This chapter describes the main features of the sectors regulated by Peru’s Supervisory Agency for Investment in Energy and Mining (Organismo Supervisor de la Inversión en Energía y Minería, Osinergmin). It also provides an overview of Peru’s public institutions, and recent institutional and regulatory reforms.
Driving Performance at Peru's Energy and Mining Regulator
The Governance of Regulators
Chapter 1. Regulatory and sector context
Abstract
Institutions
Executive
The main institutions of the Executive branch are the President of the Republic, the Council of Ministers, and the Presidency of the Council of Ministers (Presidencia del Consejo de Ministros, PCM). The Ministry of Finance (Ministerio de Economía y Finanzas, MEF) and the PCM constitute the core centre of government in Peru (OECD, 2016[1]). Together with the Ministry of Justice and Human Rights (MINJUS) they collectively have strong influence on regulatory policy in Peru. The Ministry with competences over all the sectors regulated by Osinergmin is the Ministry of Energy and Mining (Ministerio de Energia y Minas, MEM).
Figure 1.1. Structure of the Executive branch of the Peruvian government
Note: The PCM also houses a large number of public entities, secretariats and commissions, which are not included in this figure.
Source: (OECD, 2016[2]), Regulatory Policy in Peru: Assembling the Framework for Regulatory Quality, OECD Reviews of Regulatory Reform, http://dx.doi.org/10.1787/9789264260054-en.
Presidency of the Council of Ministers (PCM)
The PCM is responsible for co-ordinating the national and sector policies of the Executive including line Ministries and public agencies. The PCM houses several secretariats and commissions, and manages and co-ordinates line ministries and public entities, as defined by law. The PCM oversees and provides guidance on the general administrative processes within Osinergmin and plays a key role in appointing and nominating the President and the members of the Board of the regulator, as well as administering budget allocations and disbursements. The PCM is developing guidelines and functions to strengthen its regulatory oversight role in the Peruvian administration. While not formally defined in law, the President of the Council of Ministers in practice plays the role of Prime Minister and government spokesperson (OECD, 2016[1]).
The PCM houses several public entities, secretariats and commissions. Osinergmin mainly interacts with two public entities: the National Centre for Strategic Planning (Centro Nacional de Planeamiento Estratégico, CEPLAN) and National Civil Service Authority (Autoridad Nacional del Servicio Civil, SERVIR):
CEPLAN is a specialised technical body that is responsible for overseeing the national development plan as well as ensuring that sectoral, strategic, and operational plans of concerned government bodies are developed according to the National System of Strategic Planning (SINAPLAN, see Box 1.1). CEPLAN also monitors compliance and ensures that objectives and indicators set by the Executive are not contradictory with other sectoral or national plans.
SERVIR sets human resources policies for the Peruvian public sector, including Osinergmin. It is responsible for orienting, monitoring, and managing human resource development, such as those relating to performance evaluations, information systems, remuneration, incentives and codes of conduct. SERVIR has authority nationwide, and over all entities and employment regimes. SERVIR has developed a new employment regime (see Box 2.3). However, as of 2018, no public entity has fully implemented the regime.
Box 1.1. Peru’s National Strategic Development Plan (PEDN) and the National System of Strategic Planning (SINAPLAN)
In 2011, the government developed the National Strategic Development Plan (PEDN), which sets the strategic objective, policy guidelines, goals, and projects of the government for the next ten years. The plan consists of six strategic axes: “(i) fundamental rights and dignity of persons; (ii) opportunities and access to services; (iii) state and governability; (iv) economy, competitiveness, and employment; (v) regional development and infrastructure; and (vi) natural resources and environment” (CEPLAN, 2018[3]). The plan serves as guidance rather than a long-term action plan and provides flexibility in meeting goals in the medium-term by establishing annual goals every five years. The national plan was last updated in October 2015 and entitled as to include scenarios and targets for the country by 2021 (CEPLAN, 2018[4]).
The PEDN therefore serves as the National Centre for Strategic Planning’s (CEPLAN) guidance for the application of the National System of Strategic Planning (SINAPLAN). SINAPLAN is an articulated set of systems and co-ordination mechanisms to assure the viability of and co-operation in the national planning process and promote sustained development in the country (CEPLAN, 2018[4]). Entities that make up the SINAPLAN include the three branches of government (executive, legislative, and judicial), autonomous constitutional organisations, sub-national governments, and the national forum that includes political parties and civil society organisations.
Source: (CEPLAN, 2018[3]), Politicas y Planes, http://www.ceplan.gob.pe/politicas-y-planes/ (accessed 22 June 2018); (CEPLAN, 2018[4]), Qué es el Sinaplan?, http://www.ceplan.gob.pe/sinaplan/ (accessed 22 June 2018).
Ministry of Economy and Finance (MEF)
The Ministry of Economy and Finance is responsible for the development and oversight of economic and financial policies in the country and plays an important role in regulatory quality efforts. MEF manages the performance-based budgeting system, which apply to all executive bodies and economic regulators, as well as other regulatory policy aspects related to administrative simplification, international regulatory co-operation, inter-governmental co-ordination, performance-based regulation, ex ante impact assessments of regulation and governmental transparency and consultation. It has the capacity to assess draft policies with potential impact on trade, along with other cross‑cutting legal attribution (OECD, 2016[2]). MEF can also be consulted by Congress to submit its opinion on specific regulatory issues.
