![](media/image1.jpeg){width="1.461111111111111in"
height="1.461111111111111in"}

**Analysis of the Sustainability of the Electrical Power Sector**

![](media/image2.png){width="2.407638888888889in" height="1.5625in"}

> **Dominican Republic**

**February 2003**

**Submitted by**

**Advanced Engineering Associates International (AEAI)**

**1666 K Street, NW, Suite 620**

**Washington, DC 20006**

**Phone: 202-416-6614**

**Fax: 202-955-9082**

[![](media/image3.jpeg){width="1.4in"
height="0.8in"}](mailto:MLV@aeai.net)**aeai@aeai.net**

[The AEAI Team]{.smallcaps}

Advanced Engineering Associates International (AEAI) is a Washington,
DC-based international energy consulting firm and a prime contractor to
the US Agency for International Development (USAID) under its Global
Energy Program. AEAI is comprised of economists, lawyers and engineers
and dedicated to energy sector reform in developing and transitioning
economies. This team was assembled by AEAI.

**[Thomas P. Gross, Esq.,]{.smallcaps}** Team Leader. Mr. Gross is a
senior attorney, physicist and consultant with over 25 years experience
in energy regulation and transactions. For more than a decade Mr. Gross
has advised a number of governments on issues related to restructuring
their energy sector for the purpose of attracting investment capital,
including: advising the Government of Indonesia on drafting a new oil
and gas law; advising the Government of Nepal on establishing a power
development fund to co-finance power projects; advising the Government
of India on restructuring the electric sector; advising the Government
of Bulgaria on drafting a new energy law; advising the Government of
Romania on restructuring the electric sector; and advising the former
Soviet Union countries on power and energy issues. He has served as
Deputy Assistant General Counsel at the Federal Energy Regulatory
Commission (FERC) in Washington, DC where he worked on regulatory
programs to restructure the energy sector in the United States, and
worked in two large international law firms where he has advised clients
on power regulation, energy project finances for natural gas pipelines,
electric and hydro projects, and other energy projects. He has served as
legal advisor to Standard & Poors on power projects, and is experienced
in evaluating complex security packages for project-financed projects,
including Power Purchase Agreements, Fuel Transportation and Supply
Agreements, Operation & Maintenance Contracts, Construction Contracts,
and other documents and financial issues related to energy projects.

**[Carlos Rufin, Ph.D.]{.smallcaps}** Dr. Rufin has conducted research
and advised multilateral lenders on the sustainability of reforms in the
electricity sector in several Latin American countries. His forthcoming
book examines the political economy of institutional reform in this
sector, including a comparison of the reform experience in Argentina,
Bolivia, Brazil and Chile. As a consultant with London Economics, a
British economic consultancy, and previously with Stone & Webster, a
major engineering and consulting organization in the energy industry, he
has provided strategic analysis and planning related to the North
American, European, and Latin American energy industries. In 1988, he
assisted a major Chilean utility during its first tariff review after
privatization. More recently, he worked on the valuation of generation
assets in Panama, Nicaragua and Colombia as these assets were being
privatized by governmental utilities, evaluated the reforms in Mexico's
natural gas sector, and advised the Argentine electricity regulator on
the first review of electricity distribution rates after privatization.
For international lenders, Dr. Rufín has examined financial risks
involved in lending to electricity distribution companies in Panama in
the aftermath of their privatization. Other engagements have included
valuation of electricity generation facilities, contract restructuring
and re-negotiation, strategic advice to major industrial firms on
electricity deregulation initiatives, and development of transmission
pricing frameworks. Dr. Rufin is currently a professor of strategic
management at Babson College. Earlier based in Barcelona, Spain, he held
several financial management positions at Imperial Chemical Industries
(ICI), the largest manufacturing firm in the United Kingdom and one of
the world's largest chemical companies. As financial analyst and
financial manager, took a leading role in the reorganization and
integration in European-level structures of management accounting and
information systems for the company's Spanish and Portuguese
subsidiaries, and supervising financial accounting and treasury
functions.

**[Mary Louise Vitelli, Esq]{.smallcaps}**. Ms. Vitelli is an attorney
who has lived and worked in Central America and Russia. For almost 15
years she has provided legal, regulatory and strategic planning advisory
to governments and companies on electricity, oil and gas, coal and
nuclear restructuring. She has also assisted and advised multilateral
lenders on the sustainability of reforms in electricity and other energy
sectors throughout the world. Her emphasis on corporate governance,
legal and regulatory frameworks and institutional structures complements
her work with governments to develop federal/regional law and policy;
build institutional capacity to support large scale restructuring that
has legal, economic (subsidy reallocation) and broad social
ramifications (job creation, pension creation, relocation). Resident in
Russia 1992-1997, Ms. Vitelli served as Project Manager for the more
than \$2 billion World Bank lending activity to restructure the Russian
coal sector. Ms. Vitelli regularly serves on energy sector assessment
teams and has co-authored a variety of reviews; she is also involved in
the implementation of energy and law related technical assistance
activities for the World Bank, USAID, European Union and United Nations.
She is currently engaged in Armenia, Egypt, and Syria on energy
efficiency projects with emphasis on the electricity sectors. Her work
in Indonesia, Romania and Ukraine address sector governance and fiscal
discipline. Her work in Brazil and Egypt targets the development of
renewable energy sources including legal aspects of development for
projects such as those using cogeneration. Ms. Vitelli formerly
practiced corporate litigation in New York City and is a Board member of
several international NGOs dedicated to improving energy use.

## [David J. Jhirad, Ph.D.]{.smallcaps} Formerly Deputy Assistant Secretary of Energy for International Energy Policy, Trade and Investment (1995-2000), Senior Advisor to the US Secretary of Energy (2000-2001) and Senior Energy Advisor at USAID, Dr. Jhirad is a physicist and Visiting Professor of Science, Technology and International Affairs at the Georgetown University School of Foreign Service. He conducts research and teaches graduate courses on global energy and electricity policy, markets, technology and risk assessment. He has more than 28 years experience in energy and power policy, regulatory reform, cross-border trade and investment in natural gas and power, and environmental issues in all the major countries of the world. He led the US bilateral energy policy dialogue with all major energy consuming and producing nations, and worked successfully with governments and the private sector to stimulate private investment in gas and power infrastructure. He has lived in the UK and India. He has co-authored a book on power technology scenarios for the United States, and more than 80 technical papers on energy and power technology and policy innovation. He has testified frequently before the US Congress and has led energy policy reviews of several major countries. As the US representative to the International Energy Agency and the Asia Pacific Economic Community (APEC) Energy Working Group, he guided work on oil security, gas and electricity restructuring, climate change analysis, and energy technology innovation. 

**ACRONYMS (*in alphabetical order*)**

+--------------+--------------------+----------------+---------------+
| **Acronym**  | **English**        | **Spanish**    | **Reports     |
|              |                    |                | To:**         |
+--------------+--------------------+----------------+---------------+
| **CDE** *x*  | National Power     | Corporacion    | #             |
|              | Company            | Dominicana de  | ####### CDEEE |
|              |                    | Electricidad   |               |
+--------------+--------------------+----------------+---------------+
| **CDEEE**    | Dominican          | Corporacion    | President     |
| *x*          | Corporation of     | Dominicana de  |               |
|              | State Electric     | Empresas       |               |
|              | Companies          | Electricas     |               |
|              |                    | Estatales      |               |
+--------------+--------------------+----------------+---------------+
| **CNE\***    | National Energy    | Comision       | President     |
|              | Commission         | Nacional de    |               |
|              |                    | Energia        |               |
+--------------+--------------------+----------------+---------------+
| ### CO\*     | Coordinating Body  | Organismo      | #######       |
|              |                    | Coordinador    |               |
|              |                    | del Sistema    |               |
|              |                    | Electrico      |               |
|              |                    | Interconectado |               |
|              |                    | de la          |               |
|              |                    | República      |               |
|              |                    | Dominicana     |               |
+--------------+--------------------+----------------+---------------+
| **EGEHD**    | Dominican          | Empresa de     | ####### CDEEE |
| *x*          | Hydroelectric      | Generacion     |               |
|              | Generation Company | Hidroelectrica |               |
|              |                    | Dominicana     |               |
+--------------+--------------------+----------------+---------------+
| **ETED** *x* | Dominican          | Empresa de     | ####### CDEEE |
|              | Transmission       | Transmision    |               |
|              | Company            | Electrica      |               |
|              |                    | Dominicana     |               |
+--------------+--------------------+----------------+---------------+
| **FO         | Patrimonial Fund   | Referred to as | ####          |
| NPER\*\*\*** | (Development Fund) | both (1) El    | ### President |
|              |                    | Fondo          |               |
| **(*formerly | (*formerly Reform  | Patrimonial de |               |
| CREP*)**     | Commission of      | las Empresas   |               |
|              | Public             | Reformadas and |               |
|              | Enterprise)*       | (2) Fondo      |               |
|              |                    | Patrimonial    |               |
|              |                    | para el        |               |
|              |                    | Desarrollo     |               |
|              |                    |                |               |
|              |                    | (*formerly     |               |
|              |                    | Comision de    |               |
|              |                    | Reforma de la  |               |
|              |                    | Empresa        |               |
|              |                    | Publica)*      |               |
+--------------+--------------------+----------------+---------------+
| **MF\*\*\*** | Ministry of        | Secretaria de  | President     |
|              | Finance            | Finance        |               |
+--------------+--------------------+----------------+---------------+
| **PAEF\*\*** | Anti-Fraud Program | Programa       | National      |
|              |                    | Nacional de    | Police        |
|              |                    | Apoyo a la     |               |
|              |                    | Eliminacion    | CNE           |
|              |                    | del Fraude     |               |
|              |                    | Electrico      | SIE           |
+--------------+--------------------+----------------+---------------+
| **PRA\*\***  | Blackout Reduction | Programa       | Social        |
|              | Program            | Nacional de    | Cabinet       |
|              |                    | Reduccion de   |               |
|              |                    | Apagones       | CNE           |
+--------------+--------------------+----------------+---------------+
| **PNER\*\*** | Rural              | Programa       | CDE           |
|              | Electrification    | Nacional de    |               |
|              | Plan               | E              |               |
|              |                    | lectrificacion |               |
|              |                    | Rural          |               |
+--------------+--------------------+----------------+---------------+
| **           | Consumer Complaint | Oficina de     | SIE           |
| PROTECOM\*** | Department         | Proteccion al  |               |
|              |                    | Consumidor de  |               |
|              |                    | Energia        |               |
|              |                    | Electrica      |               |
+--------------+--------------------+----------------+---------------+
| *            | Ministry of        | Secretaria de  | President     |
| *MIT\*\*\*** | Industry and Trade | Industria y    |               |
|              |                    | Comercio       |               |
+--------------+--------------------+----------------+---------------+
| **SIE\***    | Superintendent of  | Su             | CNE           |
|              | Electricity        | perintendencia |               |
|              |                    | de             |               |
|              |                    | Electricidad   |               |
+--------------+--------------------+----------------+---------------+
| **Social     | ####               | Cabinete       | President     |
| Cab          | ### Social Cabinet | Social         |               |
| inet\*\*\*** |                    |                |               |
+--------------+--------------------+----------------+---------------+

*\* Permanent Institutions*

*\*\* Institutions dedicated to targeted programs*

*\*\*\* Government bodies impacting sector reform*

*x State Companies*

# **[Table of Contents]{.smallcaps}**

# 

+------------------------------------------------------------------+---+
| # **[Executive Summary]{.smallcaps}**                            | # |
|                                                                  |   |
| #  **[A. Introduction]{.smallcaps}**                             | [ |
|                                                                  | 8 |
| #                                                                | ] |
|                                                                  | { |
| # **[B. Factual Findings and K                                   | . |
| ey Threats to Sustainability of the Reform Effort]{.smallcaps}** | s |
|                                                                  | m |
| **[1. Structural and Organizational Issues]{.smallcaps}**        | a |
|                                                                  | l |
| **[2. Market Operation]{.smallcaps}**                            | l |
|                                                                  | c |
| **[3. Collections and Financial Viability of the                 | a |
| Companies]{.smallcaps}**                                         | p |
|                                                                  | s |
| > **[C. Recommended Strategies to Overcome Threats to            | } |
| > Sustainability of Reform]{.smallcaps}**                        |   |
|                                                                  | # |
| **[1. Structural and Organizational                              |   |
| Recommendations]{.smallcaps}**                                   |   |
|                                                                  | # |
| **[2. Market Operation]{.smallcaps}**                            |   |
|                                                                  | [ |
| > **[3. Collections and Financial Viability of the               | 8 |
| > Companies]{.smallcaps}**                                       | ] |
| >                                                                | { |
| > **[4. Statutory Amendments]{.smallcaps}**                      | . |
|                                                                  | s |
| # **[1. Institutions, Incentives and                             | m |
|  the Political Economy of the Power Sector Reform]{.smallcaps}** | a |
|                                                                  | l |
| # **[Reform in Latin America]{.smallcaps}**                      | l |
|                                                                  | c |
| ####  [1.2 Reform in the Dominican Republic]{.smallcaps}         | a |
|                                                                  | p |
| #### [1.3 Current Structure of the Electric Sector]{.smallcaps}  | s |
|                                                                  | } |
| **[1.3.1 National Energy Commission]{.smallcaps}**               |   |
|                                                                  | # |
| **[1.3.2 The Superintendency of Electricity]{.smallcaps}**       |   |
|                                                                  |   |
| > **[1.3.3 The Coordinating Organism]{.smallcaps}**              | # |
| >                                                                |   |
| > **[1.3.4 Corporación Dominicana de Empresas Eléctricas         |   |
| > Estatales (CDEEE)]{.smallcaps}**                               | # |
|                                                                  |   |
| 5.  **[Ratemaking and Regulatory Processes]{.smallcaps}**        | [ |
|                                                                  | 1 |
| #  **[1.3.5.1 Ratemaking]{.smallcaps}**                          | 0 |
|                                                                  | ] |
| #  **[1.3.5.2 Is                                                 | { |
| suance of SIE Regulations and Technical Standards]{.smallcaps}** | . |
|                                                                  | s |
| **[1.3.5.3 Imposition of penalties]{.smallcaps}**                | m |
|                                                                  | a |
| > **[1.3.5.4 Reglamento Amendments (Reglamento, Art.             | l |
| > 517)]{.smallcaps}**                                            | l |
|                                                                  | c |
| 6.  **[Appellate Jurisdiction and the Appeal                     | a |
|     Process]{.smallcaps}**                                       | p |
|                                                                  | s |
| **[1.3.7 Commission on the Reform of Public                      | } |
| Enterprises]{.smallcaps}**                                       |   |
|                                                                  | # |
| #####  [1.4 Private Sector Involvement]{.smallcaps}              |   |
|                                                                  |   |
| 1.  **[Capitalized Generation]{.smallcaps}**                     | # |
|                                                                  |   |
| > **[1.4.2 Capitalized Distribution]{.smallcaps}**               | [ |
| >                                                                | 1 |
| > **[1.4.3. Private Sector Generation]{.smallcaps}**             | 0 |
|                                                                  | ] |
| #### [Market Structure and Operation]{.smallcaps}                | { |
|                                                                  | . |
| 4.  **[Regulated Rates]{.smallcaps}**                            | s |
|                                                                  | m |
| **[2. Factual Findings and Threats to Sustaining the             | a |
| Reforms]{.smallcaps}**                                           | l |
|                                                                  | l |
| 1.  **[Conduct and Operation of Statutory                        | c |
|     Institutions]{.smallcaps}**                                  | a |
|                                                                  | p |
|     1.  **[The Personalization of Power]{.smallcaps}**           | s |
|                                                                  | } |
|     2.  **[Institutional Processes and                           |   |
|         Relationships]{.smallcaps}**                             | # |
|                                                                  |   |
|     3.  **[Institutional Predictability]{.smallcaps}**           | [ |
|                                                                  | 1 |
|     4.  **[Information and Awareness]{.smallcaps}**              | 3 |
|                                                                  | ] |
|         1.  **[Public Information and Awareness]{.smallcaps}**   | { |
|                                                                  | . |
|         2.  **[Information for Market Players]{.smallcaps}**     | s |
|                                                                  | m |
|         3.  **[Channels for Information                          | a |
|             Dissemination]{.smallcaps}**                         | l |
|                                                                  | l |
|         4.  **[Tool Used to Convey Information]{.smallcaps}**    | c |
|                                                                  | a |
| 2.  **[Statutory Institutions, Procedures and                    | p |
|     Operations]{.smallcaps}**                                    | s |
|                                                                  | } |
|     1.  **[The Commission on Electricity Sector                  |   |
|         Sustainability]{.smallcaps}**                            | # |
|                                                                  |   |
|     2.  **[The National Energy Commission (CNE)]{.smallcaps}**   | [ |
|                                                                  | 1 |
|     3.  **[Superintendency of Electricity (SIE)]{.smallcaps}**   | 4 |
|                                                                  | ] |
|         1.  **[Superintendent and Commissioners]{.smallcaps}**   | { |
|                                                                  | . |
|         2.  **[Independence of the Regulator]{.smallcaps}**      | s |
|                                                                  | m |
|         3.  **[Mode of operation]{.smallcaps}**                  | a |
|                                                                  | l |
|         4.  **[Role/Perception of Role]{.smallcaps}**            | l |
|                                                                  | c |
|         5.  **[Financing SIE]{.smallcaps}**                      | a |
|                                                                  | p |
|         6.  **[SIE Staff Capacity]{.smallcaps}**                 | s |
|                                                                  | } |
|         7.  **[Process and procedure]{.smallcaps}**              |   |
|                                                                  | # |
|         8.  **[Appellate Jurisdiction and the Appeals            |   |
|             Process]{.smallcaps}**                               |   |
|                                                                  | # |
|         9.  **[Issuing Resolutions]{.smallcaps}**                |   |
|                                                                  |   |
|         10. **[Contract Review]{.smallcaps}**                    | # |
|                                                                  |   |
|         11. **[Institutions Operating Under the                  | [ |
|             SIE]{.smallcaps}**                                   | 1 |
|                                                                  | 5 |
|     4.  **[Coordinating Organization]{.smallcaps}**              | ] |
|                                                                  | { |
| 3.  **[Statutory Institutions Supporting Specific Sector         | . |
|     Programs]{.smallcaps}**                                      | s |
|                                                                  | m |
|     1.  **[Blackout Reduction Program (PRA)]{.smallcaps}**       | a |
|                                                                  | l |
|     2.  **[Anti-Fraud Program (PAEF)]{.smallcaps}**              | l |
|                                                                  | c |
|     3.  **[Rural Electrification Plan (PNER)]{.smallcaps}**      | a |
|                                                                  | p |
|     4.  **[Pact for Stabilization and Economic                   | s |
|         Development]{.smallcaps}**                               | } |
|                                                                  |   |
| 4.  **[Trade Unions/Workers]{.smallcaps}**                       | # |
|                                                                  |   |
| 5.  **[Government Institutions Impacting Electricity             |   |
|     Sector]{.smallcaps}**                                        | # |
|                                                                  |   |
| 6.  **[Ministry of Industry and Trade (MIT)]{.smallcaps}**       | [ |
|                                                                  | 1 |
| 7.  **[Social Cabinet]{.smallcaps}**                             | 5 |
|                                                                  | ] |
| 8.  **[Dominican Corporation of State Electric Companies         | { |
|     (CDEEE)]{.smallcaps}**                                       | . |
|                                                                  | s |
| 9.  **[The Capitalized Companies]{.smallcaps}**                  | m |
|                                                                  | a |
| 10. **[Wholesale market: analysis and challenges]{.smallcaps}**  | l |
|                                                                  | l |
|     1.  **[Incentives for Investment in                          | c |
|         Generation]{.smallcaps}**                                | a |
|                                                                  | p |
|     2.  **[Spot Market Prices and Degree of                      | s |
|         Competition]{.smallcaps}**                               | } |
|                                                                  |   |
|     3.  **[Ancillary Services]{.smallcaps}**                     | # |
|                                                                  |   |
|     4.  **[Unregulated User Participation]{.smallcaps}**         | [ |
|                                                                  | 1 |
|     5.  **[Supply Restrictions]{.smallcaps}**                    | 7 |
|                                                                  | ] |
|     6.  **[Fuel Diversification and Energy                       | { |
|         Security]{.smallcaps}**                                  | . |
|                                                                  | s |
|     7.  **[Challenges Ahead]{.smallcaps}**                       | m |
|                                                                  | a |
| **[2.11 Transmission Service]{.smallcaps}**                      | l |
|                                                                  | l |
| **[2.12 Financial Sustainability]{.smallcaps}**                  | c |
|                                                                  | a |
| **[2.12.1 Retail Revenues]{.smallcaps}**                         | p |
|                                                                  | s |
| **[2.12.2 Transmission Tolls]{.smallcaps}**                      | } |
|                                                                  |   |
| **[2.12.3 Wholesale Power Prices]{.smallcaps}**                  | # |
|                                                                  |   |
| **[3. Recommendations for Sustainability of Sector               | [ |
| Reforms]{.smallcaps}**                                           | 1 |
|                                                                  | 8 |
| **[3.1 Sector Architecture]{.smallcaps}**                        | ] |
|                                                                  | { |
| **[3.1.1 Superintendency]{.smallcaps}**                          | . |
|                                                                  | s |
| **[3.1.2 National Energy Commission (CNE)]{.smallcaps}**         | m |
|                                                                  | a |
| **[3.1.3 Coordinating Organism]{.smallcaps}**                    | l |
|                                                                  | l |
| **[3.2 General Sector Reform]{.smallcaps}**                      | c |
|                                                                  | a |
| **[3.2.1 Development, Publication and Implementation of          | p |
| Government Sector Reform Strategy]{.smallcaps}**                 | s |
|                                                                  | } |
| **[3.2.2 Establish a Sector Reform Task Force]{.smallcaps}**     |   |
|                                                                  | # |
| **[3.2.3 Define further roles and responsibilities of            |   |
| institutions for each institutional mandate, methodology for     | [ |
| implementation.]{.smallcaps}**                                   | 1 |
|                                                                  | 9 |
| **[3.2.4 Consumer Protection and Participation]{.smallcaps}**    | ] |
|                                                                  | { |
| **[3.2.5 Improve Public Information and Awareness]{.smallcaps}** | . |
|                                                                  | s |
| **[3.2.6 Develop stronger commitment mechanisms for payment of   | m |
| Government electricity bills]{.smallcaps}**                      | a |
|                                                                  | l |
| **[3.2.7 Performance Contracting]{.smallcaps}**                  | l |
|                                                                  | c |
| **[3.2.8 Modify the Current Regulations for Street Lighting      | a |
| Quality]{.smallcaps}**                                           | p |
|                                                                  | s |
| **[3.3 Related Government Programs]{.smallcaps}**                | } |
|                                                                  |   |
| **[3.3.1 Anti-Fraud Unite (PAEF)]{.smallcaps}**                  | # |
|                                                                  |   |
| **[3.3.2 Blackout Reduction Program (PRA)]{.smallcaps}**         |   |
|                                                                  | # |
| **[3.3.3 National Energy Efficiency and Renewable Energy         |   |
| Program]{.smallcaps}**                                           | [ |
|                                                                  | 2 |
| **[3.4 The Wholesale Market]{.smallcaps}**                       | 0 |
|                                                                  | ] |
| **[3.4.1 Implement the Commercial Information                    | { |
| System]{.smallcaps}**                                            | . |
|                                                                  | s |
| > **[3.4.2 Develop additional mechanisms for private investment  | m |
| > in hydroelectric facilities]{.smallcaps}**                     | a |
|                                                                  | l |
| **[3.4.3 Establish and publicize a procedure for computing the   | l |
| value of water for dispatch purposes]{.smallcaps}**              | c |
|                                                                  | a |
| **[3.4.4 Modify or periodically review the spot market price     | p |
| cap]{.smallcaps}**                                               | s |
|                                                                  | } |
| #  **[3.4.5 Increa                                               |   |
| se transparency of charges for ancillary services]{.smallcaps}** | # |
|                                                                  |   |
| **[3.4.6 Follow the July 2001 Law's mandate in lowering the      |   |
| market access threshold, and rescind Order                       | # |
| SIE-15-2001]{.smallcaps}**                                       |   |
|                                                                  |   |
| **[3.4.7 Increase SIE vigilance about vertical                   | # |
| integration]{.smallcaps}**                                       |   |
|                                                                  | [ |
| **[3.4.8 Adjust transmission tolls and develop explicit          | 2 |
| mechanisms for private investment in transmission]{.smallcaps}** | 0 |
|                                                                  | ] |
| **[3.4.9 Resolve the Cogentrix Dispute]{.smallcaps}**            | { |
|                                                                  | . |
| **[3.4.10 Delay Haina-Itabo merger until a thorough study of     | s |
| competitive implications is completed]{.smallcaps}**             | m |
|                                                                  | a |
| > **[3.4.11 Establish clear and aggressive targets for reduction | l |
| > of technical losses at transmission and distribution           | l |
| > levels]{.smallcaps}**                                          | c |
|                                                                  | a |
| **[[Tables]{.underline}]{.smallcaps}**                           | p |
|                                                                  | s |
| **[Table 1-Capitalization of the Sector]{.smallcaps}**           | } |
|                                                                  |   |
| **[Table 2-Structure of the Coordinating Organism                | # |
| Council]{.smallcaps}**                                           |   |
|                                                                  | [ |
| **[Table 3-Ownership of Generation Capacity]{.smallcaps}**       | 2 |
|                                                                  | 0 |
| **[Table 4-Renegotiation of Power Purchase                       | ] |
| Agreements]{.smallcaps}**                                        | { |
|                                                                  | . |
| **[Table 5-Government Roles and Objectives]{.smallcaps}**        | s |
|                                                                  | m |
| **[Table 6-PROTECOM Offices]{.smallcaps}**                       | a |
|                                                                  | l |
| **[Table 7-Structure of the Coordinating organism                | l |
| Council]{.smallcaps}**                                           | c |
|                                                                  | a |
| **[Table 8-Governance of the Capitalized                         | p |
| Companies]{.smallcaps}**                                         | s |
|                                                                  | } |
| **[Table 9-Ede-Este Collections Data, January-August             |   |
| 2002]{.smallcaps}**                                              | # |
|                                                                  |   |
| **[Table 10-Edenorte-Edesur Collections Data, January-October    | [ |
| 2002]{.smallcaps}**                                              | 2 |
|                                                                  | 4 |
| **[Table 11-Multiple Roles of Government]{.smallcaps}**          | ] |
|                                                                  | { |
| **[[Diagrams]{.underline}]{.smallcaps}**                         | . |
|                                                                  | s |
| **[Diagram 1-Institutional Framework of the Electricity          | m |
| Sector-Dominican Republic]{.smallcaps}**                         | a |
|                                                                  | l |
| **[Diagram 2-Process for Customer Filing a Billing               | l |
| Complaint]{.smallcaps}**                                         | c |
|                                                                  | a |
| **[Diagram 3-Pra Implementation Process]{.smallcaps}**           | p |
|                                                                  | s |
| ## [Diagram 4-Non                                                | } |
|  Served Peak Demand as % of Estimated Demand]{.smallcaps} {#diag |   |
| ram-4-non-served-peak-demand-as-of-estimated-demand .unnumbered} | # |
|                                                                  |   |
| [Diagram 5-**Generation Fuel Mix, Dominican Republic, 2001       | [ |
| actual and 2003 expected**]{.smallcaps}                          | 2 |
|                                                                  | 5 |
| **[Diagram 6-Electricity Sector Value Chain]{.smallcaps}**       | ] |
|                                                                  | { |
| **[[Attachments]{.underline}]{.smallcaps}**                      | . |
|                                                                  | s |
| **[Attachment I- Training Attachment]{.smallcaps}**              | m |
|                                                                  | a |
| **[Attachment II- Letter from "Comisión Nacional de Energía",    | l |
| Dated March 6, 2003]{.smallcaps}**                               | l |
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|                                                                  | # |
|                                                                  |   |
+------------------------------------------------------------------+---+

# 

# **[Executive Summary]{.smallcaps}**

A.  **[Introduction]{.smallcaps}**

## Summary Findings

The state of electricity sector reform in Dominican Republic is
impressive. In a relatively short period of time, since 1997, a
substantial number of structural, financial and policy changes have been
implemented for supporting market reform. During the first generation of
reforms, Government has made definite legal commitments that address how
the sector is organized and regulated, and how the private sector is
involved. A number of aspects of the restructuring are very positive.
All the major entities needed for a successful restructuring are in
place, and the sector is in a transitional phase or its "second
generation." That transition is being felt throughout the sector, and
there appears to be a solid consensus by many top policy leaders to make
the restructuring a success. Many positive steps are being taken to
address the issues and there is strong momentum to make the reforms
successful.

However, as Section 3 of the Report reflects, there are a number of
major issues that Government needs to address to remedy sector flaws.
Our findings show that an array of "growing pains" exist as to how the
sector is currently operating and these issues are layered and, in
certain areas, complex. Establishing more stable and predictable
operations in the sector is not just a matter of reassigning business
functions from the Government to the private sector, but requires the
definition of legitimate business functions as part of reform. Now, as
the second generation of reforms are implemented, the Government must
address these "growing pains" in a timely and strategic manner in order
to secure the reforms achieved to date.

Government needs to clearly state its reform objectives and complement
those objectives with institutional capacity needed to support those
objectives. Timing is important. If institutional capacity is not timely
and sufficiently upgraded to guide reforms, then management of the
sector will become (and already has shown signs of becoming) reactive as
opposed to being predictable. Reactive sector management results in
neglecting other aspects of the sector each time a particular crisis
emerges. Furthermore, the financial viability of the sector, especially
at the distribution level, is critical to the long-term sustainability
of the reforms and must be addressed in a timely manner.

The sector continues to be plagued by serious problems, such as the
Cogentrix plant remaining off-line since October 2002 due to a dispute
with the Government, high prices for electricity but low quality of
service, controversy regarding Union Fenosa and its performance under
its management contract, heated debate about the success of the reforms,
some advocacy for re-institutionalizing the sector under Government
control, demonstrations by the public before the Congress and elsewhere
about the poor quality of service, and other problems. Some of these
problems have reached such a level of concern that donor agencies may
withhold further financial assistance until a clear resolution is in
sight and it is evident that the availability of financial assistance
will result in significant long-term sustainability of the sector.
Private investors remain uncertain as to whether their confidence in
this market will be restored. The international investment community is
unlikely to view investment in the Dominican Republic favorably while
these issues are pending resolution.

## 

## The Team and Mission[^1]

In late 2002, the Government requested assistance from the US Agency for
International Development (USAID) in evaluating threats to sustaining
its reform efforts with the purpose of proposing strategies or specific
actions that will assure the long-term success of the reforms. The team,
consisting of two lawyers, an engineer and a political scientist was
assembled to conduct this assessment of the sector. The assessment was
conducted between October 2002 and January 2003.

Our Mission was to complete an objective, qualitative analysis of the
sector to identify those aspects of the sector that are functioning
reasonably well, to identify those aspects of the sector that are
failing to function well, either because of the way the sector is
structured or for other reasons, and to make recommendations on how to
improve the operation of the sector in order to maintain the
sustainability of the reforms. The examination is expected to provide
some insight, among other things, into whether the architectural design
of the sector should be modified, whether the governance mechanisms are
satisfactory, whether appropriate checks and balances exist and other
related issues.

## The Report[^2]

The findings presented in this Report are based on (i) previous reports
and studies prepared by sector entities, donor agencies, and the
companies, (ii) semi-structured interviews conducted in-country with key
persons and entities in the sector, and (iii) data and other information
provided to us by various public and private entities, including those
that operate within the sector. Over a period of approximately four
months, two in-country visits were conducted. The team met with numerous
organizations and companies that operate in the sector, including, among
others, the National Energy Commission (CNE), the Superintendency (SIE),
the Coordinating Organism (CO), the two capitalized generation companies
(Haina and Itabo), CDEEE (the state-owned holding company for the
transmission and hydroelectric facilities), the three distribution
companies (EdeNorte, Edeste, and EdeSur), the Dispatch Center, the World
Bank, the InterAmerican Development Bank, and other organizations.

Although this Report is designed to be more qualitative than
quantitative, we also requested data from some of the companies about
their organizations, in order to gain a general sense about the
companies' operations, staffing, organization and collections.[^3] Our
Report is not intended to resolve every issue that is raised, due to
limited time and resources, but it may lead to subsequent, more detailed
assessments on targeted topics and issues that were uncovered during our
review. Technical and social impact issues were not thoroughly
addressed, but the World Bank is expected to conduct in 2003 an in-depth
social impact assessment that should complement these findings.

## 

We have separated our findings into three Report sections: Section 1
presents an updated review of the sector; Section 2 presents our
analysis of the institutions, market operation and financing of the
sector; and Section 3 presents our team recommendations as they relate
to key findings in Section 2. The recommendations in this Report,
although critical at times, are intended to be helpful to all sector
players. We hope the recommendations will be reviewed and evaluated by
all sector players, and appropriate steps take to implement the
recommendations, after careful review of their relevance and
applicability.

B.  **[Factual Findings and Key Threats to Sustainability of the Reform
    Effort]{.smallcaps}**

Based on our review, we have made a number of factual findings,
identified certain threats to the sustainability of the reform efforts,
and formulated a number of recommendations in order to overcome those
threats. A summary of our key findings is set forth below; more detail
and additional findings are provided in Section 2.

**1.** **Structural and Organizational Issues**

The basic organization of the sector is sound and includes the key
institutions that we expect to see in contemporary restructured markets.
We find that the sector is supported by permanent institutions as well
as temporary, programmatic institutions intended to address targeted
issues for a limited period of time. The main permanent institutions
include:

-   The National Energy Commission (CNE) which serves as a policy and
    planning entity that is part of the Executive Branch and reports to
    the President;

-   The Superintendency (SIE) which is an independent regulatory
    organization composed of several commissioners appointed by the
    President for fixed terms that oversees the operation of the sector,
    assures consumer protection and has enforcement powers

-   A spot market that is based on bidding and merit order ranking that
    is operated by a pool or private organization---in this case, the
    Coordinating Organism (CO)\--that establishes rules and
    payment/collection procedures for those who participate in the spot
    market;

-   A Dispatch Center that dispatches power based on ranked bids and
    long term contracts;

-   Other Governmental organizations and Ministries such as the Ministry
    of Finance, etc., that advise the Office of the President on policy
    issues, rural electrification and energy efficiency. This includes
    the Presidential Commission for the Sustainability of Electricity
    Reform which is an advisory body comprised of five senior advisors
    including the Minister of Finance, Superintendent and Executive
    Director of CNE.

The primary temporary programmatic institutions include the Anti-Fraud
Unit (PAEF) and the Blackout Reduction Program (PRA) which are assessed
in detail in Section 2.

*Institutional Flaws*

Although all the basic architectural elements of the sector are in
place, the sector is not operating as it should. There are several
reasons for its limited success.

In some cases, this is due to "growing pains" as the sector players
learn their respective roles and how the roles relate to the other
sector players. Questions seemed to emerge from the sector players about
these roles and the jurisdictional limits of these entities. For
example, some sector players may not fully understand the role of the
Superintendency vs. the role of CNE or they may not understand the role
of the Superintendency vs. the Coordinating Organism. Although the basic
concept of these entities seems to be clearly understood, e.g., SIE is
the regulator, there is some confusion when actual issues are presented,
e.g., who has authority to audit variable costs (SIE vs. CO), who should
address certain technical requirements in the sector (SIE vs. CO), etc.

Similarly, the entities themselves are learning the limits of their own
jurisdiction, and this learning process can result in some confusion
among themselves and the sector players. For example, the
Superintendency and CNE, or the Superintendency and the Coordinating
Organism are in the process of exploring their jurisdictional limits and
are learning how to relate to each other. Notably with regard to CNE and
SIE, there are certain legal provisions, described in Section 2, that
define jurisdictional limits that we find to be inappropriate.

*The concept of independence of the Superintendency is one of the most
critical issues in sector reform.* We suspect that this concept of
independence is not clearly understood by all sector players. Although
SIE is independent, that independence does not preclude, for example,
the Superintendent from being a team player with other Government
agencies, e.g., sharing general policy views and discussions about
sector issues, discussing probable initiatives that SIE or other sectors
could undertake, etc. The concept of independence emerges when SIE has a
matter pending before it and must make a decision about that matter,
e.g., after SIE initiates a rulemaking proceeding, initiates an
investigation or receives an application. *SIE must be careful to
prevent\--and the public and other Governmental agencies should not seek
to engage in\--any ex parte*[^4] *communications on any matter pending
before the Superintendency.*

In addition, a general lack of information for market players and
customers creates ambiguity in understanding the exact roles and limits
for sector institutions. Furthermore, Government's participation in the
sector remains significant -- as policy-maker, shareholder, enforcer,
market participant, provider of subsidies and consumer\--and these
roles, which often have conflicting objectives, create confusion when
Government speaks or acts.

