaborate the terms of references related and supervise the execution of studies that
are procured to consulting firms.
f) Elaborate the studies related to the determination of hourly blocks used in the
calculation of bar tariffs.
g) Elaborate the studies involving the estimation of average power and energy loss
rates, used in the calculation of bar tariffs.
h) Elaborate the studies defining principal and secondary transmission systems.
i) Elaborate studies defining typical distribution areas.
j) Elaborate the comparison studies defined in the LCE.
k) Elaborate the studies that set the New Replacement Value in transmission and
distribution assets.
OSINERGMIN’s Dispute Resolution responsibilities are defined in Law N° 27.332, OSINERG
Bylaws, and OSINERG’s Dispute Resolution Bylaws.
OSINRGMIN has two main bodies responsible to solve any controversy between agents
within their sphere of competence, and between them and large/free users or independent
consumers of natural gas: Collegiate Bodies and the Dispute Resolution Tribunal. Collegiate
bodies are an OSINERGMIN internal body and are responsible to solve the referred

controversies in a first instance, while the Dispute Resolution Tribunal is responsible to solve
disputes in a second and last instance342.
Regarding sanctioning function imposed by the General Management, its resolutions may
be appealed to the Board of Directors, which resolves in the second and last administrative
instance.
Collegiate bodies343
There are two types of Collegiate bodies: Permanent Collegiate Body and Ad-hoc
Collegiate bodies.
The Permanent Collegiate Body is responsible for any controversy between agents within
their sphere of competence, and between them and large/free users or independent
consumers of natural gas, excluding those disputes that are assigned to Ad-hoc Collegiate
Bodies. The latter bodies are responsible for solving specific and non-recurrent controversies.
Both types of Collegiate bodies are composed of 3 members that are appointed by the
Board of Directors. The Ad-hoc Collegiate body, after solving the specific controversy ceases
to exist. The Collegiate Bodies meeting must have at least 2 members present, and
agreements are adopted subject to most of the attendees’ approval. The members of
Collegiate bodies must meet the same requirements defined for the Board’s directors.
Dispute Resolution Tribunal
The Dispute Resolution Tribunal is responsible in solving, in a second and last instance any
controversy between agents within their sphere of competence, and between them and
large/free users or independent consumers of natural gas344. Member’s position last 5 years345
The Tribunal is composed by five members that are proposed as follows 346:
1. Two members proposed by the Ministers Council’s Presidency. One of these members
will be the Tribunal’s Chair.
2. One member proposed by the Ministry of Economy and Finance.
3. One member proposed by the energy sector.
4. One member proposed by INDECOPI.
Each of the Tribunal member’s appointment must be endorsed by the President of the
Ministers Council, MINEM and the Ministry of Economy and Finance. The members will have
to meet the same requirements defined for the Board’s directors 347. Board Members cannot
be Tribunal Members348.
Board meetings must have at least 3 attendees. Agreements upon decisions in the Tribunal
are reached if there is at least 50%+1 approval of Tribunal attendees. In the event of a tie,
the Tribunal’s Chair will decide349.
342 OSINERG’s Bylaws, article N° 66 and article N° 70.

345 Law N° 28.832, article N° 17.
346 Law N° 27.332, article N° 6.

Controversies under OSINERGMIN’s sphere of competence

OSINERGMINS duties, regarding Dispute Resolution, is to solve in a first instance through
Collegiate Bodies, and in a second instance by the Dispute Resolution Tribunal, are the
following350:
• Controversies between generators, between generators and transmission
companies, and between transmission companies, related to matters subject to the
regulation, supervision, or sanction by OSINERGMIN and that are not in COES’ sphere
of competence.
• Controversies between transmission companies and free users, between distribution
companies and free users, that are due to a limited access of free users to secondary
transmission or distribution networks.
• Controversies between generators and distribution companies, between generators
and free users, between distribution companies and between free users and
transmission and distribution companies, that are related to technical, regulatory,
and normative aspects and/or are derived from concession agreements under the
supervision of OSINERGMIN.
• Controversies between either hydrocarbon transport companies or natural gas
distribution companies and natural gas distribution companies, retailers and free
users that use their transport infrastructure, that are related to technical, regulatory,
and normative aspects and/or are derived from concession agreements under the
• Controversies between free users and natural gas producers, natural gas distribution
companies and natural gas retailers, that are related to technical, regulatory, and
normative aspects and/or are derived from concession agreements under the
• Other controversies that are defined by OSINERGMIN’s Board decisions.
OSINERGMIN is also responsible of reconciling opposing interests regarding certain matters
are of the exclusive responsibility of OSINERGMIN.
Dispute Resolution procedure
Dispute resolution request can either be solicited to OSINERGMIN by an affected party or
can be initiated by OSINERGMIN. The latter will only occur if there are existing conflicts that
could affect end-users or other companies and are in the sphere of competence of
OSINERGMIN351. Dispute Resolution requests will be addressed to the Permanent Collegiate
Body, that will determine if its capable of solving the controversy or request to OSINERGMIN’s
board the establishment of an Ad-Hoc Collegiate Body352.
Affected parties that require a Dispute Resolution procedure must submit a challenge
request including their identification, the challenged side’s identification, and the subject to
be challenged353.
The Collegiate Body can call for a Conciliation Agreement, in which the conflicted sides can
agree upon a common solution, that must be approved by the Collegiate Body. A final
350 OSINERG’s Dispute Resolution Bylaws, article N° 2.


