Energy Choice in Honduras.

Transcription

Energy Choice in
Honduras.
2015
General recommendations for the regulatory framework in the energy industry;
to promote economic development and improve the quality of life of its users.
Vision
To influence changes that will make Honduras a place of free and
prosperous individuals, where everybody can be a part of our success as a
multicultural nation.
Mission
To show that paths to prosperity, responsible rules, easy access and
protection from the legal system, are possible without having to leave
Honduras.
Contact Us
www.eleutera.org
Teléfono: +504 2540 4366
[email protected]
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en el caso de citaciones breves acuerpadas en artículos críticos y de reseña. Los autores de este documento
han trabajado independientemente y las opiniones expresadas por ellos son, a como dé lugar, suyas y no
necesariamente reflejan las opiniones de los miembros, fideicomisarios, o el personal de Fundación Eléutera.
Esta publicación de ninguna manera implica que la Fundación Eléutera, sus fideicomisarios, o su personal
apoyan o se oponen a algún partido político o candidato en particular.
Research Team
Project Manager
Guillermo Peña Panting Executive Director for Fundación Eléutera. Political Science
Major, North Carolina State University.
Authors
Jorge Colindres Legal Analyst for Fundación Eléutera. Senior at Law School
Universidad de San Pedro Sula.
Guillermo Peña Panting Fundación Eléutera Executive Director.
Consultants:
Energy Consultant: Cal Abel. Nuclear Electric Engineer. Georgia Institute of
Technology
Legal Advisor Hubert “Mort” Taylor. Abogado Especialista en Marcos
Regulatorios y Protección de Contratos. University of Alabama.
Layout and Graphics Editor Oscar A. Sagastume, Estrategy & Communications
Director for Fundación Eléutera. Associate of Arts in Philosophy, Georgia
Perimeter College.
Investigation Assistants:
José Trochez, Economy student at UNAH-VS.
Azucena Paredes, Economy student at UNAH-VS.
Special Thanks to:
Atlas Network, Washington DC
Content
I.
Short History of the Energy Market in Honduras .......................................................... 1
The electricity sector in Honduras ........................................................................... 1
Reforms in the 90´s ................................................................................................. 1
Current events ........................................................................................................ 2
II.
Quick breakdown of the 2013 Electric Market Reform ................................................ 3
A. Market Agents:........................................................................................................ 3
1. Power Generators ................................................................................................ 3
2. Transmission Companies...................................................................................... 3
3. Distribution Companies........................................................................................ 3
4. Trading Companies .............................................................................................. 4
B. New Regulators in the Market: ................................................................................ 4
1. Consumers ........................................................................................................... 4
2. Comisión Reguladora de Energía Eléctrica (CREE, Electricity Regulatory
Commission) ............................................................................................................... 4
3. National Electrical System Operator ..................................................................... 5
4. Spot Market ......................................................................................................... 5
C. General Provisions of the Act .................................................................................. 5
1. Fiscal and Tax Regime. ......................................................................................... 5
2. Dispute Resolution: .............................................................................................. 5
3. Transitory Provisions. ........................................................................................... 5
III.
Electricity Market Deregulation in Honduras ................................................................ 6
A. Free to Choose ........................................................................................................ 6
B. Price Reduction: Guatemala’s example–Honduras’ potential .................................. 7
IV.
General recommendations for the development of the regulations of the Electrical
Industry Act.................................................................................................................................. 9
A. Competition among generators ............................................................................... 9
B. Application of Financial Transmission Rights (DFT) .................................................. 9
C. Clearing Houses ....................................................................................................... 9
D. Regional System (ORS) operators ............................................................................ 9
E. Opening & outsourcing the spot market .................................................................. 9
F. System power rates ................................................................................................. 9
G. Establish competition and consumer choice .......................................................... 10
H. Special Purpose Districts (DPE) .............................................................................. 10
V.
Detailed justification for the recommendations ......................................................... 11
A. Competition among generators ............................................................................. 11
1. Barriers of Entry ................................................................................................. 11
2. Guarantee Funds ............................................................................................... 11
3. Renewable Energy ............................................................................................. 12
B. Application of Financial Transmission Rights (FTR)................................................. 12
A.
B.
C.
1.
Extension of Property Rights of the Quality of Energy ........................................ 13
C. Clearing House ...................................................................................................... 14
1. PJM Interconnection. ......................................................................................... 14
2. Intercontinental Exchange ................................................................................. 15
3. OMIE.................................................................................................................. 15
D. Regional System Operators (ORS) .......................................................................... 15
1. Determinations of the CREE: Property Model of the System Operator ............... 15
2. Committee of Market Agents. ............................................................................ 16
3. Grant the right of access to the transmission lines, following the procedure
established by CREE. ................................................................................................. 16
4. Carry out the financial settlement of the electricity market operations. ............ 16
5. Propose the costs of generation which will enter the final calculation of final
consumer´s tariffs for approval by the CREE.............................................................. 17
6. Final Considerations ........................................................................................... 17
E. Outsourcing management of the spot market. ...................................................... 18
1. Decentralization of the “spot markets” .............................................................. 18
2. International Examples ...................................................................................... 19
F. Energy Tariffs System ............................................................................................ 19
1. Transmission and Distribution systems: ............................................................. 19
2. System for the calculation of generation costs ................................................... 20
3. Calculation of prices in the regional market ....................................................... 20
4. Final consideration............................................................................................. 20
G. Establish competition and consumer choice as the main instrument for regulating
the electricity market ................................................................................................... 21
1. Protections to the rule of law within the national electricity market .................. 22
H. Special Purpose Districts (Electric Power) .............................................................. 23
1. Final Conclusions ............................................................................................... 24
VI.
Final words ..................................................................................................................... 25
VII. Bibliography ................................................................................................................... 26
Executive Summary
By the end of 2013, the Honduran National
Congress passed the General Law of the Electrical
Industry which puts an end to the state monopoly
over transmission, distribution and trading of
electric energy that for over 50 years was held by
the Empresa Nacional de Energía Eléctrica (ENEE,
National Company of Electrical Energy) in
Honduras.
To provide context, the present document details
a brief history of the electricity market in
Honduras, from the beginning of the past century
into modern times, culminating with the 2013
reforms.
The workings of the electricity market under the
new legal framework are detailed in a quick
breakdown of the General Law of the Electrical
Industry. Under this new law, the main agents of
the market will be the energy generation,
transmission, distribution and trading companies.
This means there is a transition from a vertical
structure, in which all of these activities are
concentrated in one company (ENEE), into a
horizontal structure in which different companies
carry out the different operations of an electricity
market.
The new legal framework is looking to modernize
the structures of the electricity market of
Honduras through the
introduction of
competition in the generation of energy and by
recognizing the consumer´s right to choose their
electricity service provider.
This reform represents a big leap forward
towards the protection of the Rule of Law, since it
looks to subject all actors of the energy market to
the Law and not the vested interests created by
government privileges. The new framework
places the consumer in a stronger and more
independent position against political power.
The main purpose of this document is to provide
a general vision of the transcendence of the
present reform and to look for the strengthening
and securing of the objectives of this Law through
the proposition of 8 general recommendations to
be adopted in the secondary legislation which´s
elaboration is still pending.
The success in the achieving of the objectives
enumerated in the recitals of the Law will depend
on the strength of the secondary legislation, for
which´s drafting we present the following
proposals:








Secure a competitive environment among
generating companies;
Application of Financial Transmission
Rights;
Allow for the use and establishment of
clearing houses;
Allow for the existence of Regional System
Operators;
Open up the establishment of spot
markets;
Fixed systems for price calculation, not
fixed prices;
Establish competition and consumer
choice as the national energy policy;
Allow for the establishment of Special
Purpose District.
A.
The electricity sector in Honduras
The electricity sector in Honduras was managed
at the municipal level until 1957, when the
military junta established the Empresa Nacional
de Energía Eléctrica, ENEE, who has since
managed production, transmission, distribution
and marketing of electrical power in Honduras.
Before the ENEE began operations, every city in
the country was served in isolation with small
generating units, mostly driven by diesel engines.
These small units belonged to the municipalities,
development boards, the state or private
companies. Rates were freely determined
between suppliers and consumers, or were
defined by agreements with local governments.
The first major national project was the ENEE’s
Cañaveral hydroelectric project, whose feasibility
studies began in 1957. Construction began in
1960 and was completed by 1964. That was the
beginning of what is now the national electrical
transmission network, connecting power plants
and different consumption centers. Two systems
worked then: an interconnected system and the
isolated municipal systems.1
During the time from 1980 to 1990 there was a
74.65% increase in demand for electricity.2 This
increase was probably due to the relatively higher
growth of GDP per capita in Honduras due to the
transitioning to democracy at the time, the
deepening globalization and increasing economic
freedom in Honduras and abroad. More
importantly, however, a new element was
introduced into the economy: manufacturing
industrial parks and textile manufacturing
companies. This new industry had a strong impact
on the energy demand of the country, and was a
leading reason to expand the national grid.
B.
Reforms in the 90´s
As the 1970´s and 1980’s rolled by, projections
estimated that by 1992 the additional 300 MW
from Canaveral would be overwhelmed by
demand. By 1994, the national energy sector
entered a severe crisis, manifested in a drastic
rationing as the ENEE could not meet the
demand for energy. It was in this year, that under
social and political pressure, the energy sector
was reformed, facilitating the entry of private
power generation in the country in order to meet
the growing demand. 3
In 1995, after nearly a decade of preliminary
studies, the Central American governments, the
Spanish government and the Inter-American
Development Bank agreed to undertake the
development of the Central American Electrical
Interconnection System (SIEPAC)4 project. The
project’s single objective was to create a regional
3
Midence, D., & Figueroa, M. (2013). Modelos de Mercado,
Regulación Económica y Tarifas del Sector Eléctrico en América
Latina y el Caribe – Honduras. Organización Latinoamericana De
Energía (OLADE).
1
Nuestra Historia. (n.d.). Retrieved January 12, 2015, from
http://www.enee.hn/index.php/empresa/86-historia
2
Consumo de energía eléctrica (kWh per cápita). (n.d.).
Retrieved January 12, 2015, from
http://datos.bancomundial.org/indicador/EG.USE.ELEC.KH.PC?p
age=3
4
Energy integration in Central America: Full steam ahead. (2013,
June 25). Retrieved January 12, 2015, from
http://www.iadb.org/en/news/webstories/2013-06-25/energyintegration-in-central-america,10494.html
Short History of the Energy Market in Honduras
I.
Short History of the Energy
Market in Honduras
1
In spite of all this, the interconnection capacity
has been limited, causing a slow adoption process
while local inefficient markets and producers are
continuing to be protected from more cost
effective access to electricity, as is the case for
Honduras.
With the support of international financial
institutions, the administration of Carlos Flores
(Liberal Party) attempted to reform the energy
sector in late 1999, but failed to get it through
Congress due to a lack of political support and
opposition from special interests.6 The main
intention of the reform was to promote private
participation and competition in power
generation through the establishment and
operation of a wholesale electricity market and
privatization of distribution systems. This was
accomplished with the sector reform of 2013.
C.
In June 2007, President Manuel Zelaya and his
cabinet passed an executive decree declaring an
"energy crisis", extending additional electricity
without proper public bids to overcome the
energy crisis. The task of resolving the crisis
inside of the national electric company was
delegated to the Defense Secretary, who was
appointed as “Comptroller General” of ENEE.7
In January 2014, Congress approved the new
energy sector reform with a vote of 95 to 33 in
favor, which fundamentally changes the way
ENEE operates.8 For the first time since the
military junta took over the municipal grids in the
late 50’s and 60’s, an avenue for private
investment in all sectors of the electricity market
(generation,
distribution,
retailing
and
transmission) was opened.
Current events
From 2001-2005, the government paid about US
$ 75.6 million in direct subsidies for residential
5
"SIEPAC Project." Empresa Propietaria De La Red. Web. 14 Dec.
2014. <http://www.eprsiepac.com/contenido/descripcion-lineasiepac/>
6
users. The subsidy fund was established in 1994
to compensate for any increase in rates to eligible
residential customers (with consumption less
than 300 kWh per month).
Guía para Desarrolladores de Proyectos de Generación de
Energía Eléctrica utilizando recursos renovables en Honduras.
(2002). BUN-CA.
7
Rodríguez, Luis. "ENEE Tuvo Tiempo Para Evitar Los Apagones
En Toda Honduras." La Prensa. La Prensa, 7 Aug. 2014. Web. 5
Nov. 2014. <http://www.elheraldo.hn/inicio/735956-331/eneetuvo-tiempo-para-evitar-los-apagones-en-toda-honduras>.
8
Palencia, Gustavo. "Honduras Aprueba Ley Que Abre Sector
Eléctrico a Inversión Privada." Reuters. 21 Jan. 2014. Web. 12
Dec. 2014.
<http://lta.reuters.com/article/domesticNews/idLTASIEA0K0072
0140121>.
Short History of the Energy Market in Honduras
electric market. Feasibility studies showed that
the creation of a regional transmission system
would be positive for the region, as it would lead
to reduced electricity costs through competition,
improvements in flow of electricity, and a more
reliable supply. In 1996, six countries (Panama,
Honduras, Guatemala, Costa Rica, Nicaragua and
El Salvador) signed the Framework Treaty for the
Electricity Market in Central America. 5
2
II.
Quick breakdown of the 2013
Electric Market Reform
A.
Market Agents:
distribution or supply of electricity. The
transmission companies must provide nondiscriminatory treatment to users of the
transmission network. Any facility that is part of
the transmission network in the country is subject
to the direction and control of a System Operator.
3. Distribution Companies
The proposed system is made up of four
parties:
power
generators,
transmission
operators, distribution operators and electricity
brokers. To this day, these activities have been
grouped into a single entity, ENEE. The new
electricity reform will end monopolies and create
freedom of choice for consumers. The role of
each sector is detailed as follows:
1. Power Generators
Power Generators are responsible for generating
electricity: production and supply into the
electrical grid. These plants may be: gas turbines,
steam coal, internal combustion engines, nuclear,
hydroelectric plants or plants producing
electricity using alternative energies.
2. Transmission Companies
Transmission Operators are responsible for
transporting electricity at High Voltages, as well
as the operations and maintenance of the
infrastructure they use. Transmission companies
may not participate, either directly or indirectly,
in companies engaged in the generation,
Power distributors cannot own grid level
generators, except in extraordinary cases which
must be certified by the Electricity Regulatory
Commission (CREE). These special cases are for
companies that serve isolated systems, which
may have their own power plants. Distribution
companies having their own generation must
establish one or more separate companies for
generation if they are a part of the National
Interconnected System.
With regards to distribution networks,
municipalities are responsible for paying the
subsidy, cost difference between overhead and
underground lines, for companies opting for the
construction of underground lines.
Supply Contracts Distribution companies must
provide the connection, the required meter to
service each customer, and furnish each of them
with a supply contract that establishes the rights
and obligations of the parties. The payment
obligation is for the person signing the supply
contract. The distribution company cannot
require outstanding balances be paid by the
Quick breakdown of the 2013 Electric Market Reform
Distributors are responsible for transporting
electricity at Medium Voltages, and the
