2. Luis A. Camargo S. Wholesale Electricity Market Manager Colombia The Andean Electricity Market -TIE- Cartagena de Indias, October 14&15th - 2003

3. APEx 2003 CONTENTS Background The Andean TIE scheme TIE evolution TIE next steps

4. Background

5. APEx 2003 INTEGRATION SCHEMES Reliability Only First Come, First Served Explicit Auctions The power interchange is based just in reliability reasons The power interchanges are distributed according to requirements, until the interconnection capacity is reached Offer auctions for different time periods. The capacity is assigned by merit order

6. APEx 2003 INTEGRATION SCHEMES Implicit Auctions Market Splitting Full Market Integration Auctions according to offers to the market. The capacity is assigned by merit order. The price results from the auctions. Similar to above but the price is the import market price. One market only, the agents from different regions submit offers to the same market. Price is centrally settled.

7. APEx 2003 MAIN STAGES IN MARKETS INTEGRATION Domestic market Coordinated dispatch Integrated dispatch Regional Markets integration TIE Full regional integration

8. Andean TIE Scheme

9. APEx 2003 The Andean Community of Nations -CAN-

10. APEx 2003 CAN DECISION 536 Signed by Venezuela, Ecuador, Peru and Colombia in December 19th, 2002 as the general framework for the regional interconnection of electric systems and electricity exchanges

11. Andean TIE Scheme

12. APEx 2003 LEGAL, REGULATORY AND AGREEMENTS FRAMEWORK FOR TIE Operational & Commercial Agreements AgentsISA Mandate Contract CREG Regulation CENACE CAN Decision 536 Agents CONELEC Regulation Mandate Contract TIE Procedures Public Services Law Electricity Law Electricity Regime Law

13. APEx 2003 The Andean TIE Principles and implementation characteristics –No discrimination between domestic and external prices –Open access to interconnections –Each country should operate under competitive conditions –The physical use of the grid is the result of the economical coordinated dispatch of the markets

14. APEx 2003 –The bilateral contracts are financial. No influence on coordinated dispatch –The short term international transactions are mandatory –Promote private investment in the development of international interconnections –No subsidies are allowed to international electricity transactions The Andean TIE (cont.)

15. APEx 2003 –The Financial Surplus (congestion profit) of international transactions will not be assigned to the grid owner –The prices in both sides of the interconnections should be used to value the international price, as the result of the physical flow determined by the economical coordinated dispatch The Andean TIE (cont.)

16. APEx 2003 –All transactions should be guaranteed (implemented through in advance cash payments) –No discrimination between domestic and external demand, even during rationing The Andean TIE (cont.)

17. APEx 2003 –Transactions are programmed day-ahead on hourly bases. Market redispatch is allowed under specific conditions The Andean TIE (cont.)

18. APEx 2003 OFFER AND BID PRICE FORMATION (COLOMBIA EXPORTS) Transmission fee Constrains Costs Pool Price: single node merit order price (includes Charge per Capacity) Distribution fee Connection fee PX & ISO fees Offer price in the exportation node – Colombia - PO To Colombian Domestic Demand 20% to reduce Constrains Costs 80% for subsidies to very low income consumers Financial surplus G Charges (Pending) Marginal Cost Other costs Importation price Ecuador - PB

19. APEx 2003 Colombian Pool Price To domestic demand of Ecuador G Charges Import price Bid Colombia - PB Marginal Cost Offer price at exportation node – Ecuador - PO Power Equivalent Cost Financial surplus OFFER AND BID PRICE FORMATION (ECUADOR EXPORTS) Other costs

20. APEx 2003 TIE EXAMPLE PO A: (110+30) $/MWh PO B: (220+40) $/MWh Country A Country B A1 A2 A3 A4 B1 B2 B3 B4 G Charge: 5 $/MWh 110 $/MWh 100 $/MWh 90 $/MWh 220 $/MWh 200 $/MWh 180 $/MWh Export Price Price without TIE Bid Price (PB) D P D P Flow at (180-5) $/MWh (full capacity is assigned) Financial Surplus = 35 $/MWh PB A: 90 $/MWh PB B: 180 $/MWh )(

21. APEx 2003 OTHER TOPICS RELATED TO TIE IMPLEMENTATION Financial Legal & Regulatory Foreign exchange Guarantees Commercial Customs & foreign trading Tributary & Countable

22. APEx 2003 TIE GUARANTEES SCHEME The market operators have agreed an in advance cash payments mechanism TIE power flow is subjected to effective weekly payments: minimum credit risk A guarantee call is issued to the agents that are expected to have obligations with the pool the next week

23. APEx 2003 The money is immediately transferred to the neighbour exchange A weekly procedure for cash balancing was implemented TIE GUARANTEES SCHEME (Cont.)

24. APEx 2003 TIE FOREIGN EXCHANGE MANAGEMENT TIE currency is US Dollar, while Colombian agents trade in Colombian pesos The market operator has implemented a hedging mechanism to cover currency exchange rate risk. In this way pool and TIE transactions get balanced Hence, current TIE scheme is fully transparent to domestic market participants

25. TIE Evolution (From march 2003)

26. APEx 2003 ELECTRICITY TRADING BETWEEN COLOMBIA AND ECUADOR In 7 months Colombia and Ecuador have exchanged 744 GWh, corresponding to 10% of Ecuadorian demand and 2% of Colombian demand.

27. APEx 2003 WEEKLY GUARANTEES EVOLUTION All 33 weeks have been honored, allowing normal TIE operations

28. APEx 2003 OFFER AND BID PRICE EVOLUTION (Exports from Colombia) Data are daily averaged based on hourly prices.

29. APEx 2003 TIE SUMMARY From March to september USD 53 millions have been traded between Colombia and Ecuador

30. APEx 2003 TIE EFFECTS ON COLOMBIAN POOL PRICE On the average, a 0.24 USD mills/kWh increase has been observed on the Colombian pool price as the result of TIE. The difference ranges between 0% and 12%.

31. TIE Next Steps

32. APEx 2003 TIE has proven to be a successful start-up mechanism for Andean market integration: Practical, simple and easy to follow Flexible Step-by-step development Commercially feasible Transparent to domestic agents in spot trading Consumer focused (long-term view) The Andean TIE

33. APEx 2003 TIE NEXT STEPS TIE Ecuador-Colombia –Bilateral Contracts –Further optimization (block bids/offers) –Harmonize out-of-merit TIE (security transfers) –Increase interconnection capacity (Regional Planning) –Harmonize other TIE minor aspects, including balancing mechanism

34. APEx 2003 TIE NEXT STEPS Venezuela-Colombia (2004) Peru-Ecuador (2004) Panama-Colombia (2007-2008) Block integration SIEPAC - CAN

35. Luis A. Camargo S. Wholesale Electricity Market Manager Colombia The Andean Electricity Market -TIE- lcamargo@isa.com.co www.mem.com.co