appraisal of the file copy fifth power...

Report No. 904a-PE

Appraisal of the FILE COPYFifth Power ProjectPeruFebruary 11, 1976

Power and Telecommunications DivisionLatin America & Caribbean Regional Office

FOR OFFICIAL USE ONLY

International Bank for Reconstruction and DevelopmentInternational Development Association

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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Currency Equivalents

lUS$ = 45.0oiS/ US$0.022222221,000 Si US$22.221,000,000 S, = US$22222.221,000 US$ SI 4 5,0001,000,000 US$ S-/ 45,000,000

Units and Measures

GWi = Gigawatt hbur =1 million kAhkWh = kilowatt hourton metric ton = 1,000 kgbbl barrel = 42 US gallonskm kilometer = 0.62 filekW = kilowattMW = Megawatt = 1,000 kWkVA = kilovolt - ampereMVA = Megavolt - ampere = 1,000 kVAkV = kilovoltV voltm = meter = 3.28 feetm3 = cubic meterm3/sec = cubic meters per second

Abbreviations and AcronEB

COFIDE = Corporacion Financiera de DesarrolloDGE = Direccion General de ElectricidadElectrolima = Electricidad de LimaElectroperu Electricidad del PeruHidrandina Energia Hidroelectrica Andina, S.A.IDC Interest during constructionINIE Instituto Nacional de Investigaciones

Energeticas y Servicios de IngenieriaElectrica

MEM = Ministerio de Energia y Minas

Fiscal Year

Fiscal Year ends December 31

rUK UPINrtAL U5Z V uLI

APPRAISAL OF FIFTH POWER PROJECT - PERU

Table of Contents

Page No.

Summary and Conclusions i

1. Introduction 1

2. The Sector 2Energy resources 2Sector organization 2Regulation and tariffs 3Electricity consumption and service to rural communities

and "pueblos jovenes" 3Sector development 4

3. The Project 6The E1ectrolima program and project component 6Technical assistance for the government 7Estimated cost and financing 7Engineering 9Project execution 9Procurement and disbursement 9Project risks 10

4. Justification of the Project 11Sector objectives 11Project objectives 11Demand and generation forecast 11Size of the project 11Type of facilities 12Return on investment 12

5. The Beneficiary 14Organization, management and staff 14Market 14Management information systems and audit 15Performance indicators 15

6. Finance 16Summary 16Tariff levels 16Financing plan 16Security 18Debt service coverage 18

7. Recommendations 19

This report has been prepared by Messrs. John E. Graves. Rafael A.Moscote and Philip Owusu.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

List of Annexes

1. Previous Bank Lending to Electrolima

2. Organization of the Electric Power Sector

3. Electricity Regulation and Tariffs in Peru

4. Installed Generating Capacity, Electric Energy Generation and Consumption

5. Brief Description of Some Power Projects Being Considered in Peru

6. Detailed List of Project Components and Costs

7. Estimated Project Implementation Schedule

8. Estimated Loan Disbursement Schedule

9. Electrolimas system Power and Energy Requirements

10. Rate of Return

11. Electrolimats Organization Chart

12. Performance Indicators

13. Financial History and Projections

Map 11797 - Peru Interconnected System

Map 11798 - Metropolitan Lima Transmission and Distribution Network


Summary and Conclusions

i. This report appraises the fifth power project in Peru, for whichthe government has requested financial assistance from the Bank.

ii. Since 1960 the Bank has provided major financial assistance toPeruvian power development through four loans to Electrolima, the utilityserving metropolitan Lima, totalling US$66.5 million. All four projectshave been successfully completed. However, Electrolima's financial per-formance deteriorated in 1972-74, which led to delays in Bank processingof its next loan application (see paragraph ix).

iii. The fifth project's principal component would be Electrolima's1975-78 distribution expansion program, for Which the government would on-lend most of the proposed loan. This expansion program is needed to meetincreased demands on the utility's system, including the demands of a largeinflux of lower-income population living in new communities (pueblos jovenes)in Lima's outskirts. With Bank assistance, Electrolima would triple thenumber of service connections in the pueblos jovenes by 1979 and increasethe percentage of Lima's population served to about 85%; almost 3C% ofElectrolima's total number of customers then would be residents of the newcommunities. The project's estimated total and foreign financing requirementsare Us$147.2 and US$T.O million respectively, including a US$2.1 million tech-nical assistance component (see paragraph v).

iv. Before 1972 Peru's electric power sector was highly fragmentedconsisting of many government, municipal and private utilities serving distinctconcession zones. Bank assistance to the sector was limited to loans to Electro-lima, the largest utility, because of inter alia insufficient technical andeconomic justification of other utilities' projects.

v. With the formation of a central government utility - Electricidaddel Peru (Electroperu) - in late 1972, the government took initial steps toconsolidate the sector. It has continued this process by acquiring controlof all private utilities, including Electrolima, formerly known as EmpresasElectricas Asociadas. However, serious managerial and planning problems re-main among the government's power agencies, and Bank assistance in resolvingthem is provided in a US$2.1 million component of the proposed loan. Thistechnical assistance component would help the government improve division ofresponsibilities and coordination among its agencies, establish a master planfor future sector development, identify training needs of sector personneland complete tariff studies.

vi. The proposed US$36 million loan would cover all but US$3 million of-.he project's foreign financing requirement. ElectrolimaIs total financing re-quirements cLuring the project's construction period would amount to US$221.2million. About g% of this total financing requirement would be covered byElectrolima's net internal cash generation, customers' connection fees andcontributions from developers. The balance of Electrolima's financing require-

ments would be provided by the proposed loan and by US$55.8 million equivalentin loans from the government development corporation and equity contributions bythe government via Electroperu.

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vii. Consultants acceptable to the Bank would be engaged to: assistElectrolima in improving its planning and maintenance and in engineering forits communication and control systems, and provide specialized training toElectrolima staff; and to undertake the studies comprising the technicalassistance component for the government. Electrolima's staff will engineerall other works included in the project and supervise their installation,which will be performed by local contractors. It has ample experience withsimilar works and is fully capable of successful project execution.

viii. Procurement of Bank-financed items would be through internationalcompetitive bidding in accordance with the Bank's guidelines. Because of theneed to meet the system's requirements, Electrolima might contract for cer-tain items of equipment prior to loan signing; retroactive financing of US$1.1million is recommended for initial payments on these contracts.

ix. The Bank appraised a previous version of Electrolima's expansionprogram in early 1973. However, further loan processing was delayed until1975 to permit resolution of the company's financial problems (principallyits need for higher tariffs and re-financing a large amount of short-termdebt). With substantial re-financing in 1974 and tariff increases totallingabout 38% in the first half of 1975, the government has taken appropriatesteps to resolve the problems. Provisions in the proposed loan agreementsrequiring asset revaluations, adjustment of tariff levels to produce cashcontributions to construction expenditures of at least 30% in 1976 and 45%in each year thereafter, and limitations on Electrolima's future indebtednesswould provide the mechanism for further improvements in the company's financialsituation. Assuming that these provisions are complied with, Electrolima'sfinancial performance is expected to be satisfactory.

x. Based on average tariff levels which would result from implementationof the financial covenants (paragraph ix), the rate of return on project in-vestment would be between 8% and 14%, depending on assumptions concerning theincremental cost of electricity to the system. This broad range results fromthe uncertainty regarding the future generation program which does not allowan exact determination of the incremental cost of generating electricity.

xi. The project would form a suitable basis for a US$36 million loanwith a term of 20 years including three years of grace. The loan would bemade to the Republic of Peru; US$33 9 would be onlent to Electrolima for itsdistribution expansion program (paragraph iii).


1. Introduction

1.01 This report appraises the fifth power project in Peru, for whichthe government has sought Bank assistance. Electrolima, the concessionairefor the metropolitan Lima area, (a Peruvian corporation, formerly known asEmpresas Electrica Asociadas, whose control recently passed to the government)and the main beneficiary of the proposed loan, has received four previous Bankloans totalling US$66.5 million, as detailed in annex 1; all four projectshave been successf'ully completed.

1.02 The project's principal component in monetary terms is Electrolima's1975-78 distribution expansion program. The Bank originally appraised a pre-vious version (Electrolima's 1973-77 program) in March 1973. However, furtherloan processing was postponed until 1975 to permit resolution of Electrolima'sfinancial problems (principally its need for higher tariffs and re-financingof a large amount of short-term debt). Electrolima's current expansion pro-gram is necessary to meet increased system demand, including that caused bya large influx of low-income population residing in new localities (pueblosjovenes) in Lima's outskirts. The total and foreign financing reauirementsof the project are US$147.2 and US$39.0 million respectively. The proposedUS$36 million loan would finance all but US$3 million of Eiectrolimalsforeign exchange needs (see paragraph 3.05) and would include a US$2.1million technical assistance component (see paragraph 1.04).

1.03 Future power lending to Peru would probably be to the principalutility - Electricidad del Peru (Electroperu) - where the needs for Bankfinancial and technical assistance will be greater than in Electrolima.The Bank has not previously been able to assist in sector development otherthan through its loans to Electrolima because of insufficient technical andeconomic justification of other utilities' projects. By creating the nationalelectric utility - Electroperu - in 1972, the government has begun the processof sector consolidation. However, basic planning and managerial problems re-main, and Bank assistance in resolving them is included in the proposed loan.

1.04 As summarized in paragraphs 2.04-06, the division of responsibilitybetween Electroperu and the Direccion General de Electricidad (DGE;) of theMinistry of Energy and Mines (MEM) is unusual and the coordination betweenthem, inadequate. The proposed loan includes a US$2.1 million technical assist-ance component as a first step to help the government improve sector organi-zation, establish a master plan for future power sector development, identifythe training needs of sector personnel, provide funds for part of the recom-mended training and carry out tariff studies. While the technical assistancecomponent of the proposed loan would initiate the resolution of sector prob-lems, continued effort will be necessary if the various government agencieswhich have responsibility for the sector are to achieve necessary improvementsin technical and managerial standards.

1.05 This report is based on a feasibility study of Electrolima's 1975-78expansion program prepared by the utility, on discussions between various Bank,MEM, DGE, Electroperu and Electrolima officials and staff members in 1973-75and on the findings of an appraisal mission composed of Messrs. John E. Graves,Rafael A. Moscote and Philip Owusu, which visited Peru in July 1975.

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2. The Sector

Energy resources

2.01 The main source of commercial energy is petroleum, which accountedfor 77% of all commercial sources in 1972. Peru now produces about 67% ofits needs, mostly in the coast and adjacent offshore sites. As new fields inthe Amazon basin are developed, this situation is likely to change. Eventhough discoveries in the area have been less than expected previously andseveral foreign oil companies have terminated their drilling operations, thegovernment still hopes that the country will become self-sufficient by 1977and a net exporter by 1978, when an 850 km pipeline to the port of Bayovaris expected to be finished.

2.02 Preliminary investigations have revealed the existence of importantcoal deposits in the north. Kopex, a Polish consulting firm, has estimatedan economic reserve of 270 million metric tons of coal in Alto Chicama. Ofthese, about 60 million tons are considered by Kopex as proven reserves. Onthe basis of these investigations, the government has engaged the same con-sultants for further investigations leading to determining the feasibilityof installing a coal-fired thermal station in the early 1980s.

2.03 Peru is well-endowed with hydroelectric resources. In 1972, thelatest year for which complete data are available, about 18% of all energyused in the country and about 72% of all electric energy generation had thisorigin. The government has stated a policy of substitution for petroleumproducts in the generation of electric energy and expects to increase thehydroelectric generation by implementing several hydro projects (see para-graphs 2.14-15).

Sector organization

2.0o The power sector is undergoing a major transformation, as detailedin annex 2. Before 1972, it consisted of a number of private, municipal andState-owned utilities, the largest of which was Electrolima, serving distinctconcession zones and regulated by State agencies. No national sector plan-ning or coordination existed. Captive plants serving large mining and industrialinstallations were not interconnected with public-service systems. TheNormative Electricity Law of 1972 provided for State control of the sectorby creating a single State enterprise - Electroperu - and increasing Stateparticipation in and control of all other utilities. The draft generalelectricity law anticipates that all utilities will be consolidated intoElectroperu at an unspecified future date.

2.05 At present, an inefficient distribution of responsibilities betweenthe several State entities, a lack of coordination between them, and a lackof experience and/or qualifications among personnel responsible for sectorplanning may lead to uneconomic sector development. The most unusual featureof the arrangement is DGE's assumption of responsibility for sector planningand project selection without significant participation by Electroperu,leav-ing to Electroperu only the execution and operation of the selectecd projects.This is contrary to accepted utility practice. An operating agency is by itsnature in a better position than a ministry to plan its future development

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because of its more direct contact with the market, its more thorough know-ledge of field and operating conditions, and its greater familiarity with thecapability of its own system and personnel. Both DGE and Electroperu haveprepared their own market forecasts and lists of future projects. Neitherof their efforts provides a satisfactory master plan because their marketforecasts are unreliable (see paragraph 2.13), the comparability of the pro-jects is doubtful and there is no adequate overall survey of the country'shydro resources to serve as a basis for selecting the priority of futureprojects.

2.o6 As a first step in resolving the situation, the loan includes fundsfor consultants to study the sector's organization, establish a master planof future works and identify the sector's training needs (see paragraph 3.04).The government has agreed to engage such consultants by March 30, 1977.

Regulation and tariffs

2.07 As described in annex 3, electric utilities are effectively regu-lated by DGE following the guidelines set forth in the draft general electri-city law, even though the 1955 regulatory law (Ley de la Industria ElectricaNo. 12378) is supposed to be applicable until the general law is put intoeffect. In contrast to the early 1970s, when Electrolima's tariff increaseswere insufficient, regulatory treatment in 1975 with regard to overall tarifflevels has been satisfactory (see paragraph 6.01).

2.08 Electrolima's tariff structure, however, deserves further analysis.TWhile its tariffs (summarized in annex 3) include some exemplary features,such as discounts to encourage acceptance of service at higher vo-Ltage andoff-peak and lower rates for basic consumption of lower-income residents ofpueblos jovenes, they also include other features which may not stimulateefficient energy consumption patterns. Principal among these are low resi-dential and industrial rates, high commercial and general-use rates and highconnection fees and customer contributions. Because Electrolima's tariffstructure exemplifies the approach which DGE intends for nationwide applica-tion, the proposed loan includes funds for studies to determine the incre-mental cost of providing service to various customer classes and to proposean alternative tariff structure which reflects marginal costs, assuming thatit is shown that the present one does not. The government has agreed to submitproposed terms of reference for the study by June 30, 1976, to engage consul-tants by January 31, 1977, and to discuss the study with the Bank prom.tlyupon its conclusion. e

Electricity consumption and service to rural communities and "'pueblos jovenes"

2.09 The larger cities and towns have public-service electric systemswhich account for about 60% of all electric energy used in the country, theremainder being captive generation for mining and industrial purposes (detailsare shown in annex 4). Access to electricity is limited in the urban poor areasknown as pueblos jovenes as well as in smaller villages and isolated ruralcommunities but it appears that a policy on access to service has yet to bedefined.

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2.10 As summarized below, Peru's electricity market is predominantly formining and industrial purposes. This illustrates the importance of the powersector to the economy, as these key sectors represent about 30% of GDP.

Actual 1973GWh

Residential 1067 18Commercial 505 8Industrial and mining 049 67Other 375 7Total $9976 100

2.11 In metropolitan Lima, about 478,000 or 81% of the households hadpublic-service electricity supply in 1974. About 25% of the Lima householdsare in the pueblos jovenes, of which in 1974 only some 55,000 households orabout 40% of the total had electric service. It is expected that by 1978,about 18050r households in the pueblos jovenes will have electric serviceand that the total estimated residential customers will be 653,000 or 85% ofthe projected population.

2.12 About 47% of the population of the country is rural. In 1971, theyear before its incorporation into Electroperu, Servicios Electricos Nacionalesoperated about 250 power plants with an average capacity of about 200 kW anddistributed about 120 GW. Electroperu has assumed responsibility for allrural electrification and intends to electrify a number of new comnunities inthe next five years. However, it has yet to define the policies or goals ofan overall rural electrification program. According to the draft general law,DGE will be given the responsibility for planning the rural electrificationprogram, but the draft does not specify the extent of coordination between DGEand Electroperu.

Sector development

2.13 Peru has planned several mining and industrial projects with largepower and energy needs. This will undoubtedly have as a consequence majordemands on the power sector. According to the stated policy, Electroperu hasto provide for these requirements but in its planning efforts and those of MEM,there is at present no distinction between the program that the sector shouldcarry out to meet its normal growth plus the firm power and energy requirementsof specific large industrial or mining projects, and the possible requirementsof other projects for which definite commitments have yet to be made. As aresult, there is no consensus as to what are the real requirements of the sec-tor. Because of the physical separation of the planning function from theoperating entity (paragraph 2.05), the generation and transmission planningand the priorities assigned to the different projects and to the requiredstudies are not always relevant, nor is the information obtained from the dif-ferent sources reliable. Thus, the installation program changes very often.As an example, at the beginning of 1975 sector authorities were convinced ofthe need to install a 400 MW thermal station in the Central Region by 1977 or1978 so as to avoid power shortages. Such a need had disappeared completelyby mid-1975.

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2.14 Several other generating projects have been identified by Electroperuand MEM for possible development to meet projected power demands in theCentral and Northern regions which include Lima and are the most important,with 76% of the country's population and 87% of its energy generation (annex 4).The MEM has developed a list of projects in which installation dates for theseprojects have been proposed. However, there is no evidence that their proposedorder has been determined from a general study of several alternative projectsand realistic economic comparisons between them which would lead to a list ofpriorities based upon economic and social consideration with due regard to thepower system's operating constraints.

2.15 The present total installation program envisages adding about 2,300 MWto the north and central regions and about 700 MW in the rest of the country,by 1984. The most advanced new projects, in terms of availability of data andpreliminary studies, to be in service in the north and central regions afterthe expansion of the Mantaro hydro station from its present 342 MW to itsultimate 798 MW, appear to be:

Project Type Size (MW)

Restitucion hydro 200Sheque hydro 600Chicama coal-fired 240

A brief description of these projects is included as annex 5.

