CHILEAN ELECTRIC SYSTEM AS A SOURCE OF ENERGY FOR MINING PROJECTS (ENGLISH AND SPANISH)

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 12A
CHILEAN ELECTRIC SYSTEM AS A SOURCE OF ENERGY FOR MINING PROJECTS (ENGLISH AND SPANISH)
Felipe Bascuñán M.
Attorney
Allende Bascuñán y Cía Ltda.
Santiago, Chile

FELIPE BASCUÑÁN M.

Since 1990, Felipe Bascuñán is a partner of the Chilean law firm Allende Bascuñán & Cía. Ltda. (before called Pérez de Arce & Cía.), leading the energy, natural resources, water and real estate law group. He has worked like in-house legal counsel in Colbún S.A., one of the largest hydroelectric power companies in Chile, between 1990 - 1994. Since 1995 he has represented the main companies located in this country, specially the mining and manufacturer companies connected with energy matters, in their power and gas biddings and supply contracts. He has been in charge of litigation and arbitration proceedings on those matters and contracts. Mr. Bascuñán's experience in Chile and on the wide Latin American region has focused primarily on providing legal and strategic advice to clients on all aspects related with energy, water and natural resources matters, including buying, selling and the development of new projects, biddings, contracts, litigations and arbitrations.

In the water law area, he has represented different kinds of clients related with mining, winery, manufacturing, real estate, agriculture and hydroelectric power, developing new projects and buying and selling rights and obtaining new rights. He works jointly with the Environmental Group of the law firm, giving a full advice on the matters above mentioned.

He is member of the International Bar Association; member of the Legal Section of ICARE and was member of the Legislative Commission of the Chilean Chamber of Construction. Education: Universidad Diego Portales, School of Law, with distinction. He was admitted to practice in 1989.

SUMMARY. Introduction. I. Characteristics of the Chilean Electric System. I.1. Interconnection. I.2. Legislation, regulation and authorities in the electricity sector. II. Energy and Mining. Non-regulated customers and electricity supply contracts with mining companies. II.1. Legal Nature of Electricity Supply Contracts. II.2. Long-term supply contracts in mining. Reason and expectations of the parties. II.3. Non-regulated Customers and Mining. III. Risks and challenges for large-scale electricity consumers. New electricity generation projects. Conflicts with power companies. Self-generation. III.1. Risks and challenges for large-scale electricity consumers. III.2. New electricity generation projects. III.3. Conflicts with generators. III.4. Self-generation. IV. Energy Interconnection. IV.1. Basic regulations for an appropriate energy interconnection between countries. IV.2. The case of Chile. IV.3. Natural gas interconnection between Chile and Argentina. IV.4 Energy Ring. V. Conclusions.

Introduction.

Chile was one of the pioneers in the world in liberalizing its electricity system, clearly dividing generation from transmission and from the distribution of electric capacity and energy. It was also a pioneer in encouraging the participation of diverse players in each of these areas of the electricity sector. The intent was to avoid monopolies and create operative and competitive markets in each of these areas. Through Statutory Decree No. 1 of the Ministry of Mining of 1982, known as the General Electricity Law, hereinafter "the Law," the foundations for those different sectors of electricity activity were created, setting out the conditions and incentives for their development. As we will see below, this was very important although not entirely sufficient. For that reason, two important amendments were made to the Law during 2004 and 2005. Those amendments filled in certain blanks or inconveniences within the Law, especially in regard to incentives to build new power stations, in addition to increasing the clarity and transparency of access and the toll structure for transmission systems.

The foregoing has been fundamental to confronting the increase in the demand for electric energy seen in Chile in the last 15 years, the average being a growth of approximately 7% annually, motivated fundamentally by the development and expansion of mining activity, particularly for copper, gold and molybdenum. It has also been motivated

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by the increase in demand in the industrial, commercial and household sectors. It is interesting to note that the growth in energy demand in recent years has normally been one point above the GDP growth of Chile.