In other cases, some sector players simply are using old, accustomed
methods known to achieve results, and hence they bypass the new, legally
established procedures. For example, we heard a number of anecdotal
stories about the independence of the Superintendency and how some
sector players bypass the formal appeal process and seek results at
higher political levels, such as the Office of the Presidency. We also
heard stories about how some political entities, including the Office of
the Presidency may attempt to influence the decision-making process of
the Superintendency on matters pending for decision or on matters which
have already been decided. The fact that this view exists, *whether such
conduct is actual or only perceived*, tends to exaggerate the problem,
meaning that if sector players believe that *others* are successfully
doing it, there is no reason why *they* also should not do it. The Rules
of Procedure for SIE and CNE do not seem clearly defined or well
understood by the sector. Improving the transparency of these procedures
and educating the sector about these Rules should help in promoting
their use.

In some cases, there are problems with the actual jurisdiction and
allocation of functions in the architectural structure of the sector, as
well as the manner in which the entities are implementing their
jurisdiction, that may inhibit the proper functioning of each of those
entities. For example, the Coordinating Organism has not yet issued
bylaws, or more specifically, the terms of agreement that the members
agree to when they join the CO. Failure to have clear terms and
conditions for membership and market operation can adversely affect
performance of this important entity. These problem areas are explored
in greater depth in Section 2.

The purpose and role of the Presidential Commission for the
Sustainability of Electricity Reform, which serves as an advisory
council to the President, needs to be clarified. Although similar
advisory groups are used worldwide, the composition of these groups is
generally more independent and does not include institutional directors.
In this instance we caution that this Commission may become more than an
advisory body for the President and may begin to supercede the roles
intended for CNE, SIE and possibly other institutions. This evolution of
the Commission would be detrimental to the institutional structure
required for the sector to operate in a transparent and predictable
manner.

Regarding the two temporary programs---the Anti-Fraud Unit (PAEF) and
the Blackout Reduction Program (PRA)---we find that these programs are
useful and creative transitional programs, but that, in their present
form, they should not become part of the permanent institutional setting
in which the sector operates.

**2. Market Operation**

Problems continue to plague the operation of the market, despite a
general consensus that the CO is performing well and is responsible for
many of the successes in the market. Some of our findings about market
operation that threaten the sustainability of the reforms include:

-   *Distribution companies engage in load shedding* of non-paying
    neighborhoods in order to reduce low collection rates;

-   *Generation companies take their station off line*, even if ranked
    for dispatch, because of the fear of non-payment, and it is unlikely
    such conduct is an effort to manipulate spot prices;

-   *Private sector participation in transmission and hydroelectric
    facilities is severely limited* due to legal requirements that the
    Government own all transmission and hydro facilities;

-   There are conflicting views, primarily between the Government and
    the companies and the donor agencies, *whether the transmission
    system is capable of handling full dispatch of all generation*;

-   *Technical losses for the transmission company are high* for a
    system of this magnitude and needs to be reduced through investment
    and upgrades;

-   *Transmission constraints exist primarily between the north/south
    corridor*, which become apparent when northern generation units are
    off line;

-   *There are complaints that the transmission system cannot properly
    deliver power to the distribution systems at the city gates* and
    that technical upgrades are needed to improve delivery capability;

-   *The jurisdiction of the Coordinating Organism vs. the
    Superintendency is unclear* on some matters, and in some cases,
    neither has shown a desire to address sector problems.

-   *High toll surcharges, pursuant to SIE Resolution No. 15-2001
    discourage customers from switching energy suppliers*, even though
    entitled to do so under the July 2001 Law.

-   *Tax benefits are encouraging the installation of small generation
    units of less than 4MW (distributed energy), but some generation
    units may be reselling and distributing the power without a
    concession from SIE.*

**3. Collections and Financial Viability of the Companies**

The financial viability of the companies is critical to the long term
sustainability of the reforms, i.e., companies need to make money or
they will leave, either voluntarily or involuntarily. The following
summarizes some key findings on this issue.

-   *Improving collections at the distribution level continue to be a
    high priority*; cash flow to the transmission company and the
    generation companies starts at this collection point which is the
    "cash register" for the system.

-   *The distribution companies seem to have taken aggressive measures
    to collect from non-paying customers who are capable of paying,* but
    further measures may not be effective unless there are Government
    prosecutions or other steps to deter theft, meter tampering and
    other fraudulent conduct.

-   *Government payment for services should be improved*.

-   *The general public is dissatisfied with the distribution companies,
    and does not trust the meters or the billing process.* Spot checks
    by Protecom as a result of customer complaints have found a number
    of meters inaccurate by as much as 30 percent (in favor of the
    distribution company) and billing cycles often extend more than 30
    days, e.g., 34 or 36 days.

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-   *Non-technical losses remain high*, despite the willingness of upper
    and middle class individuals to pay for electricity if the quality
    of service is improved. Continued intermittent blackouts, whether
    due to load shedding, insufficient generation due to generators
    being taken off line, or other technical malfunctions, continue to
    fuel the culture of non-payment.

-   *Distribution companies are experiencing high technical losses.*

Other factual findings and threats to sustainability are set forth in
Section 2 of this Report.

C.  **[Recommended Strategies to Overcome Threats to Sustainability of
    Reform]{.smallcaps}**

Section 3 of the Report sets forth in detail a number of steps and
strategies for improving the sustainability of the reforms. However,
based on the summary of issues set forth above, the following are some
of the key recommendations for overcoming threats to sustainability.

**1. Structural and Organizational Recommendations**

Several factors are challenging the efforts to establish new and viable
sector institutions: (i) slowly changing customer expectation of
low-cost or free electricity, (ii) distribution companies seeking high
rates of return, and (iii) a lack of publicized Government strategy to
the "second generation" of sector reform. In addition, the institutions
operate in a highly politicized environment while promoting new
approaches to sector operation and oversight. These recommendations
target institutional gaps in the immediate and medium-term of this stage
of reform.

-   *Publication and periodic updating of the Government's strategy for
    sector reform* including how it will address subsidized customers,
    private investment, and the overall institutional roles and
    responsibilities that provide for transparent and predictable
    "checks and balances" for how the sector functions.

-   *The Office of the President needs to "step back" during this
    transition period* and allow the sector institutions, and customer
    and investor confidence in those institutions, to grow.

-   *SIE must be recognized as a fully functioning independent
    regulatory agency*, and interference with the independence of the
    Superintendency should end. Sector players must learn to use the SIE
    processes and the appeal process for decisions that they do not
    agree with. Recourse to the Office of the President or other
    political agencies to change unpopular decisions must end, and
    *those agencies, and the Office of the President must stop being
    receptive to those appeals.*

-   *The close relationship between CNE and SIE should be eliminated*,
    thereby strengthening SIE's independence and enforcing CNE's role as
    a policy and planning agency. These issues include CNE's
    tie-breaking authority over SIE decisions, CNE's authority to review
    SIE decisions, and CNE's superior rulemaking authority relative to
    SIE's authority to issue resolutions. SIE should derive rulemaking
    authority directly from the statute;

-   *The capacity of CNE, SIE and other institutions should be
    strengthened* through development of organizational plans, published
    work plans and annual reporting systems. SIE will benefit from more
    detailed job descriptions, staff training, improved technology as
    needed to gather sector data, including a computerized docket and
    numbering system for tracking cases and pleadings.

-   *Both CNE and SIE should issue Rules of Procedures* for rulemaking
    and other decision-making processes to ensure full transparency and
    due process considerations. These procedures should encourage more
    public participation in SIE's decision-making process, in some
    cases, through participation of groups and coalitions, e.g.,
    consumer, industrial, commercial, and agricultural advocacy groups.

-   *The CO should finalize its legal, financial and governance rules,
    including the calculation of member dues,* so that all sector
    players understand the terms and conditions under which the market
    is operating.

-   *The structure of the Board for the CO should be revised by giving
    greater representation to the private sector*, possibly based on the
    following groups with one vote per group: all generation (including
    EGEHID); transmission (only ETED at this time); distribution; large
    users; a fifth group (possibly regulated consumers).

-   Public information about the role of, status of and *Government's
    intention for the Commission on the Sustainability of Electricity
    Reform should be clarified immediately*.

-   The Anti-Fraud Unit (PAEF) seems to be fulfilling a useful function,
    but, in order to prevent this program from perpetuating itself, *the
    order establishing PAEF should have a "sunset" provision so that it
    will automatically terminate unless explicitly extended.* *The
    program should receive appropriate funds from the Government*, and
    any direct funding through the collection of fines or penalties
    should be terminated.

-   Protecom is one of the more efficient and new institutions designed
    to handle consumer complaints. *Among other things, Protecom should
    establish more offices* throughout the Dominican Republic in order
    to provide consumers better access to this organization.
    Consideration should be given to amending the July 2001 Law so that
    Protecom is funded exclusively through the constitutional budget
    process and not directly through penalties that it assesses and
    collects

-   *The Superintendent of SIE should not be allowed to serve as the
    President of the Coordinating Organism*; a lesser role, such as
    non-participatory attendance at CO meetings should be considered;

2.  **Market Operation**

Some of the changes for improving market operation are listed above,
such as having the CO issue by-laws for its members, and amending the
July 2001 Law to allow better representation of the private sector on
the Board of the CO. Other recommendations for improving market
operation include the following.

-   *The commercial information system required by the Reglamento should
    be installed* and the CO should conclude its studies, if it has not
    already done so, on installing a central data collection system.
    Installation of both these systems will ensure proper settlement of
    market transactions.

-   *SIE Resolution No. 15-2001*, which imposes a heavy toll surcharge
    on consumers switching from their distribution company to other
    upstream sources of electricity, *should be rescinded* so that the
    market can be opened up and the provisions of the July 2001 Law
    allowing consumers to switch can be implemented;

-   *SIE should increase its vigilance of the horizontal integration of
    the market*. Among other things, the Haina---Itabo merger should be
    carefully analyzed for antitrust considerations, and possibly be
    rejected, for its impact on the market and the consolidation of
    market power into one entity;

-   *SIE should increase its vigilance of the vertical integration of
    the market*. Affiliate contracts should be carefully scrutinized to
    determine whether they contain "arms-length" bargaining terms, and
    if not, appropriate action should be taken.

-   *SIE must evaluate the current level of transmission tolls and
    revenues collected by ETED relative to the long-term operation and
    expansion needs of the transmission system,* according to the
    parameters of the July 2001 Law and the Reglamento. Any shortfalls
    should be corrected through a gradual adjustment of tolls that
    allows for the efficient operation and expansion of the system in
    the coming years.

-   *SIE should increase its vigilance of accounting practices by the
    distribution companies and consider implementing appropriate
    regulatory accounting standards* so as to improve transparency of
    the distribution companies.

-   *Expansion of the transmission sector*, although initially suggested
    through studies conducted by CNE, *ultimately should be decided by
    the CO* so that members can discuss and come to agreement on
    transmission issues. Ultimately, CO decisions on transmission should
    be subject to review by SIE.

-   *Efforts should be made to improve private participation in
    hydroelectric development and new transmission lines*.
    Build-Own-Transfer and other similar arrangements should be
    aggressively explored to allow private sector participation;

-   *The CO should establish and publish a method for evaluating the
    economic value* of electricity from hydro generation so that that
    the hydro units and the private sector can better assess their
    market revenues.

-   *The CO should enter into discussions with market participants to
    identify any current ambiguities in the calculation of ancillary
    services prices*, and CO procedures and public reporting should be
    amended as required to correct any such problems.

-   *The SIE should determine whether some small generation units that
    receive tax incentives (4 MW or less) are reselling power and acting
    as distribution companies without a concession and take appropriate
    action.*

3.  **Collections and Financial Viability of the Companies**

The financial viability of the distribution companies is critical to
sustaining the sector reforms. Substantial efforts have been made to
improve the financial condition of these companies, but additional steps
can be taken.

-   On the matter of collections, *Government must improve its payment
    for electricity, nothing short of 100 percent*. As a leader in the
    sector, the Government cannot continue to be a delinquent consumer.

-   *The distribution companies should understand that they are service
    companies*. They should take further steps to improve customer
    relations through promotion campaigns and other good will programs,
    including improving customer understanding of payment options, and
    improving accuracy in metering and billing.

-   *The 2.75 percent management fee that the distributions companies
    receive is confusing and needs to be clarified, e.g., applied to
    collections and not amounts billed.*

-   *The Government should review its legal options under the management
    agreements to clarify the distribution companies' obligations to
    transfer technology, improve service and make investments in the
    system.*

-   *The program that penalizes distribution companies for load shedding
    (July 2001 Law, Art. 93) needs to be coordinated with the PRA
    program* so that distribution companies are not penalized for
    participating in PRA.

4.  **Statutory Amendments**

> Consideration should be given to amending the July 2001 Law as
> follows:

-   *The close relationship between CNE and SIE should be eliminated*,
    thereby strengthening SIE's independence and enforcing CNE's role as
    a policy and planning agency. These issues include CNE's
    tie-breaking authority over SIE decisions, CNE's authority to review
    SIE decisions, and CNE's superior rulemaking authority relative to
    SIE's authority to issue resolutions. SIE should derive rulemaking
    authority directly from the statute;

-   *The Superintendent of SIE should not be allowed to serve as the
    President of the Coordinating Organism*; a lesser role, such as
    non-participatory attendance at CO meetings should be considered;

-   *The structure of the Board for the Coordinating Organism should be
    revised by giving greater representation to the private sector*,
    possibly based on the following groups with one vote per group: all
    generation (including EGEHID); transmission (only ETED at this
    time); distribution; large users; a fifth group (possibly regulated
    consumers).

-   *Private sector participation* should be allowed in the development,
    operation and ownership of hydroelectric facilities and transmission
    facilities.

1.  **[Institutions, Incentives and the Political Economy of the Power
    Sector Reform]{.smallcaps}**

Section 1.0 provides an overview of the electricity sector, its
historical development, and the institutions and market as they existed
at the time of this Report.

# **[1.1 Reform in Latin America]{.smallcaps}**

In many Latin American and Caribbean countries, the motivation for
reform was clear and compelling. Electric power organizations
experienced difficulties in attracting investment capital, had little
incentive to expand service, and often did not deliver reliable and
cost-effective services to consumers. The state-owned monopolies lacked
incentives for efficiency, accumulated huge financial deficits, and
functioned as political patronage machines for politicians and special
interest groups. Government subsidies were poorly targeted and
misallocated, and the expansion of service, especially to low-income
groups was inadequate and inefficient. The poor financial performance of
state-owned enterprises drained Government budgets of funds needed for
urgent social investments, and contributed to a broader financial crisis
in many nations.

The power sector reforms in the region were generally modeled on reforms
implemented in Chile. Latin American countries and other countries
transforming their economies, restructured the electric sector in order
to relieve Governments from onerous financial burdens, to attract
investment capital to the sector, and to ensure economic and financial
efficiency while meeting social and environmental obligations.
Competitive markets would provide incentives, and both domestic and
foreign private capital would be used to rejuvenate the companies. The
state would reduce its role, or completely withdraw, as owner and
operator, and assume the role of an independent regulator that would
balance the interests of investors and consumers. Expansion of the
sector to low-income populations could be met by transparent public
expenditures appropriated for that purpose.

Although significant reforms have taken place, many aspects of the
reforms clash with the institutional and technological capacity of the
region, posing threats to sustainability.

#### 1.2 [Reform in Dominican Republic]{.smallcaps}

In 1997, the Congress of Dominican Republic passed and the President
signed significant legislation designed to initiate reforms in the
electric utility sector.

Since 1955 and until that law was enacted, the electric utility sector
consisted of centralized, Government-owned service, which was owned and
controlled by the Dominican Corporation of Electricity (Corporacion
Domincana de Electricidad -CDE). By the time the 1997 Law was enacted,
the sector was plagued by significant problems and extreme
inefficiencies. Among other things, the sector was experiencing a
shortage of generation capacity compared to demand, and bottlenecks in
the transmission system prevented delivery even when supply and demand
otherwise could be balanced. Blackouts in urban neighborhoods and
regions of the country were common, and technical and non-technical
losses for the distribution system were extremely high. Due to
Government ownership of the sector, changing Government rules affecting
the operation of the sector, and strong political influence in all
aspects of the sector including tariffs that were set by political
branches of the Government, the sector suffered from severe
inefficiencies and failed to attract investment capital due to high
risks. The generation sector relied heavily on oil as the fuel for
generation, and changing oil prices caused significant fluctuations in
operating costs. The Government provided substantial subsidies in the
form of fuel subsidies and subsidies to end users, which resulted in
increasing Government debt. The Government-owned entities had little or
no incentive to improve the facilities, to improve collections or
efficiency in operations, or to improve quality of service. In short,
the sector was in a state of crisis and required a complete overhaul.

Enactment of the 1997 Law set into motion a series of events designed to
address that crisis, which included, among other things, the subsequent
enactment of additional legislation in July 2001. Commencing in 1997 and
extending to the present, the Government has implemented a number of
measures under those two laws to advance its reforms efforts. After
enacting the 1997 Law, the Government separated CDE into distinct
generation, transmission and distribution entities and subsequently
capitalized the generation entities (except for hydro) into two separate
generation companies and the distribution entities into three separate
companies. Private companies obtained a substantial minority share in
those companies, with the Government owning the other substantial
minority share. A new state-owned entity, CDEEE, was created to hold the
hydroelectric and transmission facilities and to retain control over the
operation of those facilities. A new spot market was created for bidding
and merit order ranking of those bids for dispatch. A new
self-regulatory organization, the Coordinating Organism, was established
to set the rules for that market and to coordinate its operation. The
National Energy Commission (CNE) was created as the policy arm of the
Executive Branch of Government to oversee the broad operation of the
electric sector and to make recommendations about the sector, including
planning and expansion of the sector. An independent regulatory agency,
the Superintendency, was created and granted broad powers to enforce the
regulations for the entire sector, including the spot market. In an
effort to further restructure the operation of the market, existing long
term Power Purchase Agreements that were under the administration and
control of CDEEE were renegotiated and are in the process of being
transferred from CDEEE to the distribution companies. Improvements were
made in fuel diversification, including the introduction of liquefied
natural gas (LNG) by early 2003. Fuel subsidies were eliminated and
cross subsidies among customer classes were substantially reduced.

The following are some of the major milestones that have occurred since
1997:

-   In 1997, the Public Enterprise Reform Act, Law No. 141-47 is enacted
    and provides a capitalization model for CDE.

-   In 1998, CDE is restructured into eight new companies---three
    distribution companies (EDENORTE, EDESUR AND EDESTE), two thermal
    generation companies (EGE-Itabo and EGE-Haina), and a hydroelectric
    and transmission company (EGEHID and ETED, respectively) held as
    subsidiaries of the newly created parent holding company,
    Corporacion Dominicana de Empresa Electrica Estatal (CDEEE).

-   In 1998, the three distribution companies and two thermal generation
    companies are capitalized. The private sector and the Government
    become substantial minority shareholders in the companies, with
    neither entity holding a majority of shares. That capitalization
    resulted in the following ownership and structure in the sector:

###### **Table 1**

**Capitalization of the Sector**

+---------------+-------------------------+----------------------------+
| ## [Company   | ##                      | ### [Investor]{.underline} |
| ]{.underline} |  [Activity]{.underline} |                            |
|               |                         | Gener (Chile) and Coastal  |
| Itabo         | Generation (thermal)    | (USA                       |
|               |                         |                            |
| Haina         | Generation (thermal)    | Seaboard and Enron (USA)   |
|               |                         |                            |
| EdeNorte      | Distribution            | Union Fenosa (Spain)       |
|               |                         |                            |
| EdeSur        | Distribution            | Union Fenosa (Spain        |
|               |                         |                            |
| EdeEste       | Distribution            | AES (USA)                  |
|               |                         |                            |
| CDE           | Transmission and Hydro  | 100 percent Government     |
|               | Generation              | Owned                      |
+---------------+-------------------------+----------------------------+

-   On March 18, 1998, the Superintendency of Electricity (SIE) is
    created by Decree as a division of the Ministry of Industry and
    Trade to promote, regulate and monitor the electric sector.

-   On October 29, 1998, the Ministry of Industry and Trade promulgates
    Resolution No. 235 establishing a regulatory framework for the
    sector.

-   On October 30, 1998, the Ministry of Industry and Trade issues
    Resolution No. 237-98 allowing distribution companies to transfer
    all cost increments to the tariff rate.

-   In December 2000, the Ministry of Industry and Commerce issues
    Resolution SEIC No. 283-2000 which creates a fuel subsidy.

-   Decree No. 744-01 is issued, allowing the Government to pay the
    debt, through February 28^th^, 2001, to IPPs with funds allocated to
    Fondo Patrimonial para el Desarrollo (FONPER), according to Law No.
    141-97, the Law of Public Enterprise Reform.

-   In July 2001, Law No. 125-01 (hereinafter the "July 2001 Law") is
    approved, which, among other things,

(1) mandates the separation of CDE into a holding company (CDEEE)
    consisting of a transmission company (ETED) and a hydroelectric
    company (EGEGID) as wholly-owned subsidiaries,

(2) formally creates the Office of the Superintendent of Electricity
    ("SIE" or the "Superintendency"),

(3) formally recognizes the Coordinating Organism (the "CO") to
    coordinate the activities of the wholesale market, and

(4) creates the National Energy Commission ("CNE") which, among other
    things, has the authority to issue regulations, anticipate and plan
    for the needs of the sector, gather information about the sector,
    and promote private participation.

-   On July 18^th^, 2001, the Agreement of Santo
    Domingo-Washington-Madrid (the "Acuerdo Global") is signed, which,
    among other things, alleviates the Government's fuel subsidy to
    generators and leads to the transfer of certain IPP contracts from
    CDE to the distribution companies.

-   On October 9, 2001, the Superintendency issues Resolution No.
    15-2001, that establishes a toll, payable to the distribution
    company, by users who purchase electricity from sources other than
    their serving distribution company.

-   On June 1, 2002, the spot market begins to operate under the
    supervision and rules of the Coordinating Organism.

-   On July 19^th^, 2002, the President signs the Reglamento No. 555-02
    which are regulations implementing the July 2001 Law, and further
    defining the roles of each entity and market operation.
    Modifications to the Reglamento, No. 749-02, are issued on September
    19^th^, 2002.

-   On September 17, 2002, the Superintendent issues Resolution No.
    31-2002 that modifies and increases the tariff structure, among
    other things, and substantially reduces cross-subsidies.

-   In September 2002, the President addresses the country to announce
    measures to deal with the growing electricity crisis. Among other
    things, the Government eliminates the fuel subsidy, and on September
    17, 2002, the Superintendency issues Resolution No. 31 which
    establishes a new rate for the end user, and contains an index tied
    to price variations for fuels and inflation.

-   In October 2002, the Government creates a new Anti-Fraud Unit (the
    "PAEF") and appoints Major General Rafael Guerrero Peralta, as the
    Commander, which will have authority to investigate and enforce
    claims of fraud, non-payment and illegal connections of electricity
    service.

-   In October 2002, the Government announces that, as a shareholder of
    the distribution companies, the Comptroller General's Office will
    conduct an audit of those companies, and that an international,
    independent auditing firm will be retained to perform a second
    audit. The Government issues a request for Expression from
    Interested Parties to conduct the audit.

-   In October 2002, the Government concludes some negotiations with the
    Independent Power Producers (IPPs) of existing Power Purchase
    Agreements (PPAs) but negotiations continue with Cogentrix and the
    Cogentrix plant goes off-line.

-   In December 2002, SIE issues a number of resolutions:

    -   *Resolution No. 45:* sets the new daily exchange rate to be used
        for payments from distributors to generators as the weighted
        average rate for all exchange transactions in the preceding day.

    -   *Resolution No. 47*: sets compensation for frequency regulation,
        at RD\$ 131/MWh.

    -   *Resolution No. 55*: establishes a quality regime for street
        lighting, which postpones payment for street lighting by
        municipalities to distributors until an inventory of street
        lamps is conducted in each town.

    -   *Resolution No. 56*: sets a temporary quality of service regime
        until the technical tariff is in place and confirms the 150
        percent penalty under the July 2001 Law.

    -   *Resolution No. 58*: orders Protecom to issue refunds of amounts
        billed in excess of 31 days per bill cycle, with a penalty of 10
        times the amount paid if the invoice has already been paid to
        the utility.

-   On January 1, 2003, the Government implements the penalty provisions
    of the July 2001 Law (Art. 93) and Reglamento requiring the
    distribution companies to provide regulated consumers who are not
    served with 150 percent of the electricity not delivered.

-   In January 2003, the Government's concern with lack of dividends and
    poor performance by the distribution companies continues to grow,
    and allegations that Union Fenosa has not complied with its
    Management Agreement lead to debate about "removing" that company
    from the sector.

#### [Current Structure of the Electric Sector]{.smallcaps}

Since the restructuring of the electric sector began in 1997, the
architectural landscape of the sector has changed significantly. The
following summarizes the major institutional pillars of the sector.

**1.3.1 National Energy Commission.**

The National Energy Commission (CNE) serves the role of the policy maker
and oversees the broad operation of the sector. Under the July 2001 Law,
it is vested with a number of powers which include the following (see
Article 14):

-   To analyze the functioning of the energy sector and to prepare,
    coordinate and propose to the Chief Executive the necessary
    modifications to the laws, decrees and norms in effect in these
    matters;

-   To propose and adopt policies and issue provisions for the proper
    functioning of the sector;

-   To study the projections of demand and supply of energy

-   To ensure that the proper functioning of the market

-   To promote the rational use of energy;

-   To submit to the Chief Executive annually and to the National
    Congress, a detailed report on the actions of the energy sector; and

-   To gather information about the sector.

CNE is presided over by a Board that is chaired by the Minister of
Industry and Commerce and is composed of the Technical Minister of the
Presidency, the Minister of Finance, the Minister of Agriculture, the
Minister of the Environment and Natural Resources, the Governor of the
Central Bank and the Director of the Dominican Institute of
Telecommunications (Instituto Dominicano de Telecomunicaciones -
INDOTEL). The Board, which reports directly to the President of the
Dominican Republic, has the legal authority to issue regulations for the
sector[^5] and those regulations serve as the basis for authority for
the Superintendent of Electricity.

**1.3.2 The Superintendency of Electricity.**

The Superintendency of Electricity (SIE) is designed to serve as the
regulator for the sector, and is comprised of three commissioners
appointed by the President of the Republic and ratified by the National
Congress for fixed terms. (Article 31, *et* *seq*.) The Superintendent
is deemed the President of the Superintendency and is vested with
specified executive powers to represent and manage the administrative
functions of the Superintendency (see Articles 31 and Articles 35, *et
seq*.) The members of the Board serve terms for up to four years and may
only be removed under limited circumstances such as serious infractions.
Although it is not specified in the July 2001 Law, the Superintendency
operates as a collegial body, making decisions on substantive matters
based on one-vote per commissioner and a majority vote to adopt a
resolution.

As set forth in the July 2001 Law, the jurisdiction of the
Superintendent includes (see Article 24, *et* *seq*.):

-   To prepare, analyze and ensure compliance with the structures and
    prices for electricity, and to set the rates and tolls, pursuant to
    resolutions, for electricity, and to act on requests to modify those
    rates and tolls;

-   To monitor compliance with the legal and regulatory provisions and
    the technical standards for generation, transmission and
    distribution and marketing of electricity. This function includes
    verifying compliance with the "quality and continuity" of supply,
    and the preservation of the environment;

-   To monitor anticompetitive behavior in the market;

-   To apply fines and penalties in cases of non-compliance;

-   To consider applications for licenses for generation, transmission
    and distribution facilities, including granting, revoking or
    extending such applications by means of resolution;

-   To analyze applications for generation, transmission and
    distribution facilities and to make recommendations to the National
    Energy Commission on such applications;

-   To gather data from the companies in order to determine their
    compliance;

-   To order licensees to comply with applicable regulations;

-   To order sanctions for non-compliance with technical standards and
    other violations (Article 29);

-   To establish, modify and complement, by issuing resolutions, the
    technical standards for quality and security of installations,
    equipment and other devices (Article 27)

-   To adjudicate complaints that are within its jurisdiction;

-   To preside over and to supervise the functioning of the Coordinating
    Organism; with the right to cast a tie-breaking vote (see also
    Article 36(h));

-   To establish by regulation, with the Coordinating Organism (CO), the
    dispatch order for generators (Article 36(j));

-   To oversee the Office for the Protection of the Consumer of
    Electricity (Protecom) which is authorized to resolve claims filed
    by the consumers of public service regarding billings, poor quality
    of service, and other claims regarding the distribution companies;

-   To investigate ownership or control ties between companies
    participating in the electric sector, which investigations are
    *mandatory* if any participant in the market alleges the existence
    of a "tie" that is not allowed by the law (Article 11)

The Superintendent also has authority, subject to a three year Statute
of Limitations, to determine the degree of severity of any infraction or
non-compliance of applicable rules, and can determine the amount of the
penalty subject to the limits set forth in the July 2001 Law (Article
126). Affected individuals can appeal the decision on sanctions and
penalties to the administrative law court of Dominican Republic for
review (Article 127).

Pursuant to Article 37 of the July 2001 Law and Articles 45-51 of the
Reglamento, the Superintendency has its own funding, to be shared with
the CNE. All participants in the interconnected system must pay one
percent of the value of their purchase or sale transactions in the
wholesale market (spot and contract), for either energy or capacity, net
of transmission toll payments. Likewise, ETED and electricity suppliers
in isolated systems must also pay a one percent charge on the value of
their sales revenues. For the first four years of application of the
Reglamento, 75 percent of the amount collected will be allocated to SIE
and 25 percent to the CNE.

3.  **The Coordinating Organism**

The Coordinating Organism (CO) oversees the operation of the wholesale
market. It was formally established by the July 2001 Law and is a
corporation that is totally distinct and separate from the Government.
However, it plays an important role in the operation of the wholesale
market, essentially serving as a Self-Regulatory Organization (SRO) for
the market. The members of the organization are the corporate entities
that use the wholesale market, e.g., the generation companies, the
transmission company, and the distribution companies. A Coordination
Council actually conducts the business of the Coordinating Organism and,
pursuant to Article 40 of the July 2001 Law is structured with various
representatives who are elected by their representative group. Table 2
illustrates the Current Structure of the Council and the intended
structure under Article 40.

**Table 2.**

**Structure of the Coordinating Organism Council**

  -------------------- --------------------------- -----------------------
  **No. of             **Current Structure**       **Structure under July
  Representatives**                                2001 Law**

  1                    Private Generation          Private Generation

  1                    Capitalized Generation      State Hydro Company
                       Companies                   

  1                    State Transmission Company  State Transmission
                                                   Company

  1                    Distribution Companies      Distribution Companies
  -------------------- --------------------------- -----------------------

Each block of companies elects its own representative to the Council.
The Superintendent of Electricity presides over the Board and may vote
only in the event of a tie vote (Article 24(n)).

As set forth in Article 38 of the July 2001 Law, the principle functions
of the Coordinating Organism include:

-   Planning and coordinating the operation of the spot market

-   Setting rules for the operation of the spot market

-   Provide a means for evaluating energy for the market based on the
    marginal short term cost

-   Coordinating with CNE and the Superintendency in order to promote
    healthy competition, transparency and equity in the market.

The CO also has some specific technical requirements for market
operation which include:

-   the development of a central data collection system;

-   the definition of any communications protocols and software
    standards needed to ensure the capture of the data measured at all
    the interconnection points;

-   the certification of the measurement equipment and communications
    software and facilities implemented by market participants; and

-   the hiring of subcontractors, at the participants' cost, to
    periodically audit the measurement equipment.

> **1.3.4 Dominican Corporation of State Electric Companies (Corporación
> Dominicana de Empresas Eléctricas Estatales) (CDEEE)**

CDEEE is the parent company of two critical divisions which eventually
will be converted to subsidiary corporations: Dominican Transmission
Company (Empresa de Transmisión Eléctrica Dominicana - ETED) owns and
operates the transmission grid in Dominican Republic, and Dominican
Hydroelectric Generation Company (Empresa de Generación Hidroeléctrica
Dominicana - EGEHID) owns and operates all the hydroelectric capacity.
This structure is established by the July 2001 Law (Article 138) and
provides that these entities shall be owned solely by the Government,
thereby precluding private ownership. CDEEE also includes the Rural
Electrification Unit that ensures the electrification of low-income
suburban and rural areas.

**Dispatch Center**. As the coordinating entity designed to optimize
generation, the Dispatch Center is part of CDEEE through the Dominican
Transmission Company (ETED). It receives its dispatch merit order from
the CO and then applies it to current conditions, taking into account
demand levels, transmission constraints and plant outages. It is the
coordinating entity designed to optimize generation. It is responsible
for providing efficient transmission service.

5.  **Ratemaking and Regulatory Processes**

The July 2001 Law and the Reglamento describe the processes that must be
followed by sector entities, and especially the SIE, for five major
types of regulatory intervention: distribution ratemaking, transmission
ratemaking, issuance of technical regulations and standards, imposition
of penalties, and Reglamento amendments. The prescribed processes
concern both the content of regulatory interventions, i.e. what the
authorities may do, for instance with regard to the calculation of the
cost of capital, and the form in which interventions are to take place,
e.g. use of public hearings.

#  **1.3.5.1 Ratemaking**

In general, the SIE must make public all reports and documentation
relating to the determination of transmission tolls and distribution
rates (July 2001 Law, Art. 28).

# *Distribution rates*

Articles 111-123 of the July 2001 Law establish the procedures by which
the SIE is to set regulated rates. Regulated rates have two components:
the cost of electrical energy and capacity, and the Distribution Value
Added (VAD in Spanish), which corresponds to the cost of the
distribution service (distribution transformers and wires, operation and
maintenance of the distribution systems, meter reading, billing,
collections, and customer service).

SIE computes the cost of electrical energy and capacity for each
distributor as a weighted average[^6] cost, at the distributor's
interconnection with the transmission grid, of the distributor's
purchases of energy and capacity under contract and in the spot market.
The prices paid under contracts with generation affiliates are excluded
from the calculation, (i.e., for the contracts they sign with
affiliates, distributors can recover no more than the weighted average
of other contracts and spot market purchases). This component of the
rate can be adjusted according to indexation formulas established by the
SIE, at the request of the distributors and on the basis of a cost
analysis. The adjusted rates must be published 30 days in advance in a
newspaper with nationwide circulation.

On the other hand, SIE establishes the VAD every four years on the basis
of incremental development costs and long-run total costs in efficient
distribution systems[^7]. SIE defines the typical characteristics of the
distribution systems to be used as a basis for the computation of such
costs. VAD values can be periodically adjusted according to indexation
formulas established by the SIE, until the next tariff review. Rate
adjustments must be approved by the SIE at least 30 days in advance of
their implementation.

VAD will be based on studies carried out or commissioned by the SIE
every four years. The studies, plus any other information used by the
SIE to make rate-related decisions and SIE's preliminary proposal are
placed in the public domain at least three months before the end of the
four-year period. Interested parties have at least 30 days to file
comments and recommendations on SIE proposal, after which SIE conducts
one or more public hearings. The final SIE order establishing the VAD
must set forth the reasons for the decision (July 2001 Law, Art. 26;
Reglamento, Art. 519). Any disagreements between SIE and the
distributors regarding the terms and conditions for the studies, their
content, or their result, will be resolved by a specially established
Arbitration Commission.

# *Transmission ratemaking process*

Articles 82-89 of the July 2001 Law set forth the rules for computing
transmission tolls. Every four years, SIE must establish the tolls for
the main interconnected system of the Dominican Republic. For other
systems, SIE can issue a mandatory decision if there are any
disagreements between transmission service providers and prospective
users.

Regulated tolls will be based on the total long-run cost of the
transmission system, comprising the capital cost plus operation and
maintenance costs (including losses) for an efficient system. The
capital charge will be computed using the replacement cost of the
efficient facilities and the opportunity cost of capital also used for
the computation of VAD (see footnote 5). All tolls are charged on the
basis of coincident peak demand levels.

Three months before the end of the four-year period for the
then-applicable toll, SIE must publicizes its tariff proposal, with all
supporting documentation. SIE conducts a public hearing and allows
interested parties to submit their comments within two weeks after the
hearing. The final SIE order must set forth the reasons for its
decision.