operations
and
maintenance
of
their
infrastructure. They are responsible for
maintaining power quality and uninterrupted
supply.
3
their service provider is respected, those involved
in the electricity market will be encouraged to
work towards meeting their customer’s needs.
This new approach will structure the market in a
manner in which the focus of all market players
will be to satisfy the demand for a constant flow
of electricity at an affordable price. This has yet to
be made possible in Honduras.
Free Access Networks. Transmission operators
and retailers must allow any company or
consumer who requests connection to connect
into transmission and distribution networks.
Transmission operators and retailers are also
required to allow paid use of their facilities by
other companies, “wheeling”, in the electricity
subsector,
including
generators,
other
transmitters or distributors, marketers and
qualified consumers.
4. Trading Companies
Brokers are responsible for the purchase and sale
of electricity in the spot market, including
brokering power to retail customers, and setting
their electricity surcharges. Every broker uses the
power lines owned by a Distributor to carry
power to its customers, providing payment in
return for their network usage.
B.
New Regulators in the Market:
1. Consumers
Under the new legal framework, consumers will
become one of the main regulators of the
electricity market. In the new electricity market,
individual consumer decisions will decide what
type of energy is generated, which businesses will
succeed and which businesses will fail. For the
new model to be successful, the consumer must
have the power to make decisions about their
own energy use. If the consumer's right to choose
2. Comisión Reguladora de Energía
Eléctrica (CREE, Electricity Regulatory
Commission)
The new law creates the Electricity Regulatory
Commission (CREE) which is responsible for the
implementation and enforcement of existing
rules governing the electricity sector. All activities
regulated by the new law may be carried out by
private, public, or mixed capital that meet the
requirements of legal entities.
The CREE will keep a Public Registry of all
Companies in the Electrical Sector, which shall
keep track of all generating companies and
energy brokers. Transmission operators and
distribution companies must be registered in the
Public Registry of Electrical Sub Sector
Companies.
CREE is also responsible for granting operating
licenses to transmission operators and
distributors as well as overseeing the continuity
of electricity service. The Secretary of State, after
review of the CREE, may agree to the
intervention of any generation, transmission or
distribution service whose performance is
threatening or may affect the continuity and
safety of said services.9
9
Article 8 of the Ley General de la Industria Eléctrica.
property owner, unless he is a signatory of the
supply contract.
4
The System Operator may be a public, private,
mixed capital, or nonprofit institution with the
technical capacity to perform the functions
assigned by the new law and its regulations. It
shall be independent of all distribution,
transmission, marketing or power generation
companies and qualified consumers.
The System Operator shall have full authority
over operators who are part of the national grid.
All operators must direct their facilities according
to the orders issued by the System Operator.
4. Spot Market
Under the new legal framework for the energy
industry, the System Operator shall administer an
electrical “spot” market. Power plants owners
must produce their entire available generating
capacity under the dispatch of the System
Operator, who in turn will dispatch the
generating units based on the supply stack
derived from the generators declared variable
costs, matching demand at the lowest cost with
stable network voltage and frequency.
CREE has the power to opt for the
implementation of different models to operate
the electrical system, if these new models were
successfully implemented in other countries
and/or if they make a more efficient and
economical operation.
C.
General Provisions of the Act
1. Fiscal and Tax Regime.
Companies engaged in the activities regulated by
this Act are subject to the same taxation, customs
and tax regime applicable to any other
corporation. There can be no customs duty, tax or
fiscal nature that discriminates against companies
in the electricity subsector. Sales of electricity and
capacity from companies in the electricity
subsector are exempt from paying sales taxes,
except sales to end consumers.
2. Dispute Resolution:
Conciliation and Arbitration. The parties may
resort to the Centre of Conciliation and
Arbitration of the Chamber of Commerce and
Industry of Tegucigalpa to end their differences
or agree on the conditions under which, if any,
will be subject to a conciliation or arbitration.
If not agreed upon such conditions, the
provisions of the Arbitration and Conciliation Act
shall apply. The judgment rendered in the
arbitration shall be final.
3. Transitory Provisions.
Contracts for the purchase of capacity and
electricity by ENEE after the enactment of this
Act from private generating companies will
continue unchanged until the expiration of their
term, when they will end. These contracts will
not be renewed.
However the generation plants under such
contracts may participate in the electricity
market as merchant plants, which are those that
sell to the spot market without having contracts
with market agents and also may participate in
tenders to promote distribution companies.
3. National Electrical System Operator
5
Part of the deregulation process ensures that
competitive forces can operate freely and shape
the market. An important aspect of these forces
is to punish managers who make wrong or
inefficient decisions, contrary to what currently
happens in Honduras. The problem has long been
an institutional one, which will not be fixed by
simply changing the manager of the ENEE.10 The
deregulation of the Electrical Sector represents a
total restructuring of a vertical monopoly, where
all activities are grouped into a single entity
(ENEE) to a horizontal structure where each
activity is separate and independent.
and there is a high potential that they will work
towards the rebuilding of the original integrated
structure of the electricity industry. It is therefore
imperative that the secondary legislation to be
developed for the regulation of the electricity
industry has a priority to maintain a competitive
market environment. It is transparency and open
markets that exert competitive pressure, leading
directly to a significant increase in efficiency at all
levels of the electricity industry. In many
liberalization cases, the benefits in terms of
lower prices created by deregulation resulted in a
duopoly.11
To increase the levels of competition needed to
meet the needs of a constant flow of energy at
an affordable price, there are three mechanisms
of primary importance; the first is to remove as
many barriers to market entry. This will allow for
the existence of a diversity of companies which
will offer their services to consumers. The second
is the consumer's freedom to choose which of
these companies will be their service provider.
And the third is transparency of the operations
carried out by all members of the electricity
market.
A.
The main actors in this new scheme will be
generators,
retailers,
transmitters
and
distributors of electricity.
The purpose of the deregulation is to build a
structural separation between the different
functions of production and supply. However,
anti-competitive forces are always in operation
10
Smith, V. (1988). ELECTRIC POWER DEREGULATION:
BACKGROUND AND PROSPECTS. Contemporary Economic Policy,
6(3).
Free to Choose
Since the military junta founded ENEE in 1957,
each Honduran home has been dealing with one
single company for producing electricity needs.
This company, ENEE, with regulatory approval
from the central government, sets the prices of
energy we consume.
11
Singham, S. (2007). Competition and Regulated Industries:
Electricity and Gas. In A GENERAL THEORY OF TRADE AND
COMPETITION (p. 345). London: Cameron May.
Electricity Market Deregulation in Honduras
III.
Electricity Market Deregulation
in Honduras
6
The development of an open and competitive
market consists in a true democratization of the
decision-making within the electricity market,
giving consumers the freedom to enjoy the power
of choosing their own electricity supplier. 12
Around the world the freedom to freely choose
electricity suppliers resulted in significant
benefits: competitive electricity prices, improved
and more efficient customer service, and
innovation in products and technology.
Under this approach, the consumer, not the
government, not the ENEE, nor generating
companies, will be in control of the energy
market. The consumer becomes the highest
authority of the market and the incentives of
market participants will be aligned to a single
purpose: the satisfaction of consumers. The
companies that best achieve this task will be
benefiting from greater opportunity to profit. 13