The ex ante and ex post impact assessments began in 2010 under the leadership of the General Directorate of Public Budget (Dirección General de Presupuesto Público) of MEF which directs, participates and supervises each of the stages of the evaluation process. Evaluated interventions can be activities, projects, programs or policies in progress or completed. To date, impact evaluations of public interventions of various sectors such as Education, Agriculture, Social Inclusion, Work, Citizen Security and Health have been developed1. In parallel, the Sub secretariat for Simplification and Regulatory Analysis (Subsecretaría de Simplificación y Análisis Regulatorio), it implements methodologies and actions for Regulatory Impact Analysis (RIA) in the regulatory training process, in the areas of its competence. It also issues opinions and advises public entities on the adequacy of the regulatory impact analysis in the regulatory training process.
Attached to MEF is the Agency for the Promotion of Private Investment (Agencia de Promoción de la Inversión Privada, ProInversión), which is a specialised technical body responsible for the promotion of investment in services and infrastructure through Public‑Private Partnerships (PPPs). It provides information and advice to investors, mediating different views on investment projects, and creating a conducive environment for attracting private investments, in accordance with sectoral economic plans. Osinergmin is usually asked to provide a technical opinion on forthcoming PPP contracts. The opinions are published on the institutional website and, according to the regulatory legal framework, they are not binding. The final approval rests with the Ministry of Energy and Mining. However, if accepted, these opinions can generate modifications to the texts of the concession contract projects.
Ministry of Justice (MINJUS)
MINJUS acts as a legal advisory body for the Executive branch. It has a broad mandate to improve the quality of the rule of law and act as a legal quality check for draft regulations. Together with the PCM and MEF, it is considered among the most influential ministries in the Executive branch. It also ensures that the Executive branch performs its duties within the political constitution of Peru by providing legal advice and opinions on regulatory initiatives. It is also the agency within the Executive branch responsible for co-ordinating with the judicial branch, the public prosecutor and related entities within the judicial system.
Ministry of Energy and Mining (MEM)
The Ministry of Energy and Mining is the entity in charge of promoting the development of energy and mining activities in Peru. The Ministry is ultimately responsible for the planning and development of those activities, balancing the national policy objectives of attracting investment, meeting growing demand, promoting competition, providing a stable regulatory framework and protecting the environment in line with sustainable development goals (MEM, 2018[5]).
The Ministry is organised under three main departments, each headed by a Vice-Minister and a Director General: electricity, hydrocarbons and mining and each department is assigned specific functions. Some of the key powers in the area of electricity include: the approval of permits for new electricity generators; the oversight of PPP contracts; and the monitoring of progress against the national goal of universal access to electricity by 2021 in the context of the National Energy Policy 2010-2040 (Política Nacional Energía2), the National Energy Plan 2014-25 (Plan Nacional Energético) and the National Plan for Universal Access to Energy 2013-22 (Plan Nacional de Acceso Universal a la Energía).
Agency for Environmental Assessment and Control (OEFA)
The Agency for Environmental Assessment and Enforcement (Organismo de Evaluación y Fiscalización Ambiental, OEFA) works to ensure that economic activities in Peru are conducted without compromising the right to enjoy a healthy environment. Created as a specialised technical agency ascribed to Ministry of Environment in 2008, OEFA is responsible for the assessment, supervision, enforcement and sanctions in environmental matters, as well as for collecting information and applying environmental regulations in the mining, energy, fisheries and industry sectors (OEFA, 2018[6]). Until the creation of OEFA, Osinergmin used to be the authority in charge of environmental inspections and compliance in energy and mining. These functions were transferred in their entirety to OEFA in 2009. Similarly, to Osinergmin, OEFA is funded by industry contributions.
National Superintendence of Labour Inspections (SUNAFIL)
The National Superintendence of Labour Inspections (Superintendencia Nacional de Fiscalización Laboral, SUNAFIL) is responsible for promoting, supervising and verifying that employers comply with the national social and safety rules in the labour market. Created as a specialised technical agency in 2011, SUNAFIL is ascribed to the Ministry of Labour and the Promotion of Employment. Technical visits, studies and investigations are integral to the role of SUNAFIL. Until the creation of SUNAFIL, Osinergmin used to be the authority in charge of occupational health and safety in the energy and mining sectors.
Independent agencies
Regulatory authorities
Peru created four economic regulators and supervisory authorities in the 1990s as part of a broader policy built on the pillars of economic liberalisation, private investment attraction and regulated competition. These authorities exist today under the following names: the National Superintendence of Sanitation Services (SUNASS), the Supervisory Agency for Private Investment in Telecommunications (OSIPTEL), the Supervisory Agency for Investment in Energy and Mining (OSINERGMIN) and the Supervisory Agency for Investment in Public Transport Infrastructure (OSITRAN).3 They were created to foster competition and promote infrastructure investment following the liberalisation of the economy. The defining features of these entities are: 1) institutional design as administratively independent bodies of the central government, 2) funding scheme through industry contributions, and 3) collegiate decision-making body.