#  **1.3.5.2 Issuance of SIE Regulations and Technical Standards**

Article 41 of the Reglamento specifies that prior to issuing technical
standards for quality and safety for electrical equipment and
facilities, SIE must request opinions from the CO and electricity sector
companies. For street lighting service, Article 42 requires a prior
opinion from the distributors, the CDEEE, the Dominican Municipal
League, and five of the country's main municipalities, before the SIE
can issue norms and standards. SIE issues regulations for distribution
service improvements and extensions that are subsidized by CDEEE or
municipal governments, but only after consultation with CDEEE, the
distributors, and five of the country's main municipalities (Art. 135 of
the July 2001 Law and Art. 43 of the Reglamento). Finally, before SIE
issues regulations for the tendering of contracts to supply capacity and
energy to the distributors (once the existing PPAs expire, or demand
growth requires additional contracts), SIE must provide the CO and
market participants an opportunity to comment (Reglamento, Art. 44).
Once the contracts are executed, contract information relating to
dispatch and operation must be submitted to the CO to ensure the
contract terms are compatible with the operation of the interconnected
system (Reglamento, arts. 282-283).

#  **1.3.5.3 Imposition of penalties**

Penalty procedures are established in Arts. 504-516 of the Reglamento.
SIE has authority to initiate investigations into breaches of the law or
regulations. Charges and investigation reports will be released to the
accused party, which will be allowed to respond. The SIE will then
decide about the imposition of penalties. Penalties can be appealed to
SIE for reconsideration and then to the CNE, and in any case to the
Administrative Law Court.

**1.3.5.4 Reglamento Amendments (Reglamento, Art. 517)**

Amendments to the Reglamento can be proposed by CNE, SIE, CO, and any
market participant. Proposed amendments will be circulated for comment
by the CO to all market participants. Following a comment period, the CO
will submit its opinion to the SIE, taking the comments into account.
The SIE will hold public hearings and provide its own recommendation to
the CNE, which will make the final proposal to the Government.[^8] All
documentation throughout the process must be made public.

6.  **Appellate Jurisdiction and the Appeal Process**

The two Government entities which have decision-making authority and
from which an appeal process must be established are CNE and the
Superintendency. The Coordinating Organism is a private entity created
by the July 2001 Law and is subject to SIE monitoring so that its
decisions are determined by the rules of that organization. [^9]

***Superintendency:*** As an independent regulatory organization, the
decisions of the Superintendency ideally should be appealable to a
non-political entity, normally the judiciary. As noted above, Article
127 of the July 2001 Law states that decisions regarding fines and
sanction imposed by SIE are appealable to he Administrative Law Court.
As is common in countries that follow the Napoleonic Civil Code, the
acts of the State conducted under the State's constitutional
prerogatives cannot be challenged before the general courts of law.
Instead, they must be appealed to a specialized court, the
Administrative Law Court ("Tribunal Contencioso-Administrativo"), whose
decisions are final.

On the specific matter of applications for a concession, permit or
authorization, Article 11 of the July 2001 Law does specify that the CNE
will hear appeals of SIE decisions, whether granting or rejecting such
applications. In turn, the CNE may, if it deems it advisable, take the
case to the President of the Republic.

During meetings with various organizations, however, we were told that
CNE considers appeals from the Superintendency and that the standard of
review is very limited and applies only to a review of the applicable
law. Stated differently, CNE would not overrule any factual findings,
but would have authority to review the application of the law to the
factual findings.

***The National Energy Commission**:* CNE (or the "Commission) is part
of the Executive Branch of Government that is managed by a Board, of
which the Minister of Finance serves as the President. As part of the
Executive Branch, it reports to the President of the Republic through
the President of the Board.

Aside from the statutory language, we were told, as noted above, that
CNE only has authority to review the legal basis of the
Superintendency's decisions. This limited review may arise, in part,
from its legal authority which extends to issuing regulations, a higher
legal authority than the resolutions that the Superintendency is
authorized to issue. The authority to issue regulations gives CNE a
broader authority to set the legal tone and policy for the sector. CNE
informs us that 13 appeals from SIE orders are pending before it.

***The Administrative Law Court**:* The final appeals authority for the
decisions of the SIE or the CNE is the Administrative Law Court. As
noted, this type of court is common to countries that base their laws on
the Napoleonic Civil Code. In the Dominican Republic, it was created by
Act No. 1494 of 1957. Its jurisdiction is restricted to appeals from
orders or decisions that are issued by the Governmental entities, with a
standard of review that is limited to the application of the law by the
Government agency.[^10]

The Court is formed by three justices appointed by the Supreme
Court.[^11] In addition, whenever an appeal is accepted by the
Administrative Law Court, the Office of the President appoints a Court
Secretary and an Attorney General to represent the Government agency
whose decision is being appealed. The Court has 30 days to issue a
decision; if a decision is not issued, the appeal is deemed to be
granted and the Government order or decision that is the subject of the
appeal is deemed vacated. The Court's decisions can only be appealed to
the Court itself for reconsideration. However, the jurisdiction of the
Court to hear an appeal can be challenged before the Supreme Court. If
the Supreme Court considers that the case falls outside the jurisdiction
of the Administrative Law Court, then the case goes to the general
courts of law.

***Arbitration Commissions**-* The July 2001 creates two types of
arbitration commissions: one for disputes about the value of
rights-of-way sought by distributors to build distribution lines[^12];
and another one for disputes between the SIE and the distributors about
the tariff proposed by the SIE upon the cuatriennial rate review.[^13]
These commissions are to be set up only in case of disputes and to be
purely temporary in nature, being disbanded upon completion of their
intervention in a specific dispute. To our knowledge, no such
commissions have been set yet.

> **1.3.7** **Commission on the Reform of Public Enterprises
> (Patrimonial Fund (Development Fund) (FONPER)**[^14]

FONPER, formerly the Commission for the Reform of Public Enterprise
(CREP) is specifically dedicated to "realize reform" and to assure that
reforms are sustainable. As electric sector reform became a topic for
Government review, CREP representatives met with CNE, SIE, CDE and the
distribution companies to identify key issues and begin to review steps
to address reform. CREP was also involved in the privatization,
capitalization, or other types of reform of other state-owned
enterprises, especially the formerly important sugar sector. Now, its
successor, FONPER, believes that considerable analogy and understanding
of sector reform relevant for electricity has come from the earlier CREP
experience.

FONPER is the official representative of the state as shareholder in the
capitalized companies. At present, CDEEE is participating in the board
meetings of the companies, but after recent changes, the Government will
be allocated an additional seat in the board which FONPER will occupy.
FONPER told us that in the future it would be the sole state
representative, but that it needs to first acquire sufficient expertise
about the electricity sector if it is to be an effective board member.

We were told that the Law on Public Enterprise differentiates between
Public Service enterprises and all others.[^15] Public Service
enterprises cannot be "given away" by the State and there are certain
aspects of the Sector that are considered by some to fall into the
Public Service category. This issue is under review.

FONPER maintains an impressive data room where virtually every legal
document -- including all terms of reference, contracts, etc. -- is
recorded and maintained on file. For example, FONPER maintains a book
that lists reference and legal materials available in the data room, and
a CD of internet/web- available information that quite thoroughly tracks
the process of capitalization and reform.[^16]

##### [Private Sector Involvement]{.smallcaps} 

Upon completing the capitalization of the generation and distribution
companies, both the Government and the private companies became
substantial minority shareholders. The following summarizes the current
status of the capitalized companies and private sector generation.

1.  **Capitalized Generation.**

> The structure and ownership at the present time consists of the
> following:

-   *Itabo*: Itabo was initially capitalized to Gener (Chile) and
    Coastal (US) companies. At the time of capitalization, Itabo owned
    approximately 21 percent of the installed generation capacity,
    consisting of about 573 MW (448 MW of available capacity). By the
    end of 2002, Itabo owns approximately 22.5 percent of the effective
    power in the generation system.

-   *Haina*: Since its initial capitalization to two US companies,
    Seaboard and Enron, Haina has undergone several transformations in
    ownership. Its current ownership consists of Commonwealth
    Development Corporation (England), Basic Energy (US), the Caribbean
    Basic Fund (a consortium of small entities), Heart Energy (US) and
    the National Finance Group (a consortium of Dominican Republic
    companies). It owns approximately 22.5 percent of the effective
    power generation, or 600MW, including a new barge project.

> **1.4.2 Capitalized Distribution**

-   *EdeNorte* *and* *EdeSur*: Unión Fenosa, a Spanish company, which
    also served as an advisor to the Government regarding capitalization
    of the companies, has maintained its interest in these two
    distribution companies, since the initial capitalization. Under
    Article 11 of the July 2001 Law, distribution companies are allowed
    to own up to 15 percent of the "maximum demand of the interconnected
    electric system." Consistent with this provision, EdeNorte and
    EdeSur each could own up to 15 percent each for a total of 30
    percent.

-   *Edeste*: AES, a United States power company, has maintained its
    interest in Edeste since the initial capitalization. Consistent with
    Article 11 of the July 2001 Law, it also owns generation which is
    summarized below.

> **1.4.3. Private Sector Generation**

-   *AES*: The AES Andrés facility is a 300 MW combined cycle plant that
    will use liquefied natural gas imported (LNG) from Trinidad. The
    plant is expected to come on line by early 2003. It also owns the
    Los Mina facility, a 210MW open cycle plant that is being converted
    to use LNG.[^17]

-   *Union Fenosa:* Unión Fenosa which is the parent company of the two
    distribution entities, EdeSur and EdeNorte, also includes another
    corporate entity which owns two generation plants consisting of
    "Empresa Generadora Palamara" with 100MW and Empresa Generadora La
    Vega S.A. with 80MW.

#### [Market Structure and Operation]{.smallcaps}

Electricity is provided by means of a wholesale market for electrical
energy and capacity that is structured through (1) long term power
purchase agreements (PPAs) with power producers and (2) a spot market
that the Coordinating Organism oversees. During the year 2002,
generation was distributed among 21generation companies as illustrated
in Table 3.[^18]

**Table 3**

**Ownership of Generation Capacity**

  ------------------------------------------------- ---------------------- ---------------------------
  **[Company]{.smallcaps}**                         **[MW]{.smallcaps}**   **[Percent]{.smallcaps}**

  Haina                                             663.3                  20.8%

  Itabo                                             570.9                  17.9%

  EGEHID                                            512.0                  16.1%

  CSPM (Cogentrix)                                  300.0                  9.4%

  Los Mina V+VI (Dominican Power Partners)          236.0                  7.4%

  UF: Palamara + La Vega                            194.5                  6.1%

  Smith Enron                                       175.0                  5.5%

  Seaboard EDN+EDM (Transcontinental Capital)       115.0                  3.6%

  Victoria I (Energycorp Caribbean)                 103.5                  3.3%

  Consorcio LAESA                                   79.9                   2.5%

  C.E. Puerto Plata (Coastal)                       76.9                   2.4%

  Diesel Pimentel                                   55.0                   1.7%

  Complejo Metalúrgico Dominicano (Metaldom)        42.0                   1.3%

  Maxon Engineering                                 30.0                   0.9%

  Montecristi                                       12.0                   0.4%

  A.Barril                                          6.3                    0.2%

  Dajabón                                           3.8                    0.1%

  Yamasá                                            3.0                    0.1%

  La Isabela                                        1.5                    0.05%

  S. Grande Boyá                                    1.5                    0.05%

  Oviedo                                            0.8                    0.03%

  TOTAL                                             3,182.9                100%
  ------------------------------------------------- ---------------------- ---------------------------

The July 2001 Law provides that CDEEE will administer and manage the
IPPs. However, over the past several months, most of those contracts
have been renegotiated with the sellers to buy down the stranded costs
associated with those contracts and to transfer the contracts from CDEEE
to the distribution companies owned by AES and Unión Fenosa. The current
schedule for renegotiating the PPAs is set forth below.

**Table 4**

**Renegotiation of Power Purchase Agreements**

+--------------------------------+-------------------------------------+
| **Generator**                  | **Date of Completion**              |
+--------------------------------+-------------------------------------+
| Seaboard/TCC                   | September 2001                      |
|                                |                                     |
| CEPP                           | September 2002                      |
|                                |                                     |
| DPP                            | August 2001                         |
|                                |                                     |
| Metaldom                       | In process                          |
|                                |                                     |
| Maxon                          | In process                          |
|                                |                                     |
| Laesa                          | In process                          |
|                                |                                     |
| Smith & Enron                  | In process                          |
+--------------------------------+-------------------------------------+

The supply of electricity is a mix of power delivered under long term
Power Purchase Agreements and a spot market that is coordinated by the
Coordinating Organism. Under Article 110 of the July 2001 Law, no more
than 80 percent of the demand for power can come from long term PPAs,
thereby ensuring that at least 20 percent of the power consumed will
come from the spot market.

The spot market relies on competitive bidding based on a generator's
variable costs as a means to provide a merit order for dispatch.
Variable cost information is submitted to the Coordinating Organism
weekly[^19] which then determines the merit order dispatch based on
variable costs. On the day of dispatch, the generators are dispatched in
real time and supervisors make adjustments based on the varying demand
requirements. The supervisors, who sit in close proximity to
representatives from the Coordinating Organism, inform the
representatives of the adjustments. Generators that are dispatched all
receive the same price for their power, the marginal cost. If a conflict
develops between dispatching a spot market generator vs. a bilateral
contract, the spot market generator is given the first priority. Payment
for power sold on the spot market is due in approximately 28 days from
the day of dispatch.

####  [Regulated Rates]{.smallcaps} 

With the implementation of the "technical tariff" after a three-year
transition period, regulated rates will be equal to the sum of capacity
and energy charges and transmission tolls, passed through from the
actual costs paid by the distributors to the regulated users, plus a
charge for the distribution service proper, known as the distribution
value added or VAD (Valor Agregado de Distribución).

The criteria for determining VAD are set out in the July 2001 Law. The
magnitude of this charge was originally calculated in a 1998 study by
the Chilean consultancy Synex, but those values were considered "too
low" by the SIE, and the VAD levels from Panama were used instead. We
have not conducted an independent analysis that would validate or
disprove these VAD charges. SIE informed us that a study is be concluded
in February 2003, and that new VAD values (the technical tariff or
"tarifa técnica") based on this study will be implemented in March or
April, 2003. However, no figures appear to be available. The new tariff
will include a full quality of service regime for both transmission and
distribution.

0.  **[Factual Findings and Threats to Sustaining the
    Reforms]{.smallcaps}**

**[2.1 Conduct and Operation of Statutory Institutions]{.smallcaps}**

From a global perspective, as compared to the pre-reform market
structure and institutional framework supporting the electricity sector,
remarkable progress has been made in the last two years to bring the
sector into its second generation of reforms. Government has committed
to sector reform, a viable market model is in place and the
institutional framework is sufficient to supervise competition in this
particular market setting. But from a day-to-day customer perspective,
since enactment of the July 2001 Law, improvements in electricity sector
performance have been stymied by a variety of political and economic
factors such as the devaluation of the Dominican peso and the most
recent unanticipated external factor of the Venezuelan oil crisis. The
fact that the market actually began operating and necessary institutions
were established before the enactment of the July 2001 Law makes this
transition particularly challenging. A lack of published Government
strategy, flaws in the law and inadequate public information and
participation are taking their toll on how citizens perceive Government
and the sector and how electricity service is performing in the country.
*In order to complete the reform process and to secure an institutional
setting in which the sector can operate, the performance of the market
organization as well as the regulatory institutions are critical to
securing sustainable reforms.*

*Institutional Breakdown*[^20]

**Diagram 1**

**Institutional Framework of the Electricity Sector\***

**Dominican Republic**

*\* State companies not included*

\*\* The Presidential Commission for the Financial Sustainability of the
Electricity Sector

There exist two types of institutions supporting the sector. The first
includes institutions that are intended to be *permanent* such as the
National Energy Commission (CNE), Coordinating Organization (CO) and the
Superintendent of Electricity (SIE). These institutions are mandated to
help develop, guide and oversee sector operations on behalf of
Government and the public-at-large. In addition, the Presidential
Commission for the Financial Sustainability of the Electricity Sector
("Supervisory Council") is a body that currently reports directly to the
President on sector matters. For purposes of this report, the
Supervisory Council is addressed as a permanent institution.

The second set of institutions has emerged based on *targeted programs*
to support certain aspects of sector development. These include the
Blackout Reduction Program (PRA), the Anti-Fraud Program (PAEF) and the
Rural Electrification Program (PNER). These will either be temporary,
emerge as departments or stand-alone institutions themselves depending
on how the reform process progresses. Also emerging is a "Pact for
Stability and Economic Development" informally convened under Government
auspices in mid-December 2002; although now acting as a volunteer
coalition, the work of this Pact vis-à-vis electricity sector reform may
be important in terms of information, awareness and action throughout
the country.

Finally, there are key institutional roles to be played by certain
Government bodies including the Ministries of Finance, Environment and
Natural Resources and Social Cabinet, as well as the non-Government
sector, notably trade unions and citizen groups. Under the Dominican
Corporation of State Electric Companies (CDEEE), two subsidiaries exist:
Transmission Company (ETED) and the Hydroelectric Generation Company
(EGEHID). CDEEE is an important organization to watch in terms of
institutional regulation of the sector at this stage of reform. CDEEE
has inherited the technical and managerial expertise of its predecessor
Dominican Electricity Corporation (CDE), much of which needs to now be
transferred to SIE, CNE and the non-Government sector.

What is evident from this discussion and the following discussion is
that the Government continues to have a significant role in the sector.
Those roles often have different and possibly conflicting objectives as
summarized below in Table 4. These various roles and objectives can be
confusing to sector players when the Government speaks or takes
action.[^21]

**Table 5**

**Government Roles and Objectives**

**Government Role** **Government Objective**

+-----------------------------------+-----------------------------------+
| 1\. A ***substantial              | 1\. As a shareholder (FONPER), it |
| shareholder*** (FONPER);          | expects ***dividends***;          |
|                                   |                                   |
| 2\. A ***regulator*** for the     | 2\. As a regulator (SIE), it      |
| sector (SIE);                     | seeks, *consumer protection*,     |
|                                   | ***efficiency and compliance***   |
| 3\. A ***policymaker and          | in the sector;                    |
| planner*** for the sector (CNE);  |                                   |
|                                   | 3\. As a policymaker (CNE), it    |
| 4\. A ***sector player*** in the  | ***plans for the sector*** to     |
| market (CDEEE as sole owner of    | serve the public policy           |
| hydro and transmission            | objectives;                       |
| facilities);                      |                                   |
|                                   | 4\. As a sector player (CDEEE),   |
| 5\. A ***provider of s*           | it ***operates as a company***;   |
| *subsidies*** for low income      |                                   |
| people (PRA, PNER);               | 5\. As a provider of subsidies    |
|                                   | (PRA, PNER), it seeks to ***help  |
| 6\. A ***consumer*** of           | the underprivileged***;           |
| electricity; and                  |                                   |
|                                   | 6\. As a ***consumer***, it needs |
| 7\. An ***enforcer*** with        | a reliable source of electricity  |
| prosecutorial powers (PAEF)       | that it must pay for; and         |
|                                   |                                   |
|                                   | 7\. As an enforcer (PAEF), it     |
|                                   | wants to ***deter criminal        |
|                                   | conduct*.**                       |
+-----------------------------------+-----------------------------------+

**2.1.1 The Personalization of Power**

Without exception, each key institution involved in the sector is led by
a strong individual. From the CNE to the Superintendent, from CDEEE to
PROTECOM these individuals demonstrate strong personalities and
leadership capabilities. Throughout the sector, there is an appreciation
of this strong individual leadership to the point of referring to an
institution by using the name of the lead individual. However, as the
sector evolves to increase competition and support private sector
engagement, strong personalities and overt individual actions by leaders
increasingly may challenge the sustainability and predictability of
institutional basis on which the sector will perform.

During this transitional phase of reform, strong personalities can be
beneficial to mobilize action and frame key issues. However, as the
sector becomes more market oriented and longer-term private sector
strategies are put in place, Government, investors and customers will
need to know the "rules of the game", despite who is leading the
regulatory body, the national energy commission and other institutions.
*A critical moment has arrived when Government and sector leaders can
and need to commit to the institutionalization of power and to gradually
diminish the importance of personalities.* This is not to say that
intelligent, strong-willed leadership is not important, and can help to
guide institutional performance, but rather, that these characteristics
should help guide the institution rather than define it. This is
especially true of SIE; according to international best practice, the
regulatory body should be a truly collegial body.

######  **2.1.2 Institutional Processes and Relationships**

Since 2001, institutions required to support this model have been
gradually established albeit, nascent in their overall capacity and
ability to operate. *As this second phase of restructuring is carried
out, the importance of institutional relationships, published and
respected institutional procedures and public participation need to be
underscored*. By all accounts, there is an opportunity to bypass
established legal procedures whether attributed to historic habits of
doing business, political influence or merely gaps in procedural
oversight.

Good governance in sector operation is key to securing reforms. The
outcomes of reforms depend on how they are guided, both through the
political process of reform as well as via the institutional supports
created to facilitate new order. The absence of a clearly articulated
Government strategy for the sector poses difficulty for institutions,
customers and investors. Until this strategy is issued[^22],
institutional leaders are responsible for assuring that the direction in
which they are guiding their institution is in sync with the anticipated
Government strategy. They are also responsible for responding to public
discord and investor outrage based on their not fully knowing what the
Government intentions are for the sector. *The lack of published
strategy seems to have resulted in increased collaboration among
institutions; this is better than institutions isolating themselves into
small kingdoms.*

However, increasing confusion is being created by this institutional
team approach to all sector aspects for the public, companies and
investors. *It is essential that CNE be fully developed as a
policy-making entity with full separation from SIE, although SIE can
certainly provide expert input into policy initiatives considered by the
CNE.*

*At present, sector institutions are struggling to understand their own
legally mandated jurisdictional limits as well as the jurisdictional
limits of the other sector institutions.* The separation of
policy-making, regulatory and enforcement roles have not yet been
sufficiently distinguished among institutions. Although roles and
responsibilities of various institutions are legally prescribed, in
practice, the vague boundaries among players, coupled with personalities
that seek to implement specific agendas, has resulted in confusion
within the sector and among the general population. A noticeable area of
overlap in responsibility is the reliance of the SIE on CDEEE staff
technical support. This reliance needs to be a temporary condition and
improvements in SIE technical staff will alleviate the need to rely on
CDEEE staff; moreover, in CDEEE's new role as a market player, it is
important that SIE maintain the same relationship with CDEEE as it does
with competing market players.

*Many institutional processes and relationships are impacted by what
appears to be considerable access for all institutions to the Office of
the President.* Almost on an "as needed" basis, this access routes
around established institutional protocol, breaks the management
hierarchy of the sector and obscures the attempted predictability of
sector management during this transition.

**2.1.3 Institutional Predictability**

Many private sector and public sector onlookers believe that there is no
center of power in the sector but rather, that it is shared between
CDEEE and the Office of the President. This perception is not uncommon
in transitional settings where market players learn to relate to newly
established institutions. Indeed, the July 2001 Law was intended to
divest the previous system from its centralized decision-making and to
create and formally establish new institutions that are vested with that
power, e.g., CNE, SIE, CO, etc. these lingering perceptions about
centralized power are most likely due to the lack of institutional
clarity and confusion of institutional roles.

A failure to understand and to use these new institutions, and instead
revert to previous "power lines" to centralized decision-making entities
is undercutting the sustainability of these institutions. *For example,
the willingness of some Government institutions, specifically the Office
of the President, to intervene in the decision-making process was cited
by one investor as "extraordinarily frustrating."* Institutional clarity
and definition of roles and responsibilities will provide a tremendous
boost in predictability of how the sector will function. For consumers,
the roles of institutions is confusing -- people are not sure whether
CDEEE is fully private, whether the Government is 100 percent operating
the sector, whether SIE is truly independent, etc. On at least one
occasion, we were told that it was not clear who has the authority to
regulate the sector. *This is an issue about which there should be no
ambiguity---SIE should have independent authority to regulate the
sector, and CNE should have authority to address policy and planning
issues.*

In terms of process that is predictable, *market players agree that the
July 2001 Law is "sacred."* This view was evident by frequent referrals
to "the Law" during our interviews. Nevertheless, processes for
decision-making and clearly defined roles of new sector institutions
remain unclear. Clarity can be enhanced with additional public
information while other aspects will require additional regulations and
legal detail. Specific issues raised during our interviews include:

-   Considerable private sector input concerning the lack of
    confidentiality of information, notably at the CNE level, e.g., that
    information or conversations that a company may have with CNE
    concerning inquiries and/or intentions to participate in the sector
    should be treated with a high degree of professional business
    judgment and not subsequently shared with other company or
    Government agents. More attention needs to be paid by managers and
    staff as to what information is to be shared with Government, the
    public or otherwise. Whether based *in fact or perception*, it is a
    critical issue for investors to know that dialogue with CNE and
    other Government players is professionally respected and that
    information is provided for limited review and closely guarded.

-   It appears that the SIE is playing a larger than usual role for a
    Regulatory body in sector policy-making. It is very important that
    this function not become part of SIE and that its presence as an
    independent overseer of sector operations has the security and
    respect of sector players and customers.

-   Expressed uncertainty by some as to whether the CO is assuming its
    full responsibility in addressing market issues, even though, by
    most accounts, market players expressed satisfaction with how the CO
    is operating and one company expressed the view that the CO was
    responsible for holding the entire sector together.

-   Private sector and potential investors have expressed concern that
    CDEEE is not treated the same as other market players. By virtue of
    being a state company, CDEEE has advance knowledge to non-public
    information, important historical information and institutional
    knowledge embodied in its large staff that can affect how CDEEE
    performs in this new market.

**2.1.4 Information and Awareness**

Markets are messy. But markets thrive on information. One of the most
important roles of Government and regulatory institutions, especially
during transition, is to provide public information. Two primary types
of information need to be addressed: (1) Public information and
Awareness and (2) Information for/from market players, including
Government.

> **2.1.4.1 Public Information and Awareness.**

Restructuring the market for competition requires strong customer buy-in
and participation in the reform process in order to achieve reforms for
the long term. *At this time of critical reform, ad hoc preparation and
publication of public information cannot suffice to adequately prepare
customers for the dramatic changes in how the sector will function*. *It
also fails to satisfy investors' need to secure reliable and trustworthy
information on a regular basis.* Finally, absent a coordinated
information strategy on sector reform, gaps in information will be
filled in by rising customer and investor concerns that more often than
not are based on half-facts and rumors. This means that both the content
of information as well as the approach to conveying information need to
be streamlined during this transition phase to assure accuracy,
consistency and useful information flows.

The country continues to operate in a culture of non-payment,
expectation of poor service and entitlement to free electricity as a
Government service. It is also a society in which grid-connected
customers generally have generators to supply back-up power -- it is
apparent that these generators are used frequently and that the cost of
petrol to fuel them is not inexpensive. *For Government, residents,
businesses and industry, public information and awareness efforts need
to address both a change in energy using habits as well as the
psychological impact of reforms*. Citizens can be reminded of their
willingness to pay for telephone and cable television as long as their
electricity service is of a certain level of quality. Where people were
not traditionally charged, they are now asked to pay increasing prices;
where use went unwatched, it is now metered. These are significant
changes for the way people think and the way they spend their
hard-earned money.

A number of permanent and programmatic institutions are carrying out
various levels of public information and awareness campaigns, as are
certain Government bodies (e.g., Ministry of Industry and Trade). We
recommend several improvements be made:

(a) *Government (e.g., CNE) can take a more formal and coordinated role
    in providing information about its plans and sector strategy.* This
    function may improve as this new institution grows into its
    statutory role. This includes mechanisms for monitoring feedback
    from customers, companies and Government and for considering
    feedback for policy and sector development purposes (e.g., SIE,
    possible development of independent institutes for such monitoring);
    and

(b) Information, awareness, education and participation aspects promoted
    by all institutions be more coordinated and targeted (e.g., CNE).

(c) *Government spokespeople be established and used at the key
    institutions* -- SIE, Protecom, CNE and at the CO can be fully
    dedicated to providing information in a timely and clear manner.

(d) In addition to institutional readiness to provide information,
    *Government*

> *needs to have the capability to implement sufficiently sophisticated
> information campaigns in response to particular situations, often not
> predicted.* This approach goes beyond use of media. For example, a
> campaign can be developed to respond to disruptions in the transition
> process due to the recent Venezuelan oil crisis that has deeply
> impacted the country. This would provide clarity for citizens and
> build confidence in Government's actions.

**2.1.4.2 Information for Market Players**

Although market players will benefit from information provided to the
public, they also have specific, more technical information needs that
can be better addressed. Our recommendations under the CO as well as our
overall suggestions for building SIE capacity will aid market players
apparent gap in accurate market information. *We also suggest that a
"Roundtable" for market players be conducted, perhaps quarterly, where
at least during the transition period, companies and Government
institutions gather to review sector changes, provide inputs, etc. It is
possible that such a roundtable could fall under a Chamber of Commerce
or other non-Government initiative.* At present, there is a sense among
market players that information received is not accurate or, more
commonly, that when there is sufficient information, it is difficult to
understand which issues are most important in the current market
setting. This is especially the case with Government reform measures
where market players remain uncertain as to how areas of sector reform
are being prioritized or what the priorities are.

**2.1.4.3 Channels for information dissemination**

*For most consumers, the lines of responsibility for implementing the
sector remain murky between Government and private sector.* In most
instances, these lines are nonetheless irrelevant as customers simply
seek reliable, affordable service. Finger pointing is primarily aimed at
Government and the distribution companies but ultimately, the Government
will have to bare the brunt of disgruntled citizens. Contributing to
confusion is the array of information sources and types of information
provided by various institutions:

-   The **SIE** has a Public Information unit and publishes information
    on energy efficiency as well as "how to read a meter" and "how to
    read a bill" literature.

-   Via the consumer complaint unit of SIE, **"PROTECOM**", a variety of
    consumer educational materials are published. Radio programs are
    broadcast on national radio as well as on local stations and
    broadcast in the barrios; PROTECOM coordinates much of this
    information to barrio leaders.

-   The **Anti-Fraud Unit** conducts public awareness on good energy
    practices and conservation. Awareness information is also provided
    on how to prevent fraud.

-   The **PRA** publishes educational pamphlets about its program.

-   The **Distribution Companies** are providing increasing literature
    on meter reading and energy savings. It is important to note the
    increasing role of companies in public information and awareness
    throughout the country. Edesur/Edenorte noted that fraud is
    worsening and collections have improved with the installation of an
    information system. Still, they say that they continue to battle the
    customer mentality not to pay for electricity, have commenced some
    education activities and are working in the barrios to increase
    awareness about the penalties for non-payment. Company
    representatives are said to have visited regions where non-payment
    occurs and succeeded to convince 10 percent of those households to
    begin payment.

-   **Community based organizations**[^23] are printing hand outs on an
    increasing basis calling for Government accountability and the
    alleviation of black outs. Much of this Church-based work is
    responding to gaps in information -- it is important that
    misinformation and rumor be met with the publication of Government
    intention and response.

-   **The Ministry of Industry and Trade** has an energy efficiency and
    renewable energy awareness campaign underway; a textbook on
    renewable energy and several home energy savings pamphlets have been
    published and disseminated.

At least during this phase of transition, it would be useful for
Government to take some account of which Government institutions and
programs are disseminating what types of information. *Where possible,
Government may wish to streamline information dissemination, e.g.,
establish an Energy Information Center and a CNE Public Affairs Unit.*

**2.1.4.4 Tools used to convey information**

At present, a mix of institutional and informal information and
awareness tools are used to convey information on a variety of issues.
These include: pamphlets on "how to read your meter" (Protecom, PRA,
Distribution Companies) and "how to save energy" (PAEF, MIT) to radio
clips on "why private investment is good or bad for the country" (Pact,
media). During this transition, it is important that significant
information is prepared and sufficiently disseminated to all segments of
society. However, in light of the new concepts and market approaches
that are being introduced as well as the general sentiment that
electricity is a service provided by Government, *it is also important
that information not increase confusion.*

The most readily available information tool for Government and the
sector is media. Use of the media, particularly print, but radio and
television as well, is the most powerful tool for the Office of the
President, CNE, SIE, CDEEE and companies to express their concern,
"courageous actions," and to levy accusations against counterparts.
Public debate may well serve a useful purpose to educate the public and
evaluate political options. *However, the current display of sector
"angst" in the media where Government party is pitted against other
Government parties and/or private companies must stop*! This is
especially true for the Superintendency which should remain "above" such
dialogue in order to preserve its objectivity and the integrity of its
decision-making processes. The media should be used as a tool to inform
the public and solicit feedback instead of mudslinging and
grandstanding. This type of coverage is appealing to the press but
ultimately reflects back on the Government's inability to pragmatically
implement sector reform.

A lack of sector expertise in the media needs to be addressed; as the
market evolves some energy experts and even dedicated journals or
columns will likely emerge. The manner of press coverage in the country
consists of highly opinion-based journalism. The CNE and SIE can work
with journalists to assure factual coverage of the sector and can
systematize the manner in which information is provided to media to a
greater extent than is presently the case. It will also be important to
encourage media "follow through" so that when a crisis-like story is
introduced, the Government makes sure to follow through to inform the
Press so that resolution can be as aggressively reported.

The use of pamphlets and posters is expanding. Consideration should be
given to the use of natural information networks and resources that may
include business associations, non-Government organizations, schools and
local government offices. A national media campaign prepared by
Government but using media channels to disseminate periodic/regular
messages about sector reform would be useful over the course of the next
two years. Included should be a contact number (e.g., CNE, SIE) for
additional information.

**[2.2 Statutory Institutions, Procedures and Operations]{.smallcaps}**

The National Energy Commission, the Superintendency of Electricity and
the Coordinating Organization are the primary *statutory* entities that
have been established to regulate and support sector operations. Each
entity is intended to serve a particular role concerning sector
oversight, management and information. Although this basic institutional
infrastructure presents the basis on which a viable market can operate,
none of the institutions are operating at the level of market
sophistication that is required to effectively support a well-governed
sector. *A number of factors, separately and in combination with each
other, impede progress and sustainability of transitional reforms\--the
introduction of new, often unclear approaches to sector management;
inexperienced staff in new institutions; evolving management systems;
and a lack of public awareness, understanding and support for reform.*

# In addition to these three key institutions, it is important to note the Presidential Commission for the Financial Sustainability of the Electricity Sector (the Supervisory Council). Initially designed as an *ad hoc* group to provide advice to the President on sector issues, the Commission appears to have established an important institutional identity on which public, private and Government expectations have developed. It is unclear whether this Commission is intended to be established as a long-term institution or, as we suggest, serve as a transitional body, the role of which will be consumed by other permanent institutions as reform progresses. For purposes of this assessment, the Commission is included as a permanent institution.

> **2.2.1 The Presidential Commission for the Financial Sustainability
> of the Electricity Sector (the Supervisory Council)**

This Presidential advisory council has been in existence since March
2001 and is comprised of five members.[^24] At this stage in reform, it
is clear that this Council plays a powerful, if not systematic role in
how the sector is evolving. During our visit in December 2002, the
issues of the peso devaluation and the Venezuelan oil crisis were put
before the Council in conjunction with Presidential meetings. During
virtually every meeting with Government parties, the work of the Council
was mentioned.

This type of council serves an important function during this reform
phase and it is expected that the President would ordinarily take
advantage of such an ad hoc body for technical and other advice as
relates to the sector. However, the presence and active participation of
this particular Council in sector matters may have gone beyond a
Presidential advisory role and runs the risk of so permeating how the
sector develops that it can be deemed a formal institution. This is
risky because there is no legal basis or sector mandate for this Council
beyond an acceptable advisory role to the President. Although many of
the participants are known in the sector (CNE Executive Director,
Superintendent), there may be some confusion in the sector as to which
institution, including the Council, makes the final decisions on sector
matters. At a minimum, there is a strong perception that, except for the
President, its members affect policy one level above CNE and other
institutional inputs. The Council is directly impacting, if not
directing, policy priorities and how institutions are to operate.

*More clarity as to the intended role of the Council is required.* As an
advisory or transitional body, the Government needs to decide whether
this will be a short- or long-term institution. If to function as an
ordinary advisory council to the President, clear boundaries for the
responsibilities and mandate for this type of Council need to be
provided for public and private onlookers.

**2.2.2 The National Energy Commission (CNE**)[^25]

By law, the CNE has considerable reach throughout Government and is
responsible for establishing sector policies and strategies. The CNE is
governed by a Directorate or "Commission" where seven Government
entities are represented[^26]. By all accounts, the CNE is a respected
entity and provides sector leadership at present. Legally prescribed
meetings take place and requisite coordination among various CNE
participants such as the Ministry of Industry and Trade, Technical
Secretary of the President and State Secretary of Finance are
functional[^27]. The Minister of Industry and Trade is the president of
CNE's governing Board.