B. Price Reduction: Guatemala’s
example–Honduras’ potential
In 1996, the Congress of Guatemala approved the
General Electricity Law and its Regulations in
order to demonopolize the power sector and
prevent having only one company devoted
simultaneously to the generation, transmission
and sale of electricity.14
The process of deregulation in Guatemala
allowed competition among power generators
and marketers, therefore placing pressure in the
market for an overall decline in electricity prices.
The Guatemalan law also allowed, in the same
manner as Honduran Law, for the purchase and
sale of power through a spot market.
By allowing more competitors in the energy
market, the Electric Company of Guatemala SA
(EEGSA) was able to offer more competitive
contracts. The chart below shows that during the
period February 2013 to February 2015 EEGSA
rates declined overall by 21% and 25% (Social Fee
and No Social Fee respectively). The effect of the
reduction occurred in EEGSA due to the expiring
of much of the existing contracts during 2014 as
well as having greater choice to purchase energy
in the Spot Market which has presented low
prices during the last quarter, as a result of
13
Mises, L. (1944). Profit Management. In Bureaucracy (p. 226,
227). Yale University Press.
14
12
Mises, L. (1949). Monopoly Prices. In Human Action: A Treatise
on Economics (p. 358). Yale University Press.
1996-2010: Vientos de cambio que dieron paso a una nueva
era. (n.d.). Retrieved February 4, 2015, from
http://www.eegsa.com/quines-somos/historia
With the approval of the General Law of the
Electrical Industry by the National Congress, the
deregulation of the electricity market allows for
different providers to compete in the offering of
electricity supply services. Some people may see
an increase in price but the overall cost of energy
will be at a lower price than previously allowed to
Honduran citizens.
7
obliged to respect the obligations arising from
their agreed upon contracts.16 However,
consumers for the first time in 59-years have the
freedom to choose from whom they buy the
electricity they consume. This means that we
don’t have to wait until ENEE’s contracts expire,
to the contrary, if the cost of access to the energy
market remains low, we will soon have new
suppliers in the market which will be more
competitive than ENEE. With low fuel prices, new
bidders who choose to compete for customers
against ENEE, will have plenty of opportunity for
increased profit.
In short, the deregulation of the electricity
market in Guatemala has led in the last two years
to a reduction of up to 25% in energy prices, due
to the possibility of buying energy from a larger
number of bidders and in recent months, due to
the global decline in oil prices. However, the
implementation of the electric deregulation in
Honduras has the potential to reduce the prices
in a more dramatic way than in Guatemala.
Contrary to what is done in Guatemala, where all
generating companies are forced to sell their
electricity to a state enterprise and every
consumer is forced to buy their consumption to
the company (EEGSA), the new approach in
Honduran Law enables consumers to buy their
electricity through a variety of marketing
companies.
How does this help reduce prices? To reduce
prices in Guatemala EEGSA had to wait until their
contracts expired with the generators. In
Honduras, ENEE and generating companies are
15
Ajuste Tarifario para Trimestre Febrero a Abril de 2015. (n.d.).
Retrieved February 5, 2015, from
http://www.cnee.gob.gt/wp/?p=1644
16
Power Purchasing Agreements (PPA).
reduced fuel costs and energy production
matrix.15
8
We believe that the General Law of the Electrical
Industry follows the proper path towards the
attainment of a constant supply of competitively
priced electricity in the country. Representing a
major breakthrough from the previous legal
framework,
we
make
the
following
recommendations for the drafting of the
secondary laws and regulations of the General
Law of the Electrical Industry with the intention
that these regulations will strengthen the new
legal framework and ensure the objectives that
motivated the energy reform.
After analyzing the law, we drafted eight
recommendations to facilitate its implementation
and prevent current participants from succeeding
in keeping and/or rebuilding the current structure
of the electricity market:
A.
Competition among generators
The main reason to maintain a competitive
environment between generators is to create
pressure on the efficiency of their operations. A
truly competitive environment gives consumers
the power to punish inefficient firms and reward
those who meet their expectations.
B. Application of Financial
Transmission Rights (DFT)
Implementing DFTs provide an efficient method
to prevent risks derived from the congestion of
transmission lines. Furthermore, it is essential to
comply with the ban against having tariffs that
charge users costs attributable to a different
category of users.
C.
Clearing Houses
We believe that to ensure legal and financial
security of transactions in the energy market,
future regulation should establish a simple
procedure to establish companies that would
provide clearing services. Keeping a low legal cost
for establishing and starting operations as a
clearinghouse, will help maintain a competitive
environment and therefore higher levels of
efficiency in the provision of these services.
Additionally, requiring transparency reduces
regulatory costs. Consumers will assume much of
the regulatory burden because it is in their
interest to do so.
D.
Regional System (ORS) operators
We consider the national interconnection system
should have Regional System Operators with
responsibility for a limited number of nodes in
the system. Thus there will be knowledge and a
decentralized response to any situation that
would alter the technical feasibility of the power
purchase orders in the market.
E. Opening & outsourcing the spot
market
We believe that the System Operator should
outsource the operation Spot Market into
separate entity(ies). Delivering the operation to
the first organization that has the capacity and is
ready to start market operations. Thus, it could
accelerate the implementation of the new Law
and leave the responsibility for clearing within
the respective organization.
F.
System power rates
We propose the establishment of a method or
formula for calculating prices and tariffs, which
General recommendations for the development of the regulations of the Electrical Industry Act
IV.
General recommendations for
the development of the regulations of
the Electrical Industry Act
9
should fluctuate, to be charged by transmission,
generating and distribution companies. The CREE
should have its role limited to keeping the
transparency in the use of these methods.
G. Establish competition and
consumer choice
H.
Special Purpose Districts (DPE)
To accelerate implementation of the new
reforms to the energy market, we believe that the
new Regulations establish a procedure for
community associations, citizen boards, and
associations of legal persons and traders, to
establish, in accordance with law, mechanisms to
meet their energy needs in ways that will prove
more convenient.
General recommendations for the development of the regulations of the Electrical Industry Act
We consider the CREE should act mainly as an
auditor and allow for consumer choice and
competition to be the main regulators of the
electricity market.
10
The main purpose of these guidelines is to
facilitate the achievement of the stated
objectives in the Recital of the General Law of the
Electrical Industry. Incorporating modern
structures and practices in the electricity industry
of the country; promote sector efficiency and
reduction of losses, as well as achieving
competition in generation of power in order to
have more competitive rates; and have the
support of the private sector in the tasks of
transmission system operation and distribution of
electricity; respectively.
A.
Competition among generators
Prices of energy tend to be volatile, because it
cannot be stored. This means that small changes
in generation companies’ capacity have a
significant impact on energy prices. This
potentiates the possibility of tacit collusion
among generators, and other anticompetitive
practices due to the high rewards that accompany
these practices.
To prevent this type of results and boost power
generation at affordable prices is important to
maximize competition at this level of the energy
industry.
There
are
many
examples
internationally, most notably the UK experience,
where the lack of competition among generators
-for there being too few of them- caused the
process of opening up the electricity market not
to result in the reduction of prices expected.
The main cause for the lack of competition at the
generation level tends to be, as it was in the case
of English, the difficulty faced by new companies
when trying to enter the market. The higher the
cost of entry, the harder it is to promote the
competitiveness in the generation of energy that
is needed to obtain a constant flow of energy at
an affordable price.
To maintain high levels of competitiveness in the