decision by the Collegiate Body will be taken, considering the challenge presented by the
affected party, the replies submitted by the other sides, and any consented conciliation. If
affected parties.
Appeal requests to challenge the Collegiate Body, can be presented by affected parties to
the Collegiate Body. The Collegiate body will evaluate if the appeal request is valid and if
so, it will summon the Dispute Resolution Tribunal. The latter body will solve the dispute in a
last instance354.
7.2.6 Budget
OSINERGMIN’s budget is funded by the following sources 355:
1. Regulatory Payments coming from energy agents. Payments coming from each
energy company must not exceed 1% of the agent’s annual sales (excluding Value
Added Taxes). Regulatory payments will be defined by the Ministers Council’
Presidency and endorsed by the President of the Ministers Council and the Minister
of Economy and Finance.
2. Funding coming from Perupetro, according to Article N° 6 g) in Law N° 26.221.
3. Payments coming from administrative services provided by OSINERGMIN.
4. Costs related to sanction procedures due to the non-compliance of technical and
legal requirements derived from concession agreements or norms mandated by
OSINERGMIN.
5. Donations and transfers.
6. Financial interests accrued by OSINERGMIN.
7. Other revenues due to the sale of goods or services by OSINERGMIN.
As previously mentioned, the Budget is presented for approval by OSINERGMIN’ Board to the
Ministers Council’s Presidency.
7.3 Diagnosis
According to Foster & Rana356, and as shown in Table 7-1, OSINERGMIN has relatively
advanced transparency and accountability practices. For instance, although OSINERGMIN
is not required to send annual performance reports to Congress, reports are submitted
whenever requested.
OSINERGMIN publish its regulatory projects before they come into effect and conduct public
consultation processes for some regulatory initiatives. In addition, OSINERGMIN has
established User Councils, to encourage participation of interested parties in the regulatory
process, contributing to formalization of the relationship between public institutions and
sector stakeholders. Stakeholders’ participation is also considered in Regulatory Impact
Assessments (RIAs), conducted by OSINERGMIN which consider the possible costs and
benefits from new regulations. Through the stakeholder’s participation process, OSINERGMIN
354 OSINERG’s Dispute Resolution Bylaws, article N° 47 and article N° 50.

356Source: Rethinking Power Sector Reform in the Developing World, Vivien Foster and Anshul Rana, World Bank,
2019.
https://openknowledge.worldbank.org/bitstream/handle/10986/32335/9781464814426.pdf?sequence=10&isAllow
ed=y

collects information to define the best policy option that meets the objectives set, as well as
the analysis of the costs and benefits of regulatory proposals. Finally, regulators publish
indicators focused on the quality of services, the effectiveness of the budget exercised, the
efficiency and results of its programs, among others.
According to the latter description, the energy sector’s regulation in Peru is effective and
adequately designed. OSINERGMIN is highly autonomous, and an adequate oversight
framework is in place.
However, some of the OSINERGMIN’s functions need to be revisited. In many activities,
OSINERGMIN acts as regulator, supervisor, and sanctioning entity, and could eventually lead
to possible conflicts of interest. Additionally, although OSNERGMIN is highly autonomous,
some of the members of the Board and the Dispute Resolution Tribunal are appointed by
the government; at the same time, OSINERGMIN must regulate and solve controversies
regarding state-owned companies, leading also to potential conflicts of interest.
The main OSINERGMIN’s characteristics and functions that need to be revisited are
presented in the following section.
Table 7-1. Scores based on index developed for the Rethinking Power Sector Reform Project357.
International
Peru
benchmark
Regulatory Governance 83% 59%
Accountability 85% 83%
Regulatory Oversight 67% 81%
Legal Appeals 100% 100%
Transparency 89% 67%
Autonomy 98% 71%
Decision-Making Autonomy 92% 79%
Budgetary Autonomy 100% 80%
Leadership Autonomy 100% 66%
Managerial Autonomy 100% 59%
7.3.1 OSINERGMIN’s functions