CNE basically serves a role similar to a Ministry of Energy but also
serves as the *overseer* of the regulator to the point of being a
*collaborator* in regulation. CNE maintains a legal department, and the
legal department works with counterparts at other ministries. CNE is
anxious to build capacity at the regulatory level and is promulgating a
new mentality of anti-fraud, increasing concessions to support renewable
energy[^28] and to build awareness around the fact that electricity
costs are based on the US dollar market.

The perception among private sector and state players is that CNE will
be the ultimate authority of the sector and that it is an important
institution, led by the right people, but that to date, it has had
limited impact on the sector. Onlookers believe that the institution
will play a necessary role and there is growing anticipation about the
energy policy and planning report expected to be released by CNE in June
2003. There is also a positive view that CNE and SIE are strong
collaborators. *This is a collaboration that, although necessarily
strong today during the transition stage, should ultimately diminish in
need as each institution becomes a stand-alone entity and begins working
within its own jurisdictional limits*.

*We are concerned that the CNE has too much influence in day-to-day
affairs of the sector and particularly in regulatory matters.* Among
other things, CNE has legal authority to issue Regulations which are
legally superior to the Resolutions issued by SIE and which constrain
SIE's conduct and decisions; CNE has jurisdiction to review decisions
made by SIE for conformance to CNE's Regulations and other legal
requirements; and under Article 24 of the July 2001 Law, CNE has the
ability to cast a tie-breaking vote if the SIE is deadlocked. This close
relationship should be reduced by improving the SIE staff and
considering revisions to the July 2001 Law.

**2.2.3 Superintendency of Electricity (SIE)**[^29]

As a general matter, regulation in the electric sector is technically
and economically complex. At present, regulation is further complicated
by the newness of the SIE[^30] as an entity (at least since its
separation from the Ministry of Industry and Trade), competent but
inexperienced staff and inordinate and unpredictable political
pressures. In addition, the SIE has inherited a number of sector policy
and contractual matters that transpired prior to the establishment of
the SIE (e.g., contracts with the distribution companies signed prior to
SIE operations).

Although created in March 1998, the SIE did not become independent until
2001 under the July 2001 Law. Before then, it operated under the
auspices of the Ministry of Industry and Trade. At present, SIE has
approximately 125 staff led by the Superintendent. The current
Superintendent was confirmed by the Congress approximately four months
ago although he has served in his position prior to confirmation. He is
known for his strong personality, his unquestionable integrity and his
useful working relationship with the President. He is perceived by the
other sector players as someone from outside the energy sector who does
not necessarily have a close relationship with any of the sector
players. Because the regulator needs to be a strong independent entity,
this relationship, or lack thereof, is not necessarily a detriment, but
may help in establishing SIE's independence. Indeed, most market players
expressed a desire for a strong independent Superintendent as long as
the technical competency of the Superintendent and SIE staff can be
improved.

The SIE is strongly guided by its leadership; although the three
commissioners are appointed by the President, the Superintendent carries
the public and media voice for the SIE. None of the three commissioners
have sector backgrounds[^31] and it appears that internal conflicts
among the three commissioners may be reflected in how effective the SIE
operates. From the point of view of private investors, the current
regulatory framework is not overly restrictive or complex in practice,
but rather, it is deemed to be uncertain and operating at the final call
of the President.

As the base from which the new governance structure of how the sector is
regulated, under the leadership of Julio Cross, the SIE has embraced
increasing regulatory and market oversight responsibility. *Initially
besieged by inexperienced staff and changing leadership, the SIE
currently demonstrates an emerging and necessary independence of
operation coupled with accountability to business and consumers alike*.
As an institution, the SIE continues to be directed based on the
personality of individual leadership, however a tendency to
institutionalize best practices under current leadership may show hope
that over time, the SIE framework will shape up to simply be managed and
guided by good leadership.

**2.2.3.1 Superintendent and Commissioners**

For the most part, today's institutional leaders have been actively
engaged in the electricity sector for decades. However, in the case of
the Superintendency, all three commissioners come from non-sector
backgrounds, but are nonetheless well versed in "doing business" in the
country. The current Superintendent has strong opinions that are
beginning to shape the institutional mandate of the SIE. He strongly
believes in the independence of SIE and will express his concern when
attempts are made to challenge that independence, a trait that may
irritate some sector players or Government institutions but which will
benefit the sector in the long term. Although not in total agreement
with all aspects of the restructuring including some aspects of the
capitalization agreements, the Superintendent views his role as
protecting the consumer from corporate conduct that is exploiting the
sector. He also questions the appropriateness of some Government
policies and programs, such as PAEF, that have injected the Government
into activities that normally belong to the companies, but demonstrates
a willingness to conform to legal obligations and transparent
decision-making processes.

Curiously, the other two SIE commissioners are considerably less known
to market players.[^32] Some market players complain that none of the
Commissioners meet the legal requirements[^33] to have been appointed,
e.g., having eight years experience in the energy sector. Still, the
consistent theme is "it is more important to have independent
commissioners than fully qualified ones."

The Superintendent himself is aware of his lack of inexperience in the
sector and is enthusiastic to receive regulatory assistance from the
World Bank and Government in coming months. Because of his lack of
sector specific experience, the Superintendent appears to be taking on
issues closer to his knowledge base, specifically, accounting and
financial issues, private sector contracting and the distribution of
financial flows in the sector. These are key issues for the sector,
especially at this stage of the transition, and his experience and
knowledge with these issues may well benefit the transition in the long
term. However, we note that the Superintendent should be careful not
exceed his regulatory authority in these matters, and should ensure that
other important regulatory matters are not overlooked or neglected based
on either his interest or awareness.

**2.2.3.2 Independence of the Regulator**

*The independence of the Superintendency is one of the most important
issues to be addressed in sector reform*. But, for a combination of
reasons, the actual and perceived independence of the SIE is in
question. The Superintendent himself expresses a strong desire for
independence from the Executive Branch and many sector players express
the same desire. This apparent interference with the independence of
SIE, whether this interference is *actually occurring or is only
perceived as occurring*, severely undercuts not only the authority of
this critical agency, but also the integrity, transparency and
predictability of the decision-making process, which in turn increases
the risk perceived by the international investment community. Risk
increases because a company's market position or its regulatory
approvals or its probability of investigation are controlled by
political decisions rather than predictable institutional decisions,
thereby exposing their investment to higher risk.

We find that some legally mandated responsibilities of SIE actually
serve to undermine the independence of the institution:

(1) Under the July 2001 Law the Superintendent of SIE also serves as the
    President of the Coordinating Organism. *This dual role for the
    Superintendent is an inherent conflict of interest and should be
    eliminated*.

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(2) Under the July 2001 Law, CNE has a close relationship with the
    Superintendency. Among other things, CNE issues regulations that
    have superior legal ranking over the resolutions that SIE issues,
    meaning that SIE must follow the lead set by CNE. CNE also has
    authority to review decisions by SIE, although we were told that its
    review is limited to SIE's application of the law and does not
    include a review of SIE's fact-finding. This relationship undercuts
    the independence of SIE because, among other reasons, SIE must
    follow the regulations issued by CNE which is part of the Executive
    Branch.

Sector players must begin to realize that legitimate procedures outside
preferred politics are in place to participate in and to challenge
decisions made by SIE and to use those procedures to obtain a final
result. *Government's ongoing commitment to improved information
exchange will help to clarify roles and responsibilities of still-new
institutions supporting the sector.* In the long run, this will not only
benefit the sector by reducing risk and improving predictability of
decisions, but it also will benefit them individually by ensuring a more
stable market environment that is controlled by transparent decisions
rather than political whims.

*In addition, we suspect that the concept of regulatory independence is
not yet clearly understood and/or embraced by all sector players.*
Although SIE is independent, that independence does not preclude, for
example, the Superintendent from being a team player with other
Government agencies, e.g., sharing general policy views and discussions
about sector issues, discussing probable initiatives that SIE or other
sectors could undertake, etc. This collaborative approach to sector
development may currently be perceived to blur the lines of regulatory
independence, but is acceptable without compromising the concept of
independence

The concept of independence emerges when SIE has a matter pending before
it and must make a decision about that matter, e.g., after SIE initiates
a rulemaking proceeding, initiates an investigation or receives an
application. At that point, informal communications between the public
(including other Government entities) and SIE (the Commissioners and the
staff) *must stop*, and all communications should be conducted through
open and transparent processes, e.g., public hearings, written filings
with SIE, etc. In such instance, *SIE must be careful to prevent\--and
the public and other Governmental agencies should not seek to engage
in\--any ex parte*[^34] *communications so long as that matter is
pending before the Superintendency.* Any effort to influence the
decision-making process once the matter is under consideration is
improper. However, until that point, SIE, including the Superintendent
himself, may engage in team discussions and be a team player with other
sector players.

**2.2.3.3 Mode of Operation**

Partially attributed to the crisis management scenario to which
Government has had to respond in recent months, SIE operations have been
somewhat *ad hoc* in terms of instituting regular meeting schedules. As
the Venezuelan oil crisis calms and resolution of the peso devaluation
continues, it will be important for SIE to commence a regular schedule
of operation. This will include schedules for internal staff training,
inter-agency meetings and meetings as well as a clearly defined and
published process for public hearings. The SIE website is not yet online
but is expected to be online in coming months. The web page serves as an
important mechanism for dissemination of information to the local
population and outside investors tracking the progress of reform. As SIE
develops, it may consider issuing periodic newsletters and informational
updates.

Effort should be made to *include a broader range of public
participation into SIE's decision-making processes.* The more the public
participates in those processes, the better it will understand the
purposes of the restructuring and the way to express its views. Consumer
groups and other groups representing coalitions, e.g., industrial,
agricultural, financial, commercial coalitions, should be encouraged to
participate in SIE proceedings and consideration should be given to
conducting some public hearings outside of Santo Domingo.

**2.2.3.4 Role/Perception of Role**

SIE is not necessarily seen as a "driver of reforms." This view is not
necessarily bad for a regulatory institution because regulatory
institutions normally are more reactive than proactive to market issues.
But sector players understand that SIE is a necessary institution to
support the new market order. Its staff capacity requires technical
improvement and has been cited for a lack of experience. There is a
belief that the SIE will listen to private and public players but that
it is not currently capable of resolving any serious matters. *SIE is
graced in perception with the knowledge that it is a new institution, at
least since it has been separated from the Ministry of Industry and
Trade, is still struggling with its fundamental operations and trying to
break with its previous identity and establish a new identity*. However,
a strict time line should be established for increasing staff competence
and SIE responsiveness to market issues, which will help allay sector
concerns about this critical agency.

As noted earlier, the perception is that SIE is engaged in a struggle,
partly to ensure its independence, within the sector, e.g., with CNE,
with the President/Government and with other market players*.* Evidence
of these conflicts is obvious from articles, news conferences and press
headlines. *This perception is not helpful to SIE, and SIE must contain
its use of the press to conduct what comes off as grandstanding
measures.* This sentiment was conveyed to us by market players on
several occasions. Also, the more SIE finds itself headlining in the
press, the less confidence market players will have in SIE's integrity
and objectivity about market issues.

Although the SIE is mandated to protect customers, it is nonetheless
important, especially during this transitional phase of the reforms,
that some balance be achieved not only to assure customer protection,
but also to provide investors and companies with certainty and legal
predictability that their contracts, market actions and operations, if
within legal bounds, will be safeguarded.

**2.2.3.5 Financing SIE**

Pursuant to Article 37 of the July 2001 Law and Articles 45, 49-51 of
the Reglamento, the Superintendency has its own funding, to be shared
with the CNE. All participants in the interconnected system must pay 1
percent of the value of their purchase or sale transactions in the
wholesale market (spot and contract), for either energy or capacity, net
of transmission toll payments. Likewise, ETED and electricity suppliers
in isolated systems must also pay a 1 percent charge on the value of
their sales revenues. For the first four years of application of the
Reglamento, 75 percent of the amount collected will be allocated to SIE
and 25 percent to the CNE. It was unclear to us whether this funding was
adequate for these institutions and whether they were receiving these
funds in a timely manner. We consider the funding mechanism extremely
important for these institutions to carry out their functions,
especially in the case of SIE.

**2.2.3.6 SIE Staff Capacity**

The Superintendent is aware of the shortcomings of SIE. He seeks staff
training, assistance to him, and Government recognition that SIE can
enforce the law and Reglamento. In addition to his desire to build his
own capacity, he similarly seeks improvements at the staff level on
tariffs, contracts, and technical and information matters. *By virtue of
the lack of expertise at SIE, the independence of the body is
jeopardized; for example, SIE staff commonly rely on CDEEE technical
staff and other information/advisory.*

A "Duties Manual" for SIE personnel is cited in the Reglamento, Article
36. We were not provided this document for review but understand that,
according to the Reglamento, it addresses technical and professional
requirements for each SIE position. It would be very useful to conduct a
thorough review of this manual.

In addition, the SIE has difficulty obtaining information it needs from
companies (e.g., Fenosa, AES); a more experienced and professional staff
will establish standard filing requirements and information gathering
systems that are necessary for regulatory bodies to perform their work.
The Superintendent has requested that a Regulatory Work Plan be
developed; *SIE staff itself should prepare this plan.*

The Implementing Regulations[^35] of the application of the July 2001
Law (the "Reglamento") clearly list a variety of standard regulatory
areas in which SIE will play a significant role in regulating the
market. Modifications to the Reglamento set forth further processes to
be followed by SIE concerning investigations, certifications, linkages,
monitoring the spot market, etc. We were unable to review all these
processes in their entirety and recommend that a review of the details
of these processes be conducted. By most accounts, SIE staff is not
prepared to implement its own operation.

**2.2.3.7 Process and procedure**

The Reglamento addresses both consumer complaints and company
complaints[^36]. *More process detail that is well publicized with
respect to company complaint procedures is suggested.* The processes for
hearings and appeals, permits and licenses and concessions are not well
publicized and actually appear to vary at this early stage of
development. Political factors seem to influence certain priorities of
topics. More attention to regulatory processes is expected in the coming
months and should be closely monitored.

It would be useful to improve and publish the processes that pertain to
SIE as well as other Government agencies that make decisions about the
sector, such as CNE. During meetings with different companies, we
observed differing impressions and opinions on what was believed to be
the requisite processes in place at SIE. *All companies operating in the
market should be subject to the same process.* When asked how they
receive their information, almost all refer to "word of mouth" of
friends and colleagues who work at SIE and CNE. Improved and clear
information published regularly, including a working web page for SIE,
would alleviate apparent gaps in accurate knowledge.

There are consistent concerns about the lack of decision-making coming
out of the SIE to date. Market players appear thus far to be patient,
waiting in anticipation for an improved technical capability at SIE.
However, it is important that a clear process for decision-making be
published by SIE and followed; this would include time schedules for
making decisions -- whether to extend decision-making time or present
final findings*. The Reglamento provides a good "first step" and should
be carefully reviewed and understood by staff responsible for
implementation at SIE.*

SIE is responsible for a variety of legally prescribed issues that
impact substance and procedure[^37]. SIE is to maintain a judicial and
internal audit competency.[^38] It has investigative (e.g.,
investigating ownership of power plants[^39]), enforcement, consumer
protection and contract oversight powers, but the detailed processes for
SIE's implementation of these powers is lacking. In its preparation and
issuance of resolutions, SIE should have additional procedural clarity.
Finally, processes to commence and procedures to assure fair public
hearings need to be developed, published and implemented.

*An in-depth review of the Reglamento and Modifications should be
conducted by SIE staff in order to identify any gaps in prescribed
process and/or additional areas that require clarification.* It is
suggested that SIE prepare a document describing specific processes and
time frames for standard regulatory actions (e.g., Establishment of a
claim of linkage against a company by any Wholesale Power Market Agent).

**2.2.3.8 Appellate Jurisdiction and the Appeals Process**

The two Government entities which have decision-making authority and
from which an appeal process must be established are CNE and the
Superintendency. The Coordinating Organism is a private entity created
by the July 2001 Law and is subject to SIE monitoring, so that its
decisions are determined by the rules of that organization.[^40]

***Superintendency.*** SIE decisions can be appealed to either CNE or
the Administrative Law Court following prescribed procedures. Those
procedures should be more carefully reviewed to determine the process
and standard of review.

The Superintendent has authority, subject to a three year Statute of
Limitations, to determine the degree of severity of any infraction or
non-compliance of applicable rules, and can determine the amount of the
penalty subject to the limits set forth in the July 2001 Law (Article
126). Affected individuals can appeal the decision on sanctions and
penalties to the administrative law court of the Dominican Republic
(Article 127). In addition, fines generated as a result of sanctions
levied are to be earmarked for "special education and professional
programs in regulation"[^41] -- *it will be important to track these
funds and monitor how they are channeled for public review.*

As an independent regulatory organization, the decisions of the
Superintendency ideally should be appealable to a non-political entity,
normally the judiciary. As noted above, Article 127 of the July 2001 Law
states that decisions regarding fines and sanctions imposed by the
Superintendent are appealable to the Administrative Law Court. As is
common in countries that follow the Napoleonic Civil Code, the acts of
the State conducted under the State's constitutional prerogatives cannot
be challenged before the general courts of law. Instead, they must be
appealed to a specialized court, the Administrative Law Court ("Tribunal
Contencioso-Administrativo"), whose decisions are final.

Article 127 of the July 2001 Law was interpreted by Article 28 of the
Modification to Reglamento, in what appears to be an expansion of the
appeal rights[^42]. Specifically, Article 28 of the Modification amended
Article 512 of the Reglamento to specify that any SIE decisions
regarding fines and penalties that are contrary to July 2001 Law, the
Reglamento, or the regulations issued by the SIE and the CNE, can be
appealed not only to the Administrative Law Court but also to CNE. It is
unclear to us whether this interpretation of Article 127 of the July
2001 Law is an appropriate interpretation or whether it exceeds that
Article by adding an additional forum (CNE) for appeals. Our
understanding is that the decisions of the Administrative Law Court
would prevail over those of the CNE, as the Administrative Law Court is
empowered to rule on any administrative acts of the State. We are not
aware of any appeal from a SIE or CNE decision to the Administrative Law
Court that would clarify this jurisdictional issue.

Fines and penalties are a small part of the jurisdiction of the
Superintendency, but this appears to be the only provision of the July
2001 Law specifying the appeal process. There are no other provisions in
the July 2001 Law that specify where decisions of the Superintendent are
appealed or what the standard of review would be on appeal. The only
applicable provision is Article 11 that allows interested parties whose
applications for a concession, permit or authorization, whether granted
or rejected, to appeal such decisions to CNE who, in turn, may, if it
deems it advisable, take the case to the President of the Republic.
Other provisions in other laws appear to allow a right of appeal to the
Administrative Law Court, but the interaction or priority of these
appeal rights was not immediately apparent.

During meetings with various organizations, however, we were told that
CNE considers appeals from the Superintendency and that the standard of
review is very limited and applies only to a review of the applicable
law. Stated differently, CNE would not overrule any factual findings,
but would have authority to review the application of the law to the
factual findings. However, as stated above, we were unable to find any
clear legal justification for this process or the standard of review,
although Decree No. 749-02 (September 19, 2002), Article 512 was cited
to us as the basis for the process.

***The National Energy Commission.*** CNE is part of the Executive
Branch of Government that is managed by a Board, of which the Minister
of Industry and Trade serves as the President. As part of the Executive
Branch, it reports to the President of the Republic through the
President of the Board. As noted above, the only provision of the July
2001 Law that addresses appeals is Article 11 which provides that
interested parties whose applications for a concession, permit or
authorization are granted or rejected by the Superintendency, may appeal
such decisions to CNE who, in turn, may, if it deems it advisable, take
the case to the President of the Republic. The first observation is that
the explicit language refers to "interested parties" which would appear
to include all parties to the proceeding, and not just the applicant.
However, the remaining language of Article 11 seems to limit the appeal
rights only to the applicant. If correct in this interpretation, then
interested parties who opposed the application would not have any appeal
right to CNE if the application were granted.

Aside from the statutory language, we were told, as noted above, that
CNE only has authority to review the legal basis of the
Superintendency's decisions. This limited review may arise, in part,
from its legal authority which extends to issuing regulations, a higher
legal authority than the resolutions that the Superintendency is
authorized to issue. The authority to issue regulations gives CNE a
broader authority to set the legal tone and policy for the sector.

Since CNE is part of the Executive Branch, decisions by CNE normally
would not be appealable to the judicial branch. The only remaining
appeal would lie with the President of the Republic, which clearly
introduces political issues into the review process.

**2.2.3.9 Issuing Resolutions**

The process for developing resolutions is reasonable and goes through
several stages. Draft resolutions are prepared by SIE staff, following
"brainstorming" and roundtable discussions among various sector players.
The drafts are circulated to market players who are given two days to
respond. The perception is that SIE is coordinating this process with
CNE every step of the way.

A recent example of the process is the SIE resolution on the exchange
rate as the "market value of the load." Companies met with the President
and all agreed that a resolution in this regard had to be issued. They
also knew that the resolution would establish a different value of the
dollar and would therefore impact distribution company contracts that
are based in dollars. Nevertheless, because the roundtable was a
precursor to preparing the resolution, companies and Government were in
agreement on the substance of the resolution.

This resolution is one example where the general public apparently was
excluded from the decision-making process and was denied an opportunity
to learn how and why this decision was made. The round table discussion
appears similar to a form of Advanced Rulemaking and is often used in
other countries as a way of exploring issues and opinions before a
regulatory agency has completely formulated its opinion. *But this
process should be more transparent, as well as the final process of
issuing the proposed and final rule, so that the public can participate
in and the press can report on these matters.*

Most market participants with whom we met were aware of two pending
resolutions that will provide further detail on the Reglamento,
addressing frequency and voltage requirements. One company submitted a
letter to SIE seeking less stringent limits and is awaiting reply. Here
the process has been one of collaboration with the CO and companies. At
this early stage in development of SIE process, we did not hear definite
complaints, but heard cautious concern that SIE processes become more
defined and clear and action, more immediate.

**2.2.3.10 Contract Review**

SIE staff needs more capacity in this regard. There is a tendency in the
country to disregard the integrity of a contract if deemed to be full of
unacceptable terms, often blamed on having been drafted before recent
sector changes, (e.g., capitalization) when the sector operated under
different market conditions, or under prior administrations. Although
SIE should act on abusive contracting or contracts that are deemed to be
unreasonable or not prudent by established standards, dismissing
contract terms too readily will send the wrong signal to investors and
sector entities interested in committing to long-term involvement in the
sector.[^43]

**2.2.3.11 Institutions Operating Under SIE**

**Office of Consumer Protection for Electric Energy (PROTECOM**)[^44]

Perhaps one of the more efficient new institutional operations in place
is PROTECOM, the consumer complaint division under the SIE. PROTECOM is
legally operating under SIE but works independent of SIE, reporting to
the Board President of SIE. PROTECOM does use the legal staff of SIE and
maintains its own technical staff. Functionally, PROTECOM investigates,
monitors and determines whether violations in usage, billing have been
committed. It is not responsible for any aspects of ratemaking or
addressing the issue of blackouts. This separation of functions is very
important. PROTECOM has become a clearinghouse for action on behalf of
customers and actually appears to be working at its peak capability. To
date it has processed 8,000 cases[^45] and returned more than 100
million pesos to customers.

According to its literature, at present, PROTECOM maintains four
operating offices: Santo Domingo; San Cristobal, Puerto Plata and
Higuey.[^46] In total, 52 staff are employed by PROTECOM throughout the
country. Approximately 30 staff members comprise the technical team
responsible for making visits to customers to assess the technical
nature of complaints. Twenty individuals are now receiving training to
work at PROTECOM. The Santo Domingo office that the team visited is
centrally located, vibrant, well-lit, has ample seating for customers,
many chairs were in fact filled, and an enthusiastic staff of 5-6
individuals behind the welcoming desk that accept customer complaints.
Staff members promptly provide information to customers and the office
is well equipped with furniture, equipment and supplies. Under law,
PROTECOM will operate offices in each province, and four offices will
function in Santo Domingo. Additional offices can be operated and may be
considered as temporary operations by law.[^47] SIE is allowed to
organize offices and mobile services to respond to community needs; this
is a valuable attempt to provide flexibility for consumer services. *It
is suggested that whatever offices or mobile operations are in effect be
well publicized and that sufficient notice be provided to customers in
instances where offices will close or mobile units be relocated.*

> *Filing complaints* - A complaint sheet is filled in and the customer
> is provided with a hand page describing basic electricity rights. A
> written statement is signed by the customer and assisting inspector
> that indicates that the services provided, by SIE, were free and that
> if any payment or gift is offered, a penalty can be levied.[^48] It
> invites signatories to write to the Department of Prevention of
> Corruption if necessary. Information is also available on how to read
> a meter, tariff rates, etc.

**Diagram 2**

**Process for Customer Filing a Billing Complaint**

> \*footnote 1- According to PROTECOM officials, the distribution
> company generally takes longer than 3 days to respond,
>
> \*footnote 2- Appeals are taken at the Administrative Court (July 2001
> Law, Art 127). Judges have been noted to issue favorable decisions for
> customers.
>
> *Meters -* At present, there are 4-5 types of meters used to monitor
> the network; considerable complaints have been received on the
> Schlumberger meter used by Fenosa. If the distribution company is
> found to have engaged in fraud, the company will pay PROTECOM. Under
> the July 2001 Law, where the consumer has committed fraud, 20 percent
> of its penalty will go to PROTECOM, 70 percent to the distribution
> company and 10 percent for the development of renewable energy[^49].
> Cursory information provided to us indicated that 25 percent of 417
> meters that were checked were faulty---the Edesur meters had 85 errors
> and the AES meters had 21 errors, almost always in favor of the
> distribution company. Anecdotally and statistically, AES is found to
> be operating at higher compliance with the Reglamento than Fenosa.
> There is strong belief that most meters used by Fenosa, newly
> installed, have been "set" to register up to 30 percent beyond actual
> consumption; representatives from Schlumberger were said to have
> visited the country to address this matter. Although Protecom found
> some errors in AES meters, Protecom believes that those errors were
> not attributable to the meters being "set" to register higher than
> actual consumption.
>
> *Billing-* There are increasing complaints regarding billing cycles --
> customers are bringing in bills that reflect 34-37 billing days in a
> month cycle; in some cases, customers have been billed up to 400 days
> per year! Customers are entitled to receive ten times the value of
> overpayment (e.g., if billed for 32 days and should be 31, the value
> of the one day payment times ten.) Under law, where customers do not
> pay, their service can be shut off after one month, forcing people to
> first pay the incorrect bill and to then seek remedy.
>
> **Arbitration Commission**[^50]*-* the Commission is not yet in
> effect; it is important that the Commission be established and that
> its mandate is clearly articulated in order to establish an immediate
> trust in its status and decision making. The Commission will be used
> when the first rate review takes place and when/if there are
> disagreements between the distribution companies and the SIE. The
> Commission will function under the auspices of the Superintendency and
> initial processes are prescribed in the Reglamento. *However,
> considerable more detail for how the Commission will operate will be
> necessary*. In the current sector climate, by company accounts,
> effective operation of this Commission will be welcome; the prospect
> of international arbitration lacks appeal due to time, money and the
> negative publicity a company will receive.

**2.2.4 Coordinating Organism (CO)**[^51]

In general, and despite the slowness of the process of institutional
development, the wholesale market appears to be working reasonably well
from an operational perspective, although not from a financial one. The
CO has been in existence for more than two years and is cited as
operating in a "very professional" and transparent manner.[^52] Its work
is conducted through the Coordination Council; the Reglamento and
Modification specify composition, operations and processes. It has
statutory power to issue norms about the operation of the market and
seems capable of executing its mission with a high degree of
transparency.[^53] In the year 2001, the CO issued internal procedures
for the preparation of periodic operational reports concerning: the
settlement of commercial transactions among market participants; the
settlement of capacity adjustment transactions; and updates of
transmission loss factors across system nodes. These reports are posted
in the CO's website and are hence public information. We have reviewed
several reports; they constitute an important and commendable aspect of
the CO's development, as they contribute to the transparency needed by
market participants, the regulator, the Government, and other
stakeholders to ensure that the market is operating without distortions
in favor of any participants. The CO also implemented several
information systems for dispatch and transmission system control,[^54]
and it has organized educational activities for sector
participants.[^55]

The main problem that the CO is experiencing is an overly slow process
of consolidating its legal, financial and governance structures. *For
the short term the CO budget has been approved and its technical staff
is recognized as highly competent.* No procedures for the calculation
and collection of participant charges (for the financing of the CO's
costs) appear to yet to be in place,[^56] and by-laws for the governance
of the CO are still lacking.[^57] The intended restructuring of the CO
Board has not been implemented because, among other reasons, CDEEE has
not created the corporations for ETED and EDEHID.

At present, private-sector participants are concerned about Government
entities dominating the CO governing board. As illustrated below, under
both the current structure and the structure mandated by the July 2001
Law, the composition of the CO Governing Board is heavily weighted
towards Government-owned companies.

**Table 7**

**Structure of the Coordinating Organism Council**

  -------------------- --------------------------- -----------------------
  **No. of             **Current Structure**       **Structure under July
  Representatives**                                2001 Law**

  1                    Private Generation          Private Generation

  1                    Capitalized Generation      State Hydro Company
                       Companies                   

  1                    State Transmission Company  State Transmission
                                                   Company

  1                    Distribution Companies      Distribution Companies
  -------------------- --------------------------- -----------------------

Under the July 2001 Law, the Board, which has the decision-making power
for the CO, is composed of one representative from each of the following
sectors: private generation, the state hydro company, the state
transmission company and the distribution companies. The Government owns
approximately 50 percent of the distribution companies, meaning that the
Government's interest in the Board, compared to the private sector
companies, is heavily weighted by this composition. If this structure is
to be changed, an amendment to the July 2001 Law would have to be
enacted.

There is some concern expressed by public and private market players,
that the CO may provide opportunity for internal collusion among its
members. We did not find any direct evidence or hear of such activity
but the fact that this concern is being expressed reveals a perception
about the CO and that it will benefit from educating the public about
its functions.

We note that the Superintendent of SIE presides over the CO as its
President -- *this should not be allowed.* The Superintendent can serve
in a lesser role, such as non-participatory attendance at CO meetings.
Another concern is that the July 2001 Law is silent on CDEEE's
obligation to adhere to CO decisions. Although CDEEE is a market player,
it can also be construed as an instrument of the Government. Some
provision should be made to clarify that CDEEE's role in the CO is the
same as other private entities.

With regard to transparency and financial sustainability of the market,
however, a major issue regarding the CO's ability to discharge its
duties is the fact that the "commercial information system" required by
Title IX, Chapter V of the Reglamento to ensure appropriate settlement
of transactions, has not yet been fully implemented. The commercial
information system required by the Reglamento[^58] should be installed
and the CO should conclude its studies if not already done so on the
installation of a central data collection system. Installation of both
systems will ensure proper settlement of market transactions.

According to the CDEEE, US\$1 million worth of transmission congestion
costs per month are at present being charged to the CDEEE by default, as
the CO lacks sufficient information to charge them to other participants
with better measurement equipment. This obviously impacts both the
degree of transparency in the system and the industry's financial
sustainability, since CDEEE is already very stretched financially due to
its PPA-related burden.[^59]

3.  **[Statutory Institutions Supporting Specific Sector
    Programs]{.smallcaps}**

**2.3.1 Blackout Reduction Program (PRA**)[^60]

As part of the Global Sustainability Agreement, the Government
established in 2001 a 2-year Blackout Reduction Program (PRA)[^61] to
provide subsidized electrical energy to low-income neighborhoods on a
transitory basis.[^62] PRA does not address medium and large voltage
users, public lighting or Government agencies. Begun on a pilot basis in
November 2001, the program was expanded in September 2002 after severe
rioting in Summer 2002 which left several people dead from
confrontations with the police.[^63] The PRA ensures that up to 18 hours
of electricity (24 hours during weekends) are made available in selected
low-income neighborhoods[^64] by paying for 13 hours out of a RD\$100m
budget earmarked by the Government for 2002. [^65] The distributor
provides the first five hours of supply. In addition, the PRA works with
community leaders and merchants to establish a bill collection system
and to educate the community about paying for electricity. Collected
amounts are used to pay for the energy delivered (i.e., to recover some
of the cost of the subsidy) and to invest in upgrading local
distribution facilities, including legalizing illegal connections and
meter installation. The budgeted subsidy amount in 2003 is RD\$80m per
month, as the program is to be phased out at the end of 2003.

*PRA is an important transition program*; it is important that PRA not
become institutionalized, but rather, serve as an impetus to remedy the
problem of blackouts. PRA is implemented technically and
administratively under the Social Cabinet but actually reports to the
CNE Board and SIE. Payments received under PRA by the distribution
companies are kept in a special account. Technical experts of CDEEE
conduct technical audits to confirm payments due to the PRA. CDEEE
technicians visit the regions to read meters and conduct the audits each
month. PRA is audited by the Comptroller General. It is intended that
the program will expand coverage and increase service to 24 hours
everyday. However, we are informed that 24 hour service under PRA
depends on the financial and technical capability of Government. PRA
currently employs 70 staff including supervisors in the barrios. Fifteen
staff members are based in Santo Domingo in addition to eight part-time
workers responsible for computer data entry. These jobs are to become
full time; weekly staff meetings are conducted each Monday.

  -----------------------------------------------------------------------
  In *Los Mulos* some simple technical fixes may result in improved
  electricity service. In collaboration with CDEEE and AES, NRECA will
  maintain a \$4.7 million project to rebuild power connections,
  transformers and necessary materials impacting 16,000 households -
  80,000 people. In 2000, 70 people were killed due to bad electricity
  connections. This barrio often receives 5 hours daily service, not the
  18 hours intended by PRA. It is reported that despite the installation
  of many new power lines, inadequate poles placed 2 feet underground
  instead of 4, resulted in non-working lines. This 5-7 year program
  brings together 57 local organizations and may provide a solution to
  increase service as well as build company-community collaboration to
  improve access and safety.

  -----------------------------------------------------------------------

PRA targets 700,000 families identified as not having paid their bills
but also as not receiving adequate service. At this stage in the
program, 238,000 families are participating in PRA. The program seeks to
operate in 238 sectors but is presently operating in 70.

###### PRA Implementation Process

Selection of barrios for PRA participation was based on a "poverty map"
of the country as well as technical criteria. Individual income levels
are very poor. Although indications are that selected barrios meet
program criteria, it was noted that certain barrios appear to have been
given priority selection for immediate participation based on political
pressure.

**Diagram 3**

**PRA Implementation Process**

[]{.mark}

By working with community leaders, PRA seeks to increase confidence of
the poor in distribution companies and to balance the fiscal crisis for
companies suffering certain non-payment.[^66] Importantly, much of the
collected money stays in the barrios through a strictly controlled
process of investment in distribution network upgrades.[^67]

**2.3.2 Anti-Fraud Program (PAEF )**[^68]

The Anti-Fraud Unit was established as part of the National Police in
October 2002 to enforce collections and eliminate illegal connections.
The program also maintains a public awareness scope that addresses
energy use, conservation and how to prevent fraud. PAEF maintains its
headquarters in Santo Domingo and has five regional offices. General
Rafael Guerrero Peralta, Director of the Unit, is also the Executive
Director of the Commission for the Reform and Modernization of the
National Police. PAEF meets monthly with the SIE and CNE and ultimately
reports to the Attorney General.

PAEF is staffed with 116 individuals, 70 percent of who have street
police experience. This new operation has clear objectives, is well
managed, is collaborative and is operating in what appears to be an
objective manner. In theory this Government program is reasonable and
seeks to assist the sector in increasing collections, deterring and
prosecuting fraud, and improving the quality of distribution networks.
The obvious concern with a unit that is vested with police powers is the
concern with which police participation in the sector may be abused
and/or feared.

*Strategy*

For the time being, the Unit is specifically targeting mid to high-end
customers with initial emphasis on commercial customers; 80 percent of
fraud found by PAEF to date was carried by commercial customers.[^69]
This strategy seeks not to harm the poor without first addressing those
more able to pay. PAEF leadership informs us that PAEF is not concerned
about the number of fraud findings, but rather, that illegal connections
be reduced and payments increased.

*Process*

PAEF receives information about violations from a variety of sources
although it appears that the distribution companies provide most of the
"tips." Interestingly, of the 4000 "tips" received to date from
distribution companies, only 10 percent have resulted in findings of
fraud. Some general neighborhood sweeps, generally conducted in "problem
areas", have also been conducted without notice or specific fraud
targets.