Competition and consumer protection authority
The National Institute for the Defence of Free Competition and the Protection of Intellectual Property (Indecopi)4 was created in 1992 as specialised public body in charge of enforcing competition law and intellectual property law.5 Since 2010, Indecopi is also responsible for protecting consumers across the economy as the National Consumer Protection Authority, exercising its duties within the framework of the National Consumer Protection and Defence Policy, and based on four strategic pillars: 1) education, orientation, and dissemination; 2) protection of consumer health and safety; 3) mechanisms for the prevention and solution of conflicts between providers and consumers; and 4) strengthening of the National Integrated Consumer Protection System.
It has the authority to make binding decisions over sanctions or penalties and can fine up to PEN 20 000 for violations. Furthermore, since 2013, Indecopi has been conducting ex post reviews of regulations within their jurisdiction and has eliminated nearly 3 000 regulations in the country.
Indecopi chairs the National Consumer Protection Council, an inter-institutional working group created for the integration of the local and national statutory framework on consumer protection, as well as to bolster activities carried out for the benefit of consumers and to identify common information campaigns. The Council is made up of 16 representatives from the public and private sectors: ministries, utilities regulators, business associations, and consumers associations, in co-ordination with the PCM. At the time of writing, Osinergmin has been nominated to represent all other regulators on the Council.
Legislature
The legislative branch of Peru is conferred to the Congress. The Congress is a unicameral institution composed of 130 members elected to serve five-year terms. Its composition is the result of a reform passed in 1993 following the Democratic Constituent Congress that resulted in the new Political Constitution (OECD, 2016[1]). The Congress holds the authority to pass legislation that require regulators to develop secondary regulations. Furthermore, the Congress can call on the regulators for them to submit opinions on draft laws and to attend sessions to respond to any questions that raised by Congress. There are twenty-three (23) standing committees, including the Commission for Consumer Defence and Regulators of Public Utilities (Comisión de Defensa del Consumidor y Organismos Reguladores de los Servicios Públicos, CODECO), the Commission for Budget (Comisión de Presupuesto y Cuenta General de la República), and Commission for Energy and Mines (Comisión Energía y Minas).
Sub-national governments
There are three subnational layers of government in Peru: the regional government, the provincial local government and the district local government (OECD, 2016[2]). These government levels have exclusive and joint functions which are described in the Peruvian Political Constitution (Constitución Política del Perú, CPP), the Organic Law of the Executive Power (Ley Orgánica del Poder Ejecutivo, LOPE, the Organic Law of Regional Governments (Ley Orgánica de Gobiernos Regionales, LOGR) and the Organic Law of Municipalities (Ley Orgánica de Municipalidades, LOM). Sub-national governments have the authority to enact regulatory measures in their region. Osinergmin’s decentralised offices (DO) are responsible for inter alia liaising with regional governments. Sub-national governments have the authority to enact regulatory measures in their region. Osinergmin operates 24 regional offices in charge of supervising services provided to customers in the downstream electricity, gas and hydrocarbons markets. These regional offices interact with sub-national governments on local issues including electricity outages and infrastructure emergencies.
Judiciary
The judiciary is responsible for interpreting and applying the laws in Peru to ensure equal justice. In this capacity, it is responsible for providing mechanisms for dispute resolutions through a hierarchical system. The judiciary is led by the Supreme Court and is supported by 28 superior courts with defined jurisdictions across the 25 regions in the country. Under each superior court are 195 primary courts responsible for each province and is then followed by 1 838 Courts of justice of the Peace within each district (Poder Judicial del Peru, 2012[7]).
Supreme Audit Institution
The Comptroller General of the Republic (Contraloría General de la República del Perú, CGR) was established in 1929 as the Supreme Audit Institution of Peru. As the highest authority of the National Control System, the CGR is responsible for supervising, monitoring and verifying the correct management, collection, and use of State resources and property. A comptroller general serves a seven-year term and is elected by a majority in Congress. It is represented in each government body, including Osinergmin, by the Institutional Control Body (Órgano de Control Institucional, OCI). The Chief Audit Officer of the OCI and is assigned by the General Comptroller of the Republic. Its function is the correct and transparent management of resources and assets of Osinergmin, safeguarding the legality and efficiency of its acts, as well as the achievement of its management goals, through the execution of control tasks, While the Chief Audit Officer of the OCI comes from the CGR. The rest of the audit staff are employed by the government agency. The OCI is responsible for all auditing all public spending; for example, by monitoring the procedure and evaluation process related to contracts, procurement, and other services.
Regulatory process and policy
Legislative process
Aside from the members of Congress, the President, the Judiciary, autonomous public bodies, professional associations, and the citizenry can submit draft laws to Congress for consideration.
Once a draft law is submitted, it is registered by the Congress document processing office of the Congress and processed by the Secretary General of the Executive Council, who is also responsible for identifying the committee that receive the draft law. The assigned committee deliberates and issues a report within thirty days and classifies it as favourable, unfavourable, or flat rejection. If more than one committee receives the proposal, they can submit joint or individual reports. If approved, the committee reports are received by the Executive Council, which includes the Secretary General, the Parliamentary Director, and the reading clerk, who will also be organising the debate and co-ordinating the distribution of the copies to the members of parliament. The plenary assembly then accepts or rejects the bill. An accepted bill is then registered, reviewed, and certified by the Secretary General’s office and passed to the Executive branch. The President then endorses the bill into law and orders its publication, which then comes into force once published in the official gazette, El Peruano (Congreso de la República, 2017[8]).