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3. The Project

The Electrolima program and project component

3.01 Electrolima serves its concession area with 220 kV and 60 kV double-circuit transmission systems and 10, 30 and 60 kV distribution systems and a220 V low-voltage system. The 30 kV voltage is being phased out. The projectincludes the estimated requirements for the expansion of these systems from1975 to 1978.

3.02 The Electrolima component of the project includes the followingmajor elements, described in detail in annex 6.

a. Transmission and subtransmission:

i. 26 circuit-km of 220 kV and 125 circuit-km of 60 kV lineextensions;

ii. construction, expansion and/or improvement of six 220/60 kVsubstations and of seventeen 60/10 kV substations.

b. Distribution:

i. installation of about 2,300 transformers, 10,000/220 V, withan aggregate capacity of about 233 MVA;

ii. installation of about 1,000 circuit-km of 10 kV lines;

iii. installation of 200,000 meters.

c. Auxiliary services:

i. expansion of the existing communications and control center;

ii. auxiliary equipment for the data processing center;

iii. laboratory, shop, transportation and maintenance equipmnent.

d. Consultant services and training: (25 man-months)

i. consultant services for the expansion of the communicationsand control center, for a review of distribution planningstandards and for hot-line maintenance of overhead distri-bution and transmission lines; and

ii. training of Electrolima personnel in hot-line maintenance ofoverhead distribution and transmission lines.

3.03 Electrolima will continue expanding its system as required afterthe project is completed. The most important future work is to close a 220 kVloop towards which it has worked for a number of years and which will limitthe extent to which 60 kV is used as a transmission voltage. 60 kV will in thefuture be used mostly for distribution. The project's 220 kV components wouldform part of that loop (see map 11798).

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Technical assistance for the government

3.04 The problems of sector coordination are serious (paragraph 2.05).The project therefore includes intensive technical assistance to the govern-ment (see annex 6 for details). The technical assistance component consistsof:

a. a power sector organization study to be conducted under terms ofreference shown in the attachment to annex 6 and which would attemptto suggest ways of improving the division of responsibi:Lities andcoordination between sector entities and identify sector trainingrequirements (25 man-months of consultants' effort);

b. the preparation of a master plan for future generation and trans-mission additions in the north-central interconnected system ofthe country which would follow generally accepted practices andwould distinguish between firm and possible power requirementsand for which terms of reference are also shown in the attachmentto annex 6 (160 man-months);

c. training of sector personnel in operation, planning and administra-tion of large public utility enterprises; and

d. tariff structure studies (10 man-months)

Estimated cost and financing

3.05 The project's estimated cost is US$137.32 million with a US$35.27million foreign component. Total financing requirements, including interestduring construction (IDC) are US$147.]8 and US$39.Qmillion respectively. Thepronosed loan would cover all the project's foreign financing requirementsexc^ent US$3 million of urgerntly-needed imported equioment which Electrolimahas contracted using procurement procedures not in accordance with the Bank'sg,uidelines .

3.06 The costs for the Electrolima component of the project were estimatedby Electrolima's technical p3rsonnel, based on information from recent bids andquotations and were found to be reasonable by the Bank. The costs for thetechnical assistance to the government were estimated by Bank staff. The costsare detailed in annex 6 and summarized below:

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Sc x 106 US$ x 106LocaL Foreign Total Local Foreign Total

A. EEA system expansionTransmission and sub-transmission (220 and60 kV) 776.3 472.5 1248.8 17.25 13.50 27.75Distribution (10 kVand below 2214.2 380.3 2594.5 49.21 8.45 57.66Auxiliary services 352.5 333.0 685.5 7.83 7.40 15.23Consulting servicesand training 1.0 11.7 12.7 0.02 0.26 0.28Total direct costs 3344.0 1197.5 454 741 26.61 100.9

Physical contingencies 217.4 78.8 296,2 4.83 1.75 6.58Price contingencies 1023.7 225.4 1249.1 22.75 5.01 27.76Total - Part A 45851 1501.7 6h86 8101.89 33.37 135_26

_ =

B. Technical assistanceto the government:Studies and training 5.0 62.5 67.5 0.11 1.39 1.50Physical contingencies 0.5 8.6 9.1 0l 0.19 0.20Price contingencies 1.9 14.4 16.3 04 0.32 D.36

Total - Part B 7.4 . 92.9 -7-.1U T7?9 2.06Total project cost 4592.7 '587.2 61797 102 07 35.27 1T37.3

Interest during construc-tion (IDC):

Part A 275.9 159.3 435.2 6.13 3,54 9.67Part B - 8.6 8.6 - 0.19 0.19Total interest 275.9 167.9 -4431.8 6._1_ 3 3.73 --

Total financing require-ments 4868.4 1755.1 6623.5 108.18 39.00 147.18

3.07 A physical contingency allowance of 5% was assumed for aLl 220 and60 kV components and of 10% for all remaining components. This was consideredsufficient because no major civil works are involved and finaldesigns are welladvanced for most project components.

3.o8 The base cost estimates shown in paragraph 3.06 are based on theprice levels prevailing at the beginning of 1976. Local and foreign pricecontingencies estimated using the following annual inflation percentages havebeen added:

International Local

1976 10 121977 8 101978 8 91979 7 8

The percentagesused to calculate price contingencies for the local componentsof the project are lower than the forecast general inflation rates for Perudue to the fact that EEA has received informal quotations for most of theequipment and services to be obtained that indicate that the lower percentagesare appropriate.

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Engineering

3.09 Electrolima's own staff will carry out the engineering necessaryfor execution of most parts of the project. This is acceptable as Electro-lima has proven experience in similar works. Electrolima would agree toengage consultants acceptable to the Bank for the purposes described inparagraph 3.02 (d)(i).

Project execution

3.10 The execution of the project will be carried out as follows:

a. Electrolima will request bids for materials and equipment andwill contract for the construction of all 60 and 220 kV linesand substations. Electrolima's own personnel will commissionall lines and substations;

b. the government should agree to engage consultants for thetechnical assistance component of the project under terms ofreference acceptable to the Bank.

A project implementation schedule, which envisages completion of the projectby June 30, 1979, has been agreed upon and would be used to monitor projectexecution (see annex 7).

Procurement and disbursement

3.11 The government would agree to follow the Bank policies and pro-cedures for the utilization of consultants for the technical assistancecomponents of the project. All purchases by Electrolima for Bank-financedequipment would be made following international competitive bidding (ICB)in accordance with the Bank's Guidelines for Procurement. Peruvian regulationsand high import duties (60-100%) effectively prevent ICB for equipment manu-factured in Peru. About one-third of the project's cost represents locally-manufactured equipment - distribution (10 kV and below) cables and transformersand substation structures and accessory equipment. Similar imported equipmentwould cost about 30% less than such non-competitive locally-manufactured equip-ment, so that reserved procurement of these items has the effect of increasingthe project cost by about 10%. Purchase of locally-supplied equipment andmaterials, not financed by the Bank, of over US$80,000 would be made afterlocal competitive bidding procedures; those under US$80,000 would be placeddirectly with the supplier after a comparison of prices with at least twoother sources. This arrangement is satisfactory. While this equipment in-cludes a small foreign exchange component (about h%), the latter has beenshown as local costs in paragraph 37)6 for clarity of presentation.

3.12 Disbursements from the loan account would be made for:

a. the CIF cost of imported equipment and materials;

b. the cost of consultant studies; and

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c. financial charges on the Bank loan through October 14, 1979,the day before the semi-annual repayment date preceding theestimated closing date of the loan.

Estimated loan disbursements are shown in annex 8. Because of the ongoingnature of transmission/distribution improvements, any unused loan balancecould be applied to system extensions similar to those included in theproject after consultation with the Bank.

3.13 In order to avoid delays in project execution, Electrolima wouldpurchase equipment and materials, such as cables and meters, prior to thedate of loan signing, to be financed by the proposed loan. Therefore, re-troactive financing of up to US$1.1 million for payments made after July 1,1975 has been agreed.

Environment

3.14 Electrolima has carried out its previous projects with due regardto ecological and environmental factors and expects to do so with thisproject. Most of its distribution system is underground because of, interalia, aesthetic reasons. As detailed in paragraph 4.05, there is somequestion as to whether the aesthetic benefits and reduction in congestionoffset the higher costs associated with underground systems, so that theproject provides means whereby Electrolima may in due course decrease theproportion of underground lines, with eventual resultant savings. Thecompany intends to route its overhead lines so as to minimize their visualimpact.

Project risks

3.15 While the price contingencies assumed ap-;'ar L- be sufficient,further local inflation could result in cost increases beyond those fore-cast. As noted in paragraph 6.04, Electrolima's financing plan includessome cash build-up, which would cushion the impact of such further inflation.

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4. Justification of the Project

Sector objectives

4.01 The Bank's objectives in lending for electric power developmentin Peru are:

a. to stimulate the government to organize the electric powersector in the most efficient manner and define its financialpolicy towards the sector in order to provide the necessaryinstitutional foundation for effective public utility operations;and

b. to provide for the training of key administrative, operative andplanning personnel in the sector in order to help Electroperu inbecoming an effective enterprise.

Project objectives

4.02 Besides assisting the government to formulate a progra-n to meet theabove goals and serve as a basis for further assistance, the project wouldprovide facilities to expand Lima's distribution system and thus meet future

demands for electricity in that city (which accounts for 35% of the nationalmarket) without a reduction in the quality of service and would assist Electro-lima in its planning and maintenance operations and its tariffs. The projectwould be instrumental in making available public-service electricity to thepueblos jovenes as Electrolima would build distribution facilities in them, in-cluding the necessary substations and transmission lines. It is estimated thatthe households in the pueblos jovenes with public-service electricity would in-crease by about 230% by the end of 1978.

Demand and generation forecast

4.03 The average gro-th in the past 10 years has been 9.5% p a. However,the rate of growth has decreased to about 8.5% p.a. in the last five years.Annex 9 gives details of both historical and forecast energy sales and maximumdemand for the Electrolima system. The projection, which assumes an average8.3% p.a. rate of increase in sales of electric energy and in maximum demand,is conservative and reasonable. Generation capacity appears to be adequate tosupply the projected growth, although there are unresolved problems regardingfuture sector development (paragraphs2.13-2.15).

Size of the project

4.04 The project is of an adequate size to provide Electrolima with thetransmission and distribution facilities in Lima to enable it to satisfy theexpected increase in power and energy requirements without reduction in thequality of service or investment in idle facilities. It will increase totalinstalled capacity in 220 and 60 kV transformers from 2 times the maximumdemand in 1974 to 2.2 times the maximum expected demand in 1979. The exist-ing ratio has allowed Electrolima to provide satisfactory service but theratio will increase as 60 kV transmission is gradually replaced by 220 kVtransmission and 60 kV distribution. Electrolima has kept a relatively low1.18 ratio of the total installed capacity in 10 kV transformer to peak demand.

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At the end of the project, the ratio will have decreased to about 1.12 dueto expected increases in services at 60 kV.

Type of facilities

4.05 In most areas of the world, overhead transmission/distributionsystems are usually lower-cost than underground, although new materialsand advances in underground construction methods have decreased the differ-ential in recent years. Consideration of the non-quantifiable costs ofincreased urban and suburban congestion and the detrimental aesthetic effectsassociated with overhead systems has in many cases, however, resulted in apreference for underground facilities. Because of Lima's unique climaticsituation - extremely dusty conditions caused by an almost total absence ofrain and a salt-laden atmosphere, combined with extremely high hurnidity -Electrolima has demonstrated that the higher maintenance cost of overheadfacilities reduces their cost advantage and has opted for continuation of abasically underground 10 kV distribution system with some overhead lines onthe outskirts of the city in the 1975-78 program. The project already in-cludes a larger percentage of overhead lines than previous expansion programsand the inclusion of consultant services for a review of the planling pro-cess and of the weight given to the non-economic advantages of undergroundlines and of training in hot-line maintenance of overhead lines as part ofthe project, should eventually reduce the cost of maintaining the overheadsystems, reduce Electrolima's staff opposition to them and prepare the wayfor future projects to have an increasing proportion of overhead lines,thus reducing capital requirements and resulting in eventual savings.

h.o6 For most of the equipment included in the project, such as metersor communication equipment, no reasonable alternative exists. Where alterna-tives do exist, e.g. in routing of lines and location of substations, Electro-lima has selected the least-cost solution which is compatible with safetyand aesthetic considerations.

Return on investment

4.07 It is difficult to determine the economic value of Electrolima'sincremental energy needs as Electroperu has not priced its sales to Electro-lima on the basis of its costs to expand and operate the Mantaro plant, fromwhich these sales will be made. The uncertainty regarding the future pro-gram (paragraphs 2.13-2.15) does not allow a reasonable calculation for thecost of generating the required incremental energy at the other plants in-cluded in the program. It is, however, possible to establish a range ofcosts and from it determine a range of economic rates of return of the project.

4.08 The rate of return of the project as calculated on the basis of thepresent purchase price of energy by Electrolima from Electroperu and the re-commended Electrolima tariff is about 8.4%, while that obtained with the presentElectrolima tariff is about -2.2%. As shown in detail on annex 10, the rate ofreturn is quite sensitive to the cost of the incremental energy obtained byElectrolima. As indicated below, the present purchase price is higher than theprobable incremental cost of electricity and therefore represents the maximumeconomic value of this energy and hence, results the lowest rate of return.

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If, for example, the purchase price is substituted by the incremental costof an alternative fuel-fired plant the rate of return rises to about 4.7%at the present tariffs and to about 12.8% at the recommended tariff level.At the estimated costs of the most probable next generation addition to thesystem, the Restitucion project, the rates of return are about 6.8% and14.4% respectively.

4.09 The rate of return of the project is less sensitive to variationsin the cost of the project, as also shown in detail in annex 10. An increaseof 20% in the project's costs would lower the rate of return to -)X.3% at thepresent tariff level and to about 5.4% at the recommended level. A decreaseof the same magnitude in the project's costs would increase the rate of re-turn to about 0.8% and 13% respectively.

4.10 The range of rates of return (8.4 to 14.4%) obtained at the recom-mended average Electrolima tariff for sales to the public comrpares favorablywith the opportunity cost of capital for Peru. The above range is based onefficiency prices, which in this case differ from market prices only by theamount of import duties estimated at 10% of total costs, but use of marketprices would not effect the results materially.

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5. The Beneficiary

5.01 The beneficiary of most of the loan would be Electrolima, thepublic-service concessionaire for Lima and its environs. Electrolima wasformerly a privately-owned, Swiss-controlled company. The governmentestablished control over it in 1973 by assuming ownership of the public-domain assets managed by the company (annex 2). It has reached agreementto acquire the holdings of the foreign interests which previously owned21% of Electrolima's shares and has also finalized agreements with the localholders of 25% of the shares. It now owns almost all of the company's shares,mostly in Electroperu's name.

5.02 The government has also reached agreement with the Swiss interestswhich controlled Energia Hidroelectrica Andina SA (Hidrandina), a companyformed in 1946 to provide bulk electricity to the Electrolima system. Inaddition to the Moyopampa and Huampani hydro plants, all of TAhose generationElectrolima purchases, Hidrandina also operates a separate concession northof Lima.

Organization, management and staff

5.03 Electrolima is well organized (annex 11 shows the organizationchart), and its management and staff are competent to execute the projectand operate the system. The composition of the 15-man board of directorsreflects the change in Electrolima's control; all members are governmentrepresentatives, The board and the executive president (a new po3itioncreated by the government-controlled board) control policy matters to amuch greater degree than previously, when a particularly forceful generalmanager effectively controlled all aspects of the company. The inevitabletransitional problems associated with the change in control have not signi-ficantly interfered with management's administration of day-to-day operations,which reflects its capability. Most of the top management positions formerlyheld by Europeans are now filled by Peruvians. The company's policy ofpromotion from within, the depth of its middle management and supervisorypersonnel, and its training program have served to provide sufficient manage-ment continuity.

5.04 At the end of 1974, staff numbered 2,407 which represented 227 cus-tomers/employee, up from 120 in 1964 and 180 in 1970. These ratios are indica-tive of a high degree of efficiency. Several unions represent Electrolima'semployees; while competion among them has contributed to some differences ofopinion between management and the unions, the company has been able to re-solve the issues without negative effect on the quality of service. The ef-fect of the workers' community to be established by the general electricitylaw (paragraph 15 of annex 2) cannot be determined at this time.

Market

5.05 WThile industrial consumption forms a smaller portion of Electrolima'smarket than of electricity consumption in the entire country (paragraph 2.10),it is still the largest factor in Electrolima's market. The relative marketshares of different consumer classifications are not expected to change signi-ficantly during the project execution period, as summarized below:

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Actual Projected1973 1974 1978

GWh 7 GWh GWhi

Residential 709 31 785 32 1088 32Commercial 370 16 383 15 501 1lIndustrial and mining 1020 44 1099 44 1513 44Other 200 9 222 9 326 10Total 2299 100 100 70 100

5.o6 In 1974 Electrolima served 545,000 customers, 55,ooo of which werein pueblos jovenes. In 1979 the total number of customers is expected to in-crease to 770,000, and those in pueblos jovenes, to quadruple. Eiectrolima'squality of service has been good and is expected to continue so.

Management information systems and audit

5.07 Electrolima's internal management information system is good:operating and financial reports are prepared accurately and promptly; andcustomer records and accounting systems have been computerized. ]:ts financialstatements are audited by Moreno, Patifio y Asociados, which has a working re-lationship with Price Waterhouse & Co. The proposed project agreementwould require audited financial statements and the auditors' report to betransmitted to the Bank within six months of the end of Elpctrolima's fiscalyear. Electrolima has generally complied with this covenant in the nast.

Performance indicators

5.o8 Annex 12 shows a representative selection of indicators of Electro-lima's marketing, operating and financial performance through the year follow-ing project completion. Performance as measured by these indicators would bemonitored during project execution.

