Energy Policy 30 (2002) 575–582

Experience and new challenges in the Chilean generation and

transmission sector
Oscar E. Moya*
Department of Electrical Engineering, University of Chile, Av. Tupper 2007, P.O. Box 412-3, Santiago 6513027, Chile

Abstract

The Chilean electrical sector was deregulated in 1982, where unbundling was applied, and generation competition and marginal
costing were introduced. Description of the main features of the generation market and system operation is presented, followed by a
synthesis of the main achievements and difficulties experienced in the practical application. The experience with the troubles faced in
the reformed power sector after 18 years is used to look at the possible advantages of the second stage of deregulation. The
challenges of a new legislation, where the system is expected to join the second generation of deregulation are discussed. Advantage
and risks of opening the energy market with a bidding system separate from ancillary service market are analysed. The experience
with the troubles faced in the reformed power sector after 18 years is used to look at the possible advantages of the second stage of
deregulation. r 2002 Elsevier Science Ltd. All rights reserved.

1. Introduction generation leaving transmission and distribution as

The original vertically integrated electrical sector in
Chile was formed during the national interconnection
and electrification plan of 1940, by connecting hydro-
electric power stations in the South to the main
consumer centres located in Santiago and Valparaiso.
State-owned ENDESA was committed to project, install
and operate several reservoir hydro plants from 1940 to
1982. Another utility, CHILECTRA, initially private
owned and then nationalised, in charge of distribution
in the main cities, installed some thermal plants in the
central part of the country.
The period featured a demand increase of about 7%
per year, due to vegetative growth and industry
development and by the incorporation of a large
number of small locations to the electrical system.
Electricity reached over 97% of the population located
in the part of the country covered by the central system.
International agencies credits helped financing the
electrical development funded by the state. The genera-
tion was mainly hydraulic, supplying between 60% and
80%, depending on the hydrological conditions, and
coal-based thermal plants.
In 1982, the deregulation process started by passing
the Electrical Law, which opened the market to
*Fax: +56-2-695-3881.
E-mail address: osmoya@die.uchile.cl (O.E. Moya).
regulated areas. The National Energy Commission
(NEC), the regulator body reporting to the Ministry of
Economy, was the entity assigned to co-ordinate the
system development through an indicative plan. Actual
planning was left in a decentralised way to generating
companies. National Energy Commission has the
mission of defining regulated distribution electricity
rates for small customers, below 2 MW of installed
capacity, and setting the by-laws that complemented the
main electrical law. The Commission also calculates
periodically nodal prices of energy and power for the
high voltage nodes of the SIC. These are the regulated
values at which distribution companies buy electricity
for their regulated consumers.
On the other hand, the first open market for
generation was started with large customers, over
2 MW, who should negotiate their supply with any of
the generators or a combination of them. Competition
in power supply was encouraged.
With the unbundling process Endesa was sepa-
rated into two generator companies, giving origin to
!
Colbun company, and a transmission company
Transelec. Chilectra splitted into the generation entity
now called Gener and kept only as a distribution
company of the metropolitan area. Thus, there were
three actors in the generation field, Endesa, Colbun !
and Gener, though by far Endesa remained as the
largest one.

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576 O.E. Moya / Energy Policy 30 (2002) 575–582
The co-ordination of operation was assigned to an
operating body, Economic Centre of Load Dispatch
(CDEC), which was originally formed by staff of the
generation companies. It was established only for the
central interconnected system (SIC), 1800 km long, which
covers 80% of the country’s electrical consumption.
Privatisation was initiated in 1986 by putting stocks to
sale to institutions, mainly social security funds, and the
public.
In 1995, the second CDEC in the country was created,
the northern interconnected system (SING), after
connection of the generation components of the north-
ern utilities that supplied different cities and mining
processing plants that are the main load centres in that
area. This system is purely thermal based on coal and
originally had two generators Electroandina and Edel-
nor. It is isolated from the central system due to the long
distances involved. There is a desert zone of nearly
400 km between SIC and SING systems with almost no
consumers in between.
In 1998, both CDECs became independent in opera-
tion and personnel, though generation and transmission
companies’ representatives form its Board of Directors.