Squads (sometimes referred to as "brigades") of 2-3 police officers, 1-2
technical experts who are usually distribution company employees, and
one attorney from the Office of the Public Prosecutor are sent to the
site to detect and prosecute fraudulent electrical connections and meter
tampering. Squad members are provided with identification cards and go
through a strict selection process. Prior to entering an establishment
or dwelling, the attorney present must sign an "Act of Inspection",
finding that "probable cause" of a violation exists, and indicating that
entry was made. In cases where "probable cause" is found, we are told
that very thorough documentation of the violation is necessary to
provide a "stand alone" case in the event of a later court review.

The Squads commenced work on November 25, 2002. There are currently 28
Squad members; 12 more police officers are to be moved to the Unit. In
its first 12 days of operation, the Unit received approximately 4000
tips that include some residential units but mostly commercial
establishments.[^70] No prosecutions have been initiated, because the
program is still being established and public attorneys are in the
process of being assigned to accompany the Squad Units.

The Unit is establishing a database to monitor abuses. Collection of the
data is step by step from various sources and only address fraud. The
stated intention of the Unit is that customers take action before a
court filing has to be made. Use of penalties is deemed as the first and
hopefully last step in the enforcement process. There have not yet been
any arrests but this authority is included in the scope of the Unit.

###### Issues

> [Due process]{.underline} - Overall due process including procedural
> safeguards are critical in such a program in order to avoid abuses of
> police power, build credibility and to prevent retaliation by the
> distribution companies against critics of those companies[^71]. The
> program described to us appears, at present, to include reasonable
> safeguards, including the presence of a public attorney from the
> Justice Department in order to ensure that proper processes are
> followed. *However, the possibility for abuse of this police approach
> and the risk of selective prosecution*[^72] *are significant.* Notice
> provisions and customer feedback need to be closely monitored. The
> program needs to be considered as *temporary* and should be aligned
> with indicators of success over a finite period of time to assure
> appropriate results and minimize levels of fear/anxiety that are
> generally attached to these types of programs.
>
> [Financing the Unit]{.underline} -- For at least its initial operating
> period (2 months), Unit financing, based on the Government's request,
> has been covered by the distribution companies in the form of lending
> approximately US\$200,000-\$300,000. As the loan is paid off, which
> apparently began in December 2002 or early January 2003, the funding
> for the Unit will come from penalties that the Unit collects from
> violators (see, for example, Articles 124 and 125 of the July 2001
> Law). The Anti-Fraud Unit will retain 67 percent of the penalties that
> it collects. It is unclear how these funds will be channeled to the
> Anti-Fraud Unit. *If the funds from the penalties go directly to the
> Anti-Fraud Unit, we are concerned that this method of funding will
> provide a profit incentive for the Unit to promote its function, as
> opposed to social and economic reform incentives to pursue its
> mandate.*
>
> The standard process for funding such a Unit would be to have the
> penalties paid into the Ministry of Finance. The Unit would submit an
> annual budget in accordance with the normal budgetary process, and
> refer to the penalties it has collected as partial justification for
> its future funding. *Money collected from penalties should never pass
> directly to the Anti-Fraud Unit; budgetary and review processes are
> critical to provide the proper incentives.*

# 

> [Coordination with Protecom]{.underline}-- If a customer challenges a
> bill and files a complaint with Protecom, that customer is entitled
> not to pay charges while the complaint is under review. It is possible
> that such customers may be identified, either intentionally or
> accidentally by the distribution company. *We suggest that the program
> be monitored, especially on referrals from the distribution companies,
> to determine whether such individuals are being targeted as suspects.*
> Since the Unit has arrest authority, and apparently can make arrests
> without a warrant issued by an objective third party who can determine
> whether an arrest meets certain legal criteria, this authority has the
> potential of harassing innocent individuals and establishments. *At a
> minimum, an objective third party reviewing a request for an arrest
> warrant, can determine whether a protest is pending at Protecom.*
>
> [Arrest Authority]{.underline} - The Squad police have the typical
> authority to make an arrest if it views the crime in progress. A
> fundamental issue to review is whether, for example, the mere
> existence of connected power lines to a dwelling is so obvious a crime
> as to justify the use of the arrest authority, i.e., is a crime really
> occurring, and if the crime is occurring, who is committing the crime
> and who should be arrested (the landlord, the tenant, if a
> corporation, which corporate officer)? The fact is that the PAEF Unit
> does not know, and this ambiguity is precisely the reason why an
> objective third party with authority to issue an arrest warrant is
> imposed between the arresting officer and the public, i.e., so that an
> objective review of the facts can be made before the individual is
> forced to defend himself.[^73]

# [Judicial relationship]{.underline} -- Because of the newness of the Unit, it is premature to assess the role of the courts in how the work of the Unit is progressing. It will be important to monitor the number of cases that are brought for judicial review and to assess whether any judicial burden is presented. It may also be important, depending on the level of cases actually brought to court, that technical capability at the court level vis-à-vis the electricity sector be increased.

> [Monitoring results]{.underline} -- it is not possible to describe in
> economic terms the utility of the work of the Unit. This is a factor
> that should begin to be quantified and published on a regular basis
> with reference to type of user (residential, commercial, industrial),
> region and resolution.

**2.3.3 Rural Electrification Plan (PNER**)[^74]

The PNER is intended to subsidize the connection of areas not yet
connected to the grid or lacking electricity supply. Plans have been
developed for the North, South, East and border with Haiti. The plan is
expected to provide electricity services to approximately 420,000 rural
consumers. Only a portion of financing is expected via lending from
Spain to cover the estimated program cost of \$USD60 million.

**2.3.4 Pact for Stabilization and Economic Development**[^75]

An informal but potentially important initiative has been commenced by
an array of Government, political groups, sector entities, the Catholic
and other Christian Churches and different sectors of society in a
volunteer effort to address vital national interests such as the course
of the July 2001 Law in the National Congress. The press reports that
today more than ever, various segments of Dominican society need to be
united in their proposals that impact economic affairs. The Government
has and is inviting various groups to participate in this pact and to
contribute to its content in order to provide a solid basis from which
to discuss issues with political forces, state authorities and civil
society organizations.

The Economic Cabinet and members of the country's main business
organization, the National Council of Private Enterprises (CONEP)[^76]
constitute a monitoring commission (Comision de Seguimiento) to
guarantee implementation of this Pact[^77]. Because of its issuance most
recently, December 9, 2002, we were unable to receive information beyond
news articles.

### [2.4 Trade Unions/Workers]{.smallcaps}

######## During this assessment, the issue of trade unions was not once raised. Historic accounts of the influence of the unions seem to no longer impact sector operations to the extent they had. The fact that unions were not mentioned by any public or private player is unfortunate but not surprising. The transitional issues of reform have been all consuming for each institutional player to the point that certain fundamental issues -- like workers in the sector -- are overlooked. It will be useful for Government to conduct an assessment of worker issues.[^78] 

**[2.5 Government Institutions Impacting Electricity
Sector]{.smallcaps}**[^79]

*Office of the President* -- Presidential influence is apparent at all
levels of sector operation. This is not uncommon during sector
transition and in time, as institutions gain more experience and the
public becomes more aware of the new market organization and how it
operates, this influence should naturally be reduced.

*Ministry of Finance* -- ultimately responsible for all State budget
funds allocated to support sector operations as well as social programs
relevant to sector reform. As the Chairman of the CNE Council, the
Minister presides over that Council and has significant input into the
policy direction that CNE takes. Since CNE issues the regulations that
SIE must follow, this policy guidance directly influences SIE.

**[2.6 Ministry of Industry and Trade (MIT)]{.smallcaps}**[^80]

The Minister of Industry and Trade presides over the National Energy
Commission (CNE). For its first three years of operation, the SIE
existed under the MIT[^81]. At that time, the Ministry had a more
dynamic relationship with SIE. Following the July 2001 Law, the SIE
became an independent agency and the MIT role has lessened. For example,
complaints concerning industrial customers were formerly filed at the
MIT and are now filed with SIE. However, the MIT continues a
relationship with SIE: whenever an investor is interested in a sector
operation, MIT sends relevant documentation to SIE for review The MIT
also remains engaged in sector issues via the CNE Council as one of the
seven ministries represented.

Under the auspices of the MIT, an energy efficiency campaign,[^82]
initially targeting residential users but being extended to industrial
and business consumers, is being launched. This includes collaboration
with the Ministry of Education for a school education program. We are
informed that to date, results at the commercial and industrial level
have not yet been apparent. Funding for the program is made possible
under the Hydrocarbon Law, which allows funds received from the taxes of
fuel oil and gasoline to be placed in a national fund that is dedicated
to support energy efficiency and renewable energy programs.

Energy efficiency is an important tool to reduce costs for producers and
consumers, and MIT's emphasis in this regard is well-placed. At present,
there is at least \$12 million allocated for MIT efficiency programs,
and these programs appear to emphasize public information, although
certain technical support is also provided. In contrast, it may be
useful in the short term to shift some of these funds to poorer
communities for ensure affordable and reliable electricity and to assure
that necessary improvements are timely funded. *In light of limited
funding available at this time the allocation of these funds between
these two objectives should be reviewed so as to improve the
coordination of such funds. . Another suggestion would be to solicit
donor funding for the work of the Ministry and to shift available State
funds for more direct technical support to the sector.*

**[2.7 Social Cabinet]{.smallcaps}**[^83]

The Program for the Reduction of Blackouts is funded by the "Social
Cabinet". In theory, the program and its manager are based here. But, in
practice all operations are conducted out of the CNE offices and the PRA
director reports to the CNE Council, the Executive Director of CNE as
well as to the Social Cabinet. At least in the short to mid term, it may
be useful to have PRA report to only one entity. We believe that the
Social Cabinet may have an increasing role as sector reform continues.
In specific, oversight and monitoring of electricity access and
affordability for the poor, business and job issues related to sector
reform and as promoter of a new social compact among sector players that
assures consumer participation.

[**2.8** Dominican Corporation of State Electric Companies
(CDEEE)]{.smallcaps}

It is important to review the role of CDEEE as both a market player and
Government institution as it continues to play a role in regulation of
the market -- this dual role is a conflict of interest and needs to
stop. CDEEE is taking on an increasing implementation role in the
execution of transmission and market distribution. CDEEE does provide
strategic planning leadership for the sector although CNE appears to be
gradually taking over this effort.

Reorganization of CDEEE continues to be underway. As is usually the case
with state company transformations, it is difficult to release duties
and powers, especially since it remains as the central technical and
financial base for sector operation. For example,

-   Much of the sector information that ordinarily would be kept at a
    ministry level, is housed at CDEEE. In time, this information may
    become a function of CNE; already, FONPER has begun to establish its
    information stronghold on sector materials. It is important that an
    institutional base where sector history can be maintained be
    established and, other than for confidential documents, be
    accessible to market players.

-   Formerly, CDE could not be foreclosed: under the July 2001 Law, if
    CDEEE becomes bankrupt, the State must provide a sovereign pledge.
    CDE has always been open to labor suits; CDEEE is as well.

-   CDEEE still has influence and "right of first refusal" advantage
    and/or "first move" attributed to insider knowledge. Most glaring of
    this is its recent role in the renegotiation of PPAs. CDE lawyers
    and technical staff, now part of CDEEE legal and technical staff,
    were part of the initial and renegotiating process that inevitably
    translates into access to important market information and opinions
    likely revealed during the negotiation process.

-   In addition, because of its historic role in the sector, CDEEE staff
    and records reflect important knowledge on water supply, oil
    pricing, contract negotiations, that can benefit their position as a
    market player. The perception is that CDEEE has very strong
    technical capabilities but lacks the commercial acumen to be
    operating as a true market player. This poses difficulty for
    competing companies doing business on commercial basis where they
    believe CDEEE is able to sidestep standard commercial practices by
    virtue of its technical breadth and Government depth. The fact is
    that most state companies are initially placed in a favorable
    position as the market transitions toward increased private
    investment. The state companies have information, contacts, and
    funding that new market entrants do not. However, the key for
    CDEEE's survival and Government's ability to sustain sector reform
    will be the transition of CDEEE from a State company to a private or
    para-statal market player.

Differences of opinion exist on sovereignty and privatization of
remaining state aspects of the sector. *The looming issue here is that
if at least one presumption of state control is to safeguard social
aspects of reform and to assure that all sectors of society have
accessible electricity, then the Government is failing.*. There is a
perception that CDEEE maintains a special place in the hierarchy of
market players. Such perception is not without justification because,
among other things, of its government ownership, its relationship to the
Presidential Commission for the Sustainability of Electricity Reform,
its signature authority and authority to assign power purchase
agreements, and its apparent access to non-public market information.
Because of the transitional moment in which the sector is operating,
this is not an uncommon scenario for a former State company. However,
this situation makes it even more important for Government to publicize
and practically assure that CDEEE has no special privileges or access to
information any more than any other market player. *The perception of
special privileges should be eliminated*. In some countries, a change of
company name to a less "State sounding" name begins an important process
of public recognition that the company is truly transitioning.
Similarly, more public announcements about the reduced role of
Government and its interactions with CDEEE may be of use to promote
transparent transition.

9.  [The Capitalized Companies]{.smallcaps}

The capitalization contracts with the distribution companies were signed
prior to the existence of a regulatory framework and an independent
regulator. According to some Government officials, the terms of these
contracts are vulnerable to criticism. Others feel strongly that the
Government plays an "inferior and asymmetric" role in the public-private
partnership governed by the capitalization contracts. Although all
officials expressed strong support for the July 2001 Law and the
Reglamento, they emphasized that the presumed second-class status of the
Government partner, and the absence of performance contracts with the
strategic partners in the capitalized companies, are major causes of
unsustainability in the sector. In furtherance of their views, some
senior officials argued that:

(i) The negotiation process that led to the capitalization contracts
    failed to provide adequately for rural electrification, which
    affects approximately one-fourth of the country's population (two
    million people). The high rate of return permitted in the contracts,
    20 percent or greater, or equivalent to payback times of four to
    five years, was supposed to cover the cost for the expansion of
    service to rural populations. The high rate of return was also
    designed to provide an incentive to overcome a legacy of inadequate
    investment in distribution infrastructure---the so-called
    "transition cost" of reform. However, neither of these outcomes have
    been achieved, in part for reasons outside anybody's control such as
    the 1999-2000 world oil price rise.

(ii) The management fee of "2.75 percent of net sales" has not led to a
     transfer of technology and technical capability as specified in the
     management contract.

The role of the Government entity in the capitalized contracts is a
major issue requiring resolution. However, the capitalization process
was *designed* to create an asymmetrical relationship where the
Government would become a passive or non-managerial shareholder. The
issue is the nature and extent of the asymmetry. We do not suggest that
this be carried to the point where the Government entity is denied the
same distribution of profits as the strategic or private shareholder. At
the same time, it is clear that the previous Government made numerous
concessions that cannot now be attributed to or now "blamed" on the
strategic partners in the capitalized companies.

The capitalization contracts did not specify rural electrification as an
explicit obligation of the distributors, nor did the contracts state
that the high rates of return embedded in the rates were designed to
defray the costs of delivering services to low-income populations.
Whether rural electrification constituted an implicit obligation is
difficult to establish, because the officials we spoke with came in with
the new Administration.

As for the management contracts and by-laws affecting Edeeste, Edenorte,
Edesur, Itabo and Haina (see Box below), all appear to be standardized
and contain the same provisions. In particular, they specify a fee of up
to 2.75 percent of net sales in exchange for technology transfer and
technical assistance. The term "net sales" is ambiguous. The factor of
2.75 percent is presumed to apply to amounts invoiced, rather than
amounts actually collected.[^84]

+-----------------------------------------------------------------------+
| ## Table 8                                                            |
|                                                                       |
| ## Governance of the Capitalized Companies                            |
|                                                                       |
| ##                                                                    |
|                                                                       |
| ## Current Company By-laws                                            |
|                                                                       |
| -   A strategic investor cannot purchase more than 50 percent of      |
|     shares (Art.13, para. I) The State holds 49.9 percent of Class A  |
|     shares with 0.1 percent held by the employees, and the            |
|     distribution companies hold 50 percent of class B shares.         |
|                                                                       |
| -   4 out of 5 members of Board of Directors appointed by the         |
|     strategic investor (Art.33), with one member appointed by the     |
|     Government.                                                       |
|                                                                       |
| -   Any loans, association contracts, or financial transfers of any   |
|     kind with affiliated entities require unanimous approval of Board |
|     of Directors (Art. 38)                                            |
|                                                                       |
| -   Each class of shareholders has right to appoint an auditor        |
|     ("Comisario de Cuentas") to analyze the accounts approved by the  |
|     Board of Directors (Art.47)                                       |
|                                                                       |
| -   Contracts with "affiliated entities" require unanimous agreement  |
|     of the Board.                                                     |
|                                                                       |
| **Contracts with "Affiliated Entities**"                              |
|                                                                       |
| At the time the management contracts were executed, Edesur and        |
| Edenorte, signed another contract to bypass the unanimity requirement |
| for contracts with "affiliated entities", alleging that such          |
| contracts were needed to provide technical assistance and technology  |
| transfer. For contract amounts less than US\$100K, Board              |
| authorization is not required. For larger amounts, the process is as  |
| follows:                                                              |
|                                                                       |
| -   Union Fenosa must submit at least 10 days prior to Board meeting, |
|     a proposal for agreement with an affiliate, stating reasons why   |
|     an affiliate is better than other vendors, and providing proof    |
|     that price is consistent with international market rates.         |
|                                                                       |
| -   Any Board members opposing the agreement will have 5 days to      |
|     oppose it, and will have to base the opposition on technical      |
|     reports prepared by qualified professionals in the product area   |
|     proposed. Otherwise, the agreement will be considered as          |
|     unanimously approved by the Board.                                |
|                                                                       |
| -   If there is opposition, there will be an informal meeting prior   |
|     to the board meeting to reach a consensus. Nothing is specified   |
|     if a consensus cannot be reached. Presumably, the agreement would |
|     not go forward.                                                   |
+-----------------------------------------------------------------------+

If so, this formula does not provide an incentive to increase
collections. We were informed that a new provision tying the 2.75
percent to amounts collected is scheduled to take place in 2004, as part
of a renegotiation of the management contracts (but not of the
capitalization contracts) which is currently taking place or soon to
take place[^85]. These negotiations are central to the issue of
distribution company performance and legitimacy. A more detailed
performance contract, specifying more clearly the skills to be
transferred by the strategic partner in exchange for the administration
fee, would greatly decrease the current atmosphere of accusations and
confrontation with the Fenosa companies. Some of the issues that require
resolution in the framework of a performance contract include:

-   Requiring that management decisions be based on prudent business
    practices and a fiduciary duty to maximize profits for the
    shareholder, as is standard in any for-profit corporation.

-   Eliminating diversion of potential profits through affiliate or
    parent transactions (other than the management fee) that appear as
    expenses, thereby allowing all stockholders to share the profits
    based on their percentage of ownership.

-   Improving the quality of service, terminating the load-shedding, and
    specifying clear targets for increased collections and reduced
    losses as part of the technology transfer process.

-   Providing an explicit obligation to improve infrastructure and
    expand service for low-income and rural populations under mutually
    acceptable financial terms. In accordance with world-wide practice,
    Government financial support would be agreed to beforehand.

-   Conducting regular, transparent and independent financial and
    technical audits of the distribution companies.

-   Instituting regular consultations with community organizations and
    consumer groups to improve customer service and assess client
    satisfaction.

## 2.10 [Wholesale market: analysis and challenges]{.smallcaps}

**2.10.1 Incentives for Investment in Generation**

There has been substantial investment since the enactment of the July
2001 Law. From 2000 to 2001, for instance, installed generation capacity
increased by 367 MW, or 14 percent.[^86] Recent investment in generation
has led to considerable diversification of fuels in the country's
installed generation base. The country was entirely dependent on water
and hydrocarbons prior to the beginning of the reform process. Now
additional fossil fuels are in use, namely coal and (starting in 2003)
natural gas from the LNG facilities installed by AES. In addition,
several parties are at various stages of evaluating the development of
wind turbine, as renewable energies enjoy a variety of incentives.[^87]
Further reduction in the country's dependence on hydrocarbons may be
limited, however, by the exclusion of private ownership from
hydroelectric facilities. Private development of facilities below 1 MW
is currently allowed, but according to CDEEE, this exemption has failed
to encourage any projects. Hydroelectric generation could play a more
important role in the country's energy matrix (it was only 16 percent of
installed capacity in 2001, and no new facilities are currently being
developed). CDEEE estimates that there could be a potential of 800 to
900 MW of hydroelectric generation still untapped. But with very limited
resources at present, the public sector is unlikely to develop
additional hydroelectric plants. According to the government, the state
hydroelectric company is investing only in the rehabilitation of
existing hydro units, which have experienced sedimentation
problems.[^88] Article 131 of the July 2001 Law, on the other hand, does
contemplate the possibility of private sector financing through vehicles
other than equity.[^89] According to CDEEE the company is actively
pursuing innovative ways of tapping private capital for the development
of new hydro plants.[^90] But leaving matters to the initiative of the
CDEEE's current management does not seem sufficient, given the magnitude
and potential impact of hydro in reducing oil dependence and its vast
impact on the financial sustainability of the sector, as discussed
below. The vagueness of the current legislation, and the failure of the
1-MW exemption, point to the need for stronger measures. The possibility
of passing a concessions law including hydroelectric concessions could
be an important step in overcoming the limitations of the current
setting.

**2.10.2 Spot Market Prices and Degree of Competition**

Spot prices for energy are quite high due to the high dependence on
imported oil. In 2001, average monthly marginal costs varied from about
US\$50/MWh at the lowest level, to US\$90/MWh at the highest. The basis
for valuing electricity from hydroelectric units with reservoirs, for
the purposes of establishing the dispatch merit order (and hence spot
market prices), has not yet been established by the CO, as mandated by
Art. 259 of the Reglamento.[^91] The same article specifies that
hydroelectric facilities are either not taken into account for the
determination of the spot price of energy, or that EGEHID is free to
determine the value of electricity from its units. Neither alternative
is desirable: the first one introduces inefficiency in the market, as
the merit order curve will be distorted; the second one reduces
transparency in price formation. However, hydroelectric capacity is too
small (16 percent of installed capacity in 2001) to be ever marginal and
hence set the spot price, so the lack of transparency affects mainly the
pricing of ancillary services, which hydro units are especially capable
of supplying. By Resolution No. SIE-19-2001, SIE has capped spot market
prices at the variable cost of the Higuamo generation plant.[^92] If
units with higher variable costs have to be dispatched, they are paid
their variable cost rather than a market price applicable to all
dispatched units. The price cap was apparently imposed first in
Resolution No. SIE-09-2001, but no clear reason is offered for the cap.
The only reason that can be inferred is to limit spot market prices in
the wake of the elimination of government fuel subsidies to the
generators that limited maximum spot market prices.

In an electricity market as small as that of the Dominican Republic,
with peak demand below 2,000 MW, market power is always a concern.
Requiring generators[^93] to bid only their variable costs, subject to
the threat of audits, makes price manipulation harder, as it impedes
opportunistic bids when peak demand comes close to installed capacity.
This is common across most Latin American wholesale markets, following
the original model from Chile. Variable costs can be easily audited
because the fuels used by generators in the Dominican Republic---coal
and hydrocarbons---have liquid international markets against which
prices can be checked,[^94] and heating rates can also be easily checked
against manufacturer specifications and extensive worldwide data. We
understand that the CO has hired an Italian firm to conduct an audit of
variable cost data, which should provide assurances that ranking and
dispatch are based on economics and not on market power.[^95]

With variable cost bids in place, the only other way prices can be
manipulated is by withdrawing generation from the market. The typical
way of doing this, as observed in the England and Wales Pool and in
California, is by declaring a unit unavailable, so that the marginal
generator becomes a higher-cost one and the spot market price increases.
In the Dominican Republic, generators have shut units down deliberately.
Their explanation, however, is that CDE wasn't paying them for the
power, not that they were trying to manipulate market prices. We believe
their explanation for the following reason: for capacity withdrawals to
make sense for an *individual* generator, it must own several units,
ideally with different variable costs. Then, when both are being
dispatched, the more expensive unit can be declared unavailable (e.g, by
claiming it tripped off the system). If the merit order curve is
sufficiently steep, the spot price increases so much that the generator
can make *greater* profits with only the low-cost unit running than if
both units were up. Even if this were true for some generators in the
Dominican market---and we have neither performed nor come across
analyses of this kind---a further disincentive is the fact that, as
mentioned below, about 80 percent of electrical energy is traded through
contracts. Contracts eliminate incentives to manipulate prices, because
the seller does not benefit from higher prices,[^96] and because at
least in the Haina, Itabo, and CDE contracts there are steep penalties
for failure to deliver.[^97] For these various reasons, the price cap
imposed by the regulator would appear to be unnecessary at this point
*from a market power perspective*, although not necessarily as a means
to dampen the impact of oil price increases.

> **2.10.3 Ancillary Services**

Charging appropriate prices for ancillary services is important in a
wholesale market. Although there is some controversy as to how many
types of ancillary services products should be defined and charged for,
at least a minimal system should be in place. The reasons are that
ancillary services can represent a significant cost of running an
interconnected electricity network, and generation technologies vary in
terms of their suitability for providing different types of ancillary
services. Charging and crediting properly for the use or supply of
ancillary services can provide adequate incentives for the development
of plants that can supply the services, and a disincentive for
activities that produce reactive power, such as certain types of load.
The Reglamento (Title IX, Section VIII.1) specifies pricing rules for
reactive energy, voltage regulation, frequency regulation, and spinning
reserve. At present, generators are being charged, according to Haina,
but there is apparently no transparency as to how the charges are
calculated. We are unsure about the reasons for the lack of transparency
of application of the pricing rules specified in the Reglamento.[^98] It
is clear, however, that according to the Reglamento, the CO is
responsible for the computation of correct charges for ancillary
services and for including these charges in the monthly settlement and
collection process.[^99] The CO should thus address any current
shortcomings regarding charges for ancillary services.

**2.10.4 Unregulated User Participation**

At present, few unregulated users are buying energy or capacity in the
wholesale market: in August 2002, for instance, purchases by the
unregulated users (QUITPE, Carrefour, and PIISA) represented 6.7 GWh out
of a total load for the month of 841.6 GWh, less than 1 percent of the
total. The reason for this situation is most probably SIE Resolution No.
15, which is discussed below.

![](media/image4.png){width="5.375196850393701in"
height="3.6251968503937007in"}

**2.10.5 Supply Restrictions**

The CO estimates the amount of electricity demand that cannot be
fulfilled at any point in time due to supply restrictions of various
kinds (known as "un-served energy"). The estimated levels of un-served
energy are quite significant. During the peak day in 2001, for instance,
out of a total generation of close to 1,500 MW near the peak hour, an
estimated maximum of 240 MW (almost 15 percent) were not served. The
magnitude of the problem becomes apparent in the graph below:

In energy volume terms, the deficit reached an annual maximum in
November 2001, with more than 23 percent of estimated energy demand
being unmet.[^100] Even with a substantial excess of available capacity
over that needed to satisfy peak demand,[^101] electrical energy
generated in the last two years could not meet the demand. In 2001, 9742
GWh of electrical energy was generated, with a total demand of 11,734
GWh and a deficit of 1992 GWh. This means that about 17 percent of
demand was not served despite the available generation capacity to meet
the demand. In August 2002, hourly un-served demand reached 550 MW (for
a slightly lower peak demand level), or 15 percent in volume
terms.[^102]

The problem of un-served energy is caused by problems with the quality
of service and collections experienced by the sector as a whole, as can
be seen in the CO's partial estimates of the causes of un-served energy.
During the peak day of August 2002, the CO estimated[^103] that, as a
percentage of the total un-served energy during a 24-hour period, the
most important reason by far was insufficient generation capacity with
54 percent, followed by distribution overloads and circuit protection
(16 percent), load shedding (9 percent), unscheduled maintenance[^104]
(8 percent), scheduled maintenance (6 percent), low voltage (5 percent),
and transmission faults (2 percent). In some cases, un-served energy is
caused by a collapse of the entire interconnected system. In the year
2001, for instance, there were seven such system-wide blackouts.[^105]
On an annual basis, although we only have information from Edenorte and
Edesur,[^106] the results seem quite different regarding the causes
although not the extent of the blackouts. For 2001, Edesur's service
interruptions left, on average, all customers without electricity for 13
percent of the hours in the year, or more than thee hours a day.[^107]
Edesur estimates that 63 percent of the time, the causes were internal,
and the rest were attributable to generation and transmission causes
(mainly unavailability of the Smith-Enron plant). Edenorte's customers
were without service for an average of 18 percent of all hours, or more
than four hours a day. Internal causes accounted for 55 percent of the
hours.[^108]

Looking at the limited information we have on the causes of un-served
energy, it is clear that financial problems play a major role in the
sector. Lack of availability of generation capacity is caused by
generators shutting down for lack of payment, not for lack of installed
capacity.[^109] Some distribution companies have alleged that generation
companies are "gaming" the spot market by removing units from the
dispatch ranking system to force the use of higher-priced units.
Although we have no evidence that this is the case, occasionally, the
generation shutdowns do seem to flare up in open conflict. SIE
Resolution No. 32-2001 threatened penalties for the generators that were
apparently not heeding the instructions of the CO and the dispatch
center.

Load shedding by the distributors is also caused by financial
reasons---theft of electricity and nonpayment at the distribution level.
We were told that distributors are resorting to load shedding to avoid
uncollectible accounts receivable from delinquent end-users.
Distributors are attempting to reduce their financial losses through
load shedding---perhaps an acceptable practice from a short-term
business perspective, but not consistent with the obligation to provide
reliable power to customers.

Finally, distribution circuit overloads and maintenance needs point to
the consequences of insufficient investment to upgrade capacity.

Altogether, then, the high level of un-served energy points to the
urgent need to ensure the financial sustainability of the sector. The
reasons for the financial problems affecting the sector and the current
measures being pursued to tackle these problems are discussed below.

High system losses make the problem of lack of availability of
generation capacity worse. Here, the reform process appears to be having
a positive impact. The total level of losses in the system, fell from
43.6 percent of energy generated from January to September 2000, to 30.5
percent for the January-September period in 2002. For Edenorte, energy
losses (as a percentage of energy entering the company's facilities)
fell from 42 percent in January 2001 to 32 percent in December of the
same year; for Edesur, the fall was from 37 percent to 22 percent.[^110]
CDEEE estimates that transmission losses have fallen from 7 percent to 3
percent over the last two years. Nevertheless, losses of 30 percent
create an enormous financial deadweight on the sector and the pressure
to reduce them must be maintained. The measures taken at present to
reduce technical and non-technical losses are further discussed below.

**2.10.6 Fuel Diversification and Energy Security**

The Government of the Dominican Republic understands the need for the
electricity sector to free itself from the damaging effects of oil price
volatility and steep price increases. We strongly support the efforts of
the Dominican Republic to diversify the fuel mix for power generation
over the near-term future. Such efforts include:

-   A new AES LNG storage facility to be available in early 2003, with a
    capacity to eventually serve 900MW of generation capacity. The
    facility will initially serve 500MW of capacity.

-   Feasibility studies and fiscal incentives to promote the use of
    wind-generated electricity provided by companies from Norway,
    Canada, Spain and the United States.

-   Possible expansion of hydro capacity, even though financial
    constraints on state budgets would limit public development of the
    approximately 600-900MW of undeveloped potential.

The projected evolution of the fuel supply mix is shown below:

Generation Fuel Mix, Dominican Republic, 2001 actual and 2003 expected

![](media/image5.wmf){width="4.59375in" height="2.4375in"}

![](media/image6.wmf){width="4.604166666666667in"
height="2.4479166666666665in"}

source: CNE

Although the issue of fuel price volatility primarily affects
generation, lowered fuel prices and decreased volatility also serve the
interests of distributors and consumers. Therefore, another possible
measure to reduce dependence on imported oil would be an energy
efficiency program for electricity use in all sectors and promoting
cost-effective renewable systems.

**2.10.7 Challenges Ahead**

Looking ahead, however, there are a number of challenges that SIE as the
regulator and the CNE as policymaker, must address to maintain
competition in the wholesale market at a high level.

**First**, the recent PPA renegotiations have extended the term of the
PPAs by 15 years in exchange for a number of concessions (see below)
related to the financial sustainability of the sector. This means that a
significant portion of demand will remain closed to competition for the
foreseeable future,[^111] as the earlier termination of the PPAs would
have created competition for new contracts with distributors.[^112] On
the other hand, the effect of the contract extensions on competition may
not be severe for several reasons. The renegotiated PPAs allow
reductions in contract capacity (and associated energy) levels as large
users migrate to the wholesale market, so the PPAs will not impede this
type of competitive force.[^113] In addition, in an environment where
demand has grown by more than 8 percent per annum on average over the
last decade, demand growth will provide abundant opportunities for
competition. Finally, some of the PPAs managed by CDEEE are being bought
out and the generation units turned into merchant plants (this is
further discussed below).

**Second**, the July 2001 Law's ambiguity with regard to vertical
integration can restrict competition in different ways. According to
most parties with whom we discussed the issue, and according to past SIE
opinions[^114], the July 2001 Law's exception for vertical integration
by distribution companies (Art.11, para. I) is applicable on a legal
entity basis, which means that the two Unión Fenosa distribution
companies (Edenorte and Edesur) could together own up to 30 percent of
installed generation capacity. In turn, this would cause a considerable
level of vertical integration and significant horizontal concentration
in the wholesale market. With vertical integration and horizontal
concentration, Unión Fenosa's distributors could contract their
electricity purchases under conditions of less than perfect competition
that might favor the company's own generation assets.[^115] In this
regard, it is worrisome to note that in Resolution SIE-13-2001, the SIE
declared itself not competent to judge on such matters and referred the
matter to the Government. On the positive side, Art.113 of the July 2001
Law excludes contracts between distributors and their generation
affiliates from the determination of the energy and capacity prices
passed through to the distributors' regulated customers. More generally,
Art.110 of the July 2001 Law requires that contracts for the supply to
distributors be subject to open auctions under terms set by the SIE, and
grants the SIE the power to examine the contracts. The recent
modifications of the Reglamento require the generation affiliates of
distributors to sell at least 40 percent of their output in the spot
market (Modifications to Reglamento, Art.10 modifying Art.44 of the
original). Lastly, there is little indication that Unión Fenosa is
planning to push up its generation to the 30 percent maximum for the
time being. We conclude that there is no apparent threat at present, and
the July 2001 Law provides SIE with the tools to address any adverse
effects of vertical integration on competition and captive consumers. It
is the SIE's responsibility to ensure that the provisions of the law are
enforced, and SIE must not side step this responsibility in the future.
This should be an essential element of the SIE's institutional
objectives and responsibilities, possibly through the expansion of the
SIE's enforcement unit.

**Third**, the proposed Haina-Itabo merger is cause for further concern
about horizontal concentration, because the resulting merger would
create an entity controlling approximately 42 percent of current
installed capacity.[^116] Although this merger is subject to regulatory
approval by SIE, we were told (not by SIE) that SIE will most likely
approve the merger because, among other reasons, there is healthy
competition in the generation sector. We also note that the Government
will accrue significant financial benefits from the merger because of
its 50 percent ownership of Itabo, which obviously provides a motivating
force for the Government to advance the merger regardless of the market
consequences. The merger of Haina and Itabo will result in a company
that will have an even greater diversity of plants than either company
separately, thereby increasing the incentives of the merged company to
attempt to manipulate prices via availability redeclarations, as
explained above. For instance, in the merit order for November 30 to
December 6, 2002. the combined entity would have 260 MW of cheaper
supply (the Itabo II and Sultana del Este plants), and also 170 MW of
some of the most expensive units (the three Itabo turbines and the two
Higuamo units). During peak times, Haina-Itabo could diminish the
availability of its peaking units so that the spot market price is
pushed upwards and Haina-Itabo's baseload units can reap additional
margin. Another possibility is that, when contracts with distributors or
large users are up for renegotiation, Haina-Itabo could impose higher
prices. Clearly, the Haina-Itabo merger will require SIE to monitor more
closely the potential abuse of market power. In a situation of relative
institutional weakness and still nascent capabilities on the part of the
SIE, it might not be advisable to add such an additional burden on the
SIE. The implications of the Haina-Itabo merger need to be carefully
assessed before a final determination is made.

**Fourth**, Order SIE-15-2001 constitutes a serious obstacle to
competition and participation in the wholesale market. The order
requires end users who select power from a source other than their
distribution company to pay a significant charge for access to the
wholesale market. The charge equals 85 percent of the distributor's
margin for sales of electrical energy between cost of purchase and sales
price. Such a high charge can severely limit the ability of merchant
generators to offer attractive contracts to unregulated users. If
maintained, it will also negate the pro-competitive effects of planned
reductions in the threshold of access to the wholesale market that are
specified in Art. 2 of the July 2001 Law.[^117] In our interviews, it
did not become apparent that the order would be rescinded any time soon;
in fact, some individuals expressed concern about the July 2001 Law's
provisions about the access thresholds (see footnote 117), on the basis
that these provisions violate the terms under which the distribution
companies were capitalized.