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6. Finance

Summary

6.01 As detailed in annex 13, Peruvian regulatory authorities haveincreased Electrolima's tariff levels sufficiently to enable the company toachieve satisfactory financial results in 1975, in contrast to its unsatis-factory performance in 1972-74. To assure that Electrolima's financial per-formance continues to improve, it is provided in agreements related to theproposed loan that the company would earn sufficient revenues to contribute,from internal resourcesnot less than 3:% in 1976 and 45% in each year sub-sequently, to its investment program. Attachment 1 to annex 13 containsprojections of Electrolima's key financial indicators, which are expectedto improve as a result of the utility's higher earnings and reduced dependenceon borrowing.

Tariff levels

6.02 Prior loan agreements with Electrolima have not included specificcovenants relating to tariff levels because the 1955 regulatory law and itsapplication were satisfactory. Because of the effective suspension of thatlaw (with respect to tariffs) and the lack of clarity of the normative anddraft general laws (annex 3), such covenants are provided in agreements re-lated to the proposed loan. It is provided that Electrolima will apply for,and the government will grant, tariff adjustments sufficient to enable Electro-lima to contribute, from internal sources, to its expansion requirements atleast 30% in 1976 and 45% p.a. in subsequent years. To meet these covenants,Electrolima will require increases of 11, 16, 10, 7 and 4% in its overall tarifflevels in each of the years 1976 through 1980. It has already applied for1976 increases of about 16%; subsequent increases would be handled on a year-by-year basis

6.03 Although more specific, the above provision is consistent with thedraft general law, which provides that the utility's rate of return (to bedetermined by MEM - see paragraph 4 of annex 3) will enable it to contributeto an expansion fund. To establish a reasonable value for applicationof the still-undetermined rate of return, MEM increased the value of Electro-lima's rate base by 40% in 1975, thereby offsetting deficiencies in thisregard since 1968. Agreements related to the proposed loan provide for annualrevaluations of Electrolima's rate base.

Financing plan

6.04 Assuming that Electrolima and the government comply with the pro-visions proposed above, Electrolima's project financing plan would be accept-able. Net internal cash generation would amount to 28% of the company's finan-cing requirements (44 % if connection fees are considered as internal cashgeneration), which include substantial working-capital increases to pay offremaining short-term debt and provide some cushion for higher-than-expectedrequirements. Borrowings from the Bank and Peru's Corporacion Financiera deDesarrollo (COFIDE) would provide 3C%, and contributions from the governmentand developers (see attachment 7 to annex 13), 26%. To assure that earningsabove the legal dividend requirement are reinvested in utility assets, theproposed oroject agreement limits Electrolima's dividends to o.5% p.a. of thevalue of shares entitled to dividends. Electrolima's funds forecast is sum-marized below and detailed in attachment 3 to annex 13:

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Financing plan 1975-79- - - millions - --Soles US$ _

Requirements of fundsConstruction program incl. IDC (see note):The project 6,131 136.2Future works 1,601 35.6Developers' construction 1,54o 34.2Total construction 9,272 206.0 93

TWorking capital increase 684 15.2 7Total requirements 9 956 221.2 100

Sources of fundsNet operating income plus provisions 9,h11 220.2Less debt service, dividends and income

taxes 7,147 158.8Net internal cash generation (exclud-ing connection fees) 2,764 61.4 28

Connection fees 1,612 35.8 16Proposed borrowings:IBRD 1 34.oCOFIDE 1,450 32.2Total borrowings 2,980 30

Contributions:Government 1,060 23.6Developers 1,54 3.2Total contributions 26oo T57.8 26Total sources 221.2 100

Note: The total project amount of S,/6,,131 'i$36.24)million reflects Electro-lima's policy of capitalizing IDC for the construction period of eachproject component and is therefore higher than the project cost ofS/6,087 million shown in paragraph 3 D6, but lower than Electrolima'sfinancing requirements.

6."5 The proposed US$36 million Bank loan would be made to the Republic ofPeru for a term of 20 years including three years of grace at the current Bankinterest rate, assumed to be 8.5% p.a. The government would relend UE$33.9million of the loan to Electrolima on the same terms. As noted in paragraph3.06, US$2.1 million of the loan woul(d be for technical assistance to thegovernment. This portion is not included in the above financing plan or inthe more detailed financial projections attached to annex 13.

6.06 COFIDE has approved a S/40o million loan to Electrolima of whichS/lqO million was disbursed in 1975. COFIDE has also indicated its agreement,in principle, to provide an additional S/850 million to Electrolima over theperiod 1976-78. Eletrolima would, nresumably, ma;e arrangements with uorIDEto obtain bne S/ .60u million n,eded to iieet its fin.ncinb require:cents in 1979and 1980. COFIDEts current terms are nine years including two years of grmce,11% annual interest.

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Security

6.07 In past lending operations Electrolima has issued bonds to theBank under an open-ended indenture written in 1957 between Electrolima andSchr5der Trust Company; use of this indenture has been necessary to preventprivate bondholders from having a prior claim on Electrolima's assets.Repetition of this requirement is not necessary because the proposed loanwould be made directly to the Republic of Peru.

Debt service coverage

6.o8 The Bank has previously relied on financial tests included in the1957 indenture which provide that:

a. Electrolimals net income before interest and taxes should equalat least 150% of its interest on funded indebtedness; and

b. Electrolima's net tangible assets should be at least 150% of itstotal funded indebtedness.

These tests did not prevent Electrolima from amassing very large amounts (overUS$20 million) of short- and medium-term debt in 1968-73, which were re-financed only with governmental assistance in 1974, and a portion of which(S/535 million in overdrafts at year-end 1975) remains to be liquidated. Togive the Bank an opportunity for closer review of Electrolimals financial situa-tion, the proposed project agreement provides th-t Electrolima will not incurlong-term debt without the Bank's approval unless its most recent 12-monthinternal cash generation is at least 1.5 times its maximum debt service re-quirement (including the debt service on the proposed loan as well as exist-ing ones) for any succeeding fiscal year. Because Electrolimals debt serviceis expected to be high throughout the project period, Bank approval of futureborrowing is expected to be necessary. To prevent Electrolima from undue re-liance on short-term debt, the proposed project agreement also provides tPatElectrolima's maximum short-term indebtedness at any date is to be limited toone-sixth of its operating, maintenance and administrative expenses (exclusiveof depreciation and other non-cash provisions) during the preceding twelve-month period.

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7. Agreements Reached and Recommendations

7.01 In the proposed loan agreement, the government would agree to:

a. execution by acceptable consultants of the studies comprisingthe technical assistance component of the project (paragreph 2.06).

7.02 In the proposed project agreement Electrolima would agree to thefollowing matters:

a. use of consultants for the project (paragraph 3.09);

b. submission of audited financial statements (paragraph 5.07);

c. maintenance of tariff levels so as to provide sufficient fuidsfor an adequate contribution-to-expansion (paragraph 6.02);

d. dividend limitations (paragraph 6.04); and

e. limitations on Electrolimals long-term and short-term inidebtedness(paragraph 6.08).

7.03 Prior to declaring the loan effective, the Bank should receivenotification that the subsidiary loan agreement between Electrolirma and thegovernment has been signed.

7.04 The project constitutes a suitable basis for a Bank loan of US$36million for a term of 20 years with a three-year grace period.

February 11,1976

Annex 1


Previous Bank Lending to Electrolima

Loan Loan Loan amount (in Project Principalnumber date US$ millions) name project component

260-PE 1960 24 Huinco Construction of -the Huincohydro station with two unitsof 60 NW each

365-PE 1963 15 Huinco 11 Expansion of the Huinco sta-tion to install two additionalunits of 60 MW each to bringtotal installed capacity to240 KW

464-PE 1966 10 PowerDistribution Expansion of the transmission

and distribution system 1966-68

511-PE 1967 17.5 Matucana Construction of the Matucanahydro station, with two unitsof 60 MW each

September 1975

Annex 2Page 1 of 4 pages


Organization of the Electric Power Sector

1972 restructuring

1. Prior to 1972, the public-service portion of the sector was composedof distinct private, municipal and state entities serving concession zones orregions; no national sector planning or coordination existed. Captive plantsserving large mining and industrial installations, which account for about 4C0of total electricity generation, were generally not interconnected with publicservice systems. Decree law no. 19521, the Normative Electricity Law of Sept-ember 1972, made the State the primary factor in the sector by reserving forit the responsibility for public-service electricity supply, creating a cen-tral State-owned enterprise (Electroperu); providing for State participation inexisting private utilities (by far the largest of which is Electrolima); and pro-viding for interconnection of power systems (see paragraph 5).

2. The normative law gave Electroperu primary responsibility for plan-ning, studying, engineering, construction, construction supervision, andoperation of all new generating facilities larger than 10 MW and for the trans-mission/distribution functions of State electric utilities. To accomplish thenecessary sector and project feasibility studies, engineering, and construc-tion supervision, the law created the Instituto de Investigaciones Energeticasy Servicios de Ingenieria Electrica (INIE), which was to report directly toElectroperu's executive president and thus be independent of Electroperu'soperating division. As detailed in paragraphs 6 and 9 it consolidated allthen-independent State-owned electricity agencies into Electroperu and pro-vided for incorporation of municipally-owned utilities within two years andfor Electroperu to represent the State in the management of other electricutilities.

3. State participation in the other utilities was accomplished by meansof capitalizing public-domain assets. Prior to 1972 those assets, which areprimary and secondary distribution facilities paid for by third parties (prin-cipally by the developers of new communities, existing customers through tariffsand new customers who would recieve the service) and located in public streets(in Electrolimals case, outside its original concession zone) but maintained by theutilities were not classified as assets of the utilities. The normative lawdeclared the State to be the owner of the public-domain assets and providedthat the State contribute such assets to the appropriate utility, receivingtherefor shares equivalent to their value; such shares are not entitled todividends.

4. Increased State participation in the private utilities is assuredby other sections of the law which provide that the State is to be the ex-clusive buyer of all new shares issued by utilities and of all shares cur-rently held by non-Peruvians.


5. Other sections of the normative law oblige non-State utilities andcaptive plants to intercoimect their systems with Electroperu's when the Stateenterprise deems such interconnection necessary. The law's provisions wereextended in the M4arch 1974 Electrical Interconnection Law no. 20560, whichgives Electroperu responsibility for load dispatching and the Direccion Generalde Electricidad (DGE) responsibility for establishing interconnection tariffs.

Present situation

6. The State-owned electric utilities which were combined to formElectroperu were:

a. Corporacion de Energia Electrica del Mantaro, whose principalfacilities are a 342 MW hydro station, with an ultimate capacityof 798 MW and transmission facilities to supply electricity fromMantaro to Lima, Ica and Independencia (see map 11797);

b. Corporacion Peruana del Santa, which operated the 100 MW Canon delPato hydro plant and 82 MW of gas turbines to serve the Chimbote-Trujillo region;

c. installations run by agencies reporting to the Sistema Nacionalde Apoyo a la Movilizacion Social, which include several hydraulicand thermal generating plants, generally less than 50 MW each,in various regions; and

d. Servicios Electricos Nacionales, which operated about 250 smallisolated thermal installations.

7. Electroperu has divided the country into the following five opera-ting regions (with principal cities in each region):

North-central interconnected - Lima, Chimbote, TrujilloNorth - Bayovar, Piura, TalaraSouth-west - Tacna, Arequipa, PunoSouth-east - CuzcoEast - Iquitos, Pucallpa

The north-central region is by far the largest electricity market withelectricity generation amounting to 87% of the country's total.

8. Electroperu's operating results leave room for improvement. Its1973 operating losses exceeded SI 300 million (tariff increases and increasedenergy sales from its largest installation - the Mantaro hydroelectric develop-ment - are expected to improve these results). Its control over operations,particularly over the 250 isolated plants for which it is responsible, islimited. Completion of a major 220 kV transmission line to link the Chimbote-Trujillo region with the central region (see map 11797) will be seriously de-layed because of difficulties in arranging financing to pay for expected costoverruns.


9. Electroperu's participation in the management of other utilitiesis not being carried out as provided in the normative law. No representativeof Electroperu sits on Electrolima's board of directors or otherwisewparticipatesin the company's management.

10. INIE has been separated from Electroperu, presumably to report toMEM. Its basic laws remain unwritten, however, and the failure of the draftgeneral law to recognize its existence (see paragraph 17) leaves its futurestatus in doubt.

11. With respect to Electrolima, the go7rernment has concluded negotiations -acquire the 21% interest in the company held by foreign shareholders. The govern-ment has proposed the terms of acquisition for the 25% of Electrolimats sharescurrently in private Peruvian hands; the governmentts proposal was approved ata shareholders' meeting in October. The shareholders will receive bonds in ex-change for their shares; terms of the bonds are detailed in attachment 7 toAnnex 12. Once this process is completed, state agencies, principally Electro-peru, will be the exclusive owners of Electrolima's shares.

Present organizational problems

12. Despite the provisions of the normative law which gave Electroperuoverall sector responsibility (paragraph 3), DGE has assumed responsibilityfor sector planning and selection of future generating and transmission works,citing its own organic law as authority for doing so. This arrangement, whichleaves to Electroperu only the execution and operation of the selected works,is very unusual. In most electric power systems, the agency responsible forplanning, designing and executing works to meet expected growth in demand isthe operating agency, subject to governmental review only for policy and/orbudgetary purposes. The reasons for this are threefold: the operating agencyhas more direct contact with the market for electricity - distribution com-panies and/or retail consumers - and hence is in a better position to fore-cast future requirements and coordinate its installation program with presentor prospective customers' needs; it has a more thorough knowledge of fieldand operating conditions, which allows it to take into consideratiorn the capa-bilities and limitations of its system to handle the expected loads; and itis in a better position to accept all the responsibilities connected with plan-ning decisions related to quality of service, such as amount of reserve, out-age expectancy, etc.

13. The results of the unique arrangement found in Peru are not en-couraging. Both DGE and Electroperu have prepared their own market forecastsand formulated a list of projects to meet the expected demand. The validityof their demand forecasts, however, is questionable because the forecasts arebased on assumptions of industrial expansion which may not reflect the currentsituation. There is no adequate hydro survey of the country; instead, indi-vidual surveys of Peru's major river basins have been prepared by variousforeign consultants and local agencies. While pre-feasibility and feasibilitystudies of certain hydroelectric developments (e.g., the Restitucion plantdownstream from the Mantaro plant, the Sheque plant upstream from Electrolima'sexisting H-uinco plant and the Chorro plant upstream from Electroperu's existing

Annex 2Pag of 4 pages

Canon del Pato plant) exist, they may not be comparable because non-coincidentand uncoordinated study preparation may have resulted in the use of incom-patible assumptions.

14. To improve this situation, the proposed loan includes US$2 millionto assist the government in improving coordination among its power sectoragencies, establish a "master plan" of future generating and transmissionworks, identify the training needs of sector personnel (including but notlimited to Electroperu's) and propose means of meeting those needs. Themaster plan would include reliable projections of energy requirements for theperiod 1977-96, a nationwide hydro survey, pre-feasibility-level cost estimatesfor the most promising hydroelectric sites identified in the survey., and theresultant least-cost scheme to meet the forecasted requirements. The Governmenthas agreed to the proposed terms of reference for this study (see the attachmentto annex 6).

Future developments

1. Most foreseeable future developments concerning the power sector'sorganization are embodied in the draft general electricity law which MEMpublished in late 1974. The noteworthy features of the draft are that it:

a. confirms the division of responsibility for sector planning,selection, execution and operation of works advocated by DGE(paragraph 12);

b. provides for incorporation of all utilities into Electroperu atan unspecified future (iate;

c. fails to mention INIE;

d. provides for a unified national tariff (see annex 3);

e. establishes two funds, the electric development fund (fondo dedesarrollo electrico) and the network improvement fund (fondo deampliaciones de redes) to provide for financing of system expansion.The former is to be funded by a portion of the rate of return to bedetermined by DGE and the latter, by contributions from developersand consumers to pay for the distribution works now known as public-domain assets (paragraph 3); and

f. creates a workers' community (comunidad de electricidad) toparticipate in the management of electric utilities and in theirearnings and financing through a complex financing scheme detailedin annex 12.

September 1975



Electricity Regulation and Tariffs in Peru

Regulation

1. Electricity tariffs in Peru are regulated by the Direccion Generalde Electricidad (DGE), which has already begun to take steps to implement thefeatures included in the draft general electricity law (annex 2). Among themore noteworthy features are:

a. the creation of a tariff system which provides for the eventualimplementation of a unified national tariff (under which standardservice classifications, demand charges and block energy rateswould be established for nationwide application regardless oflocation or sources of electricity);

b. bi-annual review of tariff levels; and

c. determination of the allowable rate of return every four years.

2. Implementation of the unified national tariff would be gradual. Asan interim step the draft general law provides for the implementation ofregional tariff systems. The draft law also establishes a compensation fund(fondo de compensacion tarifario) into which utilities whose revenues exceedrevenue requirements would contribute and from which those wihose requirementsexceed revenues would draw. DGE personnel have already drafted proposals re-lating the tariff levels to be charged various customer classifications tothe overall average tariff levels. These relationships would be similar to

those inherent in Electrolimats tariffs (see paras. 8-10) and would be determinedmore by political than by technical or economic factors. Under this system,commercial and general-use tariffs are extremely high; governmental-use (ex-clusive of water pumping, which is off-peak), about average; and residentialand industrial, quite low,

3. While the draft law provides for tariff-level reviews every twoyears, the underlying philosophy apparently does not prevent more frequenttariff adjustments to compensate for inflation rates higher than expected

in the original biennial determination. Electrolimals 1975 tariff increases provideevidence of this pragmatic approach: after having received an overall 30%tariff increase in February 1975, a further increase of about 7% was putinto effect in July.