Companies in the generation sector in SIC today
include mainly Endesa (55% of the market), Gener
(20%), Colbun ! (17%) and several other minor compa-
nies (8%).
After an economic protocol for natural gas import
from Argentina was approved, combined cycle gen-
erators (CCG) entered the central system (three plants
with 350 MW each) and the northern system (five plants
with a total of 1480 MW). This was partly due to their
low variable costs, which made them very attractive in a
competitive environment. A substitution process took
place in the northern system, which had the unexpected
consequence of over-investment in capacity of about
120%.
The first CCG plant located in Argentinean land,
Salta, delivering energy to the Chilean northern system,
via a 350 km, 345 kV line, came into service in 1999. In
the decade 1990–1999, three other entities were opened
in the SING: Gener, with coal-based units, Salta and
Nopel, with CCG stations.
The following sections provide a view of the economic
dispatch procedures and the mechanism to assure timely
investments in the electrical sector and a degree of
reliability of supply.
2. The economic dispatch
The interconnection of power stations in a system
involves several conditions, which include the member-
ship to the Economic Load Dispatch Centre (CDEC).
This means the acceptance of operation in a co-
ordinated manner, which has effects on economic
operation and security of service.
Co-ordinated economic dispatch means that the
system is operated under minimum cost criteria, by
using the audited cost information provided by the
generating companies to the authority and to the CDEC.
The electrical legislation (DFL 1, 1982) states that the
marginal costs have to be determined in a time horizon
suitable for operation planning (Bernstein, 1988).
Though there are four interconnected power systems
in the country, the marginal cost procedures are used
only in the central system (SIC), with a peak demand of
4800 MW, and in the northern system (SING,
1200 MW). The two other systems located in the
extreme south are very small and fully regulated. A
computational model for the central system is used to
determine the economic cost of water for each time
interval in a 4-year horizon, period that is necessary
because the main reservoir, Lake Laja, has an inter-
annual regulation capability. In the absence of hydro-
electric reservoirs in the northern system, the
interannual simulation becomes unnecessary. Economic
operation therefore is solved on an annual basis, by a
merit order method, considering the usual constraints,
which include transmission capacity and availability.
In both systems, availability is simulated with a
probabilistic model considering historical outages rates
of thermal units. Load variation in time is taken into
account by means of load forecast both for the next year
and for the shorter terms.
A decomposition of the load curve in blocks is
performed, where a solution for each block should be
searched. Interdependence amongst these blocks ap-
pears as a consequence of the thermal generation, which
imposes that a unit must remain in service for time
periods that exceed the daily horizon. The demand curve
is represented as a duration curve with six blocks of load
levels valid for each month of the year.
Operating costs of thermal units have fixed and
variable components. Fixed items are costs incurred by
1 h of operation irrespective of the power output level [$/
h]. Variable costs include fuel consumption and other
variable items that are dependent on the power output
[$/kW h]. Audited costs are used for economic dispatch.
The economic dispatch is then technically defined and
solved by CDECs, in a procedure completely indepen-
dent from the energy trade referred below.
3. The energy trade
Consumers of different types, industrial, residential,
commercial, public lighting, etc., represent the electrical
market.
The market includes three sectors:
* contract rate customers (free agreed rates),
 O.E. Moya / Energy Policy 30 (2002) 575–582
* distribution utilities (regulated rates and node prices
for regulated users),
* pool of generators (marginal costs obtained every
quarter of an hour).
Chilean legislation considers different rules for two
large classes of customers: contract rate clients and
regulated users. Large consumers (over 2 MW at
present) belong to the contract rates group. Small
consumers (with installed capacity below 2 MW) have
regulated energy and power rates, which are fixed by the
authority periodically (every 6 months). Generator
utilities deal directly only with large customers and
distribution companies. Small users are served by the
distribution company corresponding to their location.
Node prices are the high voltage energy and power
prices used for energy sold to distribution companies in
the proportion of regulated consumers load to total
demand. These values are calculated every 6 months by
the regulator (NEC).
The electrical energy open trade takes place mainly
with the contract rated customers. There is a direct
agreement on electricity rates between the generator
utilities and the customers. Contract rate customers
within the area of a distribution company can buy their
energy either from this company or from a generating
company, in which case they are subject to a wheeling
right to be paid to the distribution company.