Given other changes taking place in the distributors' commercial
environment, it is difficult to understand their resistance to allowing
such migration to occur, i.e., their fear of "cream skimming." First,
the renegotiated PPAs allow the distributors to lower their capacity
purchases as large users migrate to the wholesale market. The
distributors are not stuck with capacity they no longer need as the
migration occurs. Second, with the implementation of the technical
tariff, cross-subsidies in the rates will be entirely eliminated,
together with any margins from the sale of energy and capacity to users,
as energy and capacity costs will simply be passed through to the end
users[^118]. Distributor profits will be obtained exclusively through
the supply of distribution services. The only reason why distributors
might oppose large user migration is the fact that large
(non-Governmental) users pay their bills more promptly than any other
users, but this anomaly should be corrected over time with the programs
implemented by the Government, which are discussed below.

**Fifth**, competition may be hampered by transmission bottlenecks,
which would split the market into smaller regions and thus create
inefficiency, leading to higher spot prices. Since this issue stems from
financial considerations concerning ETED, it is addressed in the section
on financial sustainability.

**Finally**, we note the challenge of ensuring that distributors abide
by the legal requirements that they purchase at least 20 percent of
their needs on the spot market, and that any new contracts should be
competitively procured.

To summarize, we are concerned that lack of vigilance by SIE\--whether
due to complacency, outright negligence, lack of adequate staff or other
reasons\--may be decreasing competition in a wholesale market whose size
is already small by international standards. Although the renegotiation
of the PPAs may not pose a direct threat to competition in the spot and
contract markets, the possibility of vertical integration by Unión
Fenosa, the proposed Haina-Itabo merger, the permanence of Order
SIE-15-2001, the possibility of transmission bottlenecks, and
over-contracting by distributors constitute, as a whole, a significant
challenge which SIE must be prepared to address.

**[2.11 Transmission Service]{.smallcaps}**

In the course of conducting our interviews, we heard conflicting views
whether the transmission grid was capable of handling a full dispatch of
existing generation. Generally, the Government entities such as CDEEE
stated that the transmission grid was fully capable of handling full
dispatch, while the sector players such as the distribution companies
and generation companies complained that a system needed major upgrades
in capacity. One company told us that a major problem exists not only
getting the power to the city gate, but also getting the power past the
city gate into the city; this issue was their top priority.

It is perplexing to us that so many qualified individuals could have
such differing opinions about such a critical issue. It is not within
the scope of this report to conduct the technical study necessary to
make a definite finding on this issue, but we agree that it is a
critical issue. The fact that there is such a wide diversity of opinions
on this issue means that it needs to be studied and resolved as soon as
possible. This is especially critical in view of the efforts to correct
collection and quality of service issues at the distribution level,
meaning that once these issues are corrected, any problems in the
transmission grid will become acutely apparent.

However, based on a report conducted in 1999 by Mr. Germán Guerrero, a
Chilean consultant, the expansion needs are:

-   some system reinforcements and looping to increase reliability (for
    instance, additional capacitors may be needed to maintain stable
    voltage levels at all times);

-   the expansion of regional networks, mainly to allow greater
    electrification and improvements in distribution service quality;

-   the construction of several substations to solve distribution
    problems caused by the existing high-voltage feeders being too
    overextended for adequate voltage regulation (this appears to be
    consistent with AES' assessment about the key problems in the
    transmission grid); and

-   for the longer term, the development of a 345 kV North-South trunk
    line.

There is also much scope for reducing technical losses, which account
for 15 percent of the power flowing into the distribution network. In
our view, adoption of international "best practices" could reduce this
figure to five percent or lower through modest investments in reducing
resistive and reactive losses, improving the power factor, and replacing
inefficient distribution transformers. Standards for maximum frequency
and voltage deviations are provided in the Reglamento. *SIE's
enforcement of these standards should improve the quality of generation
and transmission service, and lead to a reduction in technical losses.*

Closely related to the need for loss reduction, which may require
investment in capacitor banks and other equipment, the most serious
concern about the transmission system is the adequacy of current and
expected toll revenues to allow adequate expansion. This is covered in
the section on financial sustainability.

# [**2.12** Financial Sustainability]{.smallcaps}

Financial sustainability, in the sense of ensuring a sufficient flow of
financial resources over time to meet the operating and investment needs
of the sector, is key to the overall sustainability of the reform. The
foundations of the reform lie in the transfer of investment decisions in
generation and distribution from the public sector (the former CDE) to
the private sector. On the generation side, this transfer is achieved
through the creation of a competitive wholesale market, where private
generation businesses compete to sell multi-year contracts to
distributors and large consumers of electricity, and to sell capacity
and energy in the spot market.[^119] On the distribution side,
investment is undertaken by the distribution companies in response to
financial incentives provided by the regulatory framework. Unlike the
public sector, privately-owned companies lack the ability to rely on tax
revenues to cover any shortfalls between revenues and costs, including
investment-related needs;[^120] given that the July 2001 Law makes
cross-subsidies infeasible, social objectives can only be met through
explicit subsidy programs such as the PRA or the PNER Operating and
capital costs can only be funded from commercial revenues. Therefore, if
the flow of revenues in the sector is insufficient to cover operating
and capital costs in any of the segments of the sector's value chain,
private-sector companies will not be able to make sufficient investments
or may even be unable to continue operating. Sustainability is
guaranteed only if the public receives reliable, affordable electricity
services for which it pays, and the industry receives adequate financial
incentives for efficient operation and expansion. The sustainability of
reform will hinge on the effective balancing of these interests, which
has proved to be highly problematic so far. It is clear to us that
ensuring the sustainability of reform requires that innovative solutions
be implemented on all fronts: policy and institutional, financial and
technical.

To better understand the foundations for the financial sustainability,
it is useful to use a value chain diagram for the sector as a whole. The
sector's revenue stream originates at the downstream end of the sector,
through regulated and unregulated sales to end users of electricity;
some of these revenues then flow to the upstream segments through
payments for transmission and generation. The value chain illustrates
the dependence of the entire sector on downstream sales. The value chain
also shows that the amount of money that flows upstream depends on the
prices at which transactions between downstream (distribution) and
upstream (generation and transmission) companies take place. This is an
important issue in the Dominican case, as in most other markets that
have gone through several iterations of reform.[^121]

### ![](media/image7.wmf){width="4.645833333333333in" height="1.9715277777777778in"}Electricity Sector Value Chain

With this diagram in place, we can then proceed to examine the financial
challenges faced by the Dominican electricity sector in the aftermath of
the reform.

# **2.12.1 Retail Revenues**

The performance of distribution companies is fundamental to the success
of power sector reform. The delivery of reliable services to end-users
and the collection of revenues constitute the financial anchor for the
electricity value chain. From an industry and investor perspective, the
value chain will be broken unless revenues from consumers cover the
costs of expansion, new investment, operation and maintenance. Poor
distribution performance places the financial viability of the entire
sector in jeopardy.

The first weak point in the system concerns both the level of regulated
rates and the collection of revenues from regulated consumers. Without
question, ability and willingness to pay for electricity constitute the
greatest challenges faced by the reform from a financial perspective.
Ability to pay is problematic in a country at the per capita income
level of the Dominican Republic, where the UN estimated that in 1987-97,
21 percent of the population lived on less than US\$1/day,[^122] and
thus much of the population may not be able to afford basic electricity
consumption needs in the absence of subsidies.[^123] Willingness to pay
is also a key challenge because, as in many other countries, prior state
ownership has left major negative legacies with regard to both the level
of rates and revenue collection: (i) significantly subsidized rates,
which makes consumers reluctant to pay the full cost of electricity
supply[^124]; (ii) the perception of electricity supply as an
entitlement, and thus low historical collection rates; and (iii) as a
result of (i) and (ii), lack of financial resources for state-owned
utilities, leading to underinvestment in distribution networks and to
high levels of technical losses and poor quality of service. These
legacies explain many of the revenue problems faced by distributors in
the Dominican Republic:

-   High levels of technical losses

-   High levels of theft, fraud, and nonpayment

-   High initial levels of unfunded subsidies (until September 2002).

Collection data from various classes of consumers provided by Ede-Este
for the first eight months of 2002 show excellent collections from the
industrial sector (102 percent) but lower collection rates for
residential (73 percent) and commercial customers (81 percent). The
worst payer is the Government, with a collection rate of only 5 percent
before the payment of subsidies (fuel subsidies, which were paid until
the Presidential measures of September 2002, were allocated to all
customer classes and are not equivalent to payments for electricity
consumed by Government entities). These data are presented in Table 8
below for the year 2002. Unfortunately, no data showing collection
percentages by income group was available to the team.

For the Unión Fenosa companies, Ede-Norte and Ede-Sur, the data we have
for the first ten months of 2002 shows a similar pattern for industrial
and commercial collections: 96 percent from industrial customers, 82
percent for commercial. Residential collections were comparable to
Ede-Este at 62 percent, but Government collections were substantially
higher at 83 percent (due to nearly 100 percent for the central
Government and 35 percent for municipalities.)[^125]

Table 9

Ede-Este Collections Data, January-August 2002

> *source: AES Corporation*

**Table 10**

**Edenorte-Edesur Collections Data, January-October 2002**

*source: Edenorte and Edesur*

  ------------------- ---------------- ---------------- ----------------- ----------------
                      **Industrial**   **Government**   **Residential**   **Commercial**

  Billed RD\$\'000    2,550,229        1,058,046        3,349,358         888,686

  Collected in        2,438,122        878,480          2,071,000         728,475
  RD\$\'000                                                               

  **Collections %**   96%              83%              62%               82%
  ------------------- ---------------- ---------------- ----------------- ----------------

We note that the distributors have developed a wide network of points of
payment for electricity bills as an effort to improve collections. In
the case of Edenorte and Edesur, for instance, payment points in 2001
included banking and retail establishments (64 for Edesur and 74 for
Edenorte), plus 131 bank branches in Edesur's territory and 143 in
Edenorte's, among them those of the country's major banks such as Banco
Popular and Banco Agrícola (Edenorte and Edesur, Informe de Gestión, Año
2001). Ede-Este has instituted similar payment options. However, during
a spot check at an Ede-Este/AES payment center on a Friday afternoon, we
noted long lines consisting of over an hour wait. For whatever reasons,
customers chose not to use alternate payment locations even through they
were readily available and in close proximity to the AES payment center.
This may illustrate the need for the distribution companies to educate
the public about alternate locations through public information and
promotional campaigns, e.g., offering small discounts for using
alternate locations and educating customers that payments at the
alternate locations have the same effect as payment at company payment
centers.

As a result of measures taken to reduce illegal connections, improve
billing and collections, and upgrade the distribution network, technical
and non-technical losses decreased 13.1 percent over the period from
January-September 2000 to January --September 2002. The losses therefore
declined from a total of 43.6 percent to 30.5 percent over this period.
However, despite the improvement, the sector cannot attain financial
viability at this level of theft and technical losses.

Poor quality of service, manifested mainly in the form of blackouts or
"un-served energy," has compounded the problem. Blackouts make consumers
more reluctant to pay their bills, as they perceive an imbalance between
price and quality of service. For instance, distributors currently buy
power from the transmission company at about 8 cents a kilowatt-hour,
and sell it to residential consumers at 13.8 cents a kilowatt-hour.
Informal interviews conducted by the team indicated that many middle and
upper income consumers would be willing to pay the comparatively high
price of 14 cents a kilowatt-hour if they were assured of high-quality,
reliable service 24 hours a day and 7 days a week. *Blackouts thus
create a vicious cycle where they lead to greater theft and fraud, which
in turn weakens the utility financially and technically*. As discussed
earlier, the un-served energy problem appears to be caused by financial
problems: generator shutdowns due to nonpayment by their customers
(mainly CDEEE and the distributors), load shedding by distributors of
districts with low collection rates, and a legacy of underinvestment in
"wires" which has left behind shaky distribution and, possibly,
transmission systems.

One way of ending the vicious cycle is by creating a better relationship
between the distributors and consumers. Judging from media reports and
our informal conversations with a variety of consumers and officials,
there is widespread dissatisfaction and distrust with distribution
companies,[^126] pointing to a serious issue that requires timely and
remedial action. This highlights the need for improved customer
relations (media campaigns, dialogue, prompt resolution of complaints,
etc.) between the distribution companies and their customers.[^127]
Customers need to adopt a culture of prompt payment to ensure the
financial viability of the distribution companies.

Public policy can also help break the current deadlock. We believe that
the situation calls for Presidential leadership to address the rift
between distribution companies and their customers, possibly through
devising a new "social compact" among the distributors, the Government
and the communities. Media reports and our interviews with senior
Government officials have made it clear that President of the Republic
is staunchly against renationalization. Yet the President needs to
strike a balance between assuaging public anger and preserving an
attractive investment climate for international investors. The
fundamental clash between the President and the Senate illustrates the
importance of implementing solutions that are broadly acceptable to the
public, the power sector, and the domestic and international investment
community. In seeking to achieve such a balance, there is compelling
evidence from the experiences of other countries that *institutional
reforms are broadly accepted if there are mechanisms for the public to
participate in the design and implementation of new reforms and
institutions*. In particular, public information campaigns, led by the
Office of the President, could play a major role in spelling out the
benefits of reform for all segments of the society. Reformers need to
explain the relationship of electric power sector reform to other urgent
national social and economic priorities, such as creating sustainable
livelihoods and reducing poverty. They also need to explain the
importance of a "social compact" that will deliver affordable and
reliable power to all sections of the society, while maintaining the
financial viability of the sector.

In the meantime, the Government has taken a number of measures to deal
with the sector's problems. Some of these measures may permanently
correct some of the problems, while other measures may only provide
temporary relief and require further search for permanent solutions.

*Unfunded subsidies*. The reform contemplated a transition period with
rate cross-subsidies until a purely cost-based tariff regime (the
so-called "technical tariff") came into place on January 1, 2003. This
was a sound idea, because regulated rates often include cross-subsidies
and other distortions that make rate rebalancing desirable for
efficiency purposes, but politically hard to implement at the outset of
reform, when the legitimacy of reform has not been yet established, and
when consumers expect lower, not higher rates (that is how reform is
sold to a skeptical public, and the Dominican Republic was no exception
to this rule).

However, rising world oil prices in 1999 and 2000, as the reform was
being implemented, threw the plans into disarray. The distribution
companies were unable to adjust rates to match changes in the cost of
electrical energy (which is indexed to international oil product prices)
and quickly incurred major financial losses. Facing a crisis in the
reform model, in 2001 the Government undertook the direct provision of
subsidies to the generators under the Global Sustainability Agreement.
But the Government's inability to fund this commitment led to a further
round of negotiations and crises. The results were: (i) the addition of
a US\$0.0055/kWh surcharge to the distribution component of the
"technical tariff" from 2003 to 2017, to compensate distributors for the
losses incurred between September 1999 and December 2000[^128]; and (ii)
the September 2002 decision to eliminate fuel subsidies altogether and
increase rates to reflect the elimination of the subsidy.[^129]

Eliminating the subsidy is a good idea that should have occurred
earlier, to avoid the stranded cost surcharge of US\$ 0.0055/kWh that
consumers will have to bear for the next 15 years. The oil subsidy was
not financially sustainable from the Government's perspective, and it
distorted market decisions because it prevented consumers from
responding to oil price changes and thus did little to reduce the
country's dependence on imported oil. It must be understood, however,
that eliminating the subsidy will exacerbate payment problems, as
customers experience significant rate increases. With a power sector
that is 85 percent dependent on fuel oil (No. 6 and No.2), and with the
termination of Government fuel subsidies, higher oil prices are passed
through to end-users practically on a one-to-one basis. Exchange rate
depreciation also affects the cost of electrical energy directly,
because oil prices, as well as wholesale and retail prices for power,
are denominated in dollars. The recent decline in the peso-dollar
exchange rate is therefore a matter of great additional concern. Hence
the issues of lifeline subsidies and anti-theft measures became all the
more urgent as a result of the elimination of the fuel subsidy. We turn
to these issues next.

*Lifeline subsidies.* For the low-income consumers who constitute the
majority of the population, affordability is the central issue. As
pointed out earlier, about one-fifth of the population of the Dominican
Republic live on less than US\$1/day, making it unlikely for a part of
the population to afford basic electricity services without Government
subsidies. As part of the Global Sustainability Agreement, the
Government established in 2001 the PRA to provide subsidized electrical
energy to low-income neighborhoods on a transitory basis.[^130] Begun on
a pilot basis, the program was expanded in September 2002 after severe
rioting in the Summer of 2002 which left several people dead from
confrontations with the police.[^131] As explained in the previous
section, the PRA ensures that up to 18 hours of electricity (24 hours
during weekends) are made available in selected low-income
neighborhoods[^132] by paying for 13 hours out of a RD\$100m budget
earmarked by the Government for 2002. The distributor provides the first
five hours of supply. In addition, the PRA works with community leaders
and merchants to establish a bill collection system and to educate the
community about paying for electricity. Collected amounts are used to
pay for the energy delivered (i.e., to recover some of the cost of the
subsidy) and to invest in upgrading of local distribution facilities,
including legalization of illegal connections and meter installation.
The budgeted subsidy amount in 2003 is RD\$80m per month, as the program
is to be phased out at the end of the year.

In combining a temporary subsidy with an educational campaign,
empowerment of local community leaders within a broader social agenda,
and system upgrades, the *PRA is an innovative, ambitious, and
well-designed program*. Specifically, the use of the "soft stick" of
peer pressure on one hand (via community leaders and organizations), and
of the "carrot" of system upgrades that can increase quality of service
on the other, is precisely the mix of incentives that can convince many
low-income households that they need to pay for the electricity they
use. We were told by the PRA Administrator that the expansion of the
program in 2002 was partly motivated by its success in raising
collection rates; Edenorte and Edesur report that in 2001, collections
in poor communities rose from 5 percent to 23 percent thanks to the
PRA.[^133]

To expand our knowledge about low-income urban consumers, the team
attended a community meeting of over 200 residents in a poor Santo
Domingo neighborhood, led by the local parish priest, Father Rogelio
Cruz. Father Cruz is organizing his parish and neighborhood to receive
improved electricity services from the distribution companies through
the PRA. Although highly critical of the distributors,[^134] Father Cruz
appears to support the PRA. With strong support from those present, he
stated his belief that the neighborhood's residents would pay their
electricity bills in the same fashion as their cell phone, phone and
cable TV bills if they received reliable service and a measure of
stability in electricity rates.

Our major concern about the PRA is how to transform it into a
sustainable longer-term program *that does not create an excessive
financial burden for the Government* and *does not perpetuate an
entitlement culture on the part of PRA beneficiaries*. Given its
ambitious coverage goal of 700,000 households (of which 238,000 have
been covered so far), its complex coverage procedures (described
elsewhere in this report), and the fact that subsidies may be
substantially below actual costs of supply (especially with high world
oil prices, which effectively reduce the value of the Government
subsidy), we are concerned that the program may achieve far less than it
intends to by the time the money runs out. This could lead to a reversal
of the progress made by then, with low-income customers reverting to
illegal connections, retaliation by distributors through load shedding,
and public disturbances. This should worry both the Government and the
international donor community, and it would be a frustrating setback
given the many qualities of the program, as previously discussed.
Finding longer-term solutions to the problem of affordability of
electricity supply should be a priority for the Government---and not
just for the CNE, as the PRA has important anti-poverty dimensions in
the form of improved access to electricity and community empowerment
that are valuable by themselves.

Another subsidy program of note is the Rural Electrification Plan
(PNER), which is intended to subsidize the connection of areas not yet
connected to the grid or lacking electricity supply.[^135] Subsidization
of the electricity supply infrastructure for poor rural communities has
been a feature of electrification in all high-income countries. The
success of subsidies for rural electrification, in the United States and
other countries, in helping reduce poverty justifies a program like the
PNER. In some suburban areas, such as Los Mulos near La Romana, the PNER
is in fact supplementing the PRA to upgrade the existing distribution
network and organize the collection of payments for electricity supply.
We heard from NRECA, which is closely involved in the PNER,[^136] that
the PNER took over Los Mulos as the PRA was faltering. This is worrisome
news. Given limited funds for PNER and PRA, it is imperative that any
jurisdictional conflict be limited. In fact, as the justification for
both programs is primarily social---ensuring access by the low-income
segments of the country to an essential service---it is not entirely
clear that they should be run as separate programs. If the primary
policy objective is established as poverty reduction through access to
electricity, then the rural-urban distinction ceases to have primacy.
Instead, it becomes relevant only with regard to program implementation.
The mechanisms for ensuring access to electricity will vary according to
population density, among other parameters. Thus solutions will have to
be tailored to such factors. But overall design and funding can be
unified and jurisdictional conflicts minimized.

*Anti-fraud measures.* For customers not covered under the PRA, the
Government established in October 2002 an anti-fraud program (PAEF)
formed by squads of police officers, distribution company employees, and
officials from the Office of the Public Prosecutor. The squads' mission
is to detect and prosecute fraudulent electrical connections and meter
tampering. The program also comprises an educational campaign against
fraud.[^137] Apart from problems regarding the incentives faced by the
PAEF administrators discussed elsewhere in this report, from the point
of view of collections, the program does not appear unreasonable,
although it is an unusual intrusion by Government into the collection
process. Like the PRA, it combines a carrot (education) with a stick
(potential prosecution for theft or fraud); and it is currently targeted
to higher-end business and residential customers whose economic
situation make the problem of theft or nonpayment, at least in most
cases, clearly a willingness to pay problem---in other words, a law
enforcement problem.

An important item regarding collections is the payment record of the
various legal entities that are part of the public sector. The
information we have seen from the distributors shows that after
residential users, public sector users have the worst payment
record[^138]. Among the agreements posted in the CDEEE website, we have
seen an agreement on "non-suspendable" Governmental users of
electricity, dated September 23, 2002. This appears to be an attempt to
define priorities for supply within the public sector, which cannot be
cutoff despite non-payment. We did not see the list or learn how
entities qualify to be on the list, but we are concerned that if the
list is excessive or is used to favor certain entities in return for
political favors, then it will undercut the pressure on those Government
entities to pay their bills.

Although some pages of the agreement are missing in the posted version,
it appears that the CNE will be in charge of processing all invoices for
electricity supply to these users, via the Ministry of Finance, and a
specific item will be included in the Government budget for payment of
electricity supply to these users. Although it is too early to judge the
success of the agreement, to the extent it commits the Government more
strongly through a dedicated budget allocation and an agency (CNE) in
charge of payments, it should lead to an improvement in the Government's
payment record. As for Government users not on the "non-suspendable"
list,[^139] we might expect that with the elimination of the fuel
subsidies and the conclusion of PPA-related negotiations (see below),
the pressure on Government finances would decrease, and the public
sector payments record would improve. But there is no certainty, as new
financial priorities and emergencies could easily arise. For this
reason, it is important to set up additional measures to ensure the
financial discipline of the Government. The first step in this regard
should be to understand the reasons for the problem: is it an
administrative problem, e.g. delays in processing and controlling the
paperwork, or is it an actual cash flow problem? Solutions should then
be tailored to the root cause. Administrative reforms---such as
centralization at the CNE, or at some other Government entity---can
streamline the paper processing and control process; cash flow problems
can be solved through credit lines and similar arrangements unless the
Government is insolvent, which does not appear to be the case at this
time.

Altogether, then, the Government is providing substantial support (the
"carrots") to the distributors through the PRA, the PNER, and the PAEF,
to increase collections, deter and prosecute fraud, and improve the
quality of distribution networks. Similarly, it is using the "stick," on
distributors. As of January 1, 2003, distribution companies face a new
quality of service measurement system, which will penalize distributors
and other parties responsible for unscheduled interruptions as set forth
in the July 2001 Law (Art. 93) and Reglamento (Order SIE-56-2002).
Penalties to generators are based on a new Value of Lost Load of RD\$
26,464.9/MWh, or about US \$1,300/MWh (order SIE-54-2002), which is
based on estimating the cost of alternative supply such as diesel
generators and batteries. Stiff penalties will be assessed against
generators, ETED, or the distributors for exceeding the limits set by
SIE on unannounced supply interruptions (150 percent of the cost of the
un-served energy, at the applicable regulated rate[^140]). The same
penalties will be imposed on generators and on ETED whenever the CO
determines that a service interruption was caused by generation or
transmission, respectively.[^141] However, there does not appear to be
an exemption for service under the PRA program, which contemplates a
supply of 18 hours per day during weekdays. Without an exemption from
the penalty provisions of the neighborhoods covered (or to be covered),
the distributors will face sharply higher costs of service for the
PRA-covered areas which appears to be a conflict between these two
programs. Thus, the exemption from the PRA is necessary to avoid further
financial turmoil in the sector.

# **2.12.2 Transmission Tolls**

The second weak point is the level of transmission tolls, which are also
regulated. Transmission tolls are computed, according to the July 2001
Law and its implementing regulations, using the replacement value new of
an optimized grid design as well as O&M costs. Tolls should therefore be
adequate for the recovery of expansion investment. The problem arises in
the use of transmission charges as a bargaining chip in negotiations
with the distributors and in PPA renegotiations, which will
significantly reduce ETED revenues. The Sectoral Framework Agreement
executed in 2001 included a reduction in transmission tolls reflected in
orders SIE-17-2001 and SIE-31-2001. This reduction apparently does not
allow ETED to cover its full capital costs computed according to the
July 2001 Law's methodology. Attempts by the SIE to alter the situation
have been successfully appealed by the distributors.[^142] In addition,
all renegotiated PPAs, with only one exception, exempt the affected
plants from payment of transmission tolls[^143]. Altogether, these
concessions will surely impact the ETED's financial resources in a
negative way.[^144]

Although ETED remains in the public sector as a wholly-owned CDEEE
subsidiary, the risk of transmission congestion will be substantially
increased if ETED has to rely on the public sector budget to obtain
sufficient financial resources to operate and expand the transmission
grid.[^145] Moreover, there is no certainty that private investment
would cover ETED financial shortfalls. The July 2001 Law provides
neither clear mechanisms for private investment in transmission
facilities, nor incentives for market participants to invest in
transmission, as transmission congestion costs do not alter the total
transmission charge payable by grid users. The only private investment
in transmission at present are major connection lines (for AES and for
Caterpillar), which are being built by the private sector under BOT
arrangements.

Again, as in the case of hydroelectric facilities, but now more
urgently, it is unwise to leave untouched the prohibitions of the July
2001 Law for private investment in transmission. Important new
investment must be undertaken in order to meet demand increases and
improve the reliability of the grid. These investments cannot depend
solely on the initiative of CDEEE management. Although centralized
transmission planning and charging mechanisms will be needed for the
foreseeable future, these functions can be entirely delegated to the CO,
which is already responsible for calculating the amounts due for
transmission service (Articles 364 and 368 of the Reglamento). As an
entity where the interests of generators, distributors, and other market
participants should be represented, the CO is well placed to facilitate
discussion and agreement on transmission system upgrades as part of a
transmission planning process. Once the plan has been defined, it can be
submitted to the SIE for inclusion of the additional costs in the
transmission tolls. The actual projects can be auctioned off to the
lowest private sector bidder, under concession, Build-Own-Transfer, or
some other such scheme, whereby the successful bidder provides the
capital to build the transmission facility and then recovers the bid
amount over time, through transfer of part of the transmission toll
revenues. Such a system would provide a sound basis for private
investment in new transmission facilities without requiring the
privatization or capitalization of ETED.

# **2.12.3 Wholesale Power Prices**

The third and last weak point is the level of wholesale prices for
electrical energy and capacity that distributors pay on behalf of their
regulated customers. In the Dominican Republic, these prices are largely
driven by the levels stipulated in the PPAs executed prior to reform by
the CDE, as modified by the subsequent renegotiations of most of these
agreements, since about 80 percent of the energy and capacity purchased
by the distributors comes from the PPAs. In any case, however, it must
be borne in mind that about 85 percent of the electrical energy
generated in the country comes from oil[^146], which has to be imported
in its entirety. Even under the best terms for the PPAs, the dependence
on oil imports exposes the country to significant hardship if oil prices
rise significantly. This is important because it sets significant
limitations about what can be done about the cost of electrical energy
in the country, at least in the short term.

The volatility of world oil prices and the current high world oil price
of over \$36 a barrel has adversely affected the financial position of
the electric power sector in the Dominican Republic. The country
consumes a total of 140,000 barrels of oil products a day, and maintains
a 10-day reserve. The oil price increase of \$18 per barrel over the
past

year translates into an additional Government expenditure of about US
\$2.5 million per day.[^147]

As most of the generators with PPAs burn oil fuels[^148], the generators
have been directly affected by the financial difficulties experienced by
the sector with regard to the issue of fuel subsidies. Both the
distributors and the CDE, as the only buyer under the original PPAs,
have had difficulty meeting payment obligations to the generators. PPA
servicing has continued to be a severe drain on Government
finances.[^149] According to the Government, in January 2002 alone, for
instance, the difference in CDE's cost of purchase from seven PPAs[^150]
and the value of the energy in the spot market amounted to US\$3.7
million. At times, arrears have accumulated enough for the generators to
turn their plants off rather than provide further credit to the buyers.
This means that despite the ample margin of installed capacity over peak
demand in the country, reliability is severely compromised as some
plants are not running, according to the information from the CO
mentioned above.

In response to this situation, the Government has undertaken, through
the Commission on Electricity Sector Sustainability, to repay any
arrears due under the PPAs and to renegotiate the PPAs with two
objectives: (i) to assign them to the distributors now that the fuel
subsidy has been eliminated and CDE (or its successor CDEEE) has no
intermediary role to play; and (ii) to buy down or buy out the contracts
so as to reduce the burden they place on regulated rates.[^151] As of
mid-December 2002, the Government had paid out a total of US\$ 185m for
arrears owed to the IPPs over the previous three months; another US\$
157m remained outstanding.

So far, the Government has renegotiated all of the PPAs except for
Cogentrix' (San Pedro de Macorís), although several of the renegotiated
agreements have not been signed in expectation of the final arrears
payments owed by the Government. In some cases, such as Transcontinental
Capital Corp. (112 MW), the PPAs have been terminated and the plant has
become fully merchant; in other cases such as Puerto Plata's unit 2 (50
MW), the contract has been assigned to the distributors, in this case
Edenorte and Edesur. The PPAs between the distributors and CDE, Haina,
and Itabo have been renegotiated to reflect 20 percent lower energy and
capacity prices and symmetrical (up and down) price escalation
clauses[^152]; to allow distributors to reduce contracted capacity as
large users enter the wholesale market; and by applying the same penalty
regime faced by the distributors for unscheduled supply interruptions.
In exchange, the term of the agreements has been extended to 15 years
starting in 2001. All of the renegotiated contracts have been vetted by
the SIE.[^153]

In general, the PPA renegotiation process appears to have been sound. If
the reputation of the country with foreign investors is to be
maintained, the contracts cannot be unilaterally rescinded by the
Government. As a result, the Government probably had little choice but
to pay the amounts in arrears. At best, these amounts can be included in
the renegotiation process, with the idea of convincing the seller to
give up some of the amount as irrecoverable, or of spreading repayment
over an extended contract term, as was done in the case of the
distributors with the 15-year VAD surcharge. Attempting to convince the
sellers (and lenders to the IPPs) that contract amounts are
irrecoverable is a risky strategy, as it can tarnish the country's
reputation and the Government's commitment to the sector's reform. And
repayment over an extended term could not be accommodated given other
renegotiation objectives such as lower prices. Thus, the actions of the
Government with regard to payment of arrears do not seem unsound. Other
actions of the Government in the renegotiation process also seem
reasonable. The Government has traded off contract term extensions for
lower prices, better penalty provisions, and flexibility about contract
capacity levels. We have already explained why contract term extensions
are unlikely to negatively affect competition in the wholesale market.
The pricing, penalty, and capacity level concessions obtained in
exchange for the contract term extensions increase consumers' ability
and willingness to pay for the contracted capacity and energy, increase
the consistency of contract terms with quality of service regulations
and penalties, and make it possible to lower the market access threshold
for large users without adverse financial consequences for the
distributors.

At the same time, the Cogentrix PPA remains a significant unresolved
matter because of the large size of the plant (300 MW), the amount of
money involved, and Cogentrix' strong negotiating position (the contract
was competitively bid, approved by the Dominican Senate, and enjoys
international guarantees). Since the plant was recently commissioned,
the full buyout cost is close to overall plant cost at US\$ 300m. The
Government obviously wants to minimize the total payment, so it is
proposing instead to make the plant merchant and to add the capability
to burn natural gas[^154] (to be supplied via AES' LNG regasification
plant near Santo Domingo). The estimated cost of contract buyout under
this scenario is in the order of US\$ 200m. In our conversations with
Government officials, the possibility was mentioned of obtaining a loan
from a multilateral institution such as the IDB to pay for the contract
buyout. If the loan does not unduly burden the increasingly heavy
foreign debt load of the Dominican Republic, it may be the only solution
to the impasse. The Government seems to lack the money to buy out the
contract in the short term, while the cost of the current situation, in
terms of the impact on blackouts and their effects on collection rates,
is too high to ignore. As a 300 MW plant, the Cogentrix plant has a
significant impact on the ability of the interconnected system to meet
peak demand levels. *Getting the Cogentrix plant back on line is thus
necessary if blackouts are to be minimized* and this last element of the
financial sustainability of the sector is to be settled.

To conclude this section, then, it is clear that while much has been
done in recent months to ensure the financial sustainability of the
sector, important areas remain to be finished or strengthened.

-   *First*, the current PRA program, although effective and well run,
    should be temporary, and transformed into a different, sustainable
    program that does not create an excessive financial burden for the
    Government and does not perpetuate an entitlement culture on the
    part of PRA beneficiaries; consideration should be given to some
    coordination with the PNER to tackle the problem of ability to pay
    for electricity in the country.

-   *Second*, the Government needs to develop stronger commitment
    mechanisms to pay for the electricity that Governmental entities
    consume, beginning with an understanding of the causes of this
    problem.

-   *Third*, the PRA needs to be excluded from the penalties for service
    interruptions, to avoid plunging the distributors back into severe
    financial difficulties, and recognizing the special nature of the
    supply problem in the communities covered by the PRA.

-   *Fourth*, explicit mechanisms must be developed for private
    involvement in the expansion of the transmission system.

-   *Fifth*, renegotiation of the Cogentrix PPA must be completed to
    finally resolve the stranded cost problem posed by the pre-reform
    PPAs and to put the sector on a more secure financial footing.

**[3.0 Recommendations for Sustainability of Sector
Reforms]{.smallcaps}**

###### **3.1 [Sector Architecture]{.smallcaps}**

Pending finalization of the CO governance structure (*see below),* we
find that the fundamental institutional elements necessary to support a
viable power sector have been put in place. Although capacity building
and adequate resources must be given to support the institutions, there
do not appear to be any fundamental "institutional gaps" in the design
of the sector as set forth in the July 2001 Law and Reglamento. Gaps do
exist however in the detailed definition and implementation of
institutional roles and responsibilities. *Considerable confusion exists
as to where the lines are drawn between Government and private sector
responsibility as well as among the various Government agencies,
especially during this transition phase where the second generation of
reforms is underway.* Important issues that relate to traditional
notions of "doing business," patronage politics and Presidential
participation should also be addressed to assure that they do not
obscure institutional credibility and ability to function.

The three most critical institutions in the sector are SIE, CNE and the
CO. We recommend that the function and jurisdictional limits of these
entities be clearly institutionalized and strengthened so that they
perform their required function in the sector.

**3.1.1 Superintendency**

> *Actions to Ensure Independence of the Superintendency*

1.  Under the July 2001 Law, CNE has a close relationship with the
    Superintendency. Among other things, CNE issues regulations that
    have superior legal ranking over the resolutions that SIE issues,
    meaning that SIE must follow the lead set by CNE. CNE also has
    authority to review decisions by SIE, although we were told that its
    review is limited to SIE's application of the law and does not
    include a review of SIE's fact-finding. This relationship undercuts
    the independence of SIE because, among other reasons, SIE must
    follow the regulations issued by CNE that is part of the Executive
    Branch. *The potential for political meddling in SIE's decisions is
    too great to allow this relationship to continue in the long term;
    we recommend that CNE only serve as a policy entity and that SIE
    derive its authority directly from a statute.*

2.  *Build SIE Commissioner and Staff Capacity*. As long as the
    commissioners and staff lack the requisite technical, legal and
    financial capacity to develop, monitor, implement and enforce the
    regulatory regime, excessive reliance on CNE, CDEEE and other
    institutional expertise will be required. This dependency threatens
    the independence of the Superintendency. Therefore, we recommend
    that:

-   *A comprehensive organizational plan and set of job descriptions*
    should be developed. Although there is some organizational plan in
    place, it seems that SIE would benefit from a more carefully
    designed organizational plan with carefully drafted job descriptions
    for all positions. This will include how SIE departments and various
    positions relate to one another.