4. Under the draft law the utility's revenue requirements are to beits cost of doing business (broadly defined as purchases of goods and ser-vices and personnel costs - presumably related to operations and maintenance -taxes and provisions for depreciation using average useful lives determined byDGE) plus an appropriate rate of return to be determined every four years byMEM. This rate of return is designed to cover, in order of priority:


a. the utility's financial charges;

b. 70% of its contribution to the workerst community (paragraph l5fof annex 2); and

c. a contribution to the electric development fund (paragraph l5eof annex 2) to be determined by DGE.

Any excess profits (excedente economico) after deducting these charges wouldbe applied to the remaining 30% contribution to the workers' community andother uses to be determined.

5. As an interim measure (presumably until their consolidation intoElectroperu), the draft law would allow private or mixed utilities to includean 8.5% return on shares entitled to dividends in their rate of return.

6. The draft law's lack of specificity (e.g. with regard to the mannerin which contributions to the development fund are determined, what constitute"financial charges" and whether tariff adjustments will be awarded more fre-quently than bi-annually in case of high inflation) gives DGE a greater degreeof latitude in determining the self-financing capability of utilities than iscommon in many other countries' regulatory laws or in Peru's existing ElectricIndustry Law No. 12378 of 1955 (which, although nominally the regulatory lawuntil the general law has been made effective, has effectively been supersededby the provisions of the draft general law). In 1975, when arrangements forthe government to acquire private shareholders' remaining interests are ex-pected to be completed, regulatory attitudes towards the financing needs ofutilities in general and in particular have become more favorable than inprevious years, as indicated by the following:

a. DGE officials have indicated their intention to allow Peruvianutilities to self-finance 20-30% of their expansion programs; and

b. Electrolima has received two tariff adjustments through July 1975, whichwill enable it to achieve satisfactory financial performance forthe first time in four years (see chapter 6).

Because of the de facto suspension of existing regulatory legislation, thelack of clear guidelines in the rnormative law and the lack of specificity inthe draft general law, a specific rate covenant similar to the draft generallaw's interim allowable-earnings clauses (paragraphs 4 and 5) is proposedfor inclusion in the loan and guarantee agreements (see paragraph 6.02 of thetext).

7. Even with government agreement to this covenant, Electrolima's self-finanicing capability would be closely monitored during project supervision,for there is a risk that Electrolima will not be granted tariff increasesof sufficient size or with sufficient frequency to maintain its self-financingcapability in the face of continued high inflation rates (see paragraph 3.17of the text).


Electrolima's tariffs

8. Electrolima's present tariffs, which are summarized in the attachment,contain both reasonable and questionable features. Among the reasonableones are:

a. lower charges for off-peak consumption, both for water pumpingand for large industrial consumers, which have day-night metering;

b. reactive energy charges for all but the smallest industrial custom-ers; and

c. some allowance (an 8% discount) for lower-income residential con-sumers' (living in pueblos jovenes) basic consumption.

Other features deserve further investigation. _ Among the more notable are:differing demand charges among various sizes of industrial customers; thelack of a significant spread (or, in the case of nighttime large industrialconsumption, the existence of a negative spread) between Electrolimals industrialtariffs and its incremental costs (Electroperu's tariffs); the very largedifferential between industrial/residential tariffs and commercial/general,which may indicate that the latter are subsidizing the former; and relativelyhigh connection fees, which, while offsetting to some degree the financialeffects of low residential tariffs, may inhibit lower-income residents' accessto public-service electricity supply.

9. As far as can be determined, the differentiation among tariffs ofvarious customer classes reflects the government's desire for popular supportand to stimulate industrial development rather than any assessment of the costof providing service. The proposed loan includes funds for studies to determinethe incremental cost of providing electricity to the various customer classesin the metropolitan Lima area, to assess the effect on the economy of Electrolimatsexisting tariff structure (assuming that it does not reflect marginal costs)and to propose an alternative structure which reflects marginal costs.

10. Prompt completion of such a study is feasible because Electrolima hasadequate market statistics for its service area ( which may not be available for therest of the country) and particularly necessary because the general scheme ofElectrolima's tariff structure exemplifies the approach which DGE intends to take inestablishing regional and ultimately, national tariff schedules. By assessingthe effect of Electrolimats tariff structure on energy consumption and the econorythe study could serve as a basis for reviewing tariff policies for not onlyElectrolimals service area but the rest of the country.

Attachment

September 1975

M4onthly Electricity Tariffs in Metropolitan Lima Area

(in sales)

ElectroperuE.Lectroiit" tariffs tariffs

Tariff no. 20: Tariff no. 21:Residential - Residential -other than pueblos jovenespueblos jovenes

Residential service

First 30 kWh: minimum bill per month 31.00 28.50Next 100 kWh - per kWh 1.i36 1.27Next 70 kWh - per kWh 1.15 1.15Excess over 200 kWh - per kWh 1.V( 1.00

Industrial service Tariff no. 30: Tariff no. 31: Tariff no. 32: Tariff no. 33: Tariff no. 34:

Installed capacity Less than 50 kW 50 kW or higher 50-1000 kW 1000 kW or higher 1000 kW or higher N.A.Voltage Al' 0.

22 or 2 kV 10 or 30 kV 10 kV 30 or 60 kV 220 kV

Maximum demand - per kW 114.00 104.00 145.00 104.00 93.60Installed capacity - per kW 27.00Daytime energy (10 as' to 10 pm) - per kWh o.69 5.56Nifhttime energy (10 pnm to 10 am) - per kWh 0.34 0.28All energy - per kWvh 1.00 n.71 0.69 0.59Reactive energy - per kVArh 0.35 0.34 0.44 0.37 0.30

Tariff no. 40:

Commercial service Commercial

First 20 kWh: minimum bill per month 80.00Next 1980 kWh - per kWh 3.85Next 4000 kWh - per kWh 3.55Next 4000 kWh - per kWh 3.05Excess over 10,000 kWh - per kWh 2.75

Tariff' no. 51:Tsriff no,. 50: Governmental Tariff no. 60:

ueneral excl. water WaterOther service Ilse pumping pumping

First 20 kWh: minimum bill per month 80.00 ov.00Next 80 kWh - per kWh 3.80Next 100 kWh - per kWh 2.50Next 180 kWh - per kWh 2.'0First 200 kWh: minimum bill per month 500.00 oxExcess over 200 kWh 2.00 1.30 0.75 it

September 1975

P. ?'PRATS F FIl?FT. 1 PR(JTCE - PERU

Installed Generating Capacity,Electric Energy Generation

and ConsuTnption

1961 1969 1970 1971 1972 1973 1974

Installed Capacity mWPublic Suppliers 480 851 863 9 1076 1320 1431Captive Plants 573 801 811 823 854 834 831

Total 1053 1652 1677 1797 1930 2154 2265

Hydro 539 918 923 989 1057 1278 1388Thermal 511 734 754 808 873 876 877

Generation G`ThPublic Suppliers 16214 2786 2930 3297 3525 3892 4312Caftive Plants 2078 2502 2599 2652 2761 2763 2960

Total 3702 5238 5529 5949 6289 6655 7272

Hydro 2280 3701 3821 4283 4536 4769 5219Thermal 1422 1587 1708 1666 1753 1886 2053

Eiectric Energy Consun)tion and Losses - GWhPublic Lighting 156 176 170 185 205Residential 776 855 909 948 1067Commercial 374 409 389 435 505Industrial 1620 1660 2025 2126 2279Agricultural 74 83 78 61 67Mining 1681 1683 1612 1704 1770Fisheries 145 130 165 76 67Other Uses 88 119 82 122 37Losses 3714 14114 519 496 658

Total 72i9 59149 F73- (1) Z6WT

(' ) Refers to 97.85>' of Generation

SOURCE: Direccion General de Electricidad - Anuario de Estadistica Electrica0

PERUMaximun Denand and Electric Energy Generation

Main Systems

1970 1971 1972 1973 194_

1. Maximum Demand (MW)Central Re-gion

Lima-CalJio (Electrolima) 391 425 444 488 516Centromln-/ 12tE 129 130 128 N.A.

North RegionElectroperu (Santa) 53 60 57 71 N.A.

Subtotal - North and Central-/ 7 612 31 687Southeastern RegionElectropera (Machu Picchu) 3-0 31 30 5 N.A.

Southwestern RegionArequipa 20 23 24 26 N.A.Electroperu (Aricota) 8 10 11 10 N.A.Southern Peru Copper 1/ 47 49 19 55 N.A.

Subtotal - Southwestern7/ 75 82 84 91

2. Electric Energy Generation (Glri)Central RegionLima-Callao 3/ 1994 2204 2346 2556 2727Centromiln 924 876 974 967 N.A.

North RegionElectroper'u (Santa) 118 250 261 333 N.A.

Subtotal - North snd Central 3036 3330 3584 3856Southeastern RegionElectroperu (Machu Picchu) 146 173 166 208 N.A.

Southwestern RegionArequipa 95 102 110 130 N.A.Electroperu gAricota) 26 31 36 33 N.A.Southern Peru Copper 321 311 325 314 N.A.

Subtotal - Southwestern 442 447 471 477

1/ Centromin and Southern Per(a Copper are mining companies that have their own generating facilities, sell onlya minor percentage of their production to third parties and will purchase their incremental needs from Electroperu.

t/ Diversity disregarded.3/ Includes energy generated by Electroperuts Mantaro and sold to Electrolima but not that sold to others.

SOURCE: Direccion General de Electricidad - Anuario de Estadistica Ealectrica - 1973excent 1??7l data for which source is Empresas Electricas Asociadas - Datos Estadisticos - 19714.

0

PERJInstalled 7eneratinet Capacity and Electric Energy Ganeration

and ConsuLrpticrn by Power Sectcr Regions2/

Public Captive '.talService Plants TNW ILa ydro Thermal

Installed Capacity- NW1. Northern Region 254.6 196.0 450.6 20.9 110.9 339.72. Central Region 917.7 467.7 13ii5.4 64.3 1057.9 327.5

Subtotal 1172.3 663.7 I-36.0 85.2 116.8 667.2

3. Eastern Region 135.6 162.1 297.7 13.8 109.5 1881.24. Southern Regicn 12.? S .C 20.2 l.0 - 20.2

TOTAL - NW 1320.1 833.- 2153.9 100 127k.3 875.6

% 61.3 36.7 -To= ~ _59.3 ' 40.7GWh

Electric Energy Generation - GWh1. Northern Region 523.4 481.1 1004.5 15.1 343.9 660.62. Central Region 2939.5 1838.5 477c.0 71.8 4048.9 729.1

Subtotal 2319.T 5782.5 8K.9 392.8

3. Eastern Region 394.9 410.3 805.2 12.1 376.0 429.24. Southern Region 34.2 33.0 67.2 1.0 - 67.2

TOTAL - G-Jh 3892.0 2762.9 6654.9 100 4768.8 1886.1

v5 1.5 100 71.7 28.3

Public TotalLighting Residential Commercial Industrial Agriculture Yining Fisheries Other 6Wh %

Electric Energy ConsumptionL/- GW,1. Northern Region 26.8 116.6 24.0 603.8 49.3 57.5 25.2 3.5 906.7 15.12. Contra.l Reon 151.5 832.8 457.2 1392.3 13 1414.8 34.8 14 4310.4 71.9

Subtotal 178.3 949.4 4 8 1.2 1996.1 75 17423 dO0O 17.5 5217.1 -7.

3. Eastern Region 2.3 14.5 6.5 32.8 - - - 2.4 58.5 1.04. Southern E'egion 24.4 102.8 17.0 250.3 4.4 298.1 6.9 16.8 720 7 12.0

TOTAL - GWh 205.0 1066.7 5°4.7 2279.2 6c.7 170.4 0'6.8.9 38- 5996.3 100

% 3.5 17.8 8.4 38.0 1.1 29.5 1.1 .6 10

1/ For power sector purposes, the country has been divided into regions as follows:- The Northern Regt<n includes the departments of Amazonas, Ancash, Cajamarca, La Libertad, Lam>alreque, Piura and Tunbes.- The Central Region includes the departments of Ayacu(cho, huancavelica, huanuco, Ica, unin, Liina and Pasco.- The Eastern Region includes the departments of Loreto and San Martin.- The Southern Regi n includes the departments of Apurimac, Cuzco, Madre de Dios end Puno, Arequipa, Msquegua, and Tacna.

/ Ref'ers to consulsption by ultima'.e consumer, irrespective of whet-er energy is generated by a public service systemor a private service supplier.

SOURCE: Direccion General de Electricidad - Anuario de Estadistica Electrica - 1972. |9

September 23, 1975

A_NEX NPage 1. of 2


Brief Description of Some Power Projectsbeing considered in Peru

1. Restitucibn _ydroelectric Plant

(a) Location: Department of Huancavelica

(b) Plrpose and description of the Project: This project's on'Ly purposeis to provide electricity. It is located in the Mantaro River,do wnstream from the existing Mantaro hydro station. It utilizesthe water from the tailrace of the existing station carrying itthrough a 1.3 km free-flow tunnel to an underground power plantlocated 239 m below the end of the tunnel. In order to use theoutput of the station in the system, new 220 kV transmission linesto Lima and Mantaro (about 300 kin) would be built.

(c) Present status: INIE has completed the feasibility studies and withthe help of Electrowatt (Switzerland) is preparing bidding documentswhich are expected to be ready by mid-1976. The first uinit in-service date is expected tc; be 1.979.

(d) Estimated cost: US$16O0 mil'ion.

2. Sheque Hydroelectric Plant

(a) Location: Department of Lima

(b) Purpose and description of the Project: This is a multipurpose projectwhich involves the atilization of water resources of the Santa EulaliaRiver's upper basin (80 krm northeast of Lima) and the diversion ofwater from the Mantaro river (Atlantic basin) for power generation,water supply and irrigation. It involves the following constructionworks:

- 10 km of tunnels;- 13 km of canals;-3 low,rock-fill dams (total volume of I450,000 m3 of materia.);- enlargement of existina transandean tunnel (from 12 to 20 in /sec);- installation of a power station (600 ri);- step-up substation (68O VI-JA);- switching substation en2arvement (Callah-uanca);- 4O km of double-circuit transmission lines (220 kV):- enlargement of the exi;t;in Huinco station (75 MW);- two pumping stations (340 NW - .00 GI4h/annuir).

ANNEX 5Page 2 of 2

The Project could be constructed in two stages, the second stageconsisting of the enlargement of the transandean tunnel pumpingstations and related works to transfer waters from the Atlanticto the Pacific basins.

(c) Present status: The feasibility study for the power plants andassoci-ated works has been completed by Mbtor Columbus (Switzerland).The feasibility study for the transandean transfer scheme is beingconducted by Binnie & Partners and is expected to be completed bylate 1975. The bidding documents for the Sheque Project, notincluding the Trans-Andean diversion, have been contracted withMotor-Coluntbus.

(d) Estimated cost: US$300 million, which includes an estimatedUS96L mMllion necessary for the diversion of water from the Atlanticto the Pacific watershed which is an essential part of thismultipurpose project. The diversion cost may be as high asUS$110 million depending on which diversion scheme is adopted.Part of the diversion cost -ould probably be allocated to other usesof water.

3. Chicama - Coal-Fired Station

(a) Location: Department of La Libertad

(b) Purpose and description of the Project: This project woald consistof:

(i) the exploitation of coal deposits, estimated at 270 millionmetric tons of which about 60 million are considered to beproven reserves. The coal has been estimated to have a heatcontent of 6,570 kcal/kg; and

(ii) the utilization of the coal for a 480 IW station (ultimatecapacity) for fifty years.

(c) Present status: PreLiminary studies, including the geological cneshave been made by Kopex, a Polish consulting firm. The feasibilityof the Project is being studied by the same consulbants. It isexpected that these studies will be finished by mid-1977 and thatthe first&unit may be operational by 1980.

(d) Estimated cost: US$116 million, which includes about USp30 millionfor development of the coal mines; it does not include cost oftransmission lines.

October 1, 1575

ANNEX 6Page 1 of 5

APPRAISAL OF FIFTH POUER PROJECT - PERU

Detailed List of Project Components and Costs

A. Electrolimals 1975-1978 Distribution Expansion Program

1. 2?0 kV Lines

San Juan - Balnearios, II km of double-circuit overhead line.

Entrada - Barsi, 2 km of double-cirruit underground line.Sub-total - 26 circuit-ki.

2. (,O kV Lines

San Juan - Villa El Salvador,11.8 km of double-circuit overhead line

San Juan - Atocongo, 4.4 km of double-circuit ove;head line

Zapallal - Ventanilla L.3 kin of double-circuit overhead line

RIiynoso - Barsi 1.6 km of double-circuit underground line

Santa Rosa - Tacna 2.9 km of double-circuit underground line

Chavarr(a - Oqu'-ndo 7.8 km of single-circuit overhead line

Carretera - Central 4.0 km of double-circuit overhead line

Oquendo - La Pampilla 6.5 km cf single-circuit overhead line

Balnparios - Jorge Chavez ).5 km of double-circuit overhead line

San Isidro - Pershing 3.0 km of double-circuit underground line

PershinF - Pando 3.0 Ian of double-circuit underground line

Maranga - Sta. Marina ,.0 km of double-circuit olierhead line

San Juan - Chor'rillos 2.0 km of double-circuit overhead line3ub-total 121h.5 circuit-km

3. 220/60 kV Substations

Sar. Juan : This existing substation will be increased b- 8- ') kV and 1-220 kV bays and by 5, mva by thfe end of 197i and by 2-220 kV bays by 1978.

Barsi : This will be an entirely new substation with an initial capacityof 2li0 mva,

ANNEX 6Page 2 of 5

Chavarrfa : 2-220 kV bays will be added to this existing substation.

Balnearios : This will be an entirely new substation with an initialcapacity of 240 mva.

Zinc Refinery (Cajamarquilla): This substation will be built exclusivelyto serve Minero-Peru's new zinc refinery. Its initial capacity (1978) will be75 mva and its ultimate capacity (1981) will be 150 mva.