If within its jurisdiction, regulatory agencies are entitled to formulate secondary legislations linked to the law, following the guidelines for the regulatory quality assessment of administrative procedures (Presidencia del Consejo de Ministros, 2018[9]).
Figure 1.2. Peru’s legislative process
Source: (Congreso de la República, 2017[10]), Legislative Process, http://www.congreso.gob.pe/eng/legislative_process/ (accessed 26 June 2018).
Rule-making process in the executive body
The executive branch has the authority to issue subordinate regulations (decrees and resolutions). It is also responsible for approving bills (draft laws) that is submitted by the President to Congress, including any legislative decrees, emergency decrees, and resolutions, as defined by law (OECD, 2016[2]).
The rule-making process in the executive is not guided by a whole-of-government policy, but certain policies and framework serve as materials in the development of regulations.
Table 1.1. Frameworks and policies that guide rule making in the executive body
Source: (OECD, 2016[2]), Regulatory Policy in Peru: Assembling the Framework for Regulatory Quality, OECD Reviews of Regulatory Reform, http://dx.doi.org/10.1787/9789264260054-en.
When issuing subordinate regulations, the common practice among ministries is to draft a proposal, guided by the frameworks and policies outlined in Table 1.1, and posted on the website for public consultation. After consultation, Ministry or agency head approves the regulation. For ministries, vice-ministers would also need to approve the draft before it is sent to the minister. In cases when draft regulations require approval from three or four ministries and/or agencies, the proposal must be sent to the PCM to be discussed by the vice-ministerial co-ordinating council (CCV) or adopted by the Council of Ministers before it is sent to the President of the Republic for final approval. All approved proposals are published in the official gazette, El Peruano (OECD, 2016[2])
Box 1.2. OECD Regulatory policy review of Peru
In 2016, the OECD conducted a review of the regulatory policy of Peru to assess the policies, institutions, and tools utilised by the government and regulatory bodies in the country in designing, implementing, and enforcing high-quality regulations. This review formed part of the OECD Peru country programme along with xx other reviews of sectoral public policy in Peru.
The report provides an overall assessment of the political context of regulatory reform carried out by oversight bodies and relevant regulatory agencies in the country. It recognises the progress achieved to date, including the numerous tools and activities – such as a broad administrative simplification programme – utilised to improve the regulatory environment in the country. The report also highlights the challenges and improvements that remain in order to achieve a world-class regulatory framework and provides a set of recommendations and next steps, including:
establishing a regulatory oversight body, as a way to create more coherence in regulatory policy activities and tools across ministries, agencies, and offices;
issuing a policy statement – either through a law or a binding legal document – on regulatory policy, with clear objectives, strategies, and tools when managing the entire regulatory governance cycle;
measuring administrative burdens created by formalities and information obligations;
making inspection and enforcement of regulations an integral part of the regulatory policy framework, including through developing a set of guidelines related to ethical behaviour and corruption prevention;
promoting a coherent national regulatory framework that actively encourages the adoption and use of regulatory tools and best-practice sharing.
In addition, the report provides a brief overview of the governance arrangements of regulators and their interactions with the central government. It underscores the degree of independence exerted by regulators on budget and decision-making, their transparency and accountability mechanisms, as well as an overview of the regulatory policy tools applied throughout the policy cycle. Economic regulators are considered to implement more sophisticated tools than other government bodies and have progressively improved its adoption and implementation.
Following the report, the Presidency of the Council of Ministers (PCM) has been proactive in developing initiatives and co-ordinating with ministries and regulatory bodies to improve the national regulatory framework. For example, in 2017, the PCM developed a set of guidelines for the regulatory quality assessment of administrative procedures to further improve the regulatory environment for citizens and businesses. The guidelines aim to guide government bodies under their purview in identifying, reducing and measuring administrative burdens created by formalities and information obligations in both the local and the national level.
Source: (OECD, 2016[2]), Regulatory Policy in Peru: Assembling the Framework for Regulatory Quality, OECD Reviews of Regulatory Reform, http://dx.doi.org/10.1787/9789264260054-en.
Sector reforms and market overview
Energy
Between the 1970s to the early 1990s, the government of Peru aimed to develop the three main sources of energy supply in the country at the time: oil, gas and hydropower through public-led investment by State Owned Enterprises (SOEs). However the limited success of those policies led, in 1992 and 1993, to a series of major energy reforms broke apart state monopolies in the energy sector and introduced competition with private actors, including through the introduction of long-term concessions. Over time, Peru’s oil fields continued to deplete although its gas production picked up substantially benefiting from private investment. Today, Peru is a net importer of oil and a net exporter of gas. Fossil fuels continue to dominate the country’s energy mix at 81% of the total primary energy supply (MEM, 2016, p. 8[11]) although in recent years Peru has been aiming to develop more renewable energies, particularly at the micro-generation level.
