IEEE Power & Energy Magazine - May/June 2020 - 34

Regulators need to reshape frameworks that have
historically focused on low costs (rather than the
best value for money).
and other smart grid and IT advances), enabling utilities to
implement an active (rather than the historical passive or
"fit-and-forget") approach to network operation, advanced
operational measures, and nonwire solutions that will effectively displace costly investments. This environment poses
challenges, but there are opportunities too. Understanding
those opportunities and designing regulations accordingly is
a priority in Latin American countries, where maintaining
affordable energy is essential.
To ease the transition toward a more reliable and modern
electricity network, regulators need to reshape frameworks
that have historically focused on low costs (rather than the
best value for money) and expand electricity coverage and
access. Regulators in countries including Colombia, Peru,
Chile, Brazil, and Argentina have implemented or are undertaking regulatory reforms in the distribution sector. The most
important topics of debate (relevant to rate making) include
enhancing reliability for consumers, connecting DERs, and
providing secure and flexible services between distribution
and transmission networks within an incentive- or performance-based price-control regime.
Well-designed incentive- and performance-based regulations use financial enticements to encourage distribution network owners to provide their (multiple) services securely and
cost-effectively. Apart from encouraging network owners to
be efficient, network users (that is, producers, consumers,
and prosumers) should be motivated to improve their operational and deployment profiles. This is particularly relevant

Quality and
Reliability

Economic
Efficiency and
Revenue
Adequacy

Decarbonization

Equity and
Fairness

figure 1. The tetralemma for distribution network regulation in Latin America.
34	

ieee power & energy magazine	

in the context of DERs, and it poses challenges related to the
deployed meter technology and the fact that tariffs, to which
network users react, present a limited level of spatiotemporal granularity and cost reflectiveness. Other important
concerns include equity and fairness in tariff and reliability
levels, especially in rural and other underdeveloped areas.
Thus, regulators consider various policy concerns and objectives when deciding on network regulations, which are summarized in Figure 1. In the rest of this article, we focus on
distribution network price controls, especially remuneration
and tariffs. We summarize rate making in Latin America
countries and discuss the Chilean and Brazilian experiences.

Rate Making in Latin America
Overview
Determining the regulated revenues for a distribution network company is a complex task with multiple conflicting
objectives as well as determining rates, charges, or tariffs
that the company is allowed to impose for billing and collecting fees from consumers. The design of such processes
should consider that, in broad terms, remuneration will affect
network owners' decisions (investments, operation, maintenance, administration, and so forth), while tariffs will impact
network users (the locations they choose, their consumption and production profiles, and so on). While traditional
objectives for appropriate remuneration center on revenue
adequacy [to ensure that income is adequate to cover capital
expenses (CAPEX) and operating expenses (OPEX), including a reasonable return on capital] and productive efficiency
(for the regulated service to be provided at the most efficient
cost), the objectives for tariff design focus on allocative efficiency (guaranteeing that effective charge signals are sent
so that users can make cost-effective decisions about their
consumption and production) and equity (ensuring that network tariffs feature desirable distributional characteristics,
especially in terms of protecting vulnerable consumers). To
achieve this, there are numerous regulations that emphasize/
weigh conflicting objectives differently.
Latin America employs cost-of-service and incentive- or
performance-based regulations (with a preference for the
latter) to determine allowed revenues. In countries using
the cost-of-service approach, such as Ecuador and Costa
Rica, planners determine future network investments, and
regulators ensure that a company's costs are fully recovered through appropriate charges. In countries applying
-incentive- or performance-based approaches, such as Chile,
may/june 2020



IEEE Power & Energy Magazine - May/June 2020

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