1|. The work to be done in 60/10 kV substations will include:

a) New substations, 25 mva each, at Maranga, Pando, Chorrillos,Salananca and of 15 mva at Villa El Salvador.

b) Expansion of thF existing substations at Barsi, San Isidro, Tacna,Mirones, Villa Maria, Puente and Jorge Chavez by 25 miva each, and

c) General imnpovement without capacity additions of the existingsubstations at Chavarria, Oquendo and Santa Marina.

The 10 kV and 220 v system expansion, by Electrolima and tby the publiciomain will include:

233j transformers 10,000/220 v, with an aggregrate capiacii.y of about233 MVh

77J km of underground 10 kV cables

223 km of overhead 10 kV lines

200 km of 220 v lines

175,000 house connections

200,000 meters

6;. The auxiliary services expansion includes the following:

a) Th- expansion of Electrolimats communication system to include thenew substations.

b) The provision of duplicate nicrowave communication links betweenpower stations, to provide a back-up for the existing, unreliablesystem.

c) Replacement of carrier communication between Huirico ar.d Santa Rosaand between Moyopampa and Santa Rosa which is necessary due to theunreliability of the existing system.

d) Expansion of telemetering to Balnearios, Chavarria, Pershing, Barsi,Santa Marina which presently lack the necess;ry facilities toprovide the information required for load-dispatching purposes.

ANNEX 6Page 3 of 5

e) Computing and microfilrning equipment.

f) Office equipment.

g) Transportation equipment.

h) Shop equipment.

7. Consultant's services for

a) for the expansion of the communication and control center -Electrolima does not have within its staff the necessary expertiseto prepare the required technical specifications.

b) for review of planning standards and hot-line maintenance ofoverhead lines - Electrolima requires improving its decision-makingprocess regarding the selection of overhead vs. undergroundlines and to improve its maintenance practices so as toensure the reliability of its overhead lines.

Training: Electrolima .equires to train its field staff in hot-linemaintenance of overhead lines to help it achieve the necessary proficiencyto provide for increased reliability of overhead lines.

B. Technical Assistance to the Government

1. The technical assistance to be provided,with the exception of thetariff studies, is described in the attachment to this annex which contains theproposed terms of reference. It is estimated that about 200 man-months of expert'stime will be required in connection with the technical assistance.

Foreign Costs 6Total Estimated Expenditures by Year - 10 SI

us6 US$ 106 SI 1975 1976 1977 1978 1979A. Electrolima System Expansion

Transmission and Subtransmission (220-60 kV)

220 kV lines o.96 43.2 11.6 11.0 15.9 4.7 -60 kV lines 2.00 90.o 20.9 14.0 18.2 23.2 13.7220/60 substations 5.47 246.1 61.7 49.1 85.3 50.0 _60/10 kV substations 2.07 93.2 21.9 7.1 19.1 25.1 20.0

Sub-total 10.50 472.5 116 .1 13.2 103.0 33.7

Distribution (10 kV and below)

By the concessionaire's funds 7.44 334.8 - 30.0 73.7 125.2 105.9By the public domain's funds 1.01 45.5 - 9.3 9.4 16.4 10.4Sub-total .35 _ - 39.3 141.6 =3

Auxiliary Services 7.40 333.0 - - 100.0 150.0 83.0Consulting Services .13 5.9 - - 3.9 2.0 -Training .13 5.8 _ .8 3.0 2.0

Total Direct Costs 26.61 1197.5 116.1 120.5 326.3 399.6 235.0

Physical contingencies 1.75 78.8 - 9.5 23.9 28.9 16.5Price contingencies 5.01 225.4 - 12.0 55.4 85.3 72.7

Total - Part A 33.37.a/ 1501.7 116.1 142.0 405.6 513.8 324.2

B. Governmental Technical Assistance

Tariff studies .10 4.5 - - 4.5 - _Power sector organization studies .18 8.o - 5.0 3.0 -Market survey and master plan .80 36.o _ 14.o 22.0 -Training .31 14.0 -_3. 0 11.0

Total Direct Costs 1.39 62.5 _ 19.0 32.5 ll,o-

Physical contingencies .19 8.6 - 2.7 4.2 1.7Price contingencies .32 14.4 - 3.0 7.2 4.2 _

Total - Part B 1.90 85.5 - 24.7 43.9 i6.9 - X x

Total Foreign Project Costs 35.27 1587.2 116.1 166.7 449.5 530.7 324.2 X

g Includes US$3.0 million to be financed by Electrolima. OtaQ

Local Costs Estimated Expenditures by Year - 106 SI

Total106 US$ 106 5/ 1975 1976 1977 i978 1979

A. Electrolima System ExpansionTransmission and Subtransmission (220-60 kV)

220 kV lines 2.17 97.6 50.1 47.5 - -

60 kV lines 3.37 151.7 37.5 49.6 33.3 21.0 10.3

220/60 kV substations 7.12 320.3 49.5 - 114.7 130.8 25.3

60/10 kV substations 4.59 206.7 38.0 59.9 46.6 48.2 14.0

Sub-total 17.25 7 175.1 109.5 247.1 200.0

Distribution (10 kV and below)

By the concessionaire's funds 18.85 847.9 200.8 171.5 200.0 210.8 76.4

By the public domain's funds 30.36 1366.3 300.5 299.0 300.0 314.8 140.4

Sub-total EL9L2 221-4.2 501.3 470.5 500.0 525.6 21767

Auxiliary Services 7.83 352.5 113.5 93.0 62.0 84.o

Consulting Services 0.01 0.5 - 0.5 - - _

Training 0.01 0.5 - - °¢5

Total - Direct Costs 74.31 3344.0 789.9 673.5 804.6 266.4

Physical contingencies 4.83 217.4 - 62.1 63.8 68.5 23.0

Price contingencies 22.75 1023.7 - 150.0 289.7 433.7 150.3

Total - Part A 101.89 4585.1 789.9 885.6 1158.1 1311.8 439.7

B. Governmental Technical AssistancePower sector organization studies )Market survey and master plan ) 0.11 5.0 - 1.6 2.4 1.0 -

Training

Total - Direct Costs 0.11 5.0 - 1.6 2.4 1.0 -

Physical contingencies 0.01 .5 - 0.2 0.2 0.1 -

Price contingencies 0.04 1.9 0.4 1.0 .5 _ X C

Total - Part B 0.16 7.4 _ 2.2 3.6 1.6 - 0

Total Local Project Costs 102.05 4592.5 789.9 887.8 1161.7 1313.4 439.7 t

August 1975Revised February 1976

APPRPTSAL OF FIFTH POWER PROJECT - PERU ANNEX 6AttachmentPage 1 of 7 page,

Terms of Reference forr

Part B - Technical Assistance to the Government

I. Introduction

1. The purpose of these studies is to assist the Peruvian governmentto develop a comprehensive plan for the integrated development of the electricpower system in the Republic of Peru. The studies shall include a power marketsurvey, a hydropower assessment, a master plan, organization studies in thesector and the development of a training prograa for sector personnel.

2. To this end, the Consultants shall carefully review all availableinformation and previous power market and master plan studies in order toassess their relevance to the requirements stated in the "scope of the studies".After doing so, the Consultants will report on this phase of their work (seepara. 38.a) and propose an organization and schedule of work satisfactory tothe Ministry of Energy and Mines and the Bank and shall then revise, update,expand and complement the studies as necessary in order to have, as an endresult, power market studies and master plan that meet the criteria set forthin paragraphs 4-9 and 25-34 of these terms of reference.

3. The Government, with technical assistance fromhas commissioned to make an assessment of hydroresources in the country. Those studies will be carried out according to theattached terms of reference and are scheduled to begin byproceed according to the attached schedule and finish by . TheConsultants will satisfy themselves of the relevance of the results of thosestudies, as they become available, for the preparation of the master plan andieake the maximum possible use of the results of 's work.The Consultants will also complement 's work or take it uponthemselves to make such additional or advanced work as may be necessary to havea meaningful input to the master plan from hydropower assessment studies asdescribed in paragraphs 11-24 of these terms of reference. In making suchadditional or advanced work, the Consultants agree to exchange information andresults with and to coordinate their efforts with them throughthe Direccion General de Electricidad so as to avoid unnecessary duplication ofwork.

II. Scope of the Studies

Power Market Survey

!. A power market survey for all parts of the country leading to demandprojections from 1977 to 1996 is required. The purpose of this survey is toprovide a basis for economic evaluation of the various plans for supplying elec-tric power for the future market. Therefore, it is important that long-rangetrends be properly evaluated.

5. All a-ailable historical data on Peruvian power sales to differentkind of electricity users shall be collected in order to determine:

(a) the classification of the load into customer categories and itsdistribution by geographical areas,

ANNEX 6AttachmentPage 2 of 7 pages

(b) the effect of conditions of the copper and fishing industries onpast and present electric power usage, and

(c) the historical trends and growth rates by customer categories andgeographical areas.

6. A similar collection of data concerning the macro-economic variablessuch as population, gross national product, per capita income and agricultural,industrial and commercial activities shall also be made. The relationship between these variables and the use of power shall be studied to determine powercoefficients which shall be applied to projections of the macro-economic variables.

7. Extensive interviews shall be conducted with the entities responsiblefor medium and large agricultural estates, mines, manufacturing, industrial, andlarge commercial operations to determine current demand and supply, servicereliability, short-term and long-term requirements for power.

8. The effect on the power market of tariff structures and levels shall beevaluated.

9. The results of the market study shall be translated into annual andseasonal load duration curves, and typical daily load curves.

10. The consultants shall submit an interim report on the power marketstudy, within the first nine months following the Starting Date of the studies.

Hydropower Assessment

11. An evaluation of possible hydro developments will be provided whichcould meet or, in combination with thermal plants, help to meet the futuredemand for power. An inventory of all undeveloped hydro sites of suitable size forthe principal isolated systems until such time as they are interconnected(para. 28) will be required as well as identification and study or review exist-ing studies of at least 20 of the most promising future developments of morethan 200 MW. The inventory shall also include possible extensions of plantsalready existing or under construction.

12. Some of the possible hydro developments have been evaluated in paststudies. The Consultants shall carefully review these studies and make use ofall the pertinent information for their assessment of hydropower potential inPeru 0

13. All available hydrological informnation shall also be reviewed andwhere necessary, extrapolation made of the precipitation measurements for areaswhere direct flow measurements are missing. Correlations of run-off with rain-fall, where hydrological records exist for long periods of time, shall be usedfor the preliminary estimation of the flow conditions on all rivers of majorimportance.

1. The Consultants, after carefully studying all available studies, hydro-logical information, maps, topographic data, and aerial photographs, shall makea reconnaissance of all major rivers where previous studies have not, been made inorder to define the reaches of these rivers with power potential. A barometricsurvey of the pow;er reaches shall be made where required to enable river profilesto be drawn and elevations fixed at potential dam sites.

15. Once the flow and the topographic conditions are defined for each river,the Consultants shall determine or confirm the gross power potential per river


length. The power potential of each river shall be determined for the averagemulti-annual value river discharge, the average wet-seasoh, thOe average dryseason, and for the critical dry season.

16. The Consultants shall identify and make t preliminary list of allthe potential hydro power developme4ts as requested in para. 9R. In making thisinventory, the Consultants shall consider the possibility of collecting waterfrom neighboring rivers in order to concentrate the potential ata few points, bymeans of tunnels, and the possibility of developing pumped storage power.

17. The Consultants shall inspect at least 20 of the most promising develop-ments of more than 200 MW identified from the preliminary inventory. Each siteshall be inspected by a team composed of one hydro-civil engineer, one geologist,one surveyor and one hydrologist. The team shall evaluate the site and anyprevious study done on it with special emphasis on storage possibilities, geologicconditions, seismic occurence, topographic conditions, access difficulties, streamgauge location, availability of construction materials, possibility for riverdiversion during construction, accommodation of spillway capacity, etc.

18. Following inspections of the sites selected as the most promising,an intensive review of hvdrological conditions shall be made. The Consultantsshall determine or confirm for each dame site, the most probable long4rangeaverage flow, the water available during the driest period of the daHy season,the most suitable storage, the installed and firm capacities and the energy pro-duction during the average hydraulic year, the driest year of record and thewettest year of record.

19. The Consultants shall proceed with the preliminary design and costestimates of the plants determined in para. 17 above and of the possible expansionof existing plants. If the designs are already available, the consultants shallcritically review them. The design shall take into account all geological inform-ation available, and shall focus on the structures which play an important role inthe final cost of the plant. The cost estimate shall be accurate within a rangeof no more than 20%, and shall be based on a careful study of current constructioncosts. It shall take into consideration, in addition to the structures and equip-mont, the access roads necessary for construction and operation of the plant, thetransmission lines necessary to make the connection with the system grid, theoperator's camp, the detailed engineering and design, and the construction super-vision.

20. Once the preliminary designs and cost estimates are completed for eachsite, the Consultants shall classify these sites in two different ways, in orderof cost per kW of firm capacity, and cost per kWh of energy for the average yearrespectively.

21. Each site shall also be compared with an upper limit of cost based onthe estimated cost of thermal power and/or energy, with an appropriate adjustmentfor transmission costs. Any site which fails to meet this cost limitation shallbe dropped from further consideration, and an inventory of the remaining sitesshall be made.

22. For the sites deserving inclusion in the inventory, additional topo-graphic, hydrological and geological data shall be gathered by means of additionalground surveys., geological surveys, seismic prospecting, test pits, drillings,etc., to the extent considered necessary and practicable within the requiredschedule and budget for completing the assessment.

AI\MEX 6AttachmentPage 4 of 7 pages

23. Following these new investigations, the Consultants shall review, inorder to improve their quality, the preliminary designs, power characteristicsand cost estimates of the 20 most promising hydro developments selected. Theecological effects and non-power benefits or costs of each hydro developmentshall be determined. The cost estimates shall include the investment which maybe necessary to take care of major ecological problems.

24. The Consultants shall make recommendations for any additional streamgauging, rainfall measurements, geological investigations, mapping, topographicalsurveys, silt measurements, etc. required for the most promising sites. TheConsultants shall also make recommendations concerning any further studies neces-sary for a more exact estimate of the technical and economic parameters of themost promising sites.

Master Plan

25. Taking into consideration the economic conditions in Peru, the Con-sultants shall recommend a range of opportunity costs of capital to be used foreconomic comparisons. For every development program of the power system envisagedthereafter, the present worth of the stream of costs for four different discountrates shall lie computed pointing out the present worth corresponding to the oppor-tunity cost of capital in Peru.

26. The Consultants shall study the existing system conditions. They shalldescribe how the demand is being met, the present sources of energy and theirrelative economy, and the means available for transmission. They shall discusspresent operating practices and costs, system reliability, peculiar localconditions, They shall make an inventory of all the existing power facilitiesindicating their age, location, type, ownership, heat rate, water requirements,operating costs, maintenance costs, etc. For the major generating plants alreadyexisting or now under construction, the Consultants shall study Sheir capabilitiesfor expansion.

27. Possible locations for at least 5 future oil-or gas-fired thermal powerstations should be identified. The Consultants shall give all the necessary justi-fication in regard to the selected locations and for which they shall consider:proximity to load centers, availability of water, fuel supply and storage, found-ation conditions, access of transmission lines, and ecological effects.

28. The Consultants shall assess the possibilities of installing a coal-fired thermal station at Chicama, taking into consideration the elements mentionedin para. 27 above.

29. The Master Plan shall define which, if any, of the systems not currentlyinterconnected to the north-central interconnected system should be interconnectedand in what year such interconnection is economically advisable.

30. The Consultants shall propose several logical sequences of developmentof thermal generating plants or review and endorse previously developed sequences;each sequence meeting the prospective demand for power and energy up to 1996.These sequences, which may include gas turbines, shall all provide the powersystem with the same degree of reliability. The optimum size of the thermalgenerating units to be installed, and the most economic sequence of all-thermaldevelopment of generating resources, shall be determined on the basis of technicaljudgment and least present worth cost.

31. Based on the results of the power market survey, the Master Plan shalldetermine the best location of bulk stepdown substations, and develop several

AiNEX 6AttachmentPage 5 of 7 pages

transmission systems to tie the thermal generating plants defined in para.27 toload areas. in conducting the transmission system survey, the Consultants shallconsider all relevant factors such as: proximity of power load to power sources,terrain, vegetation, type of construction required, foundations, comperative lengthsof alternate routes, rights-of-way, accessibility for construction and maintenance,meteorological data, costs, etc.

32. The Consultants shall determine the most economic combination of thermalgeneration and transmission system, to meet the demand for power and energy up to1996. This all-thermal development plan is called the reference program, and allpossible hydroelectric developments shall be compared with it.

33. A final test of the economic bene2its of the most promising hydroelectricdevelopments selected by the hydropower survey (paras. 11-24), shall be made byinserting them one after the other into the reference program, and computing thecorresponding present worth costs. Thus several new logical se-luences of develop-ment of generation-transmission systems can be defined. The costs and benefits ofeach sequence shall be compared to the costs and benefits of the reference programon the basis of least present worth. The most economic sequence shall be theMaster Plan for expansion and integration of the electric generation and trans-mission system of Peru for the years 1977 through 1996.

34. Within the first twelve months following the Starting Date, the Con-sultants shall submit an interim report on the Master Plan.

Organization Studies in the Power Sector

35. The Consultants shall review the operating, planning and financial or-ganization and capabilities of Electroperut and shall also review the interrelation-ships between this entity and the Instituto de Investigaciones Energeticas yServicios de Ingenieria Electrica (INIE) and the Direccion General de Electricidadfor the purpose of optimizing the planning, designing, executing and operatingelectric power projects facilities in Peru.

36. In carrying out the obligations referred to above, the Consultants shall:

a. review the present responsibilities of Electroperu and those of INIEand the Direccion General de Electricidad inasmuch as they affecttheir relationship with Electroperu.

b. make recommendations for implementing satisfactory means f-or developingthe power sector and for carrying out and implementing all sector activitiesand programs, taking into account the interrelation between developmentof energy and water, land and other resources; and

c. develop recommendations relative to planning and financial objectivesfor the operating agencies including Electroperu.