OSINERGMIN’s multiple functions could lead to potential conflicts of interests and an
inadequate performance
As described in section 7.2.2.2, OSINERGMIN is responsible in performing supervisory,
regulatory, normative, fiduciary, and sanctioning, dispute resolution and user complaints
solution functions. According to the current regulatory framework, OSINERGMIN’s functions
should meet the neutrality, non-discriminatory, transparency, impartial, independent,
efficiency, and subsidiary principles, among others.
Some of these functions could related to a same procedure. For instance, OSINERGMIN is
responsible in setting the main guidelines regarding electricity public service procurement
procedures, including the definition of quality-of-service standards. In addition, the entity is
responsible in supervising the quality of service in the provision of electricity. Moreover,
357 Source: http://www.esmap.org/rethinking_power_sector_reform

OSINERGMIN can impose sanctions due to the non-compliance of standards by electricity

providers, as well as solving users’ complaints presented by users affected by low quality of
services. Finally, OSINERGMIN and its bodies will act as judge regarding controversies
affecting the non-compliance of electricity supply standards.
These multiple functions present two challenges:
a) All these diverse activities require multidisciplinary teams composed by specialized
members in legal, economical, and technical matters.
b) OSINERGMIN could have specific biases when conducting their regulatory,
supervision, sanction, and dispute resolution functions on a same matter.
The first challenge can be solved by having specialized areas within OSINERGMIN that can
specialize in each of the function. Apparently, this is currently achieved. However, multiple
new responsibilities will be required due to development of new market mechanisms, the
entry of new players, new types of electricity services and regulatory challenges, will require
robust technical and legal areas that have all the capabilities to solve them.
On the other hand, considering that OSINERGMIN is responsible in dictating the norms,
supervising them, and sanctioning the non-compliance, it could lead to a possible bias in
favoring specific public policies that not necessarily pursue increase energy security while
meeting efficiency, justice, and equity criteria as well as complying with Peruvian
commitments in greenhouse gases emissions. Although OSINERGMIN’s principle should
prevent this, the current framework could avert OSINERGMIN’s bodies meet the principals.
The latter could be avoided if OSINERGMIN’s current functions are conducted by separate
independent entities, in which each of these entities will be specialized in the delegated
function (e.g., supervisory).
There is no existing unit specialized in market monitoring
Like the diagnosis regarding COES’ functions, OSINERGMIN’s duties do not include market
monitoring responsibilities. The incorporation of new market-based mechanisms, possibly
including the participation of different generation and load-based resources in the provision
of energy, power, and ancillary services. An active competition surveillance will be required
to prevent market dominance behavior by incumbent or new players. These responsibilities
are not currently conducted either by COES, OSINERGMIN or INDECOPI. A careful evaluation
of who should have these duties, either COES, OSINERGMIN, or a different entity, should be
done.
Dispute Resolution functions
The existing Dispute Resolution mechanism allows Agents to challenge OSINERGMIN
decisions. Affected parties can present reconsideration requests to Collegiate Bodies or
present appeal request to the Dispute Resolution Tribunal, but only after the Collegiate Body
decides that the appeal request is worth to be presented to the Tribunal.
The Tribunal’s members are independent of OSINERGMIN, but are appointed, mainly by
Government’s representatives. Therefore, the Government, through its institutions will be
judge and party involving their actions and decisions. This could cause potential conflicts of
interest regarding decisions involving state-owned companies.
For instance, in respect of controversies between a generator and a public distribution
companies would be solved by OSINERGMIN’s bodies. The latter could be biased in deciding
on behalf of the distribution company considering that is state-owned.