Hydrocarbons sector
Peru shifted from being an oil exporter to a net importer in the late 1980s and early 1990s, following decades of dwindling production and investment in hydrocarbons sector. At the time, both oil and gas production were dominated by SOE Petroperu, which had been created in 1969 in a mass expropriation of reserves from both local oil companies and the largest foreign company active in Peru during this period - the International Petroleum Company (a subsidiary of Esso). However, declining profits and performance eventually prompted Petroperu to reinitiate a privatisation process in 1992. Underperforming assets were shut down or sold off, and Petroperu began to shelter its business decisions from political interference.
A new hydrocarbons legislation approved in 1993 effectively put an end to Petroperu’s monopoly in the oil and gas sectors by allowing private companies to participate in every part of the sector. Prices were also deregulated. A number of improvements to exploration and production contract terms and the allowance of international arbitration in case of dispute helped attract new investor interest. Investments into the oil and gas sectors skyrocketed from USD 20 million to USD 4.3 billion between 1990 and 1997 (ASCOA, 2010[12]).6
Gas production, in particular, increased dramatically from the mid-2000s when the Camisea natural gas field, discovered in 1986, became operational in 2004. Situated in the environmentally sensitive Amazon rainforest, the Camisea field was estimated to hold 11 trillion cubic feet of possible reserves and 482 million barrels of natural gas liquids, making it the premier site for natural gas production in Peru, one of the largest energy projects in the country7 and “the most important mega-field in Latin America”.8 In order to develop the Camisea field, the government opened tenders on various components of the Camisea project to attract international bidders. The first contracts to begin production in Camisea were awarded to an international consortium and is operated by Pluspetrol. The main pipeline carrying the gas from the forest to the coast of Peru was awarded to another international consortium led by Transportadora de Gas del Peru (TGP), while the distribution network across Lima and Callao is managed by Cálidda, whose majority shares are held by Grupo de Energia de Bogotá.9
Figure 1.3. Structure of primary energy production, 2016
* Estimated. ** Taxable production.
Source: (MEM, 2016[11]), Balance Nacional de Energía 2016, Figure 2 : “Estructura de la producción de energía primaria: 2016”, p. 5, http://www.minem.gob.pe/_publicacion.php?idSector=10&idPublicacion=565 (accessed on 26 November 2018).
Figure 1.4. Structure of final energy consumption by economic sector, 2016
Source: (MEM, 2016[11]), Balance Nacional de Energía 2016, Figure 9: “Estructura del consumo final de energía por sectores económicos: 2016”, p. 16, www.minem.gob.pe/_publicacion.php?idSector=10&idPublicacion=565 (accessed on 26 November 2018).
Today, over 70% of Peru’s domestic energy production comes from natural gas and liquefied natural gas (LNG) and Peru is a net exporter of gas (see Figure 1.3). The government continues to support and promote the development of natural gas in Peru for domestic consumption as well as exports. By contrast, oil accounts for only 8% of total energy production, compelling Peru to rely on imports for oil and oil products to satisfy domestic demand, which primarily comes from the transport and residential sectors (see Figure 1.4). Several electricity generators use natural gas as their primary energy source.
There are currently four main Peruvian oil and gas companies: Petroperu, Relapasa, Pluspetrol, and Peru LNG. Many international companies are also active in Peru’s hydrocarbon sector. Table 1.2 shows the composition of entities in the liquid hydrocarbon sector, supervised by Osinergmin. There are currently 44 hydrocarbons exploration and exploitation lots (Perupetro, 2018[13]).
Table 1.2. Entities in the liquid hydrocarbon sector
Source: Information provided by Osinergmin.
Electricity sector
Like the hydrocarbons sectors, the government controlled Peru’s power sector until major reforms commenced in 1992. For some twenty years prior to reform, mainly vertically integrated SOEs Electroperu and Electrolima dominated the power sector since the 1970s. Electroperu served as a holding company for the various private companies already involved in dispersed, small-scale power generation. At the time, Independent Power Producers (IPPs) were generating as much as 30% of the country’s electricity, primarily for own use.10 However, the government was keen to achieve universal electricity access and to develop the country’s vast hydropower potential, and Electroperu was deemed essential for both of these objectives. Electroperu thus came to generate most of the country’s electricity.
Already in the 1970s and 1980s, to some extent vertical separation was present in Peru. While SOEs owned and operated power plants, various retail suppliers operated in different parts of the electricity sector. At this time, electricity tariffs were not adequately reflecting the cost of capital or production, and large investment projects – primarily in hydropower, which accounted for nearly 60% of total generation capacity in 1992 – had poor returns. By the latter half of the 1980s, Peru’s power sector was facing many financial problems as companies incurred significant losses and reached unsustainable debt levels. Overall investment into the sector also dropped.
When electricity reforms began in 1992 with the Electricity Concessions Law and its regulations (Law No. 25844), the principle aim was to introduce competition and attract investors to buy up shares of the state-owned enterprises and run the power sector more efficiently. A Supreme Decree (No. 009-93-EM) followed in 1993. These laws and regulations essentially established the new structure of the power market with regards to generation, transmission and distribution activities.