The second sector is represented by distribution
utilities that intermediate between generators and final
users. Node prices are used for that part of a
distribution utility energy and power that is delivered
to regulated customers. The price for the rest of the
demand is left to free negotiation between generator and
distribution entity.
Each generator in the system can sign agreements
with any large customer. The only constraint is that the
generator can undertake energy not exceeding its firm
energy. This is the value of energy that a generator can
deliver to the system with a reasonably high probability,
explicitly defined in regulations, or the amount that has
been agreed with other generator. Anyhow, a difference
between the contracted energy and the actual produced
energy in every monthly period always exists. That
amount is sold or bought, depending on whether there is
a surplus or a deficit of actual generation with respect to
the contracted amount. This difference is traded in the
third sector, which is the pool of all connected
generators and is based on node marginal costs or spot
prices.
Generators with surplus receive payment from those
with deficit, with energy valued at the instantaneous
system marginal costs prevailing at the time when the
surplus occurred. These costs have been obtained in the
economic dispatch process.
577
It is possible, therefore, to conclude that the electric
trade is made up of all the particular agreements that
have been achieved between generator utilities and large
customers. The relationships so created are completely
independent of the technical facts originated in the
economic technical dispatch. Whereas in the energy
trade operate open market conditions, irrespective of
physical links, in the economic dispatch, there is a
central decision making process. This process is
supervised by the CDEC.
The only common magnitude in both environments is
energy produced by each generator.
4. Marginal costs and node prices
Marginal costs are obtained ex post on a quarter of an
hour basis, considering the machines that were dis-
patched at each time interval. Usually, the marginal unit
is the most expensive unit dispatched at any time. Hydro
units are represented by a curve of equivalent cost,
which is adjusted according to hydrological conditions.
Penalty factors for generators are used to correct each
marginal cost according to the extra transmission losses
caused by a unit increase in energy. Thus, the corrected
higher marginal cost gives the system marginal cost.
Node prices represent an estimation of future margin-
al costs on the average. Economic dispatch is simulated
in order to obtain nodal prices. Each time interval
corresponding to load blocks of the duration curve is
solved separately. The 12 months of a year are
simulated.
The electrical law requires an averaging of expected
energy marginal costs over 4 years. This allows for the
consideration of new plant that may be expected to enter
into service in the next years. The average so obtained is
called basic energy price. It is referred to a relevant node
in the system chosen as reference by the regulator in
node price calculations, which are performed every 6
months.
The calculation involves long term exploratory
analysis in the SIC, due to the presence of large
reservoirs, which causes interactions between different
years. The probabilistic nature of hydrology requires
special software, which includes uncertainty in the right
assessment of expected or future energy prices.
For each node in the main grid, the node price is
obtained by multiplying the basic energy price by a load
penalty factor, which considers marginal losses caused
by the respective load.
5. The capacity market
In the electricity markets, distinction is made between
energy and power products. Power markets are the same
578 O.E. Moya / Energy Policy 30 (2002) 575–582
as the energy ones: contracts, regulated and pool
markets.
Energy rates are used to obtain energy component
payments to producers. Capacity rates (Oren et al.,
1985) are used for payments of firm power delivered by
each generator company. This variable takes into
account installed and available power that each
generating company puts as an asset that can be called
at any time to replace other units that may go out of
service.
Firm power requires definition of both system firm
power and generator unit firm power.
System firm power is the amount of power that can be
guaranteed with a certain probability. This probability is
taken from the system loss of load probability LOLP
(Billinton and Allan, 1984) calculated for the season or
annual peak demand. System firm power is usually
higher than peak load since installed capacity exceeds
load.
A generating unit firm power is the contribution that
a unit makes to the system firm power and it is an
important figure as a part of the economic return
depends on it. Units with lower failure rates tend to be
those that present higher firm powers as percentage of
their rating.
Firm power of a generating company is the sum of
firm powers of all its units. A company has a contracted
power, which is the sum of peak demands of all of its
customers. When the company has a larger firm power
than the contracted power, an export occurs and the
company receives a payment according to the system
power marginal cost. Funds come from all generators
that have deficits of firm power.