Moreover, OSINERGMIN through the Board of Directors is responsible in solving controversies

regarding sanctioning function imposed by the General Management, also acting as judge
and party.
Therefore, following the recommendation regarding COES’ Dispute Resolution mechanism,
it is important to evaluate the inclusion of an Independent Tribunal (such as an Independent
Expert Panel) that could solve any discrepancies in the energy sector, either due to decisions
taken by OSINERGMIN or controversies among agents and between agents and COES.
7.4 International revision

7.4.1 Market regulation and supervision in Chile
Description of main institutions in Chile
The electricity sector in Chile is characterized by a hierarchical institutional structure with
clearly defined institutions and roles. The diagram on Figure 7-1 describes the different entities
that form part of the institutional framework.
Institutions
Ministry of Energy Policy makers

Ministry of Enviroment
Ov erseer
Superintendence Institution
National Energy Superintendence of

Commission (CNE) Electricity and Fuel
Enviromental Evaluation Technical
(SEC) serv ices
Servicie (SEA)
Consultant/
Planner Ov erseer
Institution
Experts Panel
Conflict
Independent Coordinator resolution
of the National Electrical System
coordinator Antitrust Law Court
System (CISEN)
Figure 7-1: Electricity sector agents and institutions

The Ministry of Energy is responsible of formulating the policies, programs and standards
aimed to promote a proper functioning and development of the energy sector. Additionally,
the Ministry must ensure compliance with industry standards and advise the Government on
all matters related to energy, including the research, exploration, generation, transmission,
transportation, storage, distribution, consumption, efficient use, import and export, and
anyone else that relates to electricity, coal, gas, oil, nuclear energy, geothermal and solar,
and other energy sources.
The National Energy Commission (CNE) is the regulatory entity. CNE is the technical body
responsible for analyzing prices, tariffs and technical standards to which energy production,
generation, transport, and distribution must adhere, to have a sufficient, safe, and quality of
service, compatible with the most economical operation.
The Superintendence of Electricity and Fuels (SEC) is the supervisory entity. SEC is responsible
in ensuring the adequate operation of electricity, gas, and fuel services, in terms of their
security, quality and price.
Among other relevant institutions, and as described in Chapter 3 , there is an Independent
Coordinator of the National Electrical System (CEN) responsible of commanding the

operation of all electrical system’s installations, including generation and transmission assets
as well as managing the short-term market, among other responsibilities. Dispute resolutions,
as already mentioned are responsibility of an Independent Experts Panel. Moreover, there
is a Council of Ministers for the Sustainability responsible in proposing policies and
environmental regulations to the President. Some of the Council’s duties are to i) propose to
the President the policies for the use, management, and sustainable exploitation of the
natural resources, ii) propose to the President the sustainability criteria to be considered for
the policy development and planning process of the ministries, and iii) propose to the
President the creation of Protected Areas, which includes national parks and natural
reserves, among others.
Regulatory functions
The National Energy Commission is responsible of performing the regulatory functions. Its
main functions, as defined by the law are:
• Analyze technically the structure and the level of the prices and tariffs of energy
goods and services, in the cases and manner established by law.
• Establish the necessary technical and quality standards for the operation of energy
facilities, in cases established by law.
• Monitor and project the current and expected functioning of the energy sector and
propose to the Ministry of Energy the legal and regulatory rules that are required, in
matters within its competence.
• Advice the Government, through the Ministry of Energy, in all matters related to
energy sector for its better development.
• Lead and coordinate the process of developing the centralized planning for
transmission expansion of the transmission network, together with the qualification
and pricing studies.
The administration of the Commission corresponds to the Executive Secretary, who is the
Chief of the Service and has a legal, judicial, and extrajudicial representation. The Executive
Secretary is appointed by the President of Chile, out of a list of candidates proposed by the
Public Management Agency.
Supervisory functions
The Superintendence of Electricity and Fuels (SEC) is responsible in conducting the
supervision functions. Its objective is to supervise and verify the compliance with legal and
regulatory provisions, and technical standards on generation, production, storage, transport
and distribution of liquefied fuels, gas, and electricity.
The SEC can also impose fines on electricity and gas agents due to the non-compliance of
technical norms and the existing energy regulatory framework. The SEC has also the faculty
of interpreting the norms and laws that is responsible in overseeing, in the event an agent
needs some clarification.
SEC also provides temporal concessions and informs the Ministry about the definitive
concessions in electricity distribution and transmission. Finally, SEC sets the Operating Cost
and the New Replacement Value (VNR) of the electricity energy distribution activity,
information that is relevant for the rate setting process conducted by CNE.
The SEC is linked to the central Government through the Ministry of Energy. Candidates to
the Superintendent are proposed by Senior Public Management Agency and must comply
with several requirements. The SEC has three main divisions: i) the Electricity Technical