Peru’s electricity reform had four overarching goals:
Unbundle generation, transmission and distribution under Electroperu and Electrolima
Progressively introduce private participation and attract new investment
Create a “free market” where large customers with capacity above 1 Megawatt (MW) could negotiate their own supply contracts
Establish a new mandate for the Electricity Tariffs Commission (CTE) to become the energy tariff regulator and regulate prices based on marginal cost principles
The Electricity Concessions Law 1992 effectively unbundled the electricity sector and (while establishing Osinerg as an independent regulator, later transformed into Osinergmin). Electricity generation was divided into 13 companies, of which private companies accounted for the bulk of the generation capacity (70%). Transmission system was entirely privatised under six companies. The distribution sector, then dominated by state-owned Electrolima and 9 regional companies, was split into 16 companies (see Figure 1.5).11 Electrolima’s shares were eventually bought by distribution companies Edelnor and Elelsur, and power generation company Edegel.
Figure 1.5. Taxonomy of the power sector in Peru after reforms (2017)
Notes: kV=Kilovolt. The market share of generating and distributing companies is based on Mw.h.
Source: Data provided by Osinergmin (2017), “Gerencia de Regulación Tarifaria”.
For all customers below the “free market” threshold, tariff regulations for medium and small customers were introduced. Transmission and sub-transmission tariffs are regulated either under a cost-based model (for existing assets) or as a result of a bidding process (auctions) for new assets based on Law 28832 of 2006. In response to rapid demand growth, the Law aimed to ensure the efficient development of electricity generation and reduce price volatility. To this end it mandated the use of auctions by distribution companies for the procurement of supplies to regulated consumers. Based on this law, Decree 1002 then established a mechanism were long-term guaranteed tariffs for electricity from renewable energy sources are auctioned biannually. Distribution tariffs have been regulated under a yardstick competition model, clustering companies under typical distribution sectors (e.g. urban high density, rural low density) and benchmarking them against the most efficient company of that cluster.
Figure 1.6. Organisation of the Peruvian electricity market
Notes: COES = Comité de Operación Económica del Sistema Interconectado; MWh = megawatt-hour.
Source: (Vagliasindi and Besant-Jones, 2013[14]) Power Market Structure, The World Bank, p. 209, http://dx.doi.org/10.1596/978-0-8213-9556-1.
A key outcome of the reforms was also the creation of the Committee of Economic Operation of the National Interconnected System (Comité de Operación Económica del Sistema Interconectado Nacional – COES), in 1994. COES brings together companies active in generation, transmission, distribution as well as large customers. Set up as a private, not-for-profit organisation, COES is governed by a shareholders’ assembly of over 120 members and final decisions are made by the five Directors and, ultimately, by the President who is elected every five years. COES is funded by member contributions. The main roles of the COES are:
System operation – following the merit order (least cost) criteria
Spot market management – administering the short-term electricity markets by managing the gap between existing contracts and the merit order dispatch
Planning – determining which transmission expansion projects should be given green light and providing opinions on new licenses and tests (pre-operative studies) as well as certificates for commercial operations.
At the time of writing, there are a number of both private and public companies involved in Peru’s power sector (see Table 1.3). The largest companies supplying electricity to the market (ranked by MW of production) are ENGIE Energía Perú (7 807 093 MWh), Empresa Electricidad del Perú – ELECTROPERU (6 931 976 MWh) y Enel Generación Perú (5 877 817 MWh ). All transmission companies are privately held and the ownership of 68% transmission lines is concentrated in the hands of 17% companies. Most distribution companies are privately-held. However, there is a significant gap in operational efficiency between private and public companies. For the year 2017, the System Average Interruption Frequency Index (SAIFI) for private companies was 5.8 interruptions per customer, and the System Average Interruption Duration Index (SAIDI) was 20.3 hours per customer. By contrast, SAIFI and SAIDI for state companies in the same year were 19.4 and 46.1, respectively. According to Osinergmin’s analysis, he performance gap is most likely attributable to an investment gap, since public companies in rural areas have much more stringent financing limitations that constraint their ability to raise debt for investment.
Table 1.3. Electricity companies in Peru
Source: Information provided by Osinergmin, 2018.
Overall, Peru’s electricity demand has grown rapidly in tandem with its economy, increasing by more than 79% in the last ten years (COES12). The total number of consumers connected to the grid is shown in Table 1.4. Most of Peru’s electricity demand is served by natural gas generation (55%) and hydropower (30%) (MEM, 2018[5]). The bulk of Peru’s electricity goes to the residential and commercial sectors (40%), followed by mining (32%) and industry (25%).
Table 1.4. Consumers in the energy sector
Total number of electricity consumers connected to the grid
Notes: According to the Electricity Concessions Law, “regulated” customers refer to small retail or regulated users to whom distribution companies supply electricity at regulated prices. “Non-regulated” customers refer to large users (>2.5 MW) who contract freely and directly with generators or distribution companies. Customers between 0.2 -2.5 MW can choose between regulated or non-regulated contracts. Below 0.2 MW, contracts are always regulated.
Source: Information provided by Osinergmin, 2018.
Three major policy goals are yet to be attained in the electricity sector, as evidenced by discussion with key stakeholders:
Universal access – ensuring that 100% of households are connected to electricity by 2022. Electricity access has already improved dramatically from 45% in 1990 to 93% in 2017, although a significant 20% access gap persists between rural and urban areas and an estimated 400 000 households lack direct access to electricity. Current efforts aim to extend access to around 8 000 households per month.