sector of generation we propose:
1. Barriers of Entry
That the new Regulation establishes a procedure
to provide access for generation companies into
the market and eliminates as many existing
obstacles to such access. The greater the number
of generators that are capable to compete in the
market, the more opportunity there is for
competitive market forces to exert downward
pressure on energy prices.
2. Guarantee Funds
The anti-competitive forces can be pronounced if
access to the spot market is restringed. The Law
states17 that companies that wish to participate
in the spot market should present a guarantee
fund to the CREE; we believe the guarantee
requirement should not hamper access, and
allow as many generators and marketers to
participate. The calculation of the guarantee to
be presented is usually done by the
Clearinghouse linked to the spot market. They
base it on the risk of operations of the company
that wants to participate in the market. The CREE
should allow for Clearinghouse companies to
determine the guarantee fund necessary for
companies to participate in its associated spot
market. We recommend that the secondary
legislation establishes the responsibility of CREE
17
6th paragraph of numeral F. of Artículo 9 of Ley General de la
Industria Eléctrica.
Detailed justification for the recommendations
V.
Detailed justification for the
recommendations
11
3. Renewable Energy
Delineate in the regulations to be developed a
clear and precise methodology that allows for the
legal and financial security of all participants
when the minimum percentage of renewable
energy, which defined by the Secretariat, that
distribution companies must purchase in every
bidding according to the provisions in Section B.
Article 15 of the General Law of the Electrical
Industry, is established.
In the case of the UK, their law forced distributors
to sign contracts for coal at an inflated price as it
was protected by the State, in the same manner
as renewable energy is protected in Honduras.
This motivated the distribution companies to
transfer those costs to consumers. To solve this
problem, a plan was implemented in 1998 in
which consumers were enabled to directly choose
their power supplier (generator) and thus
increase competitiveness in this sector. This
empowered the consumer to choose who
supplied the energy they consume. We believe it
would be appropriate to use a similar mechanism
in Honduras.18
Application of Financial
Transmission Rights (FTR)
B.
We recommend that the Regulation recognizes
the Financial Transmission Rights (FTR), which
aim to provide a hedge against the risks of
congestion on transmission lines.19 These rights
recognized by the legislation of several
countries20, consist in paying fees to the owner of
the transmission capacity according to the
relative scarcity of the resource; that is, that the
more congested transmission lines are, the more
expensive the service becomes; and the less
congested the lines are, the lower the cost of
transmission service.
The FTRs are financial contracts that give the
holder the right to a flow of income or expense
based on the price differences caused by
congestion of each hour through a certain path in
the transmission network. 21
Energy can be cheaper on a specific point system,
but if the transmission lines are congested, FTRs
can make it unfeasible to use cheap energy
elsewhere, due to the high costs of carrying it. If
there is no congestion, the cheapest energy can
reach all the centers of consumption, which
encourages similar prices to be set throughout
19
Bastidas Traverso, R. (2009). Aplicación de Derechos
Financieros al Sistema de Transmisión de Perú como Cobertura
contra Riesgos derivados de la Congestión. Lima.
20
Artículo 3.- XIX Derechos Financieros de Transmisión de Ley de
la Industria Eléctrica de México. The FTRs in Mexican legislation
are based on those developed by PJM Interconnection.
21
18
Guaranty Funds. (n.d.). Retrieved January 29, 2015, from
https://www.theice.com/clear-europe/risk-management
Financial Transmission Rights. (n.d.). Retrieved December 17,
2014, from http://www.pjm.com/markets-andoperations/etools/eftr.aspx
for supervising that the guarantee funds charged
by the clearing houses are calculated in
accordance to the risk formula that the clearing
house itself has established and published. The
role of the CREE must be limited to that of a
transparency and contract enforcement auditor.
12
Financial Transmission Rights can also be bought
and sold; participants can place their FTRs in the
market for bilateral exchanges, in addition to
participating in monthly auctions of FTRs. 23The
exchange of FTRs could be a parallel service
offered by the same "spot market" used for the
purchase and sale of energy.
The FTRs system is consistent with Article 18 of
the General Law of the Electricity Industry
explicitly says on the transmission fees "Charges
shall not charge to a category of users costs
attributable to another category." If the FTRs or a
similar system is not used, users in areas where
transmission lines are congested will be
subsidized by the rest of the users located in
areas where there are fewer loads on the
transmission lines, regardless of the risk of
congestion.
A similar system is also used by OMIE, the
company that manages the wholesale market
(cash or "spot") of electricity in the Iberian
Peninsula. OMIE serves buyers and sellers agents
both in Spain and Portugal, and energy prices
vary each day and hour, depending on whether
22
Acosta, F. (2014, September 8). Mitos y realidades de la Ley de
la Industria Eléctrica / I. Retrieved December 16, 2014, from
http://www.forbes.com.mx/mitos-y-realidades-de-la-ley-de-laindustria-electrica/
the interconnection capacity is sufficient to allow
the flow of electricity negotiated by agents. 24
1. Extension of Property Rights of the
Quality of Energy25
The System Operator must also watch over the
quality of energy transmitted in order to avoid
damages in the user´s electric instruments. It is
for this reason that we consider that in the same
manner in which energy generation, distribution,
or trading companies pay for the capacity the use
within a transmission line, so the final users must
also pay for the entire external load they place in
the transmission grid. The voltage flickers that
cause a high risk not only for the home electric
appliances but also for human life, are caused by
the lack of monitoring and control over the load
externalities that consumers place in the grid.
For this purpose, it is necessary for the System
Operator or the transmission, distribution and/or
trading companies provide the final user with a
guide for the proper use of their electricity,
establishing the type and quality of home
appliances recommended and the cost these may
represent in correspondence with the load
externalities they place on the transmission grid.
The distribution companies should also make use
24
El Mercado Diario. (n.d.). Retrieved December 19, 2014, from
http://www.omie.es/inicio/mercados-y-productos/mercadoelectricidad/nuestros-mercados-de-electricidad
25
23
EFTR. (n.d.). Retrieved December 17, 2014, from
http://www.pjm.com/markets-and-operations/etools/eftr.aspx
Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of
Experimental Economics Results," Handbook of Experimental
Economics Results, Elsevier, edition 1, volume 1, number 5.
the system.22 If there are differences, people
living in rural and underserved areas will be those
who have power at a more affordable cost.
13
of a power quality meter, which they can deliver
or sell to the final users.26
of the system operator information, processes all
exchanges made by market participants.27
It is also important to highlight the necessity of
investing in technology that allows for the proper
measurement of the capacity within a
transmission line at a given moment. This will
allow for the most efficient use of the
transmission lines, which in turn reduces the
congestion risk.
We recommend that the secondary laws
contemplate this figure or leave enough space for
them to arise spontaneously. As the electricity
industry in Honduras transitions from a state
monopoly system unto the market system, the
existence of clearing houses becomes necessary
for the efficiency and transparency of
transactions in that market. They would work to
collect payments market members. We believe
that the involvement of clearing transactions in
the energy market must be subject to the
contractual intent of the parties involved.
Clearing House
Article 9.- G. numeral X. of the General Law of the
Electrical Industry gives the System Operator the
responsibility for carrying out financial settlement
procedures. However, we consider that due to
reasons of efficiency and expediency in the
implementation of this law, the System Operator
should outsource this responsibility to a financial
institution or another capable organization. In
energy markets in the US and Europe, this
responsibility falls on a different entity other than
the System Operator, usually one linked to the
spot market.
In a liberalized energy market, consumers should
be able to change their energy provider as quickly