Division, ii) the Fuels Technical Division and iii) the Administrative and Finance Division. The
head of the divisions are also proposed by the Senior Public Management Agency.
7.4.2 Market regulation and supervision in Colombia
In the Colombian energy sector, there are three main entities responsible for elaborating
policies, regulation and overseeing. On the one hand, the Ministry of Mines and Energy
(MME), governs policy and establishes the long-term plans for the whole sector (through
UPEM, as described in Chapter 4). The set out of rules and roles are responsibility of the Energy
and Gas Regulation Commission (CREG), which sets out the rules and roles of each of the
participating agents and pursues the improvement of quality of service and price paid by
end users. Finally, the Superintendence of Domiciliary Public Utilities (SSPD), is responsible in
monitoring and overseeing operators and guarantees supply to the end user.
Regulatory functions
The sectoral regulator, the Commission for the Regulation of Electricity and Gas (CREG), was
created in 1994 through Laws 142 and 143. CREG is attached to the Ministry of Energy and
Mines as a Special Administrative Unit with administrative, financial, and technical
independence.
CREG’s main goal is to ensure an efficient and timely supply of electricity and gas services
in terms of quality and cost, as well as to promote competition in the electric and gas market
and regulate monopolies in the provision of utilities when competition is not possible 358.
According to the law, CREG’s main functions are:
• Promoting competition, efficiency, and sustainability in the energy market.
• Establishing requirements for entry of new competitors to both the wholesale and the
retail market.
• Determining and approving interconnection and usage charges and tariffs for the
transmission and distribution of electricity.
• Defining the regulated and unregulated end-user markets, including the regulation
of end-user tariffs, PPAs, market design, and competitive procurement
• Setting out the regulations for the operation, planning, and coordination of the
national transmission system.
• Issuing the technical regulations with respect to quality, reliability, and security of
electricity.
CREG’s Board (named Commission) is composed by the following members:
• Minister of Mines and Energy, who will act as the chair.
• Minister of Finance.
• Director of National Planning Department
358Source: Colombia Energy Investment Report, June 2016.

https://www.energycharter.org/fileadmin/DocumentsMedia/Other_Publications/20160729-
Colombia_Energy_Investment_Report.pdf

• 8 Experts, who will have exclusive dedication to these activities and will be appointed
by the President of Colombia for a period of 4 years. These experts can be reelected.
The Superintendent of Domiciliary Public Utilities will have a say (but no vote) in the
Commission.
In addition, there will be an Experts Committee, composed by the 8 experts that are part of
the Board. The Experts Committee conducts, among many functions, the following:
• Propose CREG’s internal bylaws.
• Elaborate, adopt, and oversee CREG’s strategic plan.
• Present annual regulatory agendas to the Board.
• Analyze and propose new regulatory changes, as well as attending observations

presented by the different agents.
CREG has a Director Executive who is appointed by the Commission and is mainly
responsible in conducting CREG’s administrative functions.
Finally, CREG can solve discrepancies between agents, regulated or non-regulated. Those
discrepancies between regulated agents due to conflicts in agreements and easements are
solve by CREG’s Experts Committee and Commission. CREG also is responsible in solving
discrepancies between agents due to commercial and operational agreements. These
discrepancies are solved by an Arbitral Tribunal composed by CREG Board members.
Supervisory functions
The Superintendence of Domiciliary Public Utilities (SSPD) oversees public utility companies
that operate within the Colombian territory. Its main functions are:
• Supervises the quality and efficiency of all public service companies.
• Takes control over public utilities companies when they are financially non-viable or
when the service rendered is at risk; and
• Imposes sanctions on companies under surveillance, and particularly with respect to
electricity companies as result of a violation of the code of operations of the
electricity sector.
The President of Colombia appoints or removes the Superintendent of Domiciliary Public
Utilities.
7.5 Proposals
In both Chilean and Colombian markets, regulatory functions and supervisory functions are
performed by different technical specialized entities. The management of these entities are
appointed by government officials. While in Chile, Dispute Resolution are solved by an
Independent Expert Tribunal, in Colombia the disputes are solved by the regulatory entity.
The following sections will include the proposals, considering the proposals already
presented in Chapter 3 and in Chapter 4.