The unit power price is obtained from the annualised
investment cost per MW of a combustion gas turbine. It
is also fixed by NEC every 6 months.
6. The transmission sector
Transmission is unbundled from generation, though
generator companies may own transmission assets.
Open access is guaranteed by law to any generator
that wishes to interconnect with the system through the
transmission system (Rudnick et al., 1995) This gen-
erator must concur to financing possible installation
extensions.
Generators must pay transmission rights depending
on the part of the system that belongs to their influence
area. This is the set of lines, substations and other
facilities that are located between the generating station
and the reference node, which is the point where the
energy base price is fixed and is defined by the regulation
authority. The contribution is completely independent
of the generator power transfers agreed with its
customers. All generators pay in proportion to their
capacity a transmission wheeling, which must be equal
to the annualised investment of equipment involved.
Transmission owner companies receive a basic transmis-
sion income in this way, which essentially represent
investment recovery with a fixed discount rate of 10%.
Part of the payments are based on the marginal cost
of transmission which consists of marginal losses and
congestions produced by each generator. This cost is
dependent on the transmission path going from the
generator to his customers. These marginal costs are
obtained as differences between energy withdrawn at
nodes where customers are connected and injected
energy at nodes where the units are connected. The
amount collected as marginal costs of transmission has,
historically, represented only a fraction (10–15%) of the
basic transmission income. These payments affect in
different ways to generators, according to their con-
tracts. The sum thus received by transmission owner
companies is deducted from the basic transmission
income before the calculation of generators’ contribu-
tions.
7. Experience: benefits and problems
7.1. Benefits derived from deregulation
Efficiency and designs economically optimised are
among other consequences. Old units have been
replaced due to their higher operating cost.
The most important achievement is the ability that the
system has shown to keep up with a high demand
growth, with annual percentages between 6% and 9%.
The period between 1990 and 1999 shows the largest
growth of generated energy in Latinamerica of 193%.
Final user rates have gradually reflected the market
energy and power prices. They are in the range of 24–38
US$/MW h for industrial customers (year 2000), which
are the third lowest in Latinamerica (considering data
from ten countries) and between 76 and 92 US$/MW h
for residential consumers, which is the seventh lowest
value.
The open market for large customers has triggered an
important increase of projects linked to the mining
sector, the main export activity of the country.
Open market prices went down by some 45% in 5
years in the northern system, due to strong competition
and the introduction of natural gas as the main primary
energy fuel. It should be pointed out that open market
prices push the regulated rates in this system because of
predominance of free-contract customers.
The central system has shown a 23% reduction in the
last years, but not a net reduction with respect to the
period previous to deregulation. It must be recalled
that as electrical rates are a socially sensitive field, before
the reforms they were usually directly or indirectly
 O.E. Moya / Energy Policy 30 (2002) 575–582
subsidised. As the SIC is mainly dependent on water
resources, the impact of natural gas has not been as high
as in the SING. Regulated customers predominate in
this system. Companies have experienced some bad
years mainly due to some droughts but all the initial
entities are very active in the market after 18 years of the
reformed scheme and have achieved good economic
results.
External effects ought to be mentioned since an
important consequence has been a partial property
distribution in the public and the private social security
institutions returns that have been obtained as being
important partners in electric companies.
Summary of benefits:
1. investment rate in accordance with the demand
growth,
2. system reliability satisfactory,
3. rates increase less than the national gross geographi-
cal product,
4. partial distributed property,
5. externalities on social security funds return,
6. a working market in generation.
7.2. Practical problems in the power sector
7.2.1. Problems of organisational nature
Several problems have appeared since deregulation in
1982. Difficulties are related to transmission rights, firm
power, node prices, penalty factors, reliability consid-
erations and interpretation of marginal costs; over-
installation exists in the northern system; the number of
actors in the generation market has remained small.
Disagreements are dealt within the CDEC. If no
solution is found, an appeal to authority or divergence is
submitted. If then there is no agreement still there are
legal actions. This has caused that some problems are
delayed by years and sometimes damage to operation
has occurred due to legal ambiguities.