Training Program

37. The Consultants shall recommend to the Government a training programthat will enable the staff of the entities of the sector to implement the recom-mended Master Plan and carry out their responsibilities optimally.

Reports

38. The Consultants shall submit the following reports:


(a) an inception report summarizing the Consultants' findings regardingavailability of data, relevance of available studies, organizationand schedule of future work, use of counterpart personnel and localservices. This report shall be submitted within two months followingthe Starting Date;

(b) brief quarterly reports giving a statement of work performed duringthe reporting period, the schedule of work for the next reportingperiod, the Consultants' findings, the personnel employed, the equip-ment ordered and delivered, and the subcontracts entered into.

(c) an interim report on the power market study (para. 10);

(d) an interim report on the Master Plan for the expansion and integrationof the electric generation and transmission system of Peru (para. 34);

(e) a draft final report showing all work performed and the findings andrecommendations of the Consultants, including maps, drawings and dia-grams; this report shall be submitted within the first 24 monthsfollowing the Starting Date; and

(f) within 45 calendar days of receipt of comments from the Governmentand the Bank on the draft report (e), a final report incorporatingal1 revisions deemed appropriate.

All these reports shall contain a concise first chapter summarizing the majorfindings and recommendations of the Consultants. All economic ana-Lyses whichsupport the Consultants' conclusions shall be presented in sufficient detailto permit checking of the calculations without supplementary data. The reportsshall use the metric system, and shall be submitted in twenty-five copies inSpanish, except the final report which shall be submitted in one hlndred copies.

III. Government's Participation

39. The Government shall provide the Consultants with all available in-formation related to the power sector in Peru including all existing maps,aerial photographs, stream flow data, meteorological data, census information,transportation information, power usage statistics, economic data, gross nationalproduct statistics, per capita income, national agricultural and manufactural data,and all other data and information of whatever nature requested by the Consultants,as necessary to meet the objectives of the study.

40. The Government shall make available professional personnel for a totalof about man-months, and sub-professional personnel for a total of aboutman-months according to Annex . As part of the total man-months, the Govern-ment shall provide the following:

(a) personnel to supervise and perform drilling and exploratory excavations,to the extent specified by the Consultants and as necessary to meet theobjectives of the Services;

(b) surveying crews for mapping and other purposes as specified by theConsultants and as necessary to meet the objectives of the Services;

(c) junior engineers, designers, and draftsmen required to prepare maps,drawings, exhibits, charts and similar documents, including those tobe included in the reports to be prepared by the Consultants;


(d) personnel, equipment and supplies to support field expeditions, andoperate temporary camps; and

(e) crews to assist in sampling operations for the power market survey.

41. The Government shall provide the Consultants with local transportation,office facilities and office services including drafting, reproduction, trans-lation, stenographic and clerical.

ANNE 7Page 1 of 6 pages

FIFTH POWER PROJECT - PERU

Estimated Pro.iect Implementation Schedule

1. Loan Effectiveness Conmpletion Dale

A. Sign subsidiary loan agreement 15 May 76

B. £iuThit legal opinions 30 May 76

2. San 3uan-B37noearios 2?0 WV line

A. Install and crcrcission linr 31 Dec. 76

3. Entrada-Thi-si22) kV' lir.e

A. Prepare, specifications for putchase of materials and/orinstallation of line and obtai.n IBRD app:oval 30 June 76

R. Award contract for -upply of materials and/orinstallatiomn of line 31 Dec. 76

C. Tnstall and coamissioiu line 30 Sept. 7,

4. San Juan-Vill' a El Sa)vado-.. San Jtar..-Atoccn-o. Zapallal-Ventari.lla. Rcynoso Bars 60 kV lines

A. Completed as of 28 Feb. 76

5. Cbhavnaria-Ocuendo, Carrttera Central3 Oclendo-La Pampilla60 hV ' fines

A. Pr&pare speci.fications for Purchase o£f materials and/orinstallation of lines and obta,n IBRD approval; co7npleted 28 Feb. 7

B. Av,ard conLracts ior suppl.y of waterials and!or instal-lation of lines 30 June 76

C. Install and coimri.ssion lines 30 June 77

ANNEX 7Page 2 of 6 pages

Completion Date

6. Balncari os-Jorge Clhavez

A. Prepare specifications for purchase of materialsand/or installation of line and obtaini IBRD approval 30 Mar. 76

B. Award contract for supply of materials and/orinstallation of line 30 Sept. 76

C. Install and commission line 30 June 77

7. NIaranga-Santa Marina 60 kV line

A. Prepare specifications for purchase of materials and/orinstallation of line and obtain IBRD approval 30 Sept. 76

B. Award contract for supply of materials and/or instal-lation of line 31 Mar. 77

C. Install and comnission line 31 Dec. 77

8. Pershing-Pando, Pershing-San Isidro 60 kV lines

A. Prepare specifications for purchase of materials and/orinstallation of lines and obtain IBRD approval 31 Dec. 77

B. Award contract for supply of materials and/orinstallation of lines 30 June 77

C. Install and commissionI lines 30 June 78

9. San Juan-Chorrillos 60 kV line

A. Prepare specifications for purchase of materials and/orinstallation of line and obtain IBRD approval 31 Dec. 77

B. Award contract for supply of materials and/Drinstallation of line 30 June 78

C. Install and con"mission line 30 June 79


Completion Date

10. San Juan - Phase I and Clhavarria 220/60 (V substations

A. Install and commission substations:completed as of 28 Feb. 76

11. Bars, Chavarria and Refineri.a de Zinc 220/60 kV substations

A. Prepar'e specifications for purchase of transformersand obtain IBRD approval 30 June 76

B. Prepare specifications for purchase of other materials,equipment and/or installation of substations 30 June 76

C. Award contract for supply of materials, equipmentand for installation of substations 31 Dec. 76

D. Install and commission substations 31 Dec. 77

12. San Juan - Phase II and Balnerarios 220/60 kV substations

A. Prepare specifications for purchase of transformersand obtain IBRD approval. 30 June 77

B. Prepare specifications for purchase of other materials,equipment and/or installations of substations and obtainIBRD approval 30 June 77

C. Award contract for supply of materials, equipment,and for installation of substations 31 Dec. 77

D. Install and commission cubstations 30 June 79

13. Villa Maria, Villa El Sal.vador and Chavarria 60/10 kV substations

A. Install and commission substations, completed as of 28 Feb. 76

14. Oguendo 60/10 kV substation

A. Install and commission substation 30 June 76

ANNEX 71Fe a,7 of 6 pages

Completion Date

15. Carretera Central. Puente. Maranga. Jorg.e Cavez,and Santa Marina 60/10 kV substations

A. Prepare specifications for purchase of transformersand obtain IBRD approval 31 Dec. 76

B. Prepare specifications for purchase of other materials,equipment and/or installation of substations 31 Dec. 76

C. Award contract for supply of materials, equipment,and fbr installation of substations 30 June 77

D. Install and conmmission substations 30 June 78

16. Pando, Salamanca, and Chorrillos 60/10 kV substations

A. Prepare specifications for purchase of transformersand obtain IBRD approval 30 June 77

B. Prepare specifications for purchase of other materials,equipment and/or installation of substations 30 June 77

C. Awai contract for supply of materials, equipment, and forinstallation of substations 31 Dec. 77

D. Install and commission substations 31 Dec. 78

17. San Isidro, Tacna, and Mirones 60/10 kV substations

A. Prepare specifications for purchase of transformers andobtain IBRD approval 30 Sept. 77

B. Prepare specifications for purchase of other materials,equipment and/or installation of substations 30 Sept. 77

C. Award contract for supply of materials, equipment,and for installation of substations 31 Mar. 78

D. Install and commission substations 30 June 79

. /.

ANNEX 7age 5 of' 6 pages

CompLetion Date

18. Meters - Plhase I

A. Prepare specifications for the purchase of metersand obtain IBRD. approval 28 Feb. 76

B. Award contract for supply of meters 30 Jtne 76

C. Obtain delivery of meters 31 Mar. 77

19. Meters - Phase II

A. Prepare specifications for the purchase of metersand obtain IBRD approval 28 Feb. 76

B. Award contract for supply of meters 31 Dec. 77

C. Obtain delivery of meters 30 June 79

20. Communication and Control Equipment

A. Prepare terms of reference for consultants and obtainIBRD approval 30 June 76

B. Sign contract with consultants 31 Dec. 76.

C. Prepare specifications for purchase and installationof equipment and obtain IBRD approval 30 June 77

D. Obtain bids for supply and installation of equipment 30 Sept. 77

E. Award contracts for supply and installation of equipment 31 Dec. 77

F. Install and commission equipment 30 June 79

21. Consultant Services (other than for coimnunication and control)

A. Prepare tenns of reference for consultants and obtainIBRD approval 30 Sept. 76

B. Sign contract with consultants 30 Mar. 77

C. Prepare and publish reports 30 June 78

D. Discuss reports and implementation schedule with IBRD 31 Dec. 78

* .


C.ompotion Datc

22. Training

A. Prepare detailed training program and obtain IBRDapproval 39 Sept. 76

B. Make trainee selection 30 Mar. 77

C. Implementation of training program 30 Mar. 79

PART B OF TIE PROJECT - Technical Assistance to Governmen)t

23. Power Market, Hydropower Assessment, Master Plan and Organization Studies

A. Prepare list of consultants to be invited 31 May 76

B. Send list of consultants for IDRD comments 10 June 76

C. Invite consultants to make proposals 31 July 76

D. Receive consultants' proposals 31 Oct. 76

E. Complete evaluation of consultants'proposals 31 Dec. 76

F. Submit evaluation for IBRD comments 10 Jar.. 77

G. Sign contract with selected consultants 30 Mar. 77

H. Submit draft final reports 30 Mar. 79

24. Tariff Studie-s

A. Submit proposed terms of reference for the study forIBRD comments 30 June 76

B. Send list of consultants for IBRD comments 31 July 76

C. Invite consultants to make proposals 10 Aug. 76

D. Receive consultants' proposals 30 Sept. 76

E. Complete evaluation of consultants' proposals 30 Ocr. 76

F. Submit evaluation for IBRD comments 31 Dec. 76

G. Sign contract with selected consultants 31 Jan. 77

H. Submit draft final reports 31 Dec. 77

February 1976

ANN1TX 8


Estimated Loan Disbursement Schedule

Assumptions

Loan approval and signing: April 1976

Effective date: June 1976

Closing date: December 1979

in millions of US$IBRD fiscal year Disbursements Cumulative disbursementsend semester during semester at end of semester

1977: first 3.4 3.4second 4.8 8.2

1978: first 5.9 14.1second 6.9 21.0

1979: first 6.4 27.4s.cond 4.6 32.0

1980: first 4.0 36.0

September 1975Revised February 1976

APPRAISAL OF FIFJTH PCO4WER PRCJECT - PERU

Electrolima S System

Power and Energr Requirements

--- ct ----------- F-------- Forecast------------------

1970 197Q1 1972 1973 1 97,14 S75 1,-76 1977 1 978 1979 19A0

ENERGY SALES - G.

ReSiaen,_ 1 567.5 615.7 656.1 709.4 785.4 852 925 1003 1088 1181 1281CCIPrerCia1 2fi7.7 3G3.3 323.9 3705.4 382.5 409 23" 1469 501 536 574Industrial/ 807 .i) 906.0 957.7 1019.5 1099.3 1191 1290 1397 1513 1638, 177T4Public ldghting 97.14 109.1 122.8 131.2 1b14.3 159 174 191 210 230 253WlJater wells 5>.4 57.4 61.7 60.7 78.0 86 G5 105 116 129 9 142

Total Sales l;l^.lT TCiT 2122 992 27149$ -6 2922 3165 3742 7 771 1402TI

ERGY LCr r & eUNAC,C0IJYTED FOR - GWh 1 >1.9S 212.6 223.5 256.5 237.0 267 2`9 313 33i 367 398

GC9.,5 10.0 8.7 9 9 9 9

ENERGY 3ENERlTED &PURCHASE) - Gth 1991..3 2204.1 2345.7 2555.5 2726.5 2963 3221 34? 3767 iL08i 14122

LCAD FACTCR 55.2 59.2 60.0 60.0 60.3 60 60 60 60 60 60

PEAK D3EAMrD - .39} 1 45 144 486 515 564 611 662 717 776 8141

1/ Includes zinc refinery at Cajan:oarquii'a, .Thich is expected to be connected by 1976 and whose consumptionin 197' is exrnected to be cf the order cf 60 GMh.

I-a

0

Electrolima's System

Power and Energy Balance

---------------Actual--------------- ------------------Forecast------------------1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

3iergy Balance

TOTAL ENERGY REQUIRF9ENTS-GWh 1994.3 2204.1 2345.7 2555.5 2726.5 2963 3211 3478 3767 4081 4422

ENERGY GENERATION OR PURCHASES-by Source - GWh

ElectrolimaFMTffa-o- dro 912.8 1020.0 806.5 867.9 795.7 850 85o 850 85D 850 850

Matucana - hydro - 84.5 475.6 604.4 463.3 500 500 500 500 500 500Callahuanca - hydro 492.5 491.1 480.7 410.2 343.0 475 475 475 475 475 475Santa Rosa - gas turbines 0.8 2.1 0.9 1.3 2.1 1 1 1 1 1 1

S…-total-E…A 1 13… f16.T TM2 … =2 MT2 126 1026 …o26

HidrandinaMyopampa - hydro 418.6 433.2 435.2 422.5 338.6 450 450 450 450 450 450HuaTnpani - hydro 169.6 172.5 146.0 152.6 103.6 150 150 150 150 150 150Yanacoto - hydro - 0.7 0.8 0.1 0.0 - - - - - -

Sub-total-Hidrandina 7-3R2g -W.Tl -582.0 = 7U&224422 -W2R- _- -R-- 60 -W2 -W- 6S0 60

31ectroperu-Mantaro (Net /-hydro - - - 96.5 680.2 537 785 1052 1341 1655 1996

Power Balance

TOTAL POWER REQUIRED4JrTS (w) 391 425 444 486 516 564 611 662 717 776 841

PEAXING CAPACITYZ/- MWElectrolima

ulinco 2140 240 240 240 240 240 240 240 240 240 240Yatucana - 90 90 90 90 90 90 90 90 90 90Callahuanca 60 60 60 60 60 60 60 60 60 60 60Santa Rosa 14 48 48 48 48 48 48 48 48 48 48

…ub-total-E…A 4 -…- 430 -…7-- 4-7r-

HidrandinaMoyopampa 63 63 63 63 63 63 63 63 63 63 63Ruampani 27 27 27 27 27 27 27 27 27 27 27

Sub-total-Hidrandina 90 90 90 9 --PF-w- 9o --9u 90 -- S--=

Electropera-Mantaro - - - 342 342 342 342 570 798 798 798

RESERVE 47 103 84 384-/ 354 306 259 436 381 322 257

1/ Electrolima sells to Electroperu minor accounts of energy.2/ Defined as the capacity that can be sustained for two hours.

As Yantaro serves other loads, the reserve, after 1973 is not all available for EEA's system.

October 1, 1975 Io

ANNX 10Page 1 of 5

APPRAISAL OF FIFTH FOUSR PROJECT - PEWo

Rate of Return

1. The following basic assumptions were made to calculate the rateof return on the investment in the ProGect:

(a) that for these purposes, the cost of the Project does not includetaxes and import duties, estimated at lO of the total costs;

(b) that it was not necessary to use an efficiency price for labor orshadow price foreign exchange because their market value is notsignificantly different from their economic value;

(c) that all the energy sold in 1976 through 1979 over and above the1975 levels was due to the Project. This assumption is valid evenif the existing transmission and distribution systemn is not undulyoverloaded because it does not have excess capacitv either. Theexisting system can only sell more energy than the 1975 total if areduction in system reserve during peak hours and a decreasein system flexibility and an increase in compensating lower operatingtemperatures on off-peak hours is accepted. This acceptance wouldbe equivalent to a xreducticn in the quality of service;

(d) that once the 1979 level of sales was reached, all incrementalenergy sales would be due to future projects. This assumption isvalid for the distribution system for the reasons given in cb)above. It is conservative and penalizes the transmission linesand some transformers which may not reach their capacity for 4 or 5years beyond 1979;

(e) that all new customers connected between 1976 and 1979 would beconnected because of the Pro-ect and that all new customers after1979 would be connected because of future projects. Thisassumption follows from (b) and (c) above;

(f) that the tariffs and the non-returnable, non-interest-bearingconnection fees for new customers were an adequate measure of theeconomic benefits of the Project. This assumption understates thebenefits of the Project as it does not take into considerationelectricity's contribution te industrial output, domestic convenience,cost saving: over non-electric alternatives. The present averagetariff, S/. 1.31 (US$C.029) per k-Jh was used as a starting point forthe calculations;

(g) that the total real increase in Electrolima's operation and maintenancecosts from 1976 to 1979 would be associated with the Project and that

after 1979, all real increases in costs would be due to futureprojects; and

Qi) that Electrolima would pruchase all of its incremental energy needs fromElectroperi. This assumption is consistent with the presentpolicies and laws of Peru. However, the pricing of this energyi, somewhat difficult as not much is known regarding Electroperu'spricing policy or of its future generating costs and it is consideredthat the present price is higher than warranted by the investment and

ANTEX 10Page 2 of 5

operation and maintenance costs of Mantaro, the only Electroperuplant connected to EEA's system. The present average purchaseprice S/. 0.78 (US$0La7) per k',h was used as a starting pointfor the calculations.

2. The above assumptions result in the following cost/benefit streams

(in million S/.)for the basic case:

Costs Benefits

Incremental Incremental Revenues ConnectionYear InvestmentL'Purchased Power Oper. & Main. from tariffs Fees

1 975

2 932 82 67 297 280

3 1124 290 213 617 320

4 1327 514 358 963 360

5 _ 757 489 1339 ho

6-25 - 757 489 1339

3. On the basis of the above assumptions, the rate of return of theProject is -3.4 %. On the basis of the recommended tariff -S/. 1.50 (US$0.033)per kti-, the rate of return is 8.35%.