7.5.1 Regulatory functions

Regulatory and normative functions should continue to be performed by OSINERGMIN, as it
has the required technical capabilities to set tariffs, dictate regulation and procedures,
among others.
The current governance and structure of OSINSERGMIN, should be maintained. OSINEGMIN
Board members are appointed by government officials, and although have technical
expertise, will depend on the acting government. This proposal does not intend to change
the existing governance.
However, the proposal considers a change in the budget funding. Payments should not
come from energy companies (as mentioned market agents provide funding by paying a
maximum of 1% of their annual sales). Market agents could indirectly influence OSINERGMIN
by delaying or postponing their periodically payments. Instead, additional funding should
come from the National Budget.
Decisions taken by OSINERGMIN could be challenged by COES or agents, as described in
section 7.5.5.
7.5.2 Supervisory functions
Supervisory, fiduciary, and sanctioning functions that are currently performed by
OSINERGMIN should be conducted by a new entity.
The new entity, the Superintendence would be responsible for the existing supervisory
oversight of the electricity and fuel markets (natural gas, liquefied petroleum gas and
petroleum), and carry out actions leading to impose sanctions on agents for breach of
obligations and non-compliance with regulations. In addition, the Superintendence should
be responsible for solving user complaints, consisting in solving the appeals filed by regulated
users of electricity and natural gas services against those resolved by the distribution
companies that provide such services. Moreover, the Superintendence would be
responsible in supervising the concessions handed to private investors, in the electricity and
hydrocarbons markets. Finally, the Superintendence could also denounce any non-
competitive behavior among agents in the energy sector to INDECOPI, if not previously
detected by COES’ Market Monitoring unit.
This entity should have a similar structure as a Superintendence, following the example of
Chile and Colombia. The Superintendence should be managed by a Superintendent,
appointed by the President out of 5 candidates proposed by and independent Ad-hoc
Committee. The candidates should comply with clear and transparent qualifications such
as minimum work experience in the electricity and/or gas sector, technical expertise, a title
degree in Electrical Engineering, Economou (or other related title), no existing commercial
and economic ties with market agents, among others. Decisions taken by the
Superintendence could are accountable and could be challenged in Justice Courts.
Considering that the Superintendence is a government entity, the Superintendence budget
should be included in the National Budget System.
7.5.3 Long-term Planning functions
As described in Chapter 4, long-term planning will be conducted by a specialized technical
unit, being either MINEM’s DGEE or a new unit. As mentioned, this unit conducting the must
have enough technical independence from MINEM’s governance to comply with its
functions. Moreover, the unit’s budget should be defined independently of MINEM’s budget
but should come from the National Budget System. However, MINEM would have control

over the unit’s corporate governance, as it would be MINEM the responsible entity in appoint
the unit’s professionals.
The planning process would be released every 6 years and updated every 2 years,
considering a 30-year time horizon. This plan must solve, among other, the issue about what
the role of gas will be in the energy and electricity market.
The Transmission Planning and Transmission Investment Plans would be conducted by COES
and merged into one planning process.
7.5.4 Market monitoring
As described in Chapter 3, a Market Monitoring Unit, focused on the electricity wholesale
market, is proposed to be formed in COES. COES’ Market Monitoring Unit would report
directly to COES’ board and would provide all relevant information and inputs to INDECOPI’s
Antitrust Commission, responsible for overseeing the competition conditions in the electricity
market, among others. Any ruling to correct, mitigate, or punish antitrust behavior will be
performed by INDECOPI’s Antitrust Tribunal, COES’ Market Monitoring Unit will not perform
any mitigating or punitive action and will be limited in providing INDECOPI all relevant
information and analyses. In addition, COES’ Market Monitoring Unit could eventually
suggest to OSINERGMIN potential solutions to identified market design issues.
All the decisions adopted by INDECOPI’s Antitrust Tribunal could be challenged by agents
to the Independent Expert Tribunal.
COES’ Monitoring Unit budget should be included in COES’ budget, while INDECOPI’s
budget should remain unchanged.
7.5.5 Dispute Resolutions
As described in Chapter 3, following the Chilean example, the Consultant’s proposal
considers the creation of an Independent Dispute Resolution Tribunal, responsible in solving
any that would solve all the disputes either by COES’ bodies with any agent, OSINERGMIN’s
decisions with COES or agents, and disputes arising by agents359.
This Independent Tribunal will be permanent and composed by 5 members. Each member
would serve for a period of 6 years. The qualifications of these members must be diverse.
Each member must have expertise in at least one of the following fields: i) legal, ii) economics
iii) electricity markets, and iv) natural gas markets. Collectively, the experts would have
expertise in the four mentioned fields. A Nomination Committee composed by 4 members
would be responsible of the selection of each member among the proposed candidates.
The Nomination Committee would be composed by i) COES Board Chair, ii) COES Board
Vice Chair, iii) INDECOPI’s Chair (or a representative appointed by INDECOPI’s Chair), and
iv)a representative appointed by OSINERGMIN. In the event of a tie in the selection of a
member, the Nomination Committee’s Chair would decide. COES Board Chair and the
representative of OSINERGMIN would take turns in chairing the Nomination Committee
(COES Board Chair would start as the Chair).
Having an Independent Dispute Resolution Tribunal would reduce potential conflicts of
interest, in particular those regarding decisions involving state-owned companies, and
controversies regarding sanctioning function imposed by OSINERGMIN’s General
Management. A specific norm should be elaborated stating the specific set of
Including the responsibility of ability to reconcile competing interests between agents within their sphere of
359
competence, and between them and large/free users or independent consumers of natural gas.