and easily as possible. To achieve this, market
players exchange large amounts of information
every day. A clearinghouse is both a registry as an
electronic system that handles information
originating from each of the points of the
electricity market and which, under the authority
The "spot market" will be administered,
according to law, by the System Operator. 28
However, we believe that the System Operator
must yield to a third party the management of
the spot market and have the latter decide who
will provide clearing services to market
participants. The company managing the spot
market shall provide the clearing services either
by forming a new company, as has been the case
internationally, or by hiring third party services
from a bank or financial institution.
International examples
1. PJM Interconnection.
Clearing Houses have been very helpful in energy
markets in the US and in the EU. 29 PJM
27
Clearing House. (n.d.). Retrieved January 8, 2015, from
http://www.haulogy.net/energy/grd/clearing-house/
28
26
Power Quality and Energy Tools. (n.d.). Retrieved March 1,
2015, from http://en-us.fluke.com/products/power-qualitytools/
Artículo 9.- F. third paragraph, Ley General de la Industria
Eléctrica.
29
"PJM Statistics" (pdf). 2010-03-25. Retrieved December 17,
2014
C.
14
compliance with the obligations of both parties.
Once an operation has been registered, OMIClear
proceeds to manage the resulting positions,
becoming the buyer to the seller and the seller to
the buyer, a process in which it makes use of
different systems and procedures to control the
risk assumed in relation to the participants,
especially through the management of deposits
and guarantees.33
2. Intercontinental Exchange
The Intercontinental Exchange, Inc. (ICE) operates
23 exchanges and regulated markets, which are
also owned by them, in the United States, Canada
and Europe. ICE also owns 5 "clearing houses"
among which is "ICE Clear Europe" offering the
services of financial compensation to ICE´s global
energy markets.32 We believe that leaving enough
space for these institutions to develop or for
existing institutions to provide these services to
agents of the energy market will allow more
confidence in the system, which we hope will
become dynamic and easy access.
D. Regional System Operators
(ORS)34
We believe that as this law starts to be
implemented, a single System Operator will
cover the needs of the national electricity
market. However, foreseeing the future
development of the national energy market we
consider that the secondary laws and regulations
to be drafted should contain a procedure to be
followed in order to solicit authorization from the
national System Operator to establish a Regional
System Operator, in accordance to need the
projects that are being developed in that region.
3. OMIE
In the case of Spain, the company OMIE that runs
the spot market energy in the Iberian Peninsula
owns OMIClear who assumes the position of
Clearing House and Central Counterparty in all
operations that occur in your system, ensuring
1. Determinations of the CREE:
Property Model of the System
Operator35
We propose that the System Operator works
under a system of regional subdivisions or
33
30
"PJM 2007 Annual Financial Report" (pdf). Retrieved
December 17, 2014
Perfil. (n.d.). Retrieved January 13, 2015, from
http://www.omiclear.pt/OMIClear/TermsOfUse/tabid/131/lang
uage/es-ES/Default.aspx
34
31
About Us. (n.d.). Retrieved December 17, 2014, from
http://www.pjm.com/Settlement Content/Home.aspx
The recommendations in this segment are oriented towards
the establishment and detailment mande in Chapter IV. System
Operator. Article 9.- A,B, E, F, G of the General Law of the
Electrical Industry.
32
Europe’s Leading Multi-asset Class Clearing House. (n.d.).
Retrieved December 17, 2014, from
https://www.theice.com/clear-europe
35
Article 9.- A. final part of the second paragraph says that CREE
will determine the property model of the System Operator.
Interconnection
a
Regional
Transmission
Organization which more than 830 companies are
members and that supplies power to more than
60 million consumers in the US, is currently the
world's largest wholesale electricity market. 30
PJM owns PJM Settlement Inc. which is a
subsidiary with legal personhood that works as its
clearinghouse, also providing various financial
services.31
15
The RSO would own the control room and
communications
facilities
and
operate
independently of all market participants. They are
independent entities with their own board, can
be private, public and nonprofit enterprises. They
are responsible for all aspects of the reliable and
economical operation and interconnection of the
system. Regional System Operators would
differentiate themselves with the Regional
Transmission Organizations (RTOs) in the US –in
accordance with the statutes of national law- as
they would be separate from any transmission
company and under and in cooperation with the
national Independent System Operator (ISO).
They have transparent rules, pricing and
operational protocols that are supervised by the
Regulatory Energy Commission (CREE) and take
greater responsibility for integrated investments
in transmission planning, as well as the expansion
of the network from a local level.
2. Committee of Market Agents.36
Each Regional System Operator (RSO) will have its
own Committee of Market Agents which will
include the representatives of those businesses
whose operations run within the nodes under the
responsibility of a specific RSO.
Below you will find some of the
attributions that the System Operator has
by law and which we consider must be
properly detailed in the secondary
legislation to be drafted. If they are not,
these attributes represent a potential
danger for the fulfillment of the objectives
established by this Law:
3. Grant the right of access to the
transmission lines, following the
procedure established by CREE.37
We consider that the secondary legislation must
establish a timeframe for approval, the criteria
and requisites necessary for a company to be
able to connect to the transmission network,
leaving the CREE only with the authority to
decide the way in which the necessary
documentation will be presented. This will allow
us to avoid the possibility of having the CREE
restrict access to the market by elevating the
costs of doing so by requiring excessive requisites
to be fulfilled.
4. Carry out the financial settlement of
the electricity market operations.38
We believe that this attribute should be handled
by financial institutions associated with the spot
market. We propose that the secondary
legislation establishes a procedure for the
outsourcing of this responsibility to a clearing
37
36
Article 9.- B. of the Ley General de la Industria Eléctrica, in the
final part of its second paragraph, says that the secondary
legislation will establish the composition and functions of the
committee.
Article 9.- G. numeral IX, of the Ley General de la Industria
Eléctrica.
38
Article 9.- G. numeral X, of the Ley General de la Industria
Eléctrica
Regional System Operators (RSO), each of which
will have a certain amount of nodes acting under
its supervision. All System Operators respond to
the national System Operator, who in turn must
be in connection with the Regional System
Operator as stipulated in the Framework Treaty
for the Electricity Market in Central America.
16
needs and feasibility of projects to be
developed in the transmission system
(measured in nodes) that are under the
supervision of the Regional Operator. It
will also help keep the system running
because of faster communication about a
weather-related or other malfunction
within the transmission system, and the
response to them will be more
expeditious if there is a Regional
Operator. Decentralized operators will
have a higher chance of identifying and
correcting errors in a shorter time, as
each Regional Operator is responsible for
a certain number of nodes in the system.
If it is necessary to make any changes
among the operators, it will be much
easier to replace a single Regional
Operator in the area that shows the
problem, than replace a single System
Operator in charge of the nationwide grid.
5. Propose the costs of generation
which will enter the final calculation of
final consumer´s tariffs for approval by
the CREE.39
We propose that the role of the System Operator
should be limited to that of receiving from the
generation companies the methodology they will
use for the calculation of their generation costs.
This methodology should be submitted to the
CREE to be registered and published. We consider
the role of the CREE should be limited by
secondary legislation to that of keeping
transparency within the electricity market and
the auditing of the generation companies to
verify they have calculated their costs according
to the formula they submitted. The downward
pressure on energy prices will come from
competition and consumer choice, not from price
fixing by CREE. Rate of return regulation will
create a powerful incentive for collusion between
generation companies and CREE, which will in
turn create barriers or disincentives for new
competitors to come into the electricity market.