Energy efficiency – renewed policy efforts by the Ministry of Energy and Mines currently involve an ambitious roll-out plan for smart meters within an 8-year timeframe and a requirement that operators reinvest 5% of their revenues in modernisation and efficiency-enhancing measures.
Affordability – concerns about the inability of the poorest consumers to afford energy prices have been translated into action in 2003 when the regulator introduced cross-subsidies for one-third of the population consuming the lowest amount of energy. Further affordability measures are included in the wide-ranging Energy Social Inclusion Fund (FISE) scheme, as described in Box 1.3.
Renewables potential is significant but remains largely underexplored, in part due to very low electricity prices given the current mix and in part due to MEM is currently preparing to reform its renewable energy policy to facilitate free and competitive participation in the electricity market. The Ministry is assessing options such as introducing schedule blocks to tenders to help renewable energy producers target the time periods best suited to their generation profile.13 MEM is also in the process of designing a regulatory framework to support the entry and utilisation of electric and hybrid vehicles.14
As of May 2018, Peru has 912 MW of installed capacity of Renewable Energy Resources in operation (RER 1st, 2nd, 3rd and 4th auctions); of which 39.9% are wind, 31.2% solar, 25.6% hydropower and 3.3% biomass. By the year 2020, renewable energy resources will grow with 360 MW of additional power installed (hydropower and biomass) MEM has announced a target of 15% of generation from renewable energy.
Box 1.3. The Energy Social Inclusion Fund (FISE)
The Energy Social Inclusion Fund (Fondo de Inclusión Social Energético, FISE) is a fund established in 2012 by Law 29852 to promote universal access to energy and a social compensation scheme for vulnerable and less advantaged populations. FISE is one contributor to achieving the objectives of the Universal Energy Access Plan 2013-2022, and includes the following objectives:
Expand the use of natural gas by providing discounts and compensation for establishing natural gas connections in residential properties or promoting the conversion of cars from petrol to natural gas
Provide compensation for extending the energy frontier to the use of renewable energy, including individual solar panels for households off the electricity grid and where grid expansion is not planned in the short-term. Expanding the use of energy-efficient lighting in residential and public systems is also included in this stream.
Generate access to LPG to vulnerable sectors of the population via providing compensation (vouchers) for discounted purchase of LPG containers
Ensure competitiveness of residential electricity tariffs by reducing the fixed charge, energy charge and other tariff options to eligible residential users via cash transfers to electricity distribution companies
The programmes under FISE are funded by large electricity users (mainly mining companies and large industrial players), natural gas transport service providers through pipelines, and producers and importers of fuels. The hydrocarbon and electricity companies are responsible for collecting these contributions and transferring them to the fund. FISE programmes benefit the most disadvantaged citizens.
The Law assigns the administration of FISE to MEM. The Ministry first transferred the management of the programme to Osinergmin through Law No. 29852, on a temporary annual basis. Since then, MEM has renewed Osinergmin’s mandate every year, most recently until 30 April 2019. Osinergmin is responsible for the administration of the fund. MEM establishes and prioritises FISE’s energy projects. Osinergmin’s functions related to FISE include issuing regulations, enforcing sanctions, determining installation fees and setting the administrative cost incurred by electrical distributors for the implementation of FISE.
Source: Information provided by FISE, (FISE, 2018[15]), Acceso a la energía, http://www.fise.gob.pe/acceso-a-la-energia4.html (accessed on 26 November 2018).
Mining
The mining sector is a key contributor to the Peruvian economy. Mining exports amounted to 10% of GDP and 60% of the value of all exports in 2017, growing by almost 25% above 2016 levels. Over 30% of all foreign direct investment went to the mining sector. The sector employed over 187 000 workers and generated nine indirect jobs for every job created. In addition, 3% of all tax revenues come from mining. Peru ranks across the five top producers for the following minerals: copper, silver, zinc, lead and molybdenum.
For 2018, a total of 172 units belonging to 115 mining companies are supervised by Osinergmin. A mining company is defined as a company that has an exploration, exploitation, smelting and transport concessions. A unit is an area where mining activities are carried out or planned. Osinergmin only regulates what is defined by Law as a medium or large-scale mine.15 For the smaller mines, regulatory requirements and inspections do not apply. Most of the large mines are located in the Highland Region of Peru. Due to the characteristics of the production areas, the companies, besides investing in the extraction and processing of the mineral, must consider the investment in the construction of mining camps, electricity distribution lines to connect to the national energy network, and access roads.
Table 1.5. Regulated mining companies in Peru
Source: Information provided by Osinergmin, 2018.
The Portfolio of mining construction projects consists of 49 projects with a total investment amount of USD 58 507 million. Of the projects in the portfolio, three are in the construction phase whose start of operations is expected in the course of 2018. Likewise, it is considered that nine projects begin construction in 2018. It is important to note that 21 projects have a start date pending determination due to factors associated with business decisions and social issues, among others. This portfolio includes those projects whose purpose is the construction of new mines (greenfield), the expansion or replacement of existing ones (brownfield), as well as those of tailings reuse (greenfield). These projects meet three requirements:
Investment (CAPEX) greater than USD 70 million.