14. As shown in page3 3-5 of this annex, the rate of return ishighly sensitive to changes in the tariffs and slightly less so to changes inthe cost of power purchased from Electroperu while it is much less sensitiveto changes in the cost of the Project.

5. The following table highlights the data shown in graphic form in thepages 3-5.

Rate of ReturnAt the Present At the Recommended

Tariff(%) Tariff(g)

(a) base calculation -2.2 8.35(b) with cost of EEA's incremental power

requirements equal to incremental costsof alternate oil-fired plant (S/. 0.77-US$0.017--Per KTh) based on an oil priceof US$10.00 per barrel); 4.65 12.75

(c) with cost of EEA's incremental powerrequirements equal to estimated costsof Restituci6n(S/..603 -US$.O0134 perklvh), the likely next addition tosystem 6.75 14.35

(d) increase in cost of Project by 20% -4.25 5.35(e) decrease in cost of Project by 20% 0.75 13.15

1/ Excludes price contingencies and interest during construction.

RATE OF RETURN AS,,, A FUNCTION OF PROJECT COSTSA itt t r

Cy)

3 5

30

25

-20

1 5

dia recommended average-arrif, to public

-10 '

present

.4 averagetarriff to public

.4 Total Project Cost

50 4100 III 150 200 y of estimated total cost

'q** 4t197 4663 ' total project costs 10 Sl

total project costs excluding import duties

-5 ~W

-- 5lo^

-10

V-orld Bank-15206

- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~llol -15-120

Rate RATE OF RETURN AS A FUNCTIONofReturn OF AVERAGE TARIFF TO PUBLIC(%)

25 I at cost of alternative oil-fired plant

.sn~~~~~~~~~~~~~~~~~4

- 2 at purchase price from Electroperu_~~~~~~~~

_15 It

/;-10 5

10 4

-5 , 4.t present4. price

.. t price /Average Tariff

50 150 200 % of present tariff

101 recommended price 2 S/. per Kwh

--5 1975E average price

-10 1

0 0

-15

World Bank-15205

RATE OF RETURN AS A FUNCTION OF AVERAGE COSTOF ENERGY PURCHASED FROM ELECTROPERU

Rate ofReturn

35

30

254

4. \at recommended average tariff to public20 4

4.

15 4at present / 4IL

average tariffto public 4.

so 1o sa 2?0 No of present cost

0 52 0.66 0a.78 Ipe w

estimated present generation estinmated average

-5 Restitu tion t purchase

afentv price

oil1fieredstation

-10

World Bank-15204

ELECTEOLIMAhGA UIZ ATIGF CHAP I

BOARD OF DERECTORR

EXECUTIVE COMMITTEE

EXECUTIA E PRESIDENT

| BOARD B

|SECRETARY

PUBLIC _

RELATIONS

, ~ ~ ~ ~~~~~~~~~A ,A .1 EM NT LABO

| & N1AXNTENANCE | |~~~~" OCS ANG C._ TE COMRCA | |ADMNTTRTIEE

AISSTANNGE ASIS MANAGE

MASISTAGE N MT- ASSST MANAGER A*" A ASSIST l| ASSIST

GENERATION & _NFAS5 ST AAE j US CIVIL DESIG.N ! .RC PRCRE.N-- RI N MANAAN

VVorld Bank--1520S

Annex 12

APPRAISAL OF FIFTH POWER PROJECT - P1!W

Performance Indicators

1975 1976 1977 1978 1979(est.) TProJected)

Market penetration indicators

Total Number of customerssEEA concession zone 580,000 620,000 680,000 720,000 770,000Pueblos jovenes 7I,000 100,000 135,O00 182,000 220,000

Percent of population served inEEA concession zone 82% 83% 84L% 85% 86%

Efficiency indicators

Number of employees 2,500 2,550 2,625 2,700 2,800Ca3tomers/employee 232 243 259 267 2750Gh sold/employee 1.08 1.15 1.20 1 .27 1.33S.ystem losses in percent 9 9 ' 9 9

Financial indicators

Debt service -overags 1.3 1.6 1.8 1.9 2.2

Receivables from customers atyear-end as a percent of' theyear's sales 16.7 16.7 L6.7 16.7 1o6. 7




Financial History and Projections

Summary

1. After three years of unsatisfactory financial performance causedin large part by inadequate tariff increases (paragraphs 3-5), Electrolima'sfinancial situation has improved in 1975 by virtue of two adjustments whichincreased iGs tariff levels about 3b% above those prevailing at the oeginnmnyof the year (paragrapn 6). Further tariff increases will be necessary durini theproject period if the company is to finance a reasonable portion of its investmentprogram as provided for in proposed loan agreement (paragraph 6.02 of thetext. Its internal financing capacity is expecte to improve duringthe project period because of higher non-cash provisions currently classifiedas expenses (paragraph 9) and through payments to the workers' community tobe invested in its own bonds (paragraph 10).

2. Attached to this annex are the following financial statements andforecasts for 1972-80:

attachment 1 - key financial ratiosattachment 2 - income statementsattachment 3 - estimated sources and applications of funds 1975-80attachment h - estimated debt service 1975-80attachment 5 - debt outstanding at December 31, 1975attachment 6 - balance sheetsattachment 7 - assumptions used in projections

Earnings history and financial position

3. Principally because of the lack of adequate tariff increases,Electrolimatsearnings declined seriously in 1972-74. Although the company should havereceived a tariff increase in early 1971 (according to the triennial scheduleprovided by the 1955 regulatory law), the increase was not forthcoming until1972, and its size (14%) was not sufficient to offset adverse events in 1973,the most significant of which were worldwide currency fluctuations and interest-rate increases (both'of which increased Electrolimats interest expelnse), new taxesenacted by the government and accelerated inflation. Electrolima showed profits equalto its legal dividends (8% and 8.5% respectively on preference and ordinaryshares) in 1972 only by reducing its depreciation provision from 3% to 2.26%(in accordance with regulatory directives) and then deferring two-thirds ofthe reduced provision to the two subsequent years. In 1973 its profits weresufficient only to pay legal dividends on its preference shares and a cashdividend of 1% on its ordinary stock. In 1974 it registered a net loss andpaid no dividends.


4. Electrolima's net internal cash generation was negative in 1972-1974. It met its financing requirements by a 1972 equity contribution and 1973short-term loan from the government's development corporation, CorporacionFinanciera de Desarrollo (COFIDE), and from further short-term commercialborrowings, which totalled over S/. 900 million by the end of 1973. COFIDEguaranteed an external 10-year loan and lengthened the maturity of its ownloans in 1974, which reduced the severity of the companyts immediate cash re-quirements. At COFIDE's insistence, the government agreed to make equity con-tributions to Electrolima via Electroperu equal to the amortization of theexternal loan and its own loans; such provisions would also apply to the 1975COFIDF loan of S/. 100 million.

1975 and future tariff increases

5. Electrolimals financial performance will improve significantly in1975 by virtue of a 30% increase in its tariff levels put into effect in Feb-ruary and a further 6.6% increase effective July 1. Those tariff increasesresulted in net internal cash generation (including connection fees) of aboutS/. 473 million applicable to 1975 (net of S/. 168 million in dividends on 1975earnings payable in 1976). As noted in paragraph 6.02 of the text, Electrolimawill require annual increases in its average tariff levels of 4% to 16% duringthe project construction period to meet its covenanted contribution-to-expansionratio.

Projected financial situation

6. Assuming that tariff increases are implemented as recommended inparagraph 6.02 of the text so that Electrolima meets it contribution-to-ex-pansion covenant, its financial situation will continue to improve. Asshown in attachment 1, its debt-service coverage will increase from 1.3 -1.6 times in 1975-76 to 2.2 times in 1979, and its debt/equity ratio willdecrease from 53/47 at year-end 1974 to 30/70 at the end of 1979.

7. The draft general electricity law provides for an additional inter-nal financing method which has not been included in the projections because ofthe uncertainty of its timing or auantitative effect. As discussed in para-graph 4 of annex 3, the draft law provides for each utility to make an annualcontribution (participacion prevista) to the workers' community, initially tobe computed as five times the minimum monthly industrial wage in Lima for eachemployee of the utility, and adjusted annually thereafter. Of this "partici-pacion prevista", 70% (participacion basica) is to be part of the authorizedrate of return, and the remaining 30% (participacion complementaria), to comefrom excess profits as defined in paragraph 4 of annex 3. Of the total annualcontribution (participacion efectiva), 40%O (participacion liquida) is to bedistributed to the employees in cash and the remaining 60% (participacion patri-monial), invested in the t,tilityr's bonds to finance its construction program or,in the unlikely event that the utility's program cannot absorb the investment,invested in COFIDE obligations. The 40-60 split is to be applied to whatevercontribution the workers' community receives, whether or not it amounts to theentire "participacion prevista".

attachments


ELECTROLIMA

Actual and Estimated Key Financial Ratios

(All amounts other than ratios are expressed in mill;ns )f s,les)

- - - - Actual - - - - - - - - - - - - - - - - Forecast- - - - - - - - - - - - -1972 1973 1974 1975 1976 1977 1978 1979 1980

Contribution to expansion ratio2j NA NA NA 0.3 0.45 0.45 0,45 0,45 0.45Rate of return 6. 3 6.5 6.7 7.3 7.3 8.8 8.9 8.1 7.0Rate of return (excludingcontribution-to-expansionfrom operating expenses) 8.4 8.2 9.7 9.7 8.7 7.7Debt

Times debt service covered by internalcash generation (before dividends and taxes) 0.9 1.0 0.9 1.3 1.6 1.8 1.9 2.2 2.3

Debt/equity ratio 54/46 46/54 53/47 47/53 43/57 38/62 30/66 30/70 25/75

DepreciationDepreciation as % of average gross plant:Company plant - 3.6 3.6 2.7 2.7 3.0 3.0 3.0 3.0Public domain plant _ 6.1 3.2 4.7 4.5 5.0 5.0 5.0 5.0

Indenture tests1. Income before interest and taxes as % of

interest on long-term debt (minimum 150%) ?05 175 124 148 159 201 226 237 2272. Net fixed assets (excluding public domain)

+ investments as % of long-term debt(min.15C0%) 181 214 186 172 177 194 211 250 294

/ As defined in Section 4.05 of the project agreement, the construction expenditure used in thecomputation of this ratio for any year is the average of the construction expenditures for theyear, the year preceding it and the year following it.

cl-September 1975 * xRevised February 1976

Dt


Actual and Estimated Income Statements 1972-1980(in millions of soles)

Note - - - - - -Actual- -- - -- - -Forecast - - - - - - - - - - - - - - - _1972 1973 1974 1975 1976 1977 1978 1979 1980

Energy sales (GWh) 2,140.8 2,314.7 2,489.5 2,696.0 2,922.0 3,165.0 3,428.0 3,714.0 4,024.0Average revenue per kWh (cernts of soles) 1 84.3 94.4 93.9 123.5 137.5 159.9 175,8 187.6 195.1Sales revenue 1 1,805.3 2,184.7 2 7 3,329.6 3, 824.7 ,98.5 6,947.7Revenue adjustment (net) 1 91.7 _

Operating revenue T8T 2,547 h 3,293.0 4,019.0 5,060.0 6,020.0 6,965.2 7,o51.6Operating costs:Operations and maintenance 2 977.8 1,124.8 1,246.5 1,452.0 1.744.9 2,024.0 2,347.8 2,676.5 2,977X7Purchased power (Hidrandina) 3 122.t 123.0 107.2 125.5 127.2 129.1 131.0 133.0 134.9Purchased power (Electroperu) 4 - 33.0 158.3 476.5 612.3 862.6 1,153.3 1,489.5 1,896.2Depreciation of company plant 5 73.2 349.8 354.7 333.0 418.0 540.0 633.0 741.0 856.0Depreciation of public domain plant 5 67.5 82.5 90.0 183.0 239.0 332.0 410.0 502.0 609.0Contribution to expansion 11.0 17.0 17.0 100.0 10O.C 100.0 100.0 120.0 120.0

Total operating costs 1,251.8 1,730.1 1,973.7 23,241, 4 3,27.7 4.775.1 5,662.o

Net income before interest and taxes 553.5 454.6 459.7 626.0 777.6 1 070 3 1.252.9 1 356. )1257.2

Taxes 7--Net income before interest: 8 553.5 454.6 459.7 626.0 777.6 .o44 2 1.215,9 1.2 0 1.257,2

Interest payments 333.3 394.1 -8- _ 517.4 552.7 579.5 581.0Less: interest charged to construction (37.1) (13.2) 2.1 - ( 8.0) ( 10.0) (12.0) (14.0) (16.0)Amortization of financing expenses 16.3 21.1 15.2 15.2 _ 15.0 15.0 11.0 -

Directors' fees G.8Total non-operating expenses 313.3 - - 55 512.4 555.7 57655

Net income 240.2 52.6 (0.4) 167.8 300.6 531.9 664,.2 706.5 692.2Allocation of net income:Dividends 8 239.8 59.6 167.8 301.0 442.0 53<.0 640.0 692.0Free reserves °.4 _ (0.4) - - 89.9 125.2 66.5 -

Note numbers refer to explanatory paragraphs iri attachment 7.

* Beginning in 1974, Electrolima ineluded urbilled revenues as revenues, in accordance wit re8ulatorv directives.


ELECTROLIMA

Estimated Sources anid Applications of Funds

1975-1980

(in million soles)

Estimate - - - -- - -- - - - - - - - - - - - -Projected - - - - - - - Total Total

Sources of funds Note 1975 1976 1977 1978 1979 1980 1975-1979 1975-1980Internal cash generation:Net income before interest and taxes 626.o 777.6 1,070.3 1,242.9 1,306.0 1,257.2 5,022.8 6,280.0Depreciation - company 332.6 418.o 540.o 633.0 741.0 856.o 2,664.6 3,520.6

- public domain 182.9 239.0 332.0 410.0 540.0 633.0 1,703.9 2,336.9Contribution to expansion 100.0 100.0 100.0 100.0 120.0 120.0 520.0 640.o

Total 1,241.5 1,5347 2,0Ii.3 2,385.9 2,707.0 9,911.3 12,777.5

Less: amortization 398.8 485.4 457.2 547.5 682.7 671.3 2,571.6 3,242.9

Interest charged to operations 443.0 477.0 507.4 540.7 565.5 565.0 2,533.6 _3,98.6

Total debt service 841.8 .6 1,0.2 1,2.5,105.2 6,341.5Kividends - 338.6 442.0 539.0 640.o 742.0 1,959.6 2,701.6Taxes - - 26.0 33.0 23.0 - 82.0 82.0

Total financial charges 6 1. 1,301.0 1,432.6 1,660.2 1,911.2 1,478.3 8 9,125.1Net internal cash generation (excluding connection fees) 399.7 233.6 609.7 725.7 795.8 887.9 2,764.5 3,652.4Connection fees 242.0 280.0 320.0 360.0 410.0 460.0 1,612.0 2,072.0Net internal cash generation 513.97 1,0b5.7 1,447. 5.6929.

Borrowing:Proposed IBRD loan 10 - 106.0 477.o 675.0 272.0 - 1,530.0 1,530.0

Proposed COFIDE loan 100.0 800.0 200.0 150.0 200.0 400.0 1 450.0 1,850.0Total 100 60 6.6 4 77.0 825.0 3 .

Capital contributions:Government contributions 11 18.3 65.0 287.5 407.1 282.5 392.6 1,060.4 1,453.0Developers contributions 12 200.0 250.0 300.0 360.o 430.0 520.0 1 540.0 20060

Total -21.3 315.0 767.1 712.5 912. 6 2 ,6 3,513.0Total sources 960.9 1.734.6 2.194.2 2.677.8 2.390.3 2,76.5 9.957.8 12,718.3

Uses of funds:Construction expenditures

Fifth power project 906.0 1,027.6 1,563.7 1,825.6 763.9 - 6,086.8 6,086.8

Future works - - - - 1,601.1 2,300.0 1,601.1 3,901.1

Interest charged to construction - 8.0 10.0 12.0 14.o 16.o 44.o 60.0Total construction- company 906.0 15 1,573.7 1,837 6 2, 379 0 7,731.9 10,047.9

Construction by developers 12 200.0 250.0 300.0 360.0 430.0 520.0 1 540.0 2,060.0

Total construction expenditure 1,106.0 8 1773.7 ;2,197.6 2,coo ,TWW 9, 9 12,107.9

Other usesIncrease in non-cash working capital* 128.0 59.0 128.o 79.0 101.0 107.0 495.0 602.0Decrease (increase) in social security fund (103.0) 560o.) (80.0) (60.0) (50.0) (50.0) (353.0) (403.0)

Total 25.0 1.0) 19.0 51.0 57.0 142.0.Cash surplus (deficit) (171-0) 459.0 272.5 461.2 (489.7) (132.5) 552.0 14.5

Total uses of funds 960.9 1,734.6 2,194.2 2,b77.o _ 7bO5 Y9577 tIw7I8.3

Cash less overdraft: beginning of year (263.0) (434.o) 25.0 297.5 758.7 289.0end of year (434.0) 25.0 297.5 758.7 289.0 156.5 x

Note n bems re!e,r to explanaLory paragraphs in aTTacnment 7. a

* Receivables plus materials and supplies minus payables.


Estimated Debt Service 1976-1980(in millions of soles)

1976 1977 1978 1979 1980Interest paymentsExisting debt:IBRD loan - 260-PE 48.4 43.4 39.9 35.7 31.3

- 365-PE 31.1 29.3 27.5 25,4 23.3- 464-PE 24.7 22.8 20.9 19.0 16.8- 511-PE 51.4 49.8 48.o 46.4 44.7

Total IBRD 155.6 14 5.8 12161Bonds 90.1 69.1 56.2 45.7 35.1J.COFIDE existing 29.3 21.1 12.0 3.7 -First National City Bank 108.0 108.0 108.0 95.8 79.8Short-term debt 28.0 30.0 30.0 30.0 30.0Total existing 411.0 374.0 .5 301.7 26.