discrepancies that can be presented to the tribunal, as well as the procedure how
discrepancies will be presented and the different steps in the resolution process.
The tribunal’s budget should consider the expert’s wages, defined by law, and funded by all
end users through a postage stamp charge. To ensure accountability the tribunal members
would be personally jointly and severally liable for any negligent decision taken on disputes
among agents. However, agents that are involved in a controversy that only affects them
and no other third party, could request the conduction of an arbitrage process instead of
requesting a solution by the Independent Tribunal, and they would have to pay the arbitrage
process expenses.

8 Conclusions, and main recommendations

The series of energy reforms implemented in Peru during the 1990’s, 2000’s and 2010’s have
successfully contributed to the development of the energy sector, driven the increase in
electricity coverage, and strengthened the security of supply. The successful achievements
of different milestones have been in part explained, in recent years, by a stable energy
institutional framework, and a robust group of institutions involved in planning, regulating,
supervising, and operating the electricity and gas markets.
However, moving forward, several changes in the existing institutional framework will require
to adapt the existing institutions to face the future and current challenges in the energy
sector. The continuing development of solar and wind technologies, the irruption of new
technologies such as battery-based storage, the decentralization of generation into
distributed energy sources, and the entry of new type of agents such as demand
aggregators, flexibility providers and prosumers, will require modern institutions that will be
able to cope to the different challenges that will be appearing. The new institutional
framework should promote the introduction of new type of agents and the entry of small
players, and at the same time assure that economic efficiency, equity and fairness, quality,
and reliability, and decarbonization goals are met. Several regulatory changes will be
required to implement, and these modifications should be accompanied with changes in
the characteristics, governance, and functions of energy institutions.
The following figure shows a summary of the proposed governance.
Figure 8-1: Proposed governance
On the hand, COES’ corporate governance and responsibilities need to adapt to the
challenges that are faced ahead, such as the entry of new type of agents, the irruption of
small agents, and the imminent implementation of electricity market-based mechanisms.
Higher independence in COES’ governance should be pursued. Including independent
Board members that represent the interests of small customers, distributed generators, and
new agents should strengthen the checks and balances system in COES. Reducing the
influence of holding companies controlling more one registered member could also reduce
the risk of a small number of agents influencing COES’ decisions.
Based on the international review it not immediately urgent to separate the market
management and system operation functions into different entities. It is more important to
strengthen the existing Directorates, allocating them additional resources so these units can

increase their technical and operational capabilities to be able to manage their expected
additional functions.
What is truly necessary is to implement a comprehensive strategic energy planning process