-   *Improve Staff training/capacity building.* Over the next two years,
    *SIE should be strengthened by adding power sector professionals*
    with skills in finance, auditing, accounting, utility management,
    engineering, as well as in transmission, distribution and power grid
    management. All staff should receive training in regulatory
    processes, various phases for engagement with regulated and
    non-regulated organizations, and public affairs. In the short term,
    SIE may share expertise in transmission, power grids and wholesale
    market operation with the CO, provided it maintains effective
    separation of decision-making functions.

-   *Improve the auditing and enforcement division of SIE.* SIE should
    consider establishing a set of regulatory accounting standards and
    regular filing requirements for all jurisdictional companies. The
    enforcement division should be fully staffed with qualified
    investigators so that they may vigorously pursue possible violations
    in regulatory compliance matters.

3.  *Improved internal processes*. SIE should establish a comprehensive
    docket system to track and monitor all proceedings that have been
    initiated and all pleadings that have been filed with SIE. Rules of
    procedure for announcing SIE public meetings should be established.

4.  *Improved rules of procedure.* SIE should promulgate detailed rules
    of procedure that complement the procedures set forth in the
    Reglamento, including procedures for public participation, and
    deadlines for filing pleadings, answers, protests, public hearings,
    use of court reporters, etc. These rules will serve as the basis for
    all regulated companies without discrimination. Strong rules
    prohibiting *ex parte* communications with persons outside of SIE on
    matters pending before SIE should be published.

5.  *Improved public participation in SIE proceedings.* SIE should
    encourage public participation in all SIE proceedings, especially ad
    hoc groups such as consumer, industrial, commercial, agricultural,
    and other groups. An Office of Public Affairs should be established
    to communicate, on a regular basis, with the public and market
    players and provide information on how to participate in SIE
    proceedings.

6.  *Physically relocate SIE and CNE.* SIE and CNE currently operate in
    the same building. Consideration should be given to relocating these
    offices to different physical sites so as to minimize perception of
    co-mingling these functions.

7.  Under the July 2001 Law, the Superintendent of SIE also serves as
    the President of the Coordinating Organism. *This dual role for the
    Superintendent is an inherent conflict of interest and should be
    eliminated*. We have no objection to the Superintendent attending CO
    meetings as a passive observer, but the Superintendent should not be
    managing both the independent regulatory agency *and* the private
    organization that oversees the spot market, which itself is subject
    to SIE jurisdiction. Any participation by the Superintendent,
    including the power to cast a tie-breaking vote, poses the risk of
    conflict of interest. *Because this role is established by the July
    2001 Law, we recommend considering an amendment to that Law*

8.  *Reduce Presidential Participation.* Whether *actual or only
    perceived*, the injection of presidential politics into the
    decision-making processes of SIE must be eliminated and any
    inference that these two offices are linked must end. Although it is
    important that SIE has the confidence and support of the Office of
    the President, the perception that that Office guides the SIE on
    pending matters is detrimental to SIE's credibility as an
    independent institution. We recommend an actual "stepping back" of
    the Office of the President and other Government offices from SIE
    regulatory actions. In furtherance of this goal, *SIE should
    promulgate strict rules prohibiting ex parte communications* by any
    non-SIE person with an SIE employee, and *the public and other
    Government agencies should not seek to engage in such ex parte
    communications*.

9.  *Develop an SIE internal work plan and submit an Annual Report.*
    Although some collaboration with CNE and other Government
    institutions is expected, SIE should develop its own work plan so it
    can claim ownership of that plan. Items that should be addressed in
    the plan as well as the time frame for addressing each item include:

-   Appropriate budget projections and financing of SIE;

-   Improved clarity of process (docket system, hearings, notice
    provisions);

-   Training for staff (by category of training, e.g., tariff,
    regulatory process, audit and enforcement proceedings, etc.);

-   An Office of Public Affairs for media relations and dissemination of
    information; and

-   Detailed work plans for each department, including PROTECOM

> SIE should be required to submit an Annual Report to Congress,
> stating, among other things, its perception of the sector, suggestions
> on statutory changes to its authority or changes to the sector, the
> number of cases it has processed and anticipated case load, staffing
> levels and future needs, etc.

10. *All SIE Commissioners and Staff should refrain from engaging in
    public debate.* It is evident from numerous press articles, press
    conferences, Congressional hearings, and similar media events, that
    there is considerable debate among high level officials about the
    reforms in the electric sector. Such debate may well be healthy for
    the sector and help educate the public about the reforms. However,
    SIE Commissioners and Staff should refrain from engaging in that
    debate, so as to maintain the integrity of the regulatory body and
    preserve their objectivity as pleadings and cases are filed before
    it. *An Office of Public Affairs, opposed to commissioners or other
    staff, should handle all media relations*.

11. *The role of the Commission on Electricity Sector Sustainability
    that advises the President on sector reform and operation needs to
    be more clearly defined*. Its high-level role in sector
    decision-making may not be the best use of Presidential prerogative
    at this time. In fact, the work and operation of the Commission may
    serve to undermine the level at which SIE, CNE and other
    institutions are able to function. We recommend that the objective
    and role of the Commission be made clear and published. To prevent
    further confusion in the sector, the Commission should remain, at
    most, an ad hoc advisory council, and should not be formalized in
    any statute.

**3.1.2 National Energy Commission (CNE)**

Although the basic role of CNE as a policymaker seems to be well
understood by the sector, there is apparent confusion as to CNE's role
on specific issues, primarily concerning regulatory aspects of the
sector. This can be attributed to the newness of SIE and lack of sector
experience in its leadership compared to CNE members who have more
experience. As SIE staff builds its capacity, this confusion should be
reduced. It is important that SIE not act or be seen as part of CNE but
rather, that these institutions maintain highly separate operations.
Therefore, we recommend that:

1.  C*NE's authority to review SIE decisions should be eliminated* and
    that appeals be taken directly to a judicial branch of the
    Government, such as the Administrative Law Court or other
    appropriate court. This issue may be addressed by careful review of
    the legal documents that authorized CNE to review SIE decisions,
    e.g., the Reglamento and Modifications thereto.

2.  *CNE's rulemaking authority should be eliminated* and SIE should be
    allowed to derive its authority directly from the statute.

3.  The July 2001 Law should be amended so that *CNE does not have
    tie-breaker voting authority over SIE decisions*.

4.  *CNE and SIE offices should be physically separated*. In addition,
    immediate capacity building should be started for SIE so as to
    reduce its necessary reliance on CNE and others entities for
    technical assistance.

5.  *Improve Staff training/capacity building.* CNE staff would benefit
    from a better understanding of the operation of the sector,
    including SIE's role, and should attend many of the training courses
    that SIE staff attend.

6.  *CNE should issue improved rules of procedure.* These rules would
    cover public participation in it rulemaking process and any appeals
    from SIE decisions and improve the transparency of that decision
    making process.

**3.1.3 Coordinating Organism**

The CO plays an important role in managing the spot market, and it is
important that its role be clearly defined so that all sector players
understand how the market operates. Therefore, we recommend the
following:

# *Finalize the CO governance structure*. We remarked on the excessively slow process of consolidation of the CO, both in terms of its governance structure (as established in the corporate by-laws), conditions for members to participate in the market, and participant charges. Provisional governance and financial arrangements create uncertainty among market participants, which may deter investment in the sector. *To avoid further delays, we suggest that the CO By-Laws be finalized immediately*. Members of the CO and others should clearly understand the terms and conditions under which this organization operates, thereby improving the understanding and perception of this critical organization. 

# 

# *Amend the Composition of the CO Board.* We recommend that the July 2001 Law be amended to provide for a more balanced governing Board. We suggest the following composition of its governing Board, with equal voting rights: all generators regardless of ownership (EGEHID should simply be one more generator entity participating in the election of generator representative(s) to the CO board); transmission (ETED at the time); distribution; large users; and perhaps, regulated consumers (an odd number would facilitate decision-making by avoiding deadlocked votes). User representation can be structured through two separate mechanisms: large users participating directly in the market can elect a representative among themselves; and regulated users can elect a representative through consumer organizations and business associations, such as the Fundación por los Derechos del Consumidor (FUNDECOM) and the Consejo Nacional de la Empresa Privada (CONEP)[^155]. 

# 

# *Calculation of participant charges. We recommend that as part of the elaboration of the CO's by-laws, a system for the calculation and payment of CO participant charges be put in place.* The computation of charges should be straightforward, as the principle is already stated in the July 2001 Law, once the commercial information system allows a precise measurement of participant transactions in the market.

> *4. Incorporate EGEHID and ETED so they can assume their membership
> roles. CDEEE has the responsibility for incorporating these entities.*
> These members need to be incorporated and placed on the CO governing
> Board so that the CO management team can lead the CO on market
> developments.
>
> 5\. *Development of a Public information function.* We did not hear
> any complaints about the communication and information aspects of how
> the CO is currently operating. However, for future operations and to
> preserve institutional memory, some consideration should be given to
> establishing an information function at the CO where data is
> maintained, minutes of CO meetings and history of the CO actions,
> agenda priorities and other materials that track the work of the CO
> (news clippings, memos).

**[3.2 General Sector Reform]{.smallcaps}**

#### 3.2.1 Development, Publication and Implementation of Government Sector Reform Strategy

## 

The publication of Government's sector reform strategy can help to
legitimize reform.[^156] The development of the strategy should
sufficiently include participation from stakeholders prior to
completion. In the development of the strategy, facts (e.g., social
impact work of World Bank) must be taken into consideration and
appropriate responses developed. Prioritizing the reform measures,
providing definite reform action items as well as a timeline for
implementing them can allow for an appropriate level of stakeholder
expectation, give potential investors an idea of Government's intentions
and direct institutional priorities for action.

**3.2.2 Establish a Sector Reform Task Force**

We have some concerns that there is no single entity that is overseeing
the reform efforts from an objective and broad perspective. To some
extent, CNE performs this function, but CNE's role also needs to be
reviewed, and it cannot perform that function objectively. At the risk
of creating another, albeit temporary, institution, consideration should
nonetheless be given to establishing *a Government Sector Reform Task
Force*. The Task Force would establish baseline data as to how
stakeholders currently benefit from sector operations, tracking changes
in performance based on data that may include cost of power, access,
reliability. The Task Force differs from the Presidential Supervisory
Council in its composition and role. The Task Force would ideally exist
no longer than two years and might include one or two international
advisors. *The Task Force would report to CNE and be responsible for
publishing bi-annual impact assessments.*

-   The Task Force would be responsible for assuring that programmatic
    institutions (PRA, PAEF) carry out their mandate and either close
    operations or are transitioned to a clear institutional role, either
    stand-alone or as part of an existing institution.

-   The Task Force would also monitor implementation of the law and
    possibly make recommendations on improvements to address vagueness
    and gaps in the existing Law as reform continues[^157]. *An in depth
    assessment of the Law, the Regulations and SIE Resolutions should be
    made in the next three months.*

-   The Task Force could monitor the development of regulatory processes
    to assure that a balanced approach that includes the various
    regulatory aspects of sector oversight is ongoing.

## 

## 3.2.3 Define further roles and responsibilities of institutions for each institutional mandate, methodology for implementation. 

## 

1\. *Define the Role, Responsibility, Jurisdictional Limit of Government
and Government Institutions as they relate to the Sector.* The roles of
Government in sector operations often conflict and can serve as a source
of confusion for sector players and customers. As illustrated in Table
11, Government has many roles in the sector. It is essential that sector
players know what role each Government institution is responsible for
and which objective the Government seeks to promote via that
institution. For example, even after the restructuring, the Government
remains a substantial entity in the marketplace with power to influence
decisions. Consideration should be given to reducing the Government's
role in the sector, e.g.*, privatizing the transmission and hydro
sectors, terminating PAEF after a fixed period of time, reducing it
representation on the CO Board.*

## *2. Institutional Work Plans.* As reform progresses, it is important that each institution's mandate is clearly defined by its role, responsibility and method for implementing its mandate. This definition goes beyond what is presently contained in law. At least for this transition period, institutional work plans from each involved institution will help institution staff identify key benchmarks for performance as well as inform the public and market players of each institution's definite role and responsibility. We suggest that these be completed by May 1, 2003. Some items that the work plans can address:

-   *Indicators of success* for each institution. (e.g., for Protecom,
    targeted percentage level of successful consumer protection actions;
    for PAEF, successful prosecutions, percentage of increase in
    payments).

-   *Timeline for performance* of certain actions.

-   *Program targets matched against budget costs.* Develop a detailed
    plan on how institutions will be financed (e.g., use the
    constitutional processes and do not duplicate PAEF financing
    scheme).

-   *Staffing plans.* Short- and long-term.

-   *Training Plan.* As part of the Institutional Work Plans, a Training
    Plan, based on a Training Needs Assessment, should be developed that
    includes topic areas, number of staff to be trained, financing for
    training and most importantly, a realistic timeline for training. In
    light of the recent establishment of so many institutions there is
    tremendous opportunity to share costs based on overlap of staff
    technical training needs. (*see sample topics, attached at the end
    of the Recommendations' section)*.

3\. *Publication of Institutional Processes and Procedures.* The
regular, clear and timely publication of processes and procedures is
important, especially as reform of the sector continues. Government
should consider the development of a monthly newsletter, e.g., published
by CNE, that publishes summaries of new resolutions that regulate
processes and procedures, other institutional process and procedure
information, general information about sector reform, finance, etc.

**3.2.4 Consumer Protection and Participation**

######### The public distrusts the distribution companies, and for good reason---meters are often inaccurate, billing cycles exceed actual days in the month, quality of service is poor, rates are high, etc. Immediate steps need to be taken to improve this relationship and obtain the public's endorsement of the reform efforts.

> 1\. *Additional Protecom offices* *should be immediately established,
> staffed and operational* (establish a time line for completing this
> goal). This will restore some customer confidence and keep companies
> on guard; can be valuable tool to collect anecdotal information and
> disseminate information.
>
> 2\. Building consumer confidence and support. *The following steps
> should be taken to help build consumer confidence:*

-   Regular consultations of the distribution companies with community
    organizations and consumer groups to improve customer service and
    assess client satisfaction.

-   Improved customer relations by means of consumer campaigns,
    educational pamphlets, easier means of payment, etc.

-   Establish a consumer advocate within the distribution companies
    reporting directly to the CEO and to SIE via Protecom, to coordinate
    all quality of service aspects and provide a visible and answerable
    presence in matters of customer service.

*3. Increasing Public Participation.* Public participation should be
encouraged in public decision-making processes, such as proceedings
before SIE and CNE. Consumer groups and other coalitions (e.g.,
financial, commercial, industrial, agricultural) should be educated and
encouraged to use the formal processes available before those entities
to express their views and have those views considered before a final
decision is issued*.*

*4. Discussion*. In addition to overall development of reform policy, we
attach high importance to initiating a *discussion* within the
Government or even within the Dominican society (perhaps through the
newly-created Pact for Stability and Economic Development), about the
merits of the recommended combined program. The discussion should
involve the collection of information about the affordability of
electricity supply among low-income households. By the end of the
calendar year 2003, these efforts must be translated into actual *policy
initiatives* to go beyond the PRA in addressing equitable access to
electricity supply. In our opinion, such policies are of great
importance for a long-term solution to the financial viability problems
that have plagued the electricity sector over the last decade.

> The main entity to lead policy discussion and design exercises should
> be the Social Cabinet, as it has the most extensive involvement in,
> and information about, poverty and service affordability in the
> country. But it is also necessary to involve other parts of the
> Government that have to give their assent to any initiative: at the
> very least, the Department of Finance under its role of raising and
> allocating Government finances; and the CNE, to oversee the fit
> between socially-oriented policies and the country's energy policy.

**3.2.5 Improve Public Information and Awareness.**

There is strong evidence from the experiences of other countries that
institutional reforms are broadly accepted when the public participate
actively in the design of new reforms and institutions. *Participation
helps to legitimize reform. Public information campaigns led by the
Office of the President, should be implemented to emphasize that reforms
benefit all groups in the society. Such campaigns could include press
conferences, articles in the press, and educational programs on
television and radio*. By providing reform information, Government can
set informational targets to help change customer and business mindset
and remove existing thinking of "entitlement". *We recommend:*

> 1\. *Government Sector Reform Spokesperson* (e.g., 2 years). This
> individual will speak on behalf of the Sector on the whole with
> emphasis on reform matters, thereby reducing the information role for
> the President, CNE and SIE. The individual would likely be a senior
> staff member at CNE or the Office of the President but would not be
> the Executive Director of CNE or SIE personnel. This individual would
> conduct regular briefings on sector reform.

*Key points to include in current agenda for public debate --* through
the course of developing its strategy, Government will need to pay close
attention to certain issues that require public and private sector input
if to be sustained. Examples of questions to be pursued:

-   *Social Impact Assessment*-- e.g., how will Government know it is
    succeeding?

-   *Blackouts* are overshadowing all other sector development issues,
    e.g. contracts, etc. -- how Government, consumers and business can
    work together to eliminate blackouts.

-   *Reglamento* -- consumers seeking connections must prove they own
    their own house -- this is discriminatory against the poor but at
    same time, they can obtain squatters' rights. Government needs to
    deal with this.

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-   *Presidential Role* in the sector -- people clearly believe the
    President's role in the sector is direct; increased awareness on
    institutional roles will assist Government in securing reform.

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-   *Governance of the sector* would be complete with creation of hydro
    and transmission companies. Companies and investors would benefit
    from understanding the Government's plan in terms of how they view
    future investments in the country.

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-   *Sanctity of Contracts --* ongoing awareness at the customer,
    business, Government and judicial level would be of great benefit to
    sector reform.

> 2\. *Target information during transition.* In this regard, Government
> needs to identify real institutional roles to address habits and
> psychological impacts and reduce confusion. For example, investors
> receive little or no information about potential investment
> opportunities (e.g., transmission, hydro) which promotes a hesitance
> among investors in exploring possible sector opportunities. A review
> the forums in which ideas can take place should be conducted and
> action programs commenced; some examples common in transition settings
> are: *Student Education Program; Meter Awareness Campaign* (enhance
> SIE -- "how to read meter"); and *International Investor Information
> (*can include donors).
>
> 3\. *Media training.* Government's ability to disseminate information
> on reform will be facilitated if there is a group of journalists who
> understand the sector issues. Government, specifically CNE, can take
> the lead in working with interested journalists to educate them on the
> more technical and legal aspects of private energy markets; e.g.,
> describe the pricing system, Government subsidy schemes, how to save
> energy, etc.
>
> Media workshops for journalists will build media competency about
> sector issues. This training will ultimately benefit Government
> because a pool of "energy journalists" will emerge that will be able
> to convey key points about the sector to citizens.

#  **3.2.6 Develop Stronger Commitment Mechanisms for Payment of Government Electricity Bills.**

The collection data that we have obtained from the distributors show
that the Government is a major cause of the revenue shortfalls
experienced by the distributors. This situation imperils the financial
sustainability of the sector. Our recommendation consists of two steps:

-   the causes of payment arrears by Governmental entities must be
    understood---whether the arrears are caused by real cash flow
    limitations, or by administrative inefficiency or other reasons; and

-   appropriate solutions must be developed. For instance, if the
    problem is administrative, bill processing can be centralized at the
    Comptroller's Office; if the problem is cash flow, then appropriate
    financial and accounting reforms should be implemented.

#  **3.2.7 Performance Contracting**

As a party to the management contract, the Government is entitled to
monitor the performance of the contract. Audit rights may also derive
from those contracts, depending on their provisions. Similarly, as a
substantial minority shareholder in the distribution companies, the
Government is entitled to its shareholder rights, which normally include
the right to monitor whether management is making prudent business
decisions for the company and ultimately the shareholders.

As discussed further in Section 2 of this Report, we recommend that the
Government review its legal options to initiate renegotiation of the
management contracts, with a view to replacing the current contracts
with performance contracts. Among other things, the performance contract
should be designed:

-   To impose a *clear requirement that the distribution companies be
    held to a standard of prudent business practices*, so that profits
    and ultimately dividends can be realized and all shareholders can
    share in these profits according to their shareholder interests;

-   *To terminate load shedding, to improve quality of service, to
    require investment in system upgrades, and to establish clear
    targets for increased collections and reduced losses*. Even though
    losses have declined substantially, they are still high by
    international standards and financial viability will not occur
    unless theft and technical losses are substantially reduced;

-   To use a formula which computes the *2.75 percent management fee
    based on the amount of revenue collected,* rather than on the amount
    invoiced. The contract should specifically provide for the transfer
    of technology and technical services as originally anticipated, and
    define the specific forms of technology transfer and technical
    services to which the management fee will be tied;

-   *To require regular, transparent and independent financial and
    technical audits of the distribution companies*.

    8.  **Modify the Current Regulations for Street Lighting Quality**

Order SIE-55-2002 of December 18, 2002 created a quality of service
regime for street lighting, which as Edenorte and Edesur data shows,
appears to be plagued by some of the worst collection problems. As an
interim solution, SIE allowed municipalities to postpone paying for
street lighting service until an inventory of street lighting equipment
is conducted. Since the inventory requires personnel from the
municipalities as well as the distributors, it may take either
significant resources or time to complete. In either case, the order
will place a further financial strain on the distributors at a time
where their financial position is fragile.

We recommend that a less onerous solution for the street lighting
equipment inventory be sought. We are not prepared in this Report to
make a comprehensive review of the options. However, we note that a
possible solution would be for SIE to tender the inventory to one or
more subcontractors through open bidding, to be completed nationwide
before the end of 2003. The inventory-taking could be funded by the
distributors, and one-half of the cost recovered from the municipalities
through a street lighting rate surcharge over a five-year period.

> 3.2.9 **Government should implement specific measures to reduce
> foreign exchange and fuel price volatility risks.**

Over the longer term (3-5 years), the Government should consider
establishing a 30 day emergency petroleum reserve to be filled when
world oil prices are comparatively low and near the bottom(\$22) of the
OPEC price band (\$22-28per barrel).

> **3.2.10 Government should remedy the incorrect billing by the
> distribution companies.**

Incorrect billing raises the public's mistrust of the distribution
companies and the integrity of the system. It is expected that under
recently issued SIE Resolution 58, over-billing will be more closely
monitored. This can be achieved with the proposed regulatory oversight
and with fines imposed on companies that are found to over-bill (e.g. 34
day month billing cycles).

#### 3.3 [Related Government Programs]{.smallcaps} 

**3.3.1 Anti-Fraud Unit (PAEF)**

*Encourage the PAEF to fulfill its objectives*. PAEF should help change
a culture of non-payment by sending a message of enforcement and
deterring future fraud and theft. However, as this message is
communicated to the public, the need for this program should diminish.
Therefore, we recommend that:

-   *This program have "sunset" provision* that calls for its
    termination after a fixed time, e.g., one year, so that the need for
    the program can be reevaluated.

-   This entity should be *carefully monitored* to ensure that:

    -   it follows appropriate legal processes to protect the civil
        rights of the individual,

    -   it does not exceed its authority

    -   it is not used in a vindictive manner to target certain
        individuals or institutions, and

    -   it is not controlled by the distribution companies which
        directly benefit from the program.

-   Funding for the program should go through the normal constitutional
    budgetary processes, and the program should *not* be funded directly
    through penalties that it collects.

#### 3.3.2 Blackout Reduction Program (PRA)

#### 

The distribution of power to end-users is the lynch-pin for the
financial sustainability of the entire electric power sector. For the
low-income consumers who constitute the majority of the population,
affordability is the central issue. But the Government must understand
the precise nature of the supply affordability problem, and then target
any public subsidies very sharply to the segments of the population that
can least afford to pay for electricity.

Our analysis of the Blackout Reduction Program (PRA) made clear the
discrepancy between the PRA's ambitious coverage goals and procedures on
one hand, and its very limited time horizon on the other. We noted the
strong similarities in objectives (facilitating access to electricity
supply by low-income communities), and the potential for some
jurisdictional overlap (rural communities), between the PRA and the
PNER. We also found that some of the enforcement efforts of PAEF may
ultimately impact PRA beneficiaries; this impact needs to be monitored.
The PRA is a programmatic step in the right direction for the short
term. We recommend that PRA, PNER and PAEF overlaps be assessed and
where possible, that these efforts be better coordinated for consistent
results. We further recommend:

1.  *Streamline PRA Oversight.* PRA management currently reports to the
    Social Cabinet, CNE and SIE as well as the Council of CNE. The role
    of CDEEE is implementing certain technical aspects of PRA is also
    important. The structure for operating, managing and overseeing PRA
    should be reviewed to determine how it can be modified to improve
    and simplify these issues. An effort should be made to coordinate
    this program with PNER.

2.  *Exclude PRA from service interruption penalties.* The SIE, equipped
    with a SCADA system that allows it to detect service interruptions
    in distribution circuits, and armed with stiff July 2001 Law
    penalties against unjustified interruptions (Art. 93 penalties),
    will be enforcing the law's provisions in 2003. We are concerned
    that the special circumstances of the PRA, which involves systematic
    service interruptions, may not be taken into account, increasing the
    already high level of conflict in the sector. *Any service
    interruptions specifically contemplated under the PRA must be
    excluded from interruption penalties.*

> This is an important recommendation because distributors will unfairly
> incur substantial penalties for participating in a program endorsed by
> the Government. This recommendation can be implemented very rapidly
> through the issuance of an SIE order.
>
> 3\. *Ensure Ongoing Delivery of Service to Low-Income Consumers*.
> Before the PRA ends, the Government should conduct a study of ability
> to pay for electricity and other basic public services among the
> population of the Dominican Republic. This must be followed by the
> development of suitable policy responses, such as an integrated
> lifeline program to address access to electricity supply by the poor
> in rural, suburban, and urban areas. By the end of the calendar year
> 2003, actual policy initiatives should be in place to go beyond the
> PRA in addressing equitable access to electricity supply.
>
> We suggest that the main entity to lead policy analysis, discussion,
> and design exercises should be the Social Cabinet, as it has the most
> extensive involvement in, and information about, poverty and service
> affordability in the country. But it is also necessary to involve
> other parts of the Government. These include: the Ministry of Finance
> in its role of raising and allocating Government finances; the CNE, to
> oversee the fit between socially-oriented policies and the country's
> energy policy; and Protecom as an important information source of
> customer uses and payment issues. The involvement of
> non-government/customer advocacy groups should also be included.
>
> *4. Build on Local Community participation of PRA.* We found an
> important network of Government, community and private sector players
> engaged in the PRA activities. As the program approaches its end, it
> will be important that Government consider ways in which the program's
> infrastructure can be developed to assist poorer communities beyond
> pure subsidy. Los Muelos presents an example of local participation;
> it is possible that PRA could evolve into a local power co-operative
> under the appropriate financing and management setting

**3.3.3 National Energy Efficiency and Renewable Energy Program**

In light of the Government's commitment to increasing awareness and
action on energy efficiency and renewable energy, consideration should
be given to consolidating existing programs and funding. For detected
fraud, 10 percent of penalties are used for incentives to develop
renewable energy; careful consideration should be given as to how these
funds might be leveraged. Government commitment to these topics needs to
be prioritized and realized, for example:

-   Target Government Buildings as part of how buildings can be energy
    efficient; track cost savings (new lighting, motion sensors, air
    conditioning improvements, etc.)

-   Continue public information and awareness on how to save energy,
    i.e., encourage *rational energy use*.

-   Consider establishing grants to support non-Government organizations
    dedicated to supporting efficiency programs at the industrial,
    business and/or customer level.

-   Consider establishing targeted loan assistance programs for industry
    and business as well as residential blocks willing to refurbish
    equipment with efficient ones; install renewable technologies.

-   Conduct a street lighting program -- e.g., in Santo Domingo and/or
    Santiago. Identify main streets where replacement of bulbs can have
    tangible cost savings.

**[3.4 The Wholesale Market]{.smallcaps}**

# **3.4.1 Implement the Commercial Information System**

Our analysis of the development of the wholesale electricity market in
the Dominican Republic pointed out that the commercial information
system required by the Reglamento for the computation of transactions
among all participants has not been implemented. Apparently, the
obstacle is the lack of proper metering equipment at the interconnection
of EGEHID's hydro facilities with the transmission network. The lack of
a complete information system diminishes the transparency of the market
and threatens the market's financial viability. Without complete
information, the CO at present computes the transmission charges owed by
CDEEE by default, since the missing information originates in a CDEEE
subsidiary. As a result, CDEEE may be overpaying for its use of the
transmission system. Yet CDEEE's prior obligations as default financial
backer for the sector have subjected it to considerable financial
distress, which means that it can hardly afford to be bearing
transmission costs that may be properly allocated to other participants.
In addition, the current situation may encourage inefficient use of the
transmission system by participants that are not bearing their full cost
of transmission as set by the July 2001 Law and Reglamento. *We
therefore recommend that CDEEE finalize the installation of the
necessary measurement and communications equipment for its
interconnection points.*

This action will have an important effect on the efficiency and
financial sustainability of the market and should be assigned a *high*
priority, e.g., within the next three months or within three months of
disbursement of funds by multilateral agencies. CDEEE should be in
charge of implementing this recommendation, in coordination with the CO
to ensure that the metering and communications equipment meets CO
standards and can be certified by the CO upon installation and
successful testing. Multilateral banks and donors, such as the IBRD and
IDB, and national development assistance agencies, should be engaged to
provide the financial resources required for implementation.

# **3.4.2 Develop Additional Mechanisms for Private Investment in Hydroelectric Facilities**

The current one-MW exemption for private developers to develop small
hydro has failed to produce new investment in hydro.[^158] In view of
the high volatility of world oil prices, and the high dependence on
imported oil fuels for generation, *we recommend that private investment
in hydroelectric generation be allowed through a concession system*.
This can be done through several means:

-   approving a new concessions law;

-   using build-operate-transfer (BOT) regimes, if legally permissible;
    or

-   privatizing or capitalizing EGEHID and amending the July 2001 Law to
    remove the public ownership requirement for hydro facilities.

Some of the above measures will require Congressional approval, and as
such they may take a significant amount of time. In addition, the
maturation of private investment in hydro facilities will take a number
of years, as private investors will await the stabilization of the
sector's reform and learn more about market rules and hydrological
flows. Nonetheless, the reform process should begin right away, and be
accorded medium-level importance. The CNE, as the Government's
policy-making arm for the energy sector, should take the lead in
implementing this recommendation.

# **3.4.3 Establish and Publicize a Procedure for Computing the Value of Water for Dispatch Purposes**

At present, the absence of a public method to compute the value of water
distorts price formation in the wholesale market. It also deters private
investment in hydro generation, as it creates uncertainty about market
revenues for hydro facilities. *For the sake of efficiency, a water
valuation method must be established and made public. We recommend the
use of a standard opportunity cost method, based on current and forecast
demand for energy, value of lost load, reservoir capacity, expected
inflows of water, and other relevant reservoir characteristics.* Current
and forecast energy demand is computed by the CO as part of its
operating routines. The value of lost load has already been established,
on the basis of the cost of alternative sources of electrical energy for
different types of consumers. CDEEE should have plant-specific data on
water inflows, reservoir capacity, reservoir evaporation, and other
factors affecting the availability of water for generation.

Computational steps can be publicized by sharing both the calculation
software and data with participants. A commercially available software
package that participants can purchase, as done in Panama, would work
well (if STARNET doesn't have a water valuation capability, we suggest
considering SDDP, a relatively inexpensive software used in much of
Latin America).

Proper determination of water values may affect spot market prices, so
we recommend that the CO begin work on the preparation of a procedure
right away. This action should be accorded a high importance by the CO.

# **3.4.4 Modify or Periodically Review the Spot Market Price Cap**

Our limited analysis of spot market price dynamics revealed limited
usefulness for the spot market price cap. At present, the cap appears to
help in limiting spot price spikes at times of high oil prices. When oil
prices are lower, however, the benefit of the cap in terms of dampening
spot market price spikes will be lower, whereas its cost in terms of
reduced incentives for the construction of peaking plant will be higher.
This means that the need for the cap should be reviewed on a periodic
basis, or better still, the cap should be flexible so that it only comes
into place when oil prices exceed a certain market, e.g. US\$25/bbl of
WTI in the US Gulf Coast as measured by a respected index like Platt's.
*We recommend that the spot market price cap be subject to periodic
review or that it be made contingent on the level of regional crude oil
prices.*

# **3.4.5 Increase Transparency of Charges for Ancillary Services**

Lack of transparency in determining charges for ancillary services can
distort market efficiency and even financial sustainability as the value
of ancillary services transactions in electricity markets can at times
be considerable. *We recommend that the CO enter into discussions with
market participants to clarify the calculation of prices for ancillary
services, and that CO procedures and public reporting be amended to
correct any such problems.*

Given the potential importance of ancillary services transactions, we
accord this action a high priority for the CO. Barring any limitations
imposed by the need for better information systems, any problems should
be corrected over the next three months. The CO should be charged with
implementation, as system operator and market clearing organization.

> **3.4.6 Follow the July 2001 Law's Mandate in Lowering the Market
> Access Threshold, and Rescind Order SIE-15-2001**

In our opinion, there is little ground to believe that migration of
large users to the wholesale market would harm distributors, as they are
well protected contractually and the soon-to-be-implemented technical
tariff will eliminate cross-subsidies in the distribution rates. It is
particularly important to recall that the PPAs assigned to the
distributors allow the latter to lower their capacity and energy takes
as large users migrate to the wholesale market. We thus find no
justification to delay application of the July 2001 Law's market access
provisions by direct or indirect means such as Order SIE-15-2001. *We
recommend that the SIE rescind Order SIE-15-2001 and apply the July 2001
Law's provisions regarding the reduction in the market access
threshold.*

Although the threshold reduction will not likely have an immediate
impact on market competition and is thus of medium importance only, it
can be implemented right away through an SIE order.

# **3.4.7 Increase SIE Vigilance About Vertical Integration**

We have noted that, if the July 2001 Law's provisions regarding abuses
of market power are to have any real impact, the SIE must enforce them.
As a recommendation for *routine* action by the SIE, we propose
*aggressive enforcement of the following July 2001 Law provisions:*

-   exclude affiliate contracts from the calculation of charges for
    energy and capacity that are passed through to regulated consumers
    in the rates approved by the SIE;

-   competitive auctions for new contracts;

-   40 percent spot sales requirement for new generation affiliates; and

-   20 percent spot market purchase requirement for distributors.

We attach a very high importance to this recommendation. Although we
have no specific term for the implementing this recommendation, it
should be followed closely whenever distributors need new contracts for
purchases of capacity and energy.

# **3.4.8 Adjust Transmission Tolls and Develop Explicit Mechanisms for Private Investment in Transmission**

We have expressed strong concern about the financial viability of ETED
going forward. Under the threat of litigation, the SIE has been unable
to increase transmission tolls. Transmission charges have apparently
been given away in PPA renegotiations, and the July 2001 Law prohibits
private involvement in transmission, so there is no alternative to ETED.
If ETED's revenues are insufficient to cover investment in additional
transmission capacity, or worse yet, to cover even its operation and
maintenance expense, transmission bottlenecks may arise in the near
future, imposing additional costs on to the sector.

For these reasons, *SIE must set tolls at an appropriate level, and
private involvement in transmission must be allowed*. As in the case of
hydroelectric facilities, several choices exist for private investment:
the approval of a new concessions law; use of build-operate-transfer
(BOT) regimes if legally permissible; or even the full privatization or
capitalization of ETED. In any case, transmission planning cannot be
undertaken by transmission service providers alone; participation of
generators, CO, distributors, and users is needed to ensure that their
interests are taken into account to the highest possible degree. For
this reason, *we recommend that decisions about expanding the
transmission grid be transferred from ETED to CO, which is set up to
evaluate and discuss transmission needs for the sector.*

Transmission bottlenecks can have a major financial impact on the sector
by forcing the dispatch of higher-cost plants in congested areas. Over a
longer term, bottlenecks can also distort generation siting decisions.
Similarly, one company identified technical problems at the city-gate as
a significant transmission problem. The need to set tolls at adequate
levels, to attract sufficient capital, and to plan carefully, make this
a very important recommendation. On the other hand, it involves several
elements with different time horizons.

In the shorter term---next three months---SIE should initiate and
finalize a public proceeding on establishing a transmission toll
rebalancing scheme to bring tolls up to a sustainable level (the scheme
itself can unfold over a longer transitional period). Over the same
term, the Reglamento should be amended to transfer transmission
decisions to the CO, and different alternatives for private sector
involvement should be considered.