Technical problems are usually difficult to solve due
to the system configuration: long transmission lines
threaten security and voltage regulation, a high hydro
component in generation creates trouble in dry periods,
presence of some units with high ratings with respect to
system size and demand concentration in a zone of the
system.
On the other hand, commercial difficulties arise due to
the low number of generator companies of sufficient size
in competition. Moreover, distribution companies cover
geographical regions of very different sizes, which may
lead to the risk of monopsonial behaviour. And last, but
not least, the regulated rates fixed by authority may not
always be attractive enough for generators to sign long
term agreements.
Commercial contracting has the disadvantage that the
supplier of a customer does not necessarily generates the
579
energy for which he receives payment. This introduces
distortions such as subsidies among generators. This is
due to the differences that are common between spot
prices, used for transfers among generators, and
contract prices.
7.2.2. Transmission problems
The fact that the transmission system in SIC belonged
to the main generator company was a problem till last
year 2000. It is believed that the transmission has been a
barrier for new entrants to the generator market,
especially those of intermediate or small size.
Transmission payments face the trouble of interpret-
ing properly the way to determine influence area of each
generator. It has not been uniformly understood,
though the concept refers to that region of the system
that is seen as common land for transactions among
generators of different companies. There have been
difficulties in writing down this idea in objective terms.
The authority has defined in a by-law the influence area
as the zone located between the generator and the
reference node used by the regulator in the regulated
rates setting process. But this definition addresses
mainly to a radial system and thus some ambiguity
appears with parallel flows and counter-flows.
Companies commissioning new plant have sometimes
preferred to build their own lines instead of being
dependent on the transmission system owned by other
generator companies. It is the case of Colbun ! 220 kV
lines in the central system and Gener 220 kV lines in the
northern system.
7.2.3. Security difficulties
Security issues have appeared when responsibilities
for provision of associated equipment, such as capaci-
tors, reactors and static compensators, are not very clear
in the procedures. After a disturbance that interrupts
some supply occurs, responsibility is supposed to be
shared by all generators, which discourages improve-
ments that may be developed by a generating company
in particular. Joint financing of improvements is
restrained since the companies are competitors.
Drought in 1999 was well over the statistical record of
the central system and led to compulsory partial
rationing of 10% for the first time after deregulation.
It was not quite clear whether compensations should be
paid to rationed customers or not, and thus a by-law
established an obligation to supply in future events
under any hydrological condition. Whether this rule
might have affected investor interest from 1999 onwards
has still to be cleared up.
The northern system faced problems with new
combined cycle units size and frequent failures during
their first months of operation. Outage of the largest
unit produced system collapse due to low frequency
despite the presence of an existing load-shedding
580 O.E. Moya / Energy Policy 30 (2002) 575–582
scheme. Four blackouts and several partial interruptions
affected the SING between 1998 and 2000. Reduction of
unit outages and limiting the maximum unit power has
recently permitted an important improvement.
7.2.4. Capacity contribution controversy
Capacity contribution has a return by means of the
recognised firm power of each generating unit. Dis-
agreements have appeared on the form to consider the
calculation of firm power. This might be considered to
be dependent on generator dynamics, the quality of
hydrology or the reduction of available power due to
transmission constraints.
The argument has appeared that unit dynamics
should be included in firm power calculations, as this
affects the capacity to deliver power after short duration
failures. The dynamic features include time response and
start-up time. Another view considers that firm power
calculation is a form of capacity assessment and
therefore must consider reliability in its static meaning.
The same controversy has been present with respect to
hydraulic units. Since they have faster time response, a
higher firm power with respect to thermal units should
be recognised. But this may lead to over-paid hydro-
plants, which might discourage future thermal plant
investments.
7.2.5. Energy marginal costs discrepancies
There are actors in the sector that claim that any
increase in operation cost should affect the marginal cost
of energy. Since this value has a significant impact on
payments due to energy transfers among generators,
there are other interpretations that separate energy and
what is known elsewhere as ancillary services. Thus,
voltage constraints may force to run an expensive unit
out of merit order and then energy marginal cost
increases. The second point of view considers that
energy marginal cost is not altered by this condition,
which is instead an increase in the cost of keeping system
security. Since this aspect is responsibility of the whole
pool, all generators should pay for it.