that provides an energy-wide long-term view on the development of new generation,
transmission, and gas infrastructure capacity. This planning process should provide the main
guidelines regarding the future path that Peru should adopt to comply with the different
country-set goals. A market monitoring unit within COES, focused on the wholesale market,
is also relevant, considering that eventually, multiple new market-based mechanisms will be
introduced into the Peruvian electricity market.
On the other hand, although OSINERGMIN outperforms other regulators in the region, the
future complexities in the energy markets will require that the supervisory, regulatory,
normative, fiduciary, and sanctioning, dispute resolution and user complaints solution
functions be performed by more than one entity, to meet all the expected responsibilities
and to avoid any biases and conflicts of interests. Each of these new entities would be
responsible in a specific set of functions, as shown in Figure 8-1.
The role of the Market Manager of the secondary gas market will also be significant, by
increasing the liquidity of trades of gas supply and transport capacity, and therefore
contributing to a more efficient use of natural gas. The entity managing the secondary
market must be responsible in managing the market as well as administrating all the
information regarding contracts and trades. It is important to design an adequate
mechanism to remunerate the Market Manager, based on incentives, to encourage an
efficient management of the secondary market.
Dispute resolution on controversies among different agents should be conducted by an

Independent Dispute Resolution Tribunal, mitigating eventual conflicts of interest currently
faced by COES and OSINERGMIN’s dispute resolution bodies in discrepancies they act as
judged and party.
Finally, several barriers were identified in the operation and management of state-owned
distribution companies, including legal and financial barriers, as well as an excessive control
of state-owned companies. Efficient distribution companies are required, able to timely
upgrade and expand their networks, to satisfy the load growth of their clients served, allow
the incorporation of distributed generation resources, and increase the types of services
offered to their customers. Based on the analysis, the best approach is to implement a two-
stage process, consisting first in modernizing companies under state ownership, and then, in
a second stage, granting the operation of public distribution companies to private investors
through concessions, maintaining the companies under public ownership but allowing agile
private operators to improve the companies’ management and operation. The first stage
would require to be completed before moving on to the second stage.
Additional work must be done to develop the set of proposals included in this
comprehensive report. On the one hand, detailed proposals, must be carefully designed.
On the other hand, the proposals should be implemented gradually, to avoid causing any
sudden shocks to existing and new market agents. Moreover, as the Peruvian market
evolves, some of the proposed solutions will be required to be modified and adapted to the
new market structure, considering the new market landscape and trends. These tasks should
be undertaken in future work led by Peruvian authorities, although the Consultants would be
happy to provide support.


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Hugh Rudnick Van de Wyngard

Alejandro Navarro Espinosa

Thematic Line 1: Strengthening the

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

1 Currently members meet at least once per month.

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

coordination of hydropower and natural gas expansion, and weak harmonization

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

4 Integration of Energy Planning 76

5 Dynamization of the Natural Gas Market 116

6 Modernization of Public-Owned Electricity Companies 131

7 Strengthening of market regulation and supervision/monitoring 169

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

7.3 Diagnosis 178

8 Conclusions, and main recommendations 188

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

2 Through the publication of the Supreme Resolution No. 006-2019-EM.

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

a. Evaluate institutional alternatives that allow comprehensive coordination of

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

5. Strengthening of market regulation and supervision/monitoring:

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

7 AEMO’s website: https://aemo.com.au/

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

• (California) CAISO’s Five-year 2015-2019 Financial Summary: Summarizes CAISO’s

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

31 Alta Dirección Pública’s website: https://adp.serviciocivil.cl/concursos-spl/opencms

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

49 CAN’s website: http://www.comunidadandina.org/

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

with a view to supporting economic efficiency, sustainable growth, and financial

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

• Law N° 27.332: Framework Law of Private Investment Regulatory Bodies in Public

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

100 Source: https://www.proinversion.gob.pe/RepositorioAPS/0/0/arc/ML_GRAL_INVERSION_DL_757/11-D_L_757.pdf

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

• NDCs: Nationally Determined Contributions.

112 Source: http://www2.osinerg.gob.pe/MarcoLegal/docrev/DS-020-97-EM.pdf

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

• OSINERGMIN Resolution N° 108-2009-OS-CD: Procedure that set the rules regarding

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

• SEIN: “Sistema Eléctrico Interconectado Nacional”. It is the Nationwide

130 Source: https://cdn.www.gob.pe/uploads/document/file/322224/RS_N__006-2019-EM.pdf

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

3 Institutional Transformation of COES

3.2 Main characteristics regarding COES’s institutional framework

135 Source: https://www.coes.org.pe/Portal/MarcoNormativo/Estatuto/

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

139 Law N° 28.8320, article N° 15.

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

140 Law N° 28.8320, article N° 16.1.

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile

147 COES Bylaws, article N° 14.

Don Carlos 2939 Of. 1007, Las Condes, Santiago, Chile