Having Regional System Operators will
also create a more competitive
environment as operators that don't run
the system efficiently may be replaced.
This scheme would align incentives so
that there is greater concern for
managing the system properly, contrary
to what would happen if there were a
single national system operator whose
substitution may have an unnecessary
transcendence. The replacement of a
single national system operator, may
even cause uncertainty and generate a
feeling of insecurity among investors and
other agents of the energy market.

A System Operator in charge of managing
the dispatch of energy, the administration
of the spot market, and the financial
settlement of the operations within the
6. Final Considerations

39
The existence of these regional centers
will allow greater certainty about the
Article 9.- G. numeral XI of the Ley General de la Industria
Eléctrica. Article 18.- Tariffs. In its 4th paragraph gives the
secondary legislation the power to define “the detailed method
fo the calculation of final tariffs”.
house, allowing for the existence of several of
them, each one associated with its own spot
market, or leave it to be contractually defined by
the parties involved. The System Operator will be
linked to the clearing houses for the proper
transfer of information pertaining to the
operations in the electricity market.
17
E. Outsourcing management of the
spot market.
We consider that the operation of the spot
market should be left to a public entity, private or
mixed capital, different to the System Operator;
although the first reporting to the latter. Thus
greater efficiency in operations offered by the
spot market is allowed. This method has been
successfully used in other countries, such as the
case of the company OMIE who runs the spot
market for Spain and Portugal and separate
works System Operator.40
To this effect we propose that the secondary
legislation establishes a procedure to follow one
or both of the following paths:
First. Establish a private spot market, different
to the one administered by the System Operator.
Such a spot market will be linked to a clearing
house and all information of its operations will be
remitted to the national or regional System
Operator so that they may proceed with the
corresponding dispatches.
Second. We also consider that for the most
expedite application of this law, the secondary
legislation must establish a mechanism for the
outsourcing of the spot market. In case of
following the outsourcing path, we consider of
high convenience to concede it to the first
reliable entity that demonstrates the technical
capacity necessary for administering the spot
market.
The results of the daily market, coming from the
freely enacted contracts between buyers and
sellers, need to be viable from a physical point of
view. Therefore, once these results obtained they
must be remitted to the System Operator for
validation from a technical feasibility point of
view of. This process is called managing the
technical constraints of the system and it ensures
that market outcomes are technically feasible in
the transmission grid. Therefore, the results of
the daily market suffer small variations as a result
of technical constraints analysis performed by
the System Operator.
1. Decentralization of the “spot
markets”
Substations. Using SCADA41 systems or other
similar devices for the control of the transport
infrastructure, we believe that energy
substations should be able to establish their own
spot market that will allow them to benefit by
means of arbitrage, due to the price differences
of energy amongst the several points within the
transmission grid. At the same time, we propose
the
privatization
of
the
substations
infrastructure, leaving their operation in the
hands of businesses aiming to profit through the
buying and selling of electricity. This will allow
greater levels of efficiency in relation to the
consumption of energy, as it will be consumed at
40
Nuestros Mercados de Electricidad. (n.d.). Retrieved December
31, 2014, from http://www.omie.es/inicio/mercados-yproductos/mercado-electricidad/nuestros-mercados-deelectricidad
41
Supervisory Control and Data Acquisition, a system that
operates using codified signals over communications channels in
order to control a remote equipment.
electricity market will require time to
establish. We consider that the
outsourcing of this three activities will
help achieve the most expedient and
efficient application of this Law.
18
Users. The greater respect there is for consumer
choice in the purchasing of energy and the
choosing of their energy provider, the greater the
incentives in the market will be for the
satisfaction of national demand. Article 11 of the
General Electrical Industry Law enumerates the
entities with which generation companies can
buy and sell their energy. Given the fact that the
Law does not allow for the consumers to buy
their energy directly but rather through a
distribution or trading company, we propose that
the secondary legislation establishes or through
its silence allows for the final consumer to buy
and sell energy in the spot market through a
platform provided by the trading company. The
consumer will set the bid/buy orders directly,
however it will be the trading company, which is
legally enabled to do so, the one to execute the
purchase or sell in the market. If the final user is a
micro, small, medium or even a large business,
the trading company may enable them for Direct
Market Participation (DMP) allow them to
manage the process for the acquisition of their
energy supply.
2. International Examples
Portugal and Spain. The private company
OMIE, manages the spot market for the Iberian
Peninsula. It operates separately from the System
Operator which works only to verify the technical
feasibility of the market transaction once they
have been remitted to it.
participation in the acquisition of their energy
supply.42
F.
Energy Tariffs System
1. Transmission and Distribution
systems:
According to subsection B. Article 17 of the
General Law of the Electricity Industry, the
pricing regime for use of the transmission and
distribution network will be established in the
secondary legislation.
The model used to measure the transmission
costs should seek to avoid inflation of these,
since the trend is to increase them in order to
charge a higher price for allowing third parties to
link to their lines. Distribution companies add to
their standard cost of transferring energy the
added distribution (VAD) Value. In the
distribution companies the incentive works in
reverse, as the trend is to lower its cost artificially
with the intention to win tenders based on its
low prices.43
Transmission. The secondary laws to be
established have the authority, according to law,
to establish a pricing regime for the use of the
transmission line. We strongly recommend
avoiding a system of fixed prices established by
regulation, and instead propose the establishing
of a defined method for calculating costs. The
methodology would consist in defining a model
for calculating costs that would determine the
42
New Zealand. Simply Energy, a private energy
trading company in New Zealand, has
implemented the Direct Market Participation
(DMP) system, allowing its clients a more direct
INDUSTRIAL AND COMMERCIAL CONSUMERS. (n.d.). Retrieved
March 2, 2015, from http://simplyenergy.co.nz/ourservices/industrial-commercial-consumers/
43
COMPETITION (p. 359, 360, 361). London: Cameron May.
the locations in which it will be used most
productively.
19
The price may vary in between both max. & min.
levels depending on the congestion load at each
transmission line, the climate conditions that
affect such load and the load externalities placed
in by the consumers. On the contrary, there will
be excessive charges by transmission companies,
due to the risk of congestion and integrity of the
transmission lines. The CREE´s role would be only
that of an auditor, making sure that transmission
companies are charging in accordance to the
methodology they have set and published, and
making sure that prices stay within the
established minimum and maximum figures.
By allowing the market to operate in this manner,
transmission companies will be able to calculate
their limitations objectively, and will be
incentivized to invest in the expansion of their
infrastructure in accordance to the profit
potential that such expansion would represent.
Allowing for the market to determine the prices
will avoid the building of unjust barriers of entry
into the electricity market for new competitors
and will make it harder for monopolistic
practices, which inevitably raise costs to
consumers, to take place. Article 21. B.
Transmission Costs and System Operation of the
General Law of the Electrical Industry gives the
secondary legislation the power to establish the
mechanism for the calculation of prices for the
use of transmission lines.
following the methodology established in the
secondary legislation. These costs will be
proposed to the CREE for approval.
We propose that the methodology established in
the secondary legislation consists of having the
System Operator receive and choose one among
the cost calculation formulas presented to it by
the generation companies, always adhering to
what the Law stipulates. A downward tendency
of costs and prices comes from competition and
consumer choice, not rate of return regulation.
3. Calculation of prices in the regional
market
We propose the establishing of a single price &
volume calculation methodology for a
determined hour in the whole Central American
region, in order to streamline and ease
transactions within the regional electricity
market. This follows the EU example, as they
adopted in their marginalist model the
EUPHEMIA algorithm which is currently used by
Spain, Portugal, France, Germany, Austria,
Belgium, the Netherlands, Sweden, Denmark,
Norway, Latvia, United Kingdom, and soon by
Italy, Czech Republic, Hungary and Rumania. 44
4. Final consideration
Again, we highlight the fact that it is not through
rate of return regulation45 and price fixing that
the prices and tariffs for electricity will remain
44
2. System for the calculation of
generation costs
Generation. Article 21.- A. gives the System
Operator the authority to calculate its costs,
COMPETITION (p. 359, 360, 361). London: Cameron May.
45
H. Averch and L.L. Johnson, “Behaviour of the firm under
regulatory constraint”, American Economic Review 52
(December 1962): 1052-69.
maximum and minimum price that transmission
companies may charge, in accordance with the
technical reality of the transmission grid´s floating
capacity.
20
G. Establish competition and
consumer choice as the main
instrument for regulating the
electricity market46
Regulation to be developed will play a crucial role
in determining whether the new scheme of the
electricity market in Honduras operate based on
the decisions made by consumers, either as
individuals or as organized community, or
continue operating on the basis of strong vested
interests, political and bureaucratic decisions.
We believe that competition and consumer
choice should become state policy for the
national electricity market, which should be
clearly stipulated in the Regulations. It is our
strong recommendation to establish in the
secondary legislation the following principles:47