Start of operation or start-up in the next 10 years (until the year 2028).
At least have or are developing their pre-feasibility studies.
In line with rapid growth in recent years, copper production is set to continue to expand. According to its main mineral of extraction, 26 projects are copper representing 68.6% of total investments with USD 40 155 million. Likewise, nine projects are gold and three iron, with investments of USD 7 120 million (12.2% of the total) and USD 6 700 million (11.5% of the total), respectively. The rest correspond to projects of phosphates, zinc, silver, uranium and tin, which together represent 7.8% of total investments.
References
[12] ASCOA (2010), Energy in Peru. Opportunity and Challenges, http://www.as-coa.org/sites/default/files/ASCOA_Energy_in_Peru.pdf.
[3] CEPLAN (2018), Politicas y Planes, http://www.ceplan.gob.pe/politicas-y-planes/ (accessed on 22 June 2018).
[4] CEPLAN (2018), Qué es el Sinaplan?, http://www.ceplan.gob.pe/sinaplan/ (accessed on 22 June 2018).
[8] Congreso de la República (2017), How does a bill become a law?, http://www.congreso.gob.pe/eng/legislative_process/ (accessed on 26 June 2018).
[10] Congreso de la República (2017), Legislative Process, http://www.congreso.gob.pe/eng/legislative_process/ (accessed on 26 June 2018).
[15] FISE (2018), Acceso a la energía, http://www.fise.gob.pe/acceso-a-la-energia4.html (accessed on 26 November 2018).
[5] MEM (2018), Ministerio de Energia y Minas - Institucional, http://www.minem.gob.pe/_sector.php?idSector=10.
[11] MEM (2016), Balance Nacional de Energía 2016, http://www.minem.gob.pe/_publicacion.php?idSector=10&idPublicacion=565 (accessed on 26 November 2018).
[1] OECD (2016), OECD Public Governance Reviews: Peru: Integrated Governance for Inclusive Growth, OECD Public Governance Reviews, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264265172-en.
[2] OECD (2016), Regulatory Policy in Peru: Assembling the Framework for Regulatory Quality, OECD Reviews of Regulatory Reform, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264260054-en.
[6] OEFA (2018), OEFA - Who are we, https://www.oefa.gob.pe/en/que-es-el-oefa.
[13] Perupetro (2018), Peru Petro Statistics, https://www.perupetro.com.pe/wps/wcm/connect/corporativo/7a8738e6-be5f-4b66-9343-6ed107a87954/exploraci%C3%B3n.pdf?MOD=AJPERES&Contratos%20exploracion%20febrero%202018.
[7] Poder Judicial del Peru (2012), Poder Judicial del Peru, http://www.pj.gob.pe/wps/wcm/connect/CorteSuprema/s_cortes_suprema_home/as_Inicio/ (accessed on 25 June 2018).
[9] Presidencia del Consejo de Ministros (2018), Guidelines for the Regulatory Quality Assessment of Administrative Procedures.
[14] Vagliasindi, M. and J. Besant-Jones (2013), Power Market Structure, The World Bank, http://dx.doi.org/10.1596/978-0-8213-9556-1.
Notes
← 1. Ministry of Finance and Economy, “Evaluaciones de Impacto (EI)”, https://www.mef.gob.pe/es/evaluaciones-de-impacto (accessed 23 November 2018).
← 2. Approved by Supreme Decree No. 064-2010-EM.
← 3. SUNASS was created by the Law Decree No. 25965 of December 19th, 1992; OSIPTEL by the Legislative Decree No. 702 of July 11th, 1991; Osinergmin by the Law No. 26734 of December 31st, 1996; and OSITRAN by Law No. 26917 of 23 January 1998.
← 4. Indecopi was created by Executive Order No. 25868 of November 1992. Act 27444 and Legislative Decree No. 1256 serve as the legal basis for their methodology and approach.
← 5. The only exception across all regulated sectors is telecommunications, where competition law powers rest with the economic regulator (OSIPTEL) instead.
← 9. The Group has also acquired a share of TGP (24%) in 2014, hence being involved at both levels of natural gas distribution (https://peru21.pe/economia/grupo-energia-bogota-compra-participacion-tgp-140924).
← 12. COES – Estadística Anual – Evolución de la Producción de Energía 1993-2017 (GWh).
← 14. Ibid.
← 15. Small scale mines covering an area of less than 2 000 hectares and producing less than 350 metric tons of output per day are not supervised by Osinergmin. This amount has varied over time:
Legislative Decree 708 (06/11/1991): Up to 350 TMD.
Legislative Decree 868 (01/11/1996/): Up to 150 TMD.
Law No. 27651 (24/01/2002): 350 TMD.
Legislative Decree No. 1040 (26/06/2008): Up to 350 TMD.
The limit of extension in hectares to small mining producers (Pequeño Productor Minero, PPM) has varied through time:
Legislative Decree 708 (06/11/1991): PPM, those who have up to 5 000 Ha.
Legislative Decree 868 (01/11/1996/): PPM, those who have up to 1 000 Ha.
Law No. 27651 (24/01/2002): PPM, those who have up to 2 000 Ha.