Article Courtesy from Business Panama

Panama - The Electric Porwer Sector: Opportunities and Challenges

The Electricity Sector of Panama is the best example of what can
be achieved through globalization.

by Max B. Kelly, General Manager, Bahia Las Minas Corp.

In 1998 the former state owned utility, IRHE, sold a controlling interest of its power plants and its distribution grids to a group of US, Canadian and Spanish investors. AES, Enron, Constellation, Coastal, HydroQuebec, and Union Fenosa paid a total of $ 600.0 MM for 50 % of the corporations formed to sell those assets: Fortuna, Bayano, Bahia Las Minas, Elektra, Edemet and Edechi. In addition, since then the Government of Panama (GOP) has received a similar amount from these corporations as dividends, taxes, fees and capital reductions.

Most important, since 1998, the GOP has not been required to dedicate its tax revenues and/or credit capacity to finance the new power plants and distribution lines required to meet the growing demand for electricity. Instead, it can now use those funds for health care, highways and other needs of the people of Panama.
The new privately controlled firms are now responsible for raising the necessary funds to finance expansion. AES/Bayano raised $300 MM to finance the construction of the new Esti hydropower plant and the expansion of the existing Bayano plant.
Other foreign private investors, mostly American, have also invested more than $ 250MM to add 230 MW of new thermal power plants: Copesa, PEP, Panam and Pedregal Power.

The Panamanian banks have also played an important role in the financing of the electric sector. So far they have lent and/or arranged for $ 820.0 MM in loans to the sector, of which, $ 500.0 MM have been lent by local banks and local branches of foreign banks. These new loans have compensated for the slowdown in other sectors of the economy.

A privately controlled electric power sector is the best solution for Panama and any other country. Notwithstanding the last power outage in the Northeastern states, the United States have and have had the best electricity service in the world. It is no coincidence that the US electric power sector has always been privately controlled except for minor exceptions like the Tennessee Valley Authority and a few municipal utilities.

What is the reason, then, for the very vocal complaints against the firms that now provide this crucial service in Panama? For an answer it is necessary to look at the past. As one colleague puts it, as in most developing countries, before 1998, the government-owned IRHE had a “Political Pact” with its customers: “The IRHE would pretend to provide a reliable service, and the customers would pretend to pay for it”. As a result thereof the distribution grid - poles, conductors, transformers, etc.,- especially in remote areas, were in such state of disrepair that a substantial reduction in the service interruptions, apagones, could not be achieved overnight. This is one of the main complaints by the critics of the IRHE privatization.

The distribution companies have spent substantial amounts to fix the grid and to improve the reliability of the service. The Public Services Regulatory Entity, ENTE, is forcing them to improve it on an increasing scale. Every year fewer interruptions are permitted and failure to comply with this requirement translates into a proportional reduction in the tariff that can be charged to the customers.

The second part of the “Political Pact” has been more difficult to fix. Many customers still want to pretend that they are paying. Electricity theft in Panama is still excessively high. Others simply prefer the old method when payment in some neighborhoods was optional. This type of customer obviously complains against privatization and can truly claim that its electricity bill has gone up excessively. On the other hand, for reasons easy to understand, a lower electricity tariff is part of any political candidate’s list of promises. Have you ever heard any politician promising to raise tariffs?

Is electricity expensive in Panama? The categorical answer is no, especially for a country with no fuel resources and especially for a country with a dollar denominated economy. Fortuna S.A. recently compiled the following comparison of Panamanian residential tariff (12 cents per KWH) against similar tariff in different countries and US cities. It destroys the myth that Panamanian tariffs are high.


According to the latest figures published by the Ente Regulador, in 2001 there were a total of 528,000 customers of which 517,000 were residential customers. On average, residential customers paid $ 33.0 per month. Contrary to most of his Latin American counterparts, the Panamanian consumer does not have to suffer a continuous increase in his power bill as a result of local currency devaluation.

There is a great potential for growth in the Panamanian electric power sector. Still, 20% of Panamanians do not have access to electricity, especially in the rural areas. As Panama’s maritime industry grows in importance as a container transshipment center, additional electric power will be required for cranes and to run the refrigerated containers transporting perishables. It is only a matter of time before the great copper mining potential of Panama is finally developed. When that happens, electric power demand will grow by 20%. As the standard of living increases, so will the consumption of electricity. An interesting statistic:: the fully air conditioned Multicentro shopping mall, hotel and convention center will consume more electricity than the entire town of Chitre.

Thus far the privatization is working well. As previously mentioned the Government of Panama has received more than a billion dollars from it, and has shifted to the private sector the responsibility of finding the hundreds of millions required to finance the growth of the sector. The rules that govern the power market have worked generally well; however, the ghost of political intervention still looms.

Every politician is demanding a tariff reduction and some say that the Government must get back into the business of building large hydro power plants as a ways of achieving such reduction. Other propose that the Panama Canal Commission (ACP) should also get into the business of generation, even though the current Electricity Law bans such participation. Unfortunately, the Ente Regulador is yielding to the political pressure and has allowed the ACP to sign power supply contracts with the Distribution Companies in spite of the fact that it is simply illegal. The Ente is also taking many questionable actions with the aim of reducing the electric tariff at the expense of the private investors. Most of these actions have been challenged before the Supreme Court; however, because of the so called “Mora Judicial”, judicial backlog, the Court has not been able to rule on the legality of any of these actions, in spite of the fact that some of these challenges were presented to the Court more than 44 months ago.

The figure of the Ente Regulador was designed to withstand political pressure by appointing as Directors three well-remunerated individuals of the highest standing that could not be removed. In other words, the Ente’s Directors were supposed to make the hard decisions of raising tariffs, if necessary, in order to guarantee a competitive, yet profitable, market that would attract new investment, especially in generation plants, to meet the expected growth and to replace existing obsolete equipment.

In closing, the privatized electric power sector in Panama is functioning well, provided that the Ente Regulador does not yield to the political pressure of trying to lower the cost of electricity by decrees and at the expense of the current foreign investors that in good faith invested in Panama in assets that cannot be removed and taken elsewhere.

Article Courtesy of Business Panama
The American Chamber of Commerce (AMCHAM)
and Deal Inc.

 

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