Alternatives for the Elimination of Cross-Subsidies: The Case of Brazil
20 May 2003
By Carlos Pabon-Agudelo and Dr. Michael Rosenzweig with Dr. Sarah Voll
The electricity shortage Brazil experienced in June 2001 renewed debate and concerns over whether or not the existing design of the country's electricity market was sustainable in the long term. In response, the Government of Brazil created a special committee to recommend proposals to correct the current dysfunctions and propose improvements for the electricity sector model. The first of the committee's three papers under this mandate identified the main areas where improvement was needed in the operation of the electricity market. The second paper identified 33 flawed areas that needed to be remedied in order to enhance the competitiveness and reliability of the electricity sector, and the third paper analyzed 11 of the 33 measures outlined in the previous report, issuing specific proposals for each.
The authors argue that by the third report the proposals relating to cross-subsidies - deverticalization, tariff realignment, bilateral contracting, and promotion of free customers - are no longer internally consistent. In this article the authors propose three potential solutions to eliminate cross-subsidies and make tariffs for large customers cost-based. The first, which they term the "market solution," calls for the elimination of cross-subsidies in a period concurrent with the phase-out of the Initial Contracts. A "second best solution" , makes allowances for the political difficulties of immediate elimination of cross-subsidies and proposes an alternative mechanism that keeps large customers whole for some time but eliminates cross-subsidies by the end of a period. Lastly, the authors detail an "alternative solution" which extends the transition credit during a time frame deemed appropriate by the regulatory authority. Each of the three solutions require eligible customers to face market prices for some portion of their consumption immediately and ultimately eliminate cross-subsidies altogether.
This article is based on the final report, Tariff Realignment, commissioned by Duke Energy International and Tractebel Energia in July 2002.
This abstract is republished with permission from the Electricity Journal, Volume 16, Issue 5, May 2003, Copyright (c) 2003 Elsevier Science, Inc., http://www.elsevier.com/locate/tej. All rights reserved. To request a copy of this article, please click on the link below.
