Chile: National Energy Commission issues Technical Report on Calculation of Added Value of Distribution

This is an automated translation of the original release published in Spanish.

Statement from the National Energy Commission of Chile

The National Energy Commission issued on Friday, December 23, the Technical Report on the Calculation of Value-Added Distribution (VAD) corresponding to the four-year period from November 2020 to November 2024, in accordance with the provisions of article 183 bis of the General Law on Electric Services and in accordance with the rules established in the sixth transitory article of Law 21,194 (“Short Distribution Law”, which reduces the profitability of distribution companies and perfects the electricity distribution tariff process).

This is a key milestone in the VAD determination process, which corresponds to the first under the rules of the Short Distribution Law of 2019, and which was considered a participatory instance in which the distribution concessionaire companies and other interested parties could submit observations on the cost study prepared by the consulting company in charge of said study.

The results of the Technical Report are presented in currency as of the reference date of the study (December 31, 2019), and for its application they must be updated according to the indexing formulas established therein.

The purpose of calculating the VAD is to obtain the average costs of providing the public distribution service based on an efficient model company that operates in the country and that complies with the law and current regulations. These costs are calculated for certain Typical Distribution Areas established by the Commission, which group companies whose costs of providing the distribution service and the density of customers per kilometer are similar to each other, selecting one of them as a reference company for efficient cost sizing according to its geographical restrictions, distribution of clients, among others. From the costs derived from the calculation of the VAD, the distribution rates of all the distribution companies and electric cooperatives will be subsequently obtained.

Authorities

The Minister of Energy, Diego Pardow, appreciated the work carried out by the CNE, indicating that this "is the first process that is built considering the modifications introduced in 2019. The above involved intense technical work by the Commission and constant dialogue with companies. We value this milestone and we will be attentive to future instances established in the regulations”.

This milestone was also highlighted by the Executive Secretary of the CNE, Marco Antonio Mancilla: "The Commission has advanced one more step in this first tariff process with the new legal rules introduced in 2019. And as mandated by Law, this body has reviewed, corrected and adapted the results of the cost study in what is technically pertinent, taking charge of the more than 800 observations made by the distribution companies. Although the stage of discrepancies in the Panel of Experts is still pending, in our opinion the partial results better reflect the efficient costs of this activity in the various regions of the country, allowing consumers to finally pay fair rates and receive quality service. adequate service that will be recognized at the rate.”

The process

The calculation of the VAD is regulated in the General Law of Electric Services, and must be carried out every four years by the National Energy Commission.

This process, which began at the beginning of 2020 by determining the Typical Distribution Areas and the subsequent issuance of the Technical Bases of the Cost Study, is the first to be carried out under the precepts of the Short Distribution Law, promulgated in December of 2019. Said Law lowered the rate of return of the distribution companies for purposes of calculating the VAD, leaving behind the fixed rate of 10% before taxes from previous rate processes, and establishing that this must be calculated by the Commission prior to the study of costs, establishing a band between 6% and 8% after taxes for said rate. As a result of the above, the 2020-2024 process considers a rate of 6% after taxes.

In addition, the Ley Corta de Distribución modified the tariff process by providing for the preparation of a single report by the Commission (replacing the weighting of reports between CNE and companies that was colloquially known as "2/3-1/3"), incorporating a Committee that executes and supervises the cost study that must be carried out by a consultant, temporarily establishing the obligation to define at least four Typical Areas for electric cooperatives in the 2020-2024 process, and incorporating an instance before the Panel of Experts, among other changes.

In this way, the calculation of the VAD was carried out for 12 reference companies, instead of the 6 of the previous processes. This makes it possible to improve the representativeness of the efficient costs of providing the distribution service with respect to the conditions presented by the different companies and concession areas. Consequently, based on this calculation, a remuneration is determined for distribution companies adjusted to the quality of service requirements established by current regulations, and which obliges companies and cooperatives to comply.

The Commission's Technical Report marks an important milestone in the process of determining distribution rates, which continues with the presentation of discrepancies before the Panel of Experts by companies and interested parties who made observations on the cost study. As a result of the foregoing, the Commission must issue a Definitive Technical Report that considers the opinion of the Panel of Experts.

The process culminates with the preparation of the Technical Report of the Tariff Formula Proposal, where the structuring of the tariffs must be carried out in such a way that the costs determined in the VAD Technical Report are reflected and that the economic profitability rate of the industry, after of taxes on profits, is within the band established by the Law. All civil society actors and registered companies may make observations to the proposal of tariff formulas presented by the Commission, to later send it to the Ministry of Energy of the proposed rate formulas, and the issuance of the respective rate decree by said portfolio.

To access the report click here: https://www.cne.cl/tarificacion/electrica/