Freedom of choice for consumers in
relation to the companies they decide to
buy their electricity supply from.
46
We consider this to be our most important recommendation in
order to achieve the objectives of this Law.



Open access to the national and regional
transmission and distribution system.
Lack of legislative and/or regulatory
barriers that discriminate against new
participants in the generation and trading
of electricity business.
Lack of legislative and/or regulatory
barriers that discriminate against national
and international commerce.
We believe that the principles mentioned before
are the proper mechanisms to achieve the
purposes of the General Law of the Electricity
Industry established in the fourth, fifth, sixth and
seventh Considerations of the Law:




Update the organization model and
operational rules of the electrical
industry, incorporating modern structures
and practices.
That the modernization incentivizes the
efficiency of the sector and the reduction
of losses, as well as competition in the
generation of electrical energy, with
which the country will be able to count
with competitive tariffs at a regional level.
Counting with the support of the private
sector in the transmission, system
operation, and distribution of electricity,
the ENEE will concentrate its efforts in the
development of renewable resources in
the country.
It is necessary to count with a technically
qualified and independent regulator in
order to ensure the proper functioning of
the electrical energy industry at a national
level, as well as the harmonious
functioning within the regional electricity
market.
47
Lyster, R., & Bradbrook, A. (2006). How the National Electricity
Market works. In Energy Law and the Environment. Cambridge
University Press.
The aforementioned principles have been
adopted as state policy for the electricity market
low for consumers and investors, a reality we may
conclude from the Honduran experience of 59
years of regulated electricity prices. Rather, prices
will be kept low through competition and
consumer choice. Allowing for the national
electricity market to operate freely will create the
necessary incentives for the satisfaction of
national energy demand and the necessary
investments for the development of the
electricity market infrastructure.
21
1. Protections to the rule of law within
the national electricity market
With the main purpose of avoiding excessive
discretion in the use of the power conferred by
legislation to CREE, and looking forward to
strengthen the rule of law, we identified some
responsibilities48 of CREE where we believe that
the regulation should clearly define its scope of
action:
Implement and monitor compliance with
the laws and regulations governing the
activity of electricity subsector.
Since this is a power the CREE has, it becomes
necessary to become very careful on which are
the regulations that will be applied, recalling the
need to avoid high levels of discretion in the use
of CREE´s powers. The CREE´s priority should be
to ensure transparency and truthfulness of all
information presented, pertaining to the tenders
and licenses of transmission and distribution lines
that are granted. It shall ensure transparency of
official formulas used to calculate rates of
distribution, transmission and generating
companies. The role of CREE, must be more than
a contract compliance auditor than that of a
regulator.
Issuing regulations necessary for the
proper application of the law and the
proper functioning of the electricity
subsector
This is one of the functions which´s scope of
action should be delineated most clearly since the
allowance of too much discretion in this area can
risk the achievement of the objectives set out in
the recitals of the Law. It is our recommendation
that the secondary legislation should establish a
limitation on CREE´s power, in which it is
prohibited from restricting access to the
electricity market through exceedingly costly
regulations. If the CREE´s power is not limited,
the possibility will rise for the emergence of
vested interests looking to manipulate the CREE
in order to reduce the levels of competition in
the market and, in this manner, abuse of the
prices they will be able to charge consumers. 49 In
response, we propose that the secondary
legislation limits the CREE in the sense that it will
only be able to enact regulations pertaining to
transparency and the enforcement of contracts
as enacted by the agents of the electricity
market.
Define the methodology for the
calculation of transmission and
distribution, supervise its application,
approve, publish and put into practice the
resulting tariffs.
Article 21.- COST CALCULATION. B. of the General
Law of the Electricity Industry stipulates that the
transmission companies will calculate its costs
every three years and will propose them to the
CREE for approval. It also stipulates that the CREE
will update these costs annually in adherence to
what is established in the secondary legislation.
49
48
Numerals I, III, V y X of article 3 of the Ley General de la
G.Stigler and Clair Friedland, “What Can Regulators Rgeulate?
The Case of Electricity”, Journal of Law and Economics 5 (October
1962).
by the United States and Australia, demonstrating
a high efficiency in the attainment of the
objectives enumerated by this law.
22
To that effect we propose that the secondary
legislation establishes the manner in which CREE
will define the methodology for cost calculation,
following previous recommendations pertaining
to the calculation of transmission tariffs 50 and
defining clearly and emphatically that such
methodology will not result in fixed prices, but
rather in a range of prices (min. & max.) based in
the floating capacity of the transmission lines.
The methodology defined must be selected from
among those proposed and elaborated by
transmission companies (verified by the System
Operator) and the role of the CREE must be
primarily that of ensuring transparency and the
fulfillment of contracts in accordance to the
formulas set and published by the transmission
companies themselves.
authorized by state law to provide only one or a
limited number of designated functions with
sufficient administrative and fiscal autonomy to
qualify as a separate government entity; known
under a variety of titles including districts, boards,
and commissions."51
Prevent anti-competitive, monopolistic or
discriminatory between participants
conduct electricity.
We propose that the Boards, community
associations, associations of corporate persons,
groups of companies and groups of individual
traders and other forms of existing or not yet
existing forms of social organization, can
constitute themselves as Qualified Consumers 52
enabled to negotiate their energy rates directly
with generators if the aggregate demand of its
residents exceeds the value set by the Electricity
Regulatory Commission (CREE). CREE, if
considered desirable and analyzing technical
feasibility, could set different thresholds for
companies, trusts, community associations, etc.
Special Purpose Districts that want to constitute
themselves as a Qualified Consumer.
H. Special Purpose Districts (Electric
Power)
Special Purpose Districts (SPD) are political
subdivisions which legally acquire rights and
obligations and may be dissolved according to the
procedure established by law. The SPD has been
defined as "any organized local entity (other than
counties, municipalities, boards or school districts)
50
Recommendation number 6 of this document.
The system of SPD will work for organized civil
society since, if it is deemed necessary and
possible by them, they could supply themselves
51
Definition of the United States Census Bureau.
52
Article 10 of the Ley General de la Industria Electrica.
While the Act gives the responsibility to CREE for
the prevention of antitrust behavior, we believe
that the regulation to be developed must limit
the discretionary use of power by CREE in order
to avoid it becomes the creative instrument of
anti-competitive
or
monopolistic
market
conditions.
Based on the rights of communities to prepare,
implement and manage projects of interest as
recognized by the Law of Neighborhood Trusts
and Community Partnerships we suggest that in
the elaboration of the regulations of the General
Law of the Electricity Industry a clear procedure
for inclusion boards, community associations and
other forms of social organization may establish
themselves as a Special Purpose District (SPD)
with the capacity to meet their energy needs.
23
participants into such infrastructure.
(Recommendations 2, 3, 7).

Lack of integration of the markets of the
Member States. The markets remained
national, putting very little pressure on
national operators and reducing overall
energy trading. (Recommendations 1 &
7).

Prices are not the reflection of the forces
of supply and demand. This was due to
the consumers being tied to their
electricity suppliers with long term
contracts. (Recommendations 1, 2, 5, 6
and 8).
New entrants to the electricity market,
lacked sufficient knowledge for access to
networks and transmission capacity. This
was evidence of a clear lack of
transparency. (Recommendations 1, 3)
1. Final Conclusions
The success of this historic reform of the national
electricity market will depend on the quality of
secondary legislation, which needs to be detailed
enough to eliminate the current uncertainty
regarding the Law's implementation and avoid
the backlog of investment projects billions of
dollars’ worth.

In 2007 the European Commission published the
results of an investigation of the state of
competition in the electricity and gas markets in
Europe. The resulting report delineates the areas
in which anticompetitive practices were harming
the efficient integration of energy markets in
Europe. Below, we enumerate each of the
affected areas identified by the European
Commission, and we intertwine them with the
recommendations with which we aim to reduce
the anti-competitive practices in these areas:


53
Too much market concentration in
national markets. Very few power
generators controlled large portions of the
market. (Recommendation 1, 3, 5 and 8).
Lack of liquidity which hinders new
entrants to the market. Many of the
owners of the operational infrastructure
hampered the entrance of new market
Article 14 of the Ley General de la Industria Eléctrica de
Honduras, Decreto no. 404-2013.
with their energy generation and consumption
needs. They operate in a similar fashion as the
water boards and similar institutions do. Having
to abide at all times with rules established for the
distribution and generation companies that serve
isolated systems.53
24
VI.
Final words
The principles and recommendations detailed in
this document are the result of a general
investigation on what the best practices around
the world are with respect to the operation of
open and competitive electricity markets.
Analyzing the General Law of the Electricity
Industry, the recommendations enumerated in
this document are done with one primary
purpose: the protection of the Rule of Law in the
operations within the national electricity market.
A big part of the recommendations are oriented
towards controlling, difficulting, and limiting the
discretionary use of the power attributed by
legislation to the authorities of the electricity
market, subjecting their decisions to law and not
the personal and/or arbitrary will of the persons
holding such positions.
competition among generators and consumer
choice as its main pillars. These two principles will
place more pressure towards the decrease of
energy prices than will any government
regulation. The legislative achievements, typified
in the General Law of the Electricity Industry,
must be protected through the elaboration of a
comprehensive secondary legislation which will
follow the principles and recommendations
enumerated in this document and through them,
secure this reform and prevents any regression
towards the system that is was set out to replace.
We also conclude, that the energy reform carried
out in the final months of 2013 represents a
historic opportunity under which a more efficient
and just model may be built upon, with
Final words
It is our conclusion that rate of return regulation,
price fixing, legislative and regulatory barriers to
market entry, legal oligopolies on energy
generation and legal monopolies on trading,
transmission and distribution of electricity, are all
part of an organization model that has failed in
every single one of the instances in which it has
been implemented, as has been the case of
Honduras. It has failed not only in providing a
constant flow of energy at an accessible price, but
also in keeping and sustaining principles such as
the Rule of Law, justice, private property and its
inherent element to be freely managed by its
owner, and which are of essential relevance for
the peaceful and harmonious coexistence of any
society.
25
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27

Energy Choice in Honduras.

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