The same difference appears when quick starting but
expensive running, small machines are brought into
service due to a sudden unit outage. The practical
consequence has been that some generators have been
indirectly benefited by outages, as they sell part of their
energy to the pool at marginal cost. Even if there are
surplus of energy in the system, this sudden power
deficit might push up marginal costs.
7.2.6. Over-installations
A consequence of using variable costs as the main
economic signal for system dispatching had the effect
that natural gas variable cost displaced coal-based units
from competition. The pipeline investment is considered
as fixed cost for the combined cycle units and thus does
not affect electrical marginal costs. All companies in the
northern system started nearly simultaneous projects,
which had the effect of increasing installed capacity too
much over the peak demand (about 3000 MW of
capacity versus 1200 MW in 2000), with the consequent
inefficiency introduced into the sector.
Summary of problems:
1. ambiguity in definition of transmission influence area
for cost allocation purposes;
2. marginal cost distortions due to several non-energy
attributes;
3. ambiguity in the responsibility for energy shortages;
4. lack of security and power quality equipment
incentives;
5. reliability problems and several firm power inter-
pretation problems;
6. regulated rates sometimes differ from market prices
8. Challenges for the new generation stage of
deregulation
A good challenge for the electrical sector appears with
the possibility of making important changes to legisla-
tion, which will introduce the system to those of the
second generation of deregulation.
8.1. The main challenges
The next step of deregulation considers rules for an
open market with several options, including mainly long
term contracts complemented with a short term power
exchange (PE) (Hao, 2000). Additionally, an ancillary
service market, an independent system operator (ISO)
and intermediate energy traders are considered.
How problems may be solved in this way?
Part of controversies is originated in the mixed role of
the CDEC. Technical decisions may conflict with
commercial interests and this body is often subject to
the choice between secure service and minimum cost
operation. Separate bodies, with technical management
independent from energy trade, may alleviate the
problems since decision making lies within a known
sequence. It is convenient that CDEC becomes com-
pletely independent from generation or transmission
companies.
The type of contracting will involve physical transfers
between supplier and user. This principle can avoid
distortions caused by only commercial transfers that
have been used so far.
The elimination of the firm power or capacity
payment based on a rate fixed by the authority may
solve a number of controversies, since there have been
cases of over- and under-paying because the total
amount is fixed and independent of the actual system
 O.E. Moya / Energy Policy 30 (2002) 575–582
reliability. The reserves market would take over as
ancillary services and the ISO will be responsible for
assigning the resources properly, i.e. assigning power for
generation and for reserves of different types.
Calculation of node prices involves estimations made
by the regulator of the expected load growth rate and
new generation stations to be installed in the near
future. This information has been sometimes wrong or
misinformation has tended to influence the diagnostics.
The increase of the number of deregulated customers
can encourage user participation in the market. In-
formation based on historical behaviour of contract
rates and PE clearing prices may improve the energy
cost estimations. It is expected that the PE operation
will prevent prices from being under- or over-estimated.
In the process of fixing rates, today hydraulic energy
expectancies are based on statistics and sometimes differ
significantly from the actual water inflows. Energy bids
by participants by considering other variables will lead
prices to an equilibrium and the generators, who are
directly affected by wrong decisions, instead of the
regulator, will assume risks.
Marginal costs can be interpreted in different ways. In
the pool operation, there will be a uniquely defined
clearing price at each time. Transfers among generators
will be subject then to prices known in real-time.
The ISO must solve the problems related to reli-
ability according to standards. Generator dispatch will
be his responsibility and then all precautions to
avoid important risks should be taken care. The
feedback to PE will allow that prices are adapted to
real conditions and so transfers will be paid according to
explicit rules.
Specifically the transmission problem will be reflected
in congestion prices: these are expected to encourage
transfers from generators to users located close to each
other. On the other hand, transmission rights are
expected to be linked with bilateral contracts or PE
transfers, which should make transmission lines installa-
tion more attractive in places where they are most
needed by the market.
Reliability requirements may be recognised by custo-
mers, including distributors, and thus pricing will show
the implicancies openly. The same idea stands for
generators that will be paid back according to their
contributions.
