IEEE Power & Energy Magazine - May/June 2020 - 35

Brazil, Argentina, Colombia, and Peru, various regulations
are used to compel network owners to make appropriate
investment and operational decisions. In those countries,
network tariffs are usually set ahead of time, ex ante, decoupling future real costs from regulated future revenues to
originate incentives for companies to minimize costs. This
is because revenues will be maintained at the permitted level
for a given period of time, regardless of the company's actual
costs. From time to time, however, ratchets will be applied,
where the permitted revenue and associated tariffs are reset
to 1) pass the achieved cost savings to network users and
2)  ensure, despite information asymmetries, that revenues
and costs are not unreasonably different.
The main features of price-control regulations in Latin
America are shown in Table 1, including whether the
mechanisms are cost-of-service or incentive based, the referential rates of return commonly used (note that under incentive-based regulation, real rates of return are endogenous
and dependent on the performance of the companies), and
the duration of the control periods. We also show whether
the ownership of utilities is private, public, or mixed.
The region also features an array of tariff structures (that
is, rules to determine how to charge different consumers) that
vary across countries and user classes (such as residential,
commercial, industrial, public lighting, and so forth). These
tariffs present fixed (per user) and variable components [in
U.S. dollars per kilowatt-hour (kWh) and U.S. dollars per
kilowatt (kW)] as well as different spatiotemporal-granularity
levels (in time, including peak and off-peak hours, winter
and summer, and day and night, and in space, such as per
company, per municipality, and per voltage level), and can be
based on average or marginal (or incremental) network-cost

principles. Regarding tariff components in the electricity bill,
the energy cost is generally passed through to consumers on
a dollar ($)/kWh basis, while the infrastructure cost (potentially including generation capacity and networks) is charged
on by $/kW. This, however, depends on the country and user
class. For residential consumers, for example, the combined
cost of generation, transmission, and distribution is packed
into a single $/kWh rate (which may change in time and location, albeit to a very limited degree).
Another tariff-related practice concerns the different
treatment of transmission- and distribution network costs,
which in Chile are included in the $/kWh and the $/kW
rate, respectively (for an industrial consumer). Moreover,
networks, depending on whether they belong to the transmission or distribution sector, can present completely different remuneration and pricing frameworks. For transmission,
locational marginal prices (LMPs) can be observed in countries such as Chile, Peru, and Mexico, in which energy and
part of the network costs are recovered via nodal prices that
change with location and time according to real-time system conditions. This regime, however, cannot be observed in
distribution networks in any country in Latin America (and
probably the world), although the effects of LMPs on distribution networks are starting to be investigated in the academic literature, especially in the context of DERs. Table 2
presents three countries' tariff structures for residential and
industrial consumers and their maximum temporal-resolution levels for residential and industrial loads.

The Good, the Bad, and the Ugly
Although Latin America has increasing levels of electrification,
as shown in Figure 2, the power supply's reliability remains

table 1. Price-control regulation in Latin America.
Argentina

Bolivia

Brazil

Chile

Colombia

Costa
Rica

Dominican
Republic

Utility
ownership

Mixed

Mixed

Mixed

Private

Mixed

Public

Mixed

Price control

Incentive

Incentive

Incentive

Incentive

Incentive

Cost

Incentive

Referential rate
of return

8.04%
posttax
(Edesur)

According to
public utility
companies
included in the
Dow Jones

8.09% posttax
(benchmark
company)

10% pretax
(model firm)

11.8-12.4%
pretax

4.24
posttax

9.02%
pretax

Control period

4 years

4 years

4 years

4 years

4 years

1 year

4 years

Ecuador

El Salvador

Guatemala

Honduras

Panama

Peru

Utility
Ownership

Mixed

Private

Mixed

Mixed

Mixed

Mixed

Price control

Cost

Incentive

Incentive

Incentive

Incentive

Incentive

Referential rate
of return

No public
information

10% pretax

6.88% posttax

7-10% pretax

8.94%
posttax

12% pretax

Control period

1 year

5 years

5 years

5 years

4 years

4 years

may/june 2020	

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IEEE Power & Energy Magazine - May/June 2020

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