Proposed borrowing:IBRD 19.0 53.7 98.4 127.1 126.2COFIDE proposed 55.0 89.7 _11.8 150.7 193.5Total proposed 74.0 14__ 210.2 __ 319.7Total interest 405.0 517.4 552.7 579.5 581.0

AmortizationExisting debt:IBRD loan - 260-PE 61.0 64.7 68.6 72.8 77.3

- 365-PE 32.2 34.1 36.0 38.2 42.4- 464-PE 30.2 32.4 30.9 32.1 33.6- 511-PE 26.5 28.9 28.5 27.1 27.6

Total IBRD 179.9 160.1 i-67 170.2 180.9Bonds 270.5 209.6 140.7 147.5 122. 2COFIDE 65.0 87.5 139.6 122.2 57.6First National City Bank - - 67.5 135.0 135.0Total existing 457.2 57 4 496.0

Proposed borrowing:IBRD 22.1 4I7. 0 O

COFIDE 35.7 85.7 128.6Total proposed 35.7 107.& 175.3Total amortization _405. 457.2 7.5 682.7 671.3

Total debt service 970.4 974.6 1,100.2 1,262.2 1,252.6


Long-term Debt Outstanding at December 31, 1975

TotalAnnual outstanding

Repayment interest balance inDate of loan period rate Currency million soles

IBRD:Loan 260-PE 1960 25 6 various 826.9

365-PE 1963 25 5.5 various 595.4464-PE 1966 20 6 various 437.4511-PE 1967 25 6 various 911.4

Total IBRD 2,771.1

Bonds: E 1963 15 6.5 SwF 93.1G 1964 15 7 US$ 109.9I 1967 15 6.5 SwF 283.9L 1969 15 7 SwF 332.6N 1971 6 8.5 SwF 162.80 1971 12 8.5 SwF 369.1

Sub-total 47,122 .5

First National City Bank 1974 10 variable,F UiS$ 900.0

COFIDE 1974 5 11.0 Peru S% 284.8COFIDE 1975 5 11 0 Peru S/ 100.0Total

1-1/8% above the London interbank interest rate on 6-month deposits plus 0.75% guarantee commission for COFIDE.

cF(D

CD U

c+

Revised February 1976 VrI

Actual and Estimated Balance Sheet at Year-end 1972-1980(Tn millions of Soles)

- - - -Actual - - - - - -- - - - - - - - - - - - - - - - Forecast - - - - - - - - - - - - - - - - - -

Note 1972 1973 1974 1975 1976 1977 1978 1979 1980Fixed AssetsUtility plant - company 13, 14 9,501 9,720 9,904 14,466 16,613 19,374 22,811 26,592 30,451

- public doaain 13, 14 - 2,711 2,977 4,756 5,935 7,353 9,062 11,024 13,332Work in progress 676 783 836 753 636 586 310 563 993Gross utility plant 10177 13,214 23,17 127,313 32 153 35,179

Less: accumulated depreciation-company 13, 14 3,010 3,335 5671S 5,925 7,057 9,977- public domain 13, 14 - 892 883 1 419 1,800 2,312 2,953 3,750 48734

Total accumulated depreciation 2,7 25 3,902 7113849 7,725 9,56 5Net utility plant 7,463 9,312 9,496 13,550 15,459 17,944 20,834 24,452 28,211

InvestmentsLoan to Electroperu 15 - - - 1,280 1,280 1,280 1,280 1,280 1,280Securities and fixed deposits 2 1 2 2 2 2 2 2 2Total investments - 1 2 1,272 1,282 1,252 1,282 1,2222

Current AssetsCash and banks 29 21 71 71 71 298 759 289 157Receivables 17 429 467 535 548 674 857 1,030 1,186 1,341Materials and supplies 136 142 182 233 266 316 348 405 471Tctal current assets 59 630 7 852 1,1 1,471 2,137 1,880

Deferred DebitsUnamortized debt discount & exp,nes 110 76 56 41 4i 26 11 - -Total assets 8,169 10,019 10,32 15,726 17,8332 24,298 27,609 31,353

Liabilities and CapitalShare capital 18, 19 2,980 3,o49 3,051 3,821 4,331 5,199 6,337 7,529 9,093Public domain capital 18 - 1,81) 2,094 3,337 4.135 5,041 6,109 7,274 8,598Reserve for exchange loss 19 185 ( 230) ( 779) 305 896 1,385 1,885 2,416 2,906Free reserves and surplus - 1 1 1 1 91 216 282 282Total capital and reserves 3,15 77639 4,367 7,554 9 363 11,716 14,547 17,501 20,579

Long-term debt 3,769 4,990 3 7,313 7,593 7,352 7,111Less: current portion 498 428 394 485 457 547 683 671 724Set long-term debt 3,271 3,579 -45791 -7TTB 66,379 6,766 6,910 6,711 T73B7

Current liabilitiesCurrent portion of long-tens debt 498 428 394 485 457 547 683 671 724Dividend payable 161 54 11 179 179 179 179 179 179Accounts payable 27' 375 569 505 605 710 819 931 1,045Overdraft 787 925 334 505 56 - - - _Total current liabilities 1,725 1,752 1,300 1, 297 11,36 1,751 _____ x

Deferred creditsFund for public domain installations 20 (118) (90) (102) 34 200 428 684 1,090 1,593 nFund for social security benefits 21 126 lo 173 276 336 416 476 526 576Total deferred credits 8 19 71 310 536 944 1 160 1 616 2, 19Total liabilities and capital _t7_ 10,019 10,382 15.726 17,533 _ _

Note numbers refer to explanatory paragraphs in attachment 7.


Annex 13Attachment 7Page 1 of 8 pages

Assumptions Used in Financial ProJections

Income statement: revenues

1. Sales of electric energy have been assumed to increase at an aver-age annual rate of 8.3% between 1975 and 1980 (paragraph 4.03 of the text).For projections of revenues, the average tariff levels have been derivedfrom the total revenue requirements resulting from the contribution-to-ex-pansion covenant (see paragraph 6.02 of the text) and the projected energysales.

Income statement: expenses

2. In the feasibility study submitted to the Bank, Electrolima performed adetailed analysis of the components of operating expenses consisting ofsalaries (50%), employee benefits (20%), fuel and materials (7%), generaland administrative expenses (W%), taxes (7%) and other expenses (10%). Theincrease in operating expenses so obtained for 1975 and 1976 was used in thedetermination of the tariff increase put into effect on July 1, 1975. Therates of increase of operating expense obtained (20% for 1975 and 16% for1976) were very close to the projected cost-of-living increase in metropoli-tan Lima, which is appropriate inasmuch as the bulk of the operating expenses(70%) is for salaries and employee-related benefits. The projections for 1977through 1980 have therefore been based approximately on estimated increasesin the cost of living (16, 16, 14 and 12% respectively for 1977-80).

3. The cost of energy purchased from Hidrandina is determined inaccordance with the tariff schedule contained in Ministerial Resolution No.1048-74-EM/DGE of September 30, 1974. This calls for Electrolima to purchase aminimum amount of energy from Hidrandina of 500 GWh at a cost of 51 101.9million. The cost of additional purchases of energy thereafter is 1 centavosper kWAh. The cost of energy purchased from Hidrandina also includes theoperating expenses of the two Hidrandina hydro generating stations. In 1975,this cost amounted to SI 8.6 million with about 75% going for salaries andthe remainder being expenses for materials, transportation and miscellaneouspurchases. This portion of the cost is assumed to increase at the same rateas the cost-of-living in Lima. Below is a summary of the estimated (1975)projected (1976-80) costs of purchased energy from Hidrandina:


Energy Energy Cost of Operating Totalpurchased charge living costs million

Year G_i_ mill.S% increase mill. S3% soles

1975 600 116.9 20% 8.6 125.51976 600 116.9 20% 10.3 127.21977 600 116.9 18% 12.2 129.11978 600 116.9 16% 14.1 131.01979 600 116.9 14% 16.1 133.01980 600 116.9 12% 18.0 134.9

4. Energy purchased from Electroperu is determined in accordance withMinisterial Resolution No. 1385-EM/DGE of December 31, 1974 and amended onJuly 1, 1975. The tariff structure for energy purchased from Electroperu isa three-part tariff with separate charges for active and reactive energy aswell as a demand charge (see the attachment to annex 3). The average chargeper kkh was about 67 centavos before July 1, 1975. The increase of July 1,1975 amounts to an effective rate increase of 17% (or 11 centavos per kit).An average rate of 78 centavos per kWi has therefore been assumed in theforecast for the latter half of 1975 through June 1977. A 10% tariff in-crease has been assumed in July 1977 and again in July 1979. The cost ofenergy purchased from Electroperu for the forecast period is summarized below:

Cost ofEnergy energypurchased Unit cost purchases

Year GWt Soles/kWi mil. S/

1975(Jan.-June) 263 .67 176.21975(July-Dec.) 264 .78 205.91976 785 .78 612.31977 1052 .82 862.61978 1341 .86 1153.31979 1655 .90 1489.51980 1996 .95 1896.2

5. For the years 1975 and 1976 depreciation was determined in accordancewith rates approved by DGE in the tariff study. The effective depreciationrates for Company Plant were 2 .7% for 1975 and 1976. For public domaininstallations they were 4.7% in 1975 and 4 .5% in 1976. For the ren,ainder ofthe forecast period, depreciation rates of 3.0% on Company assets and 5% onpublic domain installations have been used.


6. The contribution-to-expansion is a provision to be determined takinginto account the financing requirements of the ut;ility. The amounts includedin the forecasts are those set forth by Electrolima in its tariff applicationsto DGE. These provisions would presumably be renamed contributions to theelectric development fund (paragraph h of annex 3) once the general law is putinto effect.

7. Income taxes are computed at 20% of net income after payment of thelegal dividend (8.5% of capital entitled to dividends).

8. Net operating income for 1975 was assumed to be the remainder of oper-ating revenues less operating expenses. This resulted in a rate of return of7.3% (8e4% if the contribution-to-expansion iLund is excluded from operating ex-penses). Net operating income for 1976 and 1977 (and thereafter) have beenassumed to be the difference between operating revenues and operating expensesthat would result from the contribution-to-expansion covenant (see paragraph6.02 of the text). The rates of return on average net fixed assets would rangebetween 7.0% and 8.9% over the 1976-1980 period (7.7% and 9.7% if the contri-bution-to-expansion fund is excluded from operating expenses - see attachment 1to this annex). Dividends have been computed at 8.5% of the portion of equitycapital representing the value of shares entitled to dividends (see paragraph 18)e

9. The other components, i.e. those relating to the workerst communityparticipation and excess profits, of net operating income proposed in the draftgeneral law (paragraph 4 of annex 3) have not been considered in these projec-tions because of the uncertainty regarding their timing and quantitative effecton Electrolima's finances. As detailed in paragraph 10 of this annex, the workers'participation is designed to assist in providing financing for the uttilities, sothat omitting it tends to understate the utility's eventual self-financingcapability.

Sources and applications of funds

10. The proposed IBRD loan amount includes only the portion to be onlentby the government to Electrolima.

11. Government contributions represent amortization of the First NationalCity Bank and COFIDE loans in 1974-75, which the government has agreed tocontribute to Electrolima via Electroperu. COFIDE may insist on similar pro-visions concerning amortization of its future loans to Electrolima which wouldincrease the funds available to Electrolima from the values shown beginning inlate 1978 or 1979.

12. Electrolima does not include developers' contributions and related con-struction in its own funds forecasts because they do not involve funds (thedevelopers construct the facilities) and because, until 1973, the public-domainassets were not caDitalized in the comDany's accounts. Now that such assetsare reflected in Electrolimals balance sheet, inclusion of the developer'scontributions (which comprise a significant proportion of public-domain assets)in the funds statement appears appropriate.


Balance sheet: assets

13. To reflect the effect of inflation on costs for electric-utilityplant, a revaluation of 40% effective at year-end 1975 has been put intoeffect. Subsequent revaluations of 10% each year thereafter are assumed.

i4. The year-by-year changes in Electrolimat s plant and depreciationaccounts, including the assumed revaluations, are shown below in millions ofsoles:

January 1balance Capitalized Revaluation

Company plant in service

1975 9,904 600 3,9621976 14,466 700 1,4471977 16,613 1,100 1,6611978 19,374 1,500 1,9371979 22,811 1,500 2,2811980 26,592 1,200 2,6591981 30,451

Public domain assets

1975 2,977 589 1,1901976 4,756 703 4761977 5,935 824 5941978 7,353 974 7351979 9,062 1,056 9061980 11,024 1,206 1,1021981 13,332


January l Annualbalance provision Revaluation

Accum. depn. - company

1975 3,338 333 1,3351976 5,oo6 418 5011977 5,925 540 5921978 7,057 633 7061979 8,396 741 8401980 9,977 856 9981981 11,831

Accum. depn. - public domain

1975 883 183 3531976 1,419 239 1421977 1,800 332 1801978 2,312 410 2311979 2,953 502 2951980 3,750 609 3751981

15. Under a June decree-law, Peruvian holders of about 24.5% of Electrolimatsshares with a nominal value of about S/ 1,280 million will be offered theopportunity to sell their shares to Electroperu, receiving therefore Electrolima,8.-5 15-year bonds with 5 years of grace; it is expected that most such share-holders will participate in this voluntary exchange. To complete the trans-action, Electrolima will receive notes of like amount from -lectroperu, which areshown as investments. The cash effect on Electrolima during the grace period willbe zero; Electroperu will use the 8.5% dividends on its newly-acquired Electrolimashares to pay the bond interest. Electrolima would receive funds from Electro-

peru beginning in late 1980 to amortize the bonds, reducing the "investment"correspondingly.

16. No such provision is made for acquisition of Electrolima shares held byforeigners; under an August 1975 decree-law, the government announced agree-ment whereby Electroperu would acquire all such shares (as well as Hidrandina's)in exchange for its own bonds. The terms of the bonds are:

For foreigners resi- For foreigners resi-dent in Peru dent outside Peru

Soles US dollarsBond denominationValue - in percent of nominal

value of shares 100 75Interest - % p.a. 8.5 7.5Term - years 15 15Grace period - years 6 3


17. Receivables are estimated at two months' equivalent of annual sales,reflecting Electrolima's collection history.

Balance Sheet: capital and liabilities

18. Separate capital accounts are maintained for capital representingcompany assets, which is entitled to dividends, and that representing public-domain assets, which is not.

19. The 1955 regulatory law provides that increments arising from plantrevaluations are to be applied to accumulated depreciation and to the reservefor foreign exchange losses, with the balance accuring to the companyts capital.Yearly increments to the accumulated depreciation account represent the resultsof applying the revaluation rates to depreciation accumulated as of the beginningof the year. The corresponding increment to the reserve for exchange losses re-sult from applying the revaluation rates to foreign debt outstanding at the begin-ning of the year. The total revaluation, using assumptions shown in paragraph13 would thus be distributed as follows (in millions of soles):

Total Revaluation applied toplant Accum. Exchangerevaluation depn. losses Capital

1975 3,962 1,335 1,875 7521976 1,447 501 501 4451977 1,661 592 489 5801978 1,937 706 500 7311979 2,281 840 531 9101980 2,659 998 490 1,171

Because of inadequate revaluations from 1969 until 1975 and effective devaluationof the US dollar (to which the Sol is pegged) with respect to currencies whichform a large portion of Electrolimals indebtedness (both IBRD loans and thecompany's own bonds denominated in Swiss francs), the exchange-loss reserve isnow negative. Plant revaluations as assumed here would restore this reserve toprovide for possible future revaluations of other currencies vis-a-vis the sol.The increments to the capital accounts are summarized below (in millions of soles):

January 1 Newbalance Shares Revaluation

Share capital1975 3,051 18 7521976 3,821 65 4451977 4,331 288 5801978 5,199 407 7311979 6,337 282 9101980 7,529 393 1,1711981 9,093


January 1 Incrementbalance to capital Revaluation

Public domain capital

1975 2094 406 8371976 3337 464 3341977 4135 - 492 b141978 50141 564 50!1979 6109 :554 6111980 7274 597 7271981 3598

1/ Increment to public domain capital represents the excess of the thirdparty contributions over additions to the public domain fund, which inturn is derived as described in paragraph 20.

January 1balance Revaluation Devaluation

Reserve for exchange loss

1975 - 779 1875 (701)1976 395 5°11977 896 4891978 1385 5001979 1885 5311980 2416 1901981 29o6

j The s/-701 million represents loss from restatement of foreign debt outstandingat December 31, 1975 on account of the 16.2% devaluation of the sol.

January 1 RetainedFree reserves balance

1975 11976 11977 1 901978, 91 1251979 216 661980 282 -1981 282

20. The Electric Industry laws provide for the establishnent of a fund forpublic domain installations to be used for construction of high and low tensiondistribution networks outside the initial zone of Electrolima's concession area.Contributions to the fund come from connection fees, developers contributions,;the contribution to expansion fund and from depreciation of public domain assets.Increments to the fund for public domain installations are derived as follows,in millions of soles:


1975 1976 1977 1978 1979 1980

Sources:Dpn. - public domain 183 239 332 410 502 609Connection fees 242 280 320 360 410 460Contribution-to-expansion 100 100 100 100 100 110Developers' contributions 200 250 300 360 430 520

Total sources 869 i1 1,230 1,1462 170Uses - pub. domain construction

expenditures 589 703 824 974 1,056 1,206

Increment to fund 136 166 228 256 406 503

Until 1974 the fund has had a negative balance, which indicates that the com-pany has been financing a portion of public-domain expansion with its ownfunds.

21. Increments to the fund for social security benefits represent theexcess of provisions (composed of surcharges on revenues and payrolls) overdrawings, as specified by applicable Peruvian laws.

IBRD 117977 7'6' OCTOBER 10_7�

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appraisal of the file copy fifth power...

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