A period of another three months should be used to develop the CO
transmission planning procedures. We note that CNE is in the process of
drafting a planning report that may be useful to the CO. Meanwhile, a
policy for private investment in transmission can be considered by
Congress. By the end of 2003, the target should be to have more adequate
transmission tolls, transmission planning responsibility under the CO,
and a scheme for greater private investment in transmission.

# **3.4.9 Resolve the Cogentrix Dispute**

We understand that the Cogentrix dispute poses delicate legal and
financial issues for both parties. Without commenting on those issues,
we note the importance that this plant has in minimizing generation
shortfalls. The Government should consider, as part of its options,
using multilateral loans to assign the PPA to the distributors or to
turn it into a merchant plant. We also recommend that the Government
continue to study the option of conversion to natural gas, as natural
gas will help diversify the country's energy matrix and possibly lower
the cost of production of the Cogentrix plant, and hence spot market
prices.

In view of the urgency of eliminating blackouts, resolving the Cogentrix
dispute is of high importance.

# **3.4.10 Delay the Haina-Itabo Merger Until a Thorough Study of Competitive Implications is Completed**

It appears that the merger of Haina and Itabo will produce a high level
of concentration in a small market. The risk of adverse impact on market
competition is high, especially since SIE is still in the process of
growing into a full-fledged independent regulator and has limited
capabilities at this time to monitor monopolistic practices.

*We recommend that the SIE initiate a proceeding to study the proposed
merger, possibly hiring internationally recognized experts on antitrust
issues to assist in evaluating the impact of the Haina-Itabo merger on
the wholesale market.* The proceeding should be conducted under SIE's
public processes so that the public may participate and express their
views. SIE may wish to hold public hearings on this matter, including
adversarial hearings with witnesses and cross-examination as a means of
establishing a record for its findings. After SIE has conducted a
thorough review of the proposed merger, it should issue its findings of
fact and law, and issue an order that either, (i) rejects the merger,
(ii) approves the merger, or (iii) approves the merger with conditions.

11. **Establish Clear and Aggressive Targets for Reduction of Technical
    Losses at Transmission and Distribution Levels**

Even though overall losses have declined significantly since the
capitalization took place, they are still very high by international
standards, and financial sustainability will not occur unless technical
losses are substantially reduced. Unlike non-technical losses, with must
be addressed within broader law enforcement, cultural, and
poverty-related themes, technical losses can and must be addressed by
ETED and the distributors through investment programs. *We recommend
that loss reduction targets be established, either by the CO as a
condition of market participation, or by SIE*. Alternatively, if the
management contracts are renegotiated, standards for the distribution
companies can be addressed at that time.

> **[ATTACHMENT I]{.underline}**
>
> ***Training Attachment***
>
> ***Examples of training that could be conducted in the next six
> months:***

(a) **All Institutions**

-   Market definitions -- NOTE: the law itself identifies private and
    public "institutions" as part of the electric sub-sector[^159]; it
    is important that greater distinction be given to the types of
    institutions -- whether regulatory, private company or
    non-Government, etc.

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-   Public Information, Awareness and Participation-- including training
    of media, non-government organizations, government bodies (SIE, CNE,
    etc.), community groups.

-   Basic Market Operation of Electricity Sector

-   Roles and Responsibilities

(b) **CNE**

-   Policy making -- time lines; prioritizing reform actions

-   Reform of electricity markets (comparative world experience)

-   Roles and responsibilities

(c) **SIE**

-   Overall role in the emerging market

-   Docketing system

-   Internal management of Regulatory Body (job descriptions)

-   Public hearings

-   Regulatory process

-   Development of tariffs

-   Legal and regulatory drafting

-   Reform of electricity markets (comparative world experience)

-   Investigative and Compliance issues (legal, technical, regulatory)

-   Enforcement -- application of penalties, fines

-   How to identify monopolistic practices in the market

-   Preparation of data and information on procedures to determine
    rates, historic and expected values

-   Public Affairs

(1) **Distribution Companies**

-   *Customer Service* -- at this time, Government assistance or at
    least some type of collaborative effort to build company expertise
    in customer service would benefit the company, the market and
    ultimately help the Government to achieve reforms. This could become
    a condition of company contracts where performance parameters are
    set; some training could be provided by Government or via a donor
    program.

```{=html}
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```
-   *Community and Social Action* -- The culture often associated with
    companies in market settings engaging in local community activities
    has not sufficiently evolved. AES does engage in community
    activities; it has built a clinic and school and works with local
    leaders in areas of service; other companies do not. Government
    should consider the development of some type of community linkages
    awareness program to involve companies as a natural and important
    part of community not outside.

(2) **Consumer Groups/Church Groups** -- now is an optimal time to
    leverage the networks and power of community based groups to support
    or impede sector reform. Capacity building and ongoing information
    exchanges are critical to assuring that all stakeholders are
    effective. Government should immediately explore existing areas
    where capacity building efforts of donors and other Government
    ministries can be leveraged. (e.g., USAID assistance to NGOs, etc.)

(3) **Pact for Stability and Economic Development** --as this Pact
    develops, it is possible that some training may be of use.

**[ATTACHMENT II]{.underline}**

Comisión Nacional de Energía

**República Dominicana**

March 6^th^, 2003

**RUDDY & MUIR, LLP**

**1717 K Street, NW Suite 600**

**Washington, AD 20036**

**Attention: Mr. Thomas P. Gross**

**Attorney at Law**

Dear Mr. Gross:

1.  Which is the participation of the President's office in the
    decision's making of the sector?

2.  The payment of the energy of the public sector is discounted monthly
    by the distributors of the energy that CDEEE delivers to the
    Wholesale Market.

3.  At the present time there is not a narrow relationship of work among
    the Superintendence of Electricity (SIE) and the National Energy
    Commission (CNE); as well as we have never made observations or
    criticized their actions. In some occasions, we have sent them our
    opinion about specific cases, with the purpose to offer them a
    different vision.

4.  The poor institutionalism among the institutions, specifically,
    Superintendence of Electricity (SIE) and National Energy Commission
    (CNE), is due to at the short time that they have been created and
    to the implementation of the new regulator frame of the market.

5.  You have mentioned in your report that information that are given to
    the CNE by the Agents are not managed with the confidentiality that
    they require. Usually, we don't receive information from Agents; the
    same ones are received through the SIE. The information that has
    arrived to us directly from the Agents, have been managed very
    zealously by the CNE.

6.  You indicate that the CDEEE is treated in a different way, being
    favored by the Resolutions emitted by the SIE or the Coordinating
    Body (OC). We don't have any information that endorses that
    asseveration; however, we have many communications from the CDEEE,
    claiming mistreatment.

7.  The CNE, at the moment is developing the bases necessary to have an
    appropriate and active participation in the electric market.
    Actually, CNE is involved in the conclusion of different projects.
    The National Energy Information System, the model of the electric
    demand and the indicative planning of the transmission and
    generation of the System.

8.  The Decree that created the Presidency Commission for the
    sustainability of the electric sector was based for a specific goal;
    this Commission will disappear as soon as these problems have a
    solution.

9.  The President of the Board of CNE is the Ministry of Industry and
    Commerce and not the Ministry of Finances.

10. The PRA program is technical and administratively directed for the
    Social Cabinet. So much the CDEEE, CNE and the SIE offer them the
    logistical support and the "know how" that they need to be managed
    in the sector.

11. The Resolution 15 had validity up to December 31, 2002.

> We respect your opinion about CDEEE that it's still plays as regulator
> in the market; we are conscious that CDEEE operates as a simple agent
> in the market.
>
> Best Regards,
>
> **George A. Reinoso**
>
> **Executive Director**

![](media/image3.jpeg){width="1.4in" height="0.8in"}

**Advanced Engineering Associates International (AEAI)**

## 1666 K Street, N.W. Suite 620

**Washington, D.C. 20006**

**202-416-6611 tel., 202-955-9082 fax**

**aeai@aeai.net**

[^1]: Simone Lawaetz, Program Analyst in USAID  (EGAT Bureau/Office of
    Energy) facilitated this activity and traveled with the team,
    attended team meetings and assisted the Team in its analysis of
    the issues. Firras Traish of AEAI, provided research, coordination
    of team activities and compilation of the final report.

[^2]: A Spanish version of the final report will be prepared. Spanish
    terms used herein are intended only to clarify and provide
    continuity with those familiar with the sector.

[^3]: We note that any information that was given to us by the companies
    and other organizations was done so voluntarily and that we have no
    subpoena power or other powers, such as requiring statements under
    oath, normally associated with formal investigations. Nor is it the
    purpose of this project to conduct a formal investigation of that
    nature. We note that other Governmental organizations, such as the
    Superintendency, are authorized and more fully staffed to conduct
    such investigations. Therefore, although we deem the information
    given to us as reliable, we cannot determine with certainty the
    veracity of that information or whether there were substantial
    omissions of relevant information.

[^4]: An "*ex parte* communication" is a communication (orally or
    otherwise) made by someone other than an SIE employee to an SIE
    employee, such as a commissioner or office director, outside the
    designated legal process, about a matter that is pending before SIE,
    which may influence, or may have the *appearance of influencing,*
    SIE's decision on that matter.

[^5]: Under the legal hierarchy in Dominican Republic, legislation
    passed by Congress and signed by the President is the highest legal
    authority. Regulations enacted pursuant to legislative authority are
    the second tier, and resolutions enacted pursuant to regulations are
    the third tier of authority. Each succeeding tier must find its
    legal basis in the preceding authority.

[^6]: The July 2001 Law does not specify the weights to be used.
    Presumably they would be given by the relative share of total
    purchases excluding those from affiliates.

[^7]: These two types of costs are intended to be complementary, the
    former measuring the cost of expansion of the system over at least
    the next 15 years (capital cost and additional operation and
    maintenance), and the latter measuring the replacement costs of the
    current system (again, capital and operation and maintenance). The
    cost of capital will be the real opportunity cost of capital faced
    by Dominican distributors in international financial markets and
    will be set by the Central Bank of the Dominican Republic.

[^8]: Pursuant to Art.28 of the Modifications to Reglamento, any SIE
    decision that goes against the July 2001 Law, the Reglamento, or the
    regulations issued by the SIE and the CNE, can be appealed to the
    CNE.

[^9]: Article 24(d) of the July 2001 Law gives the SIE the power to
    oversee the behavior of the electricity market. Article 24 (l) gives
    the SIE power to resolve conflicts among entities and persons
    subject to its oversight, which includes wholesale market
    participants.

[^10]: The standard of review is thus the same as applicable to the CNE.

[^11]: Under recent reforms, Supreme Court justices are appointed by a
    Judicial Council that includes representatives from all major
    political parties and that oversees the entire administrative
    structure of the judiciary, following the model of Germany, Spain,
    Mexico, Argentina, and an increasing number of countries worldwide.

[^12]: July 2001 Law, Arts. 75-81 and Reglamento, Title V, Arts.
    130-139.

[^13]: July 2001 Law, Art.119 and Reglamento, Title XII, Arts. 520-522.

[^14]: In Spanish, referred to as both (1) "El Fondo Patrimonial de las
    Empresas Reformadas" and (2) "Fondo Patrimonial para el Desarrollo"
    (formerly Comision de Reforma de la Empresa Publica - CREP).

[^15]: We were told that the Law on Public Enterprise differentiates
    between Public Service enterprises and all others. Public Service
    enterprises cannot be "given away" by the State and there are
    certain aspects of the Sector that are considered by some to fall
    into the Public Service category. This issue is under review.

[^16]: Our team reviewed the main capitalization agreements; these
    included the management agreement, by-laws of the capitalized
    companies, share sale and purchase agreements. Other document review
    was less relevant to this study and included pre-qualification of
    bidders for capitalization auctions and consultant reports about the
    structure of the capitalization process.

[^17]: According to AES, SIE has issued an order exempting the Los Mina
    facility from the 15 percent limitation in the July 2001 Law on
    distributor ownership of generation because AES owned the facility
    prior to the capitalization of the companies.

[^18]: The data is based on Reports from the Coordinating Organism. If
    market share is based on percent of GWh generated during 2002 using
    a total of 9,623.1 GWh for that year, the limited data we had showed
    the following: Haina (2,241.2 GWh or 23.3%), Itabo (1,867.3 GWh or
    19.4%), EGEHID (736.3 GWh or 7.7%), UF (Palamara and La Vega (
    1,422.5 GWh or 14.8%), and Seaboard (885 GWh or 9.2%). Data for the
    other companies was not available for this calculation.

[^19]: Article 182 of the Reglamento.

[^20]: For background information, see Title III, Article 6 of the July
    2001 Law, "Institutions of the Electric Sub-Sector".

[^21]: For example, if SIE orders audits of the regulated companies, is
    it doing so to protect the Government's role as a shareholder or to
    protect consumers. Generally, these roles should not be commingled,
    e.g., it is not the regulator's function to protect the Government's
    role as shareholder.

[^22]: CNE expects to publish the plan in June 2003.

[^23]: Another example came to our attention of how public information
    from an external community based group can influence policy and at
    least initiative dialogue. During our December 2002 visit, a foreign
    non-Government organization faxed an "anti-Fenosa" power point
    presentation to Government, donor and company officials, which
    summarized other countries' experiences with Union Fenosa and listed
    <clientes@uef.es> as the contact for additional information.

[^24]: The Minister of Finance leads the Council, other members include:
    the SIE Superintendent, the CNE Executive Director, the CDEEE
    Administrator, one CDEEE advisor, and two presidential advisors.

[^25]: In Spanish, "Comision Nacional de Energia". The CNE initiated
    this assessment of the electricity sector.

[^26]: Technical Minister of the President; Minister of Industry and
    Trade; Minister Finance; Minister of Agriculture; Minister of
    Environment and Natural Resources; Governor of the Central Bank and
    Director of the Dominican Institute of Telecommunications.

[^27]: See Reglamento, Art 21 regarding carrying out President of CNE
    obligations.

[^28]: Four concessions for renewable energy (wind) are underway
    (York-US company, Canadian, Spanish and Norwegian firms). NRECA with
    USAID support has provided extensive wind mapping of the country.
    Meeting December 11, 2002, George Reinoso, Executive Director, CNE.

[^29]: In Spanish, "Superintendencia de Electricidad".

[^30]: The SIE is an independent supervisory agency in charge of
    monitoring compliance with the law and regulations. It also controls
    the quality of service and safety of facilities, processes,
    application for concessions and prepares the information required to
    set tariffs.

[^31]: Chapter IV, Art 31 of the July 2001 Law calls for "affiliated
    professionals...with at least eight (8) years of experience in the
    energy sector".

[^32]: Time limitations did not allow us to meet with the other two
    commissioners.

[^33]: Art. 31(b) of the July 2001 Law.

[^34]: An "*ex parte* communication" is a communication (orally or
    otherwise) made by someone other than an SIE employee to an SIE
    employee, such as a commissioner or office director, outside the
    designated legal process, about a matter that is pending before SIE,
    which may influence, or may have the *appearance of influencing,*
    SIE's decision on that matter.

[^35]: Bylaws of the Application of the General Law of Power 125-01,
    July 2002

[^36]: Reglamento, Arts. 37-40.

[^37]: Reglamento, Art 32, Art 33.

[^38]: Reglamento, Art 35.

[^39]: Reglamento, Art 12.

[^40]: Article 24(d) of the July 2001 Law gives the SIE the power to
    oversee the behavior of the electricity market. Paragraph (l) of the
    same article gives the SIE power to resolve conflicts among entities
    and persons subject to its oversight, which includes wholesale
    market participants.

[^41]: Reglamento, Art 11, Par 2.

[^42]: Decree No. 749-02 (September 19, 2002).

[^43]: Even though so called "regulatory out" clauses can be used to
    protect parties from unforeseen regulatory actions, invoking these
    clauses undermines the intention of the parties to have a long term
    contract and disrupts the financial arrangements that lenders have
    put in place.

[^44]: In Spanish, "Oficina de Proteccion al Consumidor de Energia
    Electrica"

[^45]: Of the 8,000 complaints, we are informed that none or very few of
    the complaints were levied against AES operations.

[^46]: It appears that three offices are actually fully operational.

[^47]: Reglamento, Arts. 37-39.

[^48]: A list of penalties that can be levied against violators of the
    statute is provided, "Levantamiento de Cargos".

[^49]: Title VIII, Art 125, Par IV, July 2001 Law.

[^50]: See, Reglamento, Chapter II, Arts. 130-139

[^51]: In Spanish, ^?^ Organismo Coordinador del Sistema Eléctrico
    Interconectado de la República Dominicana.

[^52]: The CO website is one of the most comprehensive sites of this
    nature the authors have seen in terms of the range and detail of the
    information provided therein. For instance, the site provides the
    current merit order, hourly marginal costs, and annual financial
    flows among participants.

[^53]: See [www.oc.org.do](http://www.oc.org.do/).

[^54]: Currently, the system used for the CO's operational forecasts is
    MOPERD, developed by Synex, a well-known Chilean consultancy (OC,
    2002b: 14). In addition, the CO implemented the STARNET program for
    short- and medium-term dispatch. This program was developed by
    ICADE, an internationally recognized Spanish engineering school in
    matters of electrical system planning and dispatch (Organismo
    Coordinador del Sistema Eléctrico Interconectado de la República
    Dominicana, *Memoria Anual y Estadísticas de Operación 2001*, p.19).

[^55]: (OC, 2002).

[^56]: Article 54 of the Reglamento specifies the following financing
    principles: the CO will be financed by generators (including any
    self-generators selling surpluses into the market), distributors,
    EGEHID, and ETED. Charges will be based on relative participation in
    total value of market transactions.

[^57]: See section 1 of the report for a description of the legal
    provisions concerning CO governance. According to some private
    company executives, , gave to USAID. But this represents the private
    generators in the CO's governing board, the delay is caused by the
    fact that the transmission and generation subsidiaries of CDEEE have
    not yet been legally constituted, so they lack legal representatives
    for the governing board.

[^58]: These provisions of the Reglamento require the installation, at
    every point of interconnection of generators and distributors with
    the transmission system, of equipment to measure active energy
    flows, reactive energy flows, and voltage levels over three-phase
    connectors (to record voltage fluctuations). Every generator or
    distributor connecting to the grid at a specific interconnection
    point is responsible for the installation of the measurement
    equipment, in accordance with the standards defined in the
    previously referenced provisions of the Reglamento, and any further
    standards defined by the CO. The generator or distributor must also
    arrange for access to a telecommunications network capable of
    transmitting the measured data to the CO. The communications network
    can be the fixed-line telephone network or other networks per
    agreement between the participant and the CO.

[^59]: Hence we have a vicious cycle of making CDEEE the "payer of last
    resort" which limits its ability to upgrade the measurement
    equipment and exacerbates the congestion charging problem.

[^60]: In Spanish, "Programa Nacional de Reduccion de Apagones ", see
    Presidential Decree 1080-01.

[^61]: The first significant crisis took place in July 2001 and the
    second in September 2002 basically due to the fact that the
    distribution companies only supplied that power for which they
    received payment. The Government announced that 20 hours service
    would be provided to these families in July 2002.

[^62]: Presidential Decree 1080-01, dated November 3, 2001.

[^63]: Economist Intelligence Unit.

[^64]: A total of 700,000 households have been identified in the country
    for PRA coverage. By way of comparison, there are about 1m
    residential customers with meters (i.e., non-PRA) in the country.

[^65]: For communities that have not signed an agreement, PRA includes
    14 hours of daily supply M-F and 18 hours daily supply weekends for
    communities.

[^66]: Fenosa's collections in poor communities rose from 5 percent to
    23 percent in 2001.

[^67]: Although we did not receive any concrete statistics on collection
    rates under this program, we were told that collection rates in one
    district improved from \$700/month to \$30,000/month over a period
    of three months.

[^68]: In Spanish, "Programa Nacional de Apoyo Eliminacion Fraude
    Electrico".

[^69]: 418 investigations have been conducted to date.

[^70]: By comparison, the distribution companies estimate there are
    approximately 200,000 violations.

[^71]: We were told that two families or relatives of families that have
    been critical of reform in the electric utility sector and the
    distribution companies were "caught" by the police units. Apparently
    in both cases, the individuals were exonerated, but only after the
    severe inconvenience of having to defend themselves and challenge
    the police investigation.

[^72]: The General staunchly asserted that as a leader, he is
    independent of the distribution companies and will not be an
    instrument of any institution or individual.

[^73]: On the other hand, if the Squad actually views the conduct of an
    illegal connection being made or a meter being tampered with, then
    the suspect is readily apparent because the crime is in progress.

[^74]: We were given the four rural electrification plans.

[^75]: See Listin Diario. Seccion La Republica, p. 14 - Wednesday,
    December 11, 2002

[^76]: In Spanish, "Consejo Nacional de la Empresa Privada".

[^77]: Signatories to the pact are Hipolito Mejia, President; Marino
    Ginebra, President of CONEP in the representation of sector
    enterprise; and Monsenior Agripino Nunez Collado in representation
    of the Catholic Church.

[^78]: The World Bank is conducting a social impact assessment; it is
    unclear whether this will address sector worker issues.

[^79]: Time did not permit meetings with Ministry of Labor, Ministry of
    Natural Resources and Environment; information received is based on
    conversations with sector representatives.

[^80]: In Spanish, "Secretaria de Industria y Comercio (SIC)"

[^81]: The MIT was formerly responsible for developing and implementing
    electricity sector policy, planning sector development and preparing
    and coordinating rules and regulations.

[^82]: "Programa de Energia no Convencional" (Program of
    Non-Conventional Energy).

[^83]: In Spanish, "Cabinete Social".

[^84]: This is certainly how AES computes it for Ede-Este, according to
    the report prepared by the Comisario de Cuentas regarding Ede-Este's
    2001 financial statements. The word "net" appears to refer simply to
    net of any discounts or adjustments on invoices.

[^85]: Curiously, in 2001 Haina increased the fee to 2.95 percent of net
    sales for a 15-year period. We have no details about this change.

[^86]: OC, 2001: Table 4.

[^87]: For instance, renewable capacity is not included in the
    restrictions on vertical integration set in the July 2001 Law.

[^88]: 118 MW were rehabilitated in 2001. Response to the Inter-American
    Development Bank's Technical Mission assessment of November 2002.

[^89]: The website of the hydroelectric generation company (EGE
    Hidroeléctrica,
    [www.hidroelectrica.gov.do/proyectos.htm](http://www.hidroelectrica.gov.do/proyectos.htm))
    calls for offers from parties interested in financing the company's
    hydroelectric projects.

[^90]: Generation equipment can be funded through export promotion loans
    from the manufacturing countries. Civil works would be built by
    private contractors in exchange for a pledge of future revenues by
    EGEHID.

[^91]: It is economically incorrect to price the electricity from
    hydroelectric units with reservoirs at zero on the basis that the
    variable cost of such units is nil. Reservoirs confer such
    facilities the capacity to allocate their output over time. Since
    the spot price of electricity varies considerably over time, and the
    amount of water in the reservoir is limited, generating electricity
    at any point in time has an opportunity cost that must be taken into
    account for the optimal use of these facilities.

[^92]: According to the merit order for the week of November 30 to
    December 6, 2002, Higuamo had a variable cost of about US\$94/MWh.
    Only three generation units had a higher variable cost.

[^93]: By "generator" we mean, in this paragraph, not only Haina, Itabo,
    and EGEHID, but also the IPPs.

[^94]: Even LNG has become increasingly commoditized as new suppliers
    such as Trinidad have begun competing with Algeria; also, since LNG
    has to compete against natural gas in the U.S., the price of natural
    gas there can also be used as a reference point.

[^95]: To be effective, the threat of audits must be credible. In the
    Colombian wholesale market, market power problems have been
    exacerbated by the lack of efforts by the regulator to enforce audit
    rights.

[^96]: The benefit would only come in the longer term, as sustained high
    spot market prices would be reflected in higher contract prices when
    the time came to renew the original agreement. But at present, this
    would be a purely speculative manipulation of market prices,
    involving significant opportunity costs.

[^97]: These contracts refer the penalties to the applicable law, which
    at present sets a penalty of 300 percent of the cost of the energy
    bought by the user to replace the energy not served by the seller.
    In addition, unavailability is typically penalized in PPAs by making
    capacity payments contingent on availability, but we have not been
    able to confirm for the PPAs in the country as we have seen very few
    of them.

[^98]: For instance, on December 18, 2002, the SIE issued an order
    setting the compensation for frequency regulation at RD\$131/MWh,
    but the basis for the computation of this figure is not provided in
    the order.

[^99]: Recall that, according to the CO itself, it has not yet installed
    the commercial information system required by the law.

[^100]: OC, 2001: Table 2 and Chart 8.

[^101]: According to CNE figures (presentation by George Reinoso, CNE
    Director, Miami, September 2002), in 2001 actual peak demand was
    1,798 MW, whereas installed capacity was 3,156 MW and available
    capacity, 2,613 MW.

[^102]: OC, Informe de Operación Real, Agosto 2002, Charts 2 and 8.

[^103]: Ibid. Table 2.

[^104]: The report does not explain whether maintenance refers to
    generation, transmission, or distribution.

[^105]: OC, 2001, p.31. These collapses have been caused, in general, by
    faults that overwhelm systemwide adjustment capacity, i.e., the
    ability to make up for the sudden loss of a generation facility by
    use of spinning reserve and capacitor banks. Some of these faults
    were generation facilities tripping off (3 cases), transmission line
    failures (2 cases), substation failures (1 case) and systemwide
    frequency and voltage falls due to insufficient generation capacity
    (1 case). With the exception of the last case, the other faults
    would in principle point to the need for reliability-related
    investment in the transmission system. This point is retaken below
    in the discussion of the transmission system.

[^106]: In 2001, Edenorte and Edesur installed a comprehensive energy
    control system, which measures energy flows at all points of
    interconnection with rest of the country's interconnected grid, and
    at intermediate points (into and out of substations and distribution
    circuits), allowing the analysis of losses by voltage level and
    geographic area. Edesur and Edenorte, Informe de Gestión, Año 2001.

[^107]: Edesur and Edenorte measure interruptions by adding the total
    amount of un-served energy (in MWh) and dividing it by the total
    capacity of the distribution system, i.e. how much energy can the
    distribution system as a whole deliver in one hour (in MW). As with
    all averages, this probably masks wide variation. Poor neighborhoods
    probably experienced many more hours without service than other
    areas.

[^108]: Edenorte and Edesur, Informe de Gestión, Año 2001.

[^109]: Installed capacity, as discussed elsewhere in this report, amply
    exceeds peak demand.

[^110]: Edenorte and Edesur, Informe de Gestión, Año 2001.

[^111]: At present, according to the Government, PPAs add up to 1,300
    MW, or 73 percent of peak demand.

[^112]: Recall that distributors must meet at most 80 percent of their
    needs for capacity and energy through contracts. By the end of 2001,
    the distributors slightly exceeded this maximum (OC, 2001: Chart
    15).

[^113]: Again, the IPPs are being compensated for potential reductions
    in capacity payments through a much longer term for the contracts
    during which captive customers of the distributors (residential and
    small commercial) will continue to make capacity payments. Note that
    any take-or-pay provisions in PPAs appear to have been superseded by
    the Reglamento, as it requires plant dispatch on the basis of
    auditable variable costs alone (Title VIII, Chapters III and IV).
    All currently applicable PPAs we have been able to review contain
    capacity payment provisions rather than take-or-pay obligations.

[^114]: Order SIE-13-2001.

[^115]: We note that Edenorte recently signed a PPA with Unión Fenosa's
    La Vega plant, and Edesur with Palamara, also owned by Unión Fenosa.
    Although the contracts were apparently not competitively procured,
    the terms of the La Vega contract are identical with those of the
    renegotiated PPAs. We have not reviewed the Palamara contract.

[^116]: OC 2001, Table 4.

[^117]: Under the definition of "public service user or customer"
    ("usuario o cliente de servicio público"). The schedule in the July
    2001 Law is as follows: customers with 2.0 MW or more of contracted
    demand at the time of approval of the July 2001 Law (2001); 1.4 MW
    in 2002; 0.8 MW in 2003; 0.2 MW in 2004.

[^118]: July 2001 Law, Arts. 110-119.

[^119]: Before reform, the market did not exist, so private investment
    could only be attracted to generation through long-term PPAs.
    Competition was restricted to bidding for PPAs requested by the CDE.

[^120]: We assume that political and financial considerations bar any
    further investment by the public sector, as shareholder, in the
    capitalized companies. Not only are public finances under severe
    pressure from many fronts (foreign debt service, social needs,
    transport infrastructure, water and sanitation), but it would be
    politically unacceptable to invest public funds after a the
    controversial capitalization process, which was supposed to end the
    public sector's investor role in the electricity sector. .

[^121]: The first cycle of private sector involvement in the electric
    power industry around the world consisted in the development of
    power plants through long-term PPAs; this gave way during the 1990s
    to a second generation of reforms involving the vertical unbundling
    of the sector and the creation of wholesale electricity markets
    where private investment in generation would be market-driven.

[^122]: Economist Intelligence Unit, *Country Profile 2002: Dominican
    Republic, Haiti*, p.18,

[^123]: This issue is also addressed in the social impact section of
    this report. We are unaware of the existence of a systematic
    assessment of household income and expenditure patterns in the
    country, and time and scope limitations have prevented us from
    seeking such a survey if it exists. Our own informal enquiries
    around the country indicate that at current rate levels (after the
    removal of oil subsidies), a low-income household with minimal
    lighting and refrigeration load may be spending up to one-third of
    its disposable income on electricity. This is certainly
    unaffordable, when housing, education, transport, food, clothing,
    and health care considerations are taken into consideration. NRECA
    estimates that on average, poor people pay about 10 percent of their
    income for electricity.

[^124]: "Rate shock" is an especially acute problem in a context where a
    controversial reform was sold politically through the claim that it
    would lower rates.

[^125]: The collection ratio for the Unión Fenosa distributors rose from
    73 percent in 2000 to 89 percent in 2001. Of course, this only
    concerns *metered* sales; technical and non-technical losses
    represent a further contribution to the financial drain on the
    distributors.

[^126]: For instance, in a recent senate session, senior executives of
    Unión Fenosa and AES were interrogated for several hours by
    legislators who accused the companies of "abusing" their clients and
    levying "high and exorbitant" bills.

[^127]: The gravity of the problem is underscored by the widespread
    negative image that Unión Fenosa appears to have despite the fact
    that it claims to have a team of about 30 communications and PR
    specialists as part of communications team, and that in 2001 it
    conducted about 20 meetings between company managers plus PR staff,
    and journalists and community groups (Edenorte and Edesur, Informe
    de Gestión, Año 2001).

[^128]: This was formally issued as Order 007 of the Secretaría de
    Estado de Industria y Comercio, dated January 5, 2001 and ratified
    in the Global Sustainability Agreement of February 5, 2001.

[^129]: Order SIE 31-2002, dated September 17, 2002.

[^130]: Presidential Decree 1080-01, dated November 3, 2001.

[^131]: Economist Intelligence Unit, *Country Profile 2002: Dominican
    Republic, Haiti*.

[^132]: A total of 700,000 households have been identified in the
    country for PRA coverage. By way of comparison, there are about 1m
    residential customers with meters (i.e., non-PRA) in the country.

[^133]: Edenorte and Edesur, Informe de Gestión, Año 2001.

[^134]: Father Cruz is at the forefront of a nationwide petition effort
    to rescind the capitalization contracts with the distributors. Our
    understanding is that the effort faces major hurdles because a
    petition would not grant the right to hold a referendum or to force
    Government action in any direct way.

[^135]: NRECA estimates that 80 percent of the country's population has
    access to electricity, including isolated systems.

[^136]: NRECA is developing an extensive geographic information system
    for the entire country that includes information about access to
    electricity among many other variables, and has extensively assisted
    the CDEEE, as implementor of the PNER, in the development of the
    plan and of rural electrification programs in specific communities.

[^137]: The mechanics of the program, as well as its benefits and
    problematic aspects, are discussed elsewhere in this report.

[^138]: In 2002, Edeste was collecting less than 5 percent of the amount
    owed by Government clients in the average month; Edenorte and Edesur
    were able to collect most of the amounts owed by the central
    Government, but no more than 42 percent of amounts owed by
    municipalities.

[^139]: The Team has not seen this list.

[^140]: July 2001 Law, Art.93, Para.I. The law also specifies that this
    penalty will apply starting on January 1, 2003.

[^141]: The renegotiated PPAs between the distribution companies and
    CDE, Itabo, Haina, and La Vega all include penalty provisions for
    unscheduled interruptions according to the applicable law. Again, it
    is important to note that, according to the information we reviewed
    and to the different parties we interviewed, blackouts appear to
    correspond to a mixture of load shedding by the distributors to
    conserve financial resources in the case of districts with low
    collection rates, and lack of availability of generators due to
    financial reasons.

    ^142^ Footnote deleted.

[^142]: Order SIE-01-2002 setting the base toll (December 2000 value) at
    RD\$ 42.50/kW-month (US\$ 2.66/kW-month at RD\$16 per US\$) was
    repealed by SIE-28-2002, which set the base toll (August 2001 value)
    at US\$ 2.285/kW-month. SIE-31-2001 had set the base toll (December
    2000 value) at RD\$ 28.17/kW-month. SIE-17-2001 set the base toll
    (December 2000 value) at US\$ 0.006/kWh (US\$ 3.94/kW-month at a 90
    percent load factor).

[^143]: We have been able to check this fact in the renegotiated
    contract between CDE and CEPP (Puerto Plata).

[^144]: In this regard, we note that SIE-17-2001 has not been
    implemented because ETED does not yet have the metering equipment
    needed to compute congestion costs, although this wouldn't have an
    impact on transmission tolls because congestion costs are simply
    deducted from connection charges in the calculation of total
    transmission charges.

[^145]: So far, 15 percent of current transmission projects are being
    funded with CDEEE's internal resources and the remainder through
    foreign bank loans with sovereign guarantees.

[^146]: Computed at the coincident peak. Figures from presentation by
    George Reinoso, CNE Executive Director, Miami, Florida, January 31,
    2001.

[^147]: The West Texas Intermediate(WTI) price was at \$17.65 per barrel
    at the beginning of January 1998. It reached a low in early February
    1999 when WTI bottomed at \$10.26 and Brent at \$9.70. Prices then
    moved steadily upward with the WTI price peaking at \$34.15 in March
    2000. After September 11th, oil prices fell substantially, hitting
    lows of about \$18 per barrel over the period November 2001 through
    February 2002. WTI is currently trading(March 7, 2003) at over \$36
    a barrel.

[^148]: Mostly residual fuel oil (RFO, or No. 6 oil); gas oil or No. 2
    oil, in the case of the Cogentrix project.

[^149]: To reduce the debts it owes to generators and distributors, CDE
    is resorting to a variety of loans and promissory note issues and
    tapping the dividends obtained from the state's share in the
    capitalized firms (H. García, "Current Situation and Prospects of
    the Power Sector Reform," n.d., p.2)

[^150]: Smith-Enron, Cogentrix, CEPP I, CEPP II, Metaldom, Laesa, and
    Maxon.

[^151]: Of course, to the extent the renegotiated prices continue to be
    unacceptable to ratepayers, PPA assignment will only transfer the
    financial crisis from the CDE to the distribution company
    owners---which include the public sector itself under the terms of
    the capitalization agreements.

[^152]: The escalation clauses in the original contracts only ratcheted
    prices up if, for example oil prices increased; if oil prices
    decreased, PPA prices were not adjusted downward. The new clauses
    allow the downward adjustment.

[^153]: SIE has affixed a statement to each contract stating that he has
    examined and approved the terms of the renegotiated contract for
    purposes of pass-through to ratepayers in the next rate review.

[^154]: As the plant currently burns expensive #2 oil, shifting to gas
    would probably improve its standing in the dispatch merit order
    considerably and thus its profitability as a merchant plant.

[^155]: For instance, the SIE can invite CONEP and FUNDECOM to choose a
    person that would represent business and residential consumers,
    respectively, or a representative can be randomly chosen from a list
    of candidates where one half of the names is proposed by CONEP and
    the other half by FUNDECOM.

[^156]: There is an Electricity Sector Policy Declaration (Declaracion
    Politica para el Sector Electrico), undated. It includes model of
    organization of the CDEEE's debt management dated February 2002 and
    Rural Electrification. Plans for various regions of the country,
    dated January through July 2001.

[^157]: This is often a role played by a non-Government energy, legal or
    other institute as well as various Governmental commissions.

[^158]: We were given no reasons for this lack of investment, but based
    on other countries' experiences, it is possible that foreign lenders
    and investors find the transaction costs of funding small facilities
    too high, especially given the complexities of hydrological risk and
    an unsettled reform (in the DR).

[^159]: Title III, July 2001 Law.