An important challenge common to many countries
nowadays is the environmental issue. In Chile, all
industrial, building development and mining projects
must approve an environmental impact study. There has
been a growing concern about emissions by thermal
plants and hydrostations projects face the opposition of
local population because they flood extensive surfaces.
Right solutions are one of the major challenges for the
future development of the power sector, irrespective of
the market approaches adopted.
581
8.2. The risks
Risks are not absent of course in a market where few
participants have significant presence. Market power
(Vieira Filho et al., 2000) may appear and introduce
distortions, specially originated in large hydraulic
stations and reservoirs.
These risks could be reduced to some extent by
encouraging competition as much as possible. Facilities
for special generations, such as co-generation projects,
distributed generation and new sources should be
considered.
A possible decoupling between regulated prices to
final users and free market costs are a source of serious
risk as well (IEEE Energy Trading Task Force, 2001).
Care must be taken that, in the process of fixing
regulated rates, they are consistent.
The short term market developed in the PE may not
favour large investments. Long term bilateral contracts
are relevant in stabilising prices in time.
8.3. Possible way for problem solutions
(1) Ambiguity in definition of transmission influence
area for cost allocation purposes: Transmission legisla-
tion considering experienced difficulties must be inte-
grated into the deregulation process. A clear definition
of transmission cost allocation is necessary with the
degree of regulation required to guarantee open access
so that transmission does not constitute a barrier to
competition.
(2) Marginal cost distortions due to several non-energy
attributes: Here, the market prices may reflect in a better
way the different effects involved instead of a centrally
marginal cost calculation.
The ancillary service market can manage the resources
linked with all type of reserves and voltage regulation.
Separation of energy and ancillary services markets can
avoid cross effects that introduce distortions to energy
marginal costs.
(3) Ambiguity in the responsibility for energy shortages:
The market clearing prices should reflect the risks faced
by generators according to their contracts and short-
term bidding. Power shortages, either due to droughts,
generator forced outages or line faults, will have an
economic effect for energy market players. All actors
must make their own provisions, such as emergency
equipment, backup contracts, insurance policies, etc.
(4) Lack of security and power quality equipment
incentives: The ancillary service market can manage the
resources linked with all type of reserves and voltage
regulation. Reactive static compensators, capacitor,
reactors, transformers, phase-shifters, etc. will be
installed according to requirements. The ISO must state
clearly the accountancy of cost and benefits of
participants during operation.
582 O.E. Moya / Energy Policy 30 (2002) 575–582
(5) Reliability problems and several firm power inter-
pretation problems: Firm power concept, with authority
intervention in the interpretation and in fixing its price,
is not necessary in an ancillary service market.
Ancillary services, separated from energy market,
should reflect the need of each complementary resource.
It is observed that just splitting ancillary services and
energy prices may solve several problems. This is
apparently the most effective change that may be
introduced, in terms of reducing or removing practical
difficulties.
(6) Regulated rates sometimes differ from market
prices: This problem should be faced in a more realistic
way, such as linking more closely the final value to the
market average trend. Other policies to avoid high
energy rates, without interfering with the energy market,
may consist in providing subsidies to some consumers.
9. Conclusions
The first generation deregulation applied in Chile
since 1982 has experienced several achievements, but
also has faced several difficulties of technical, commer-
cial and legal aspects.
From that experience, a good number of improve-
ments can be expected when the new stage of deregula-
tion is implemented. Introduction of ancillary service
market can relieve a number of distortions existing
during the first stage and thus is identified as one of the
most effective actions to improve competition, transpar-
ency and the right type of economic signals to market
participants. A market opening can be helpful in
defining market prices, which will be used for transfers
among different companies. The involved agents would
probably make provisions for eventual energy shortages
and suitable bids of power reserves can be expected.
Energy traders and a completely ISO can contribute
to providing economic signals for economic operation.
A suitable and uniquely defined form of transmission
cost allocation is the main step to stabilise this market
with well-known rules for new projects and entrants to
the generation market. Risk of market power is
identified as the main uncertainty that can threaten the
proper working of the electrical sector.
Acknowledgements
This paper was prepared within research project 199-
0599, FONDECYT, Chile.
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