The competition in each of the areas of the electric sector has undoubtedly been fundamental to its development and to the development of the economy in general. However, deregulating the electric sector to put it on a path to open competitiveness is not something easy or quick that is achieved solely by issuing constitutional or legal rules albeit those rules are undoubtedly the basis for that path towards a strong and competitive market. As said by Spanish professor and attorney Juan de la Cruz Ferrer, "the deregulation of the electric sector is not something that just happens that we can ignore. Instead, it is a lengthy process of gradual progress towards competition that requires ongoing adaptations and adjustments to overcome the problems that arise from the reform."¹

It must be highlighted that the Chilean economic model of a neo-liberal market, applied without interruption since the end of 1974, has facilitated the creation of open and competitive electric markets where the rules are clear and there are courts, agencies or authorities that provide a minimum legal certainty to investors in the different sectors of the economy.

Currently, all companies doing business in Chile in the generation, transmission and distribution of electricity are private. The State has assumed a subsidiary role as a regulator and controller.

I. Characteristics of the Chilean Electric System

As stated in the Introduction, the Chilean electricity sector is structured into three sub-sectors: electric energy generation, transmission of the energy and distribution to end customers. Electricity transmission and distribution are considered to be public services, but not generation.²

I.1. Interconnection.

The Chilean electric system is characterized by its interconnection territorially, albeit in different zones or territories. There is no unique interconnection and this interconnection has an ultimate purpose: a) to preserve the security of service in the electric system; b) to guarantee the most economic operation for the group of facilities in

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the electric system; and c) to guarantee open access to trunk transmission and sub-transmission systems.³

The entire system consists of approximately 31 power companies, 6 transmitting companies and 36 distribution companies, as well as a group of small self-producers. The most recent legal amendments also created the possibility that energy vendors participate in the market by withdrawing capacity and energy from the respective electric system for delivery to distribution companies or end customers.⁴

Electricity is generated and transmitted in Chile principally through two large interconnected systems or grids, namely the Interconnected System of the Far North (SING), where a large part of mines are located, and the Central Interconnected System (SIC), which is what groups together the greatest concentration of demand nationwide. These two systems are not interconnected to each other and the possibility of doing so has been under study for years.

In turn, each interconnected system works through Center for the Economic Dispatch of Load (CDEC). Their function is to coordinate the operation of the electric facilities of concessionaires and users who operate the respective interconnected system in order to attain the general objective of interconnection indicated above. Hence, each CDEC must plan and coordinate the operation of the power stations in their electric system in order to ensure the greatest economic efficiency of the whole. Therefore, they dispatch power stations that generate with the lowest variable cost of production. This means that when the installed electric generation capacity exceeds demand, only the most economic power stations are used. The more expensive or less efficient do not inject electric capacity and energy to the system in those cases. This means that the withdrawals of electric energy by customers of those non-generating power stations must be settled and paid by the deficit companies, those who use the energy from the system, but who do not produce or inject or who do so in less volume than what their clients use, to the surplus companies, who are those who inject a quantity of MW of electric capacity and energy to the system above what is withdrawn by their own customers. This is done through a balance of injections and withdrawals made by the CDEC monthly. Those with deficits must pay respective account to those with surpluses before day 22 of the next month.⁵

In order to understand how this system work, one must first know that Chile is a very long and narrow country that covers an expanse of 742,000 square kilometers, plus the Antarctic and Easter Island. The country runs from north to south for approximately 5,000 kilometers, with a width of no more than 300 kilometers and a drop from its eastern

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boundary, corresponding to the Andes Mountain Range, from an elevation of more than 3,000 meters to sea level. The country has been divided into 13 geographic regions politically and administratively. Two new regions were recently created, thus making the total 15.

Within that legal and geographic reality, the SING and the CDEC-SING administrate and supply electric energy to Regions I to II, covering an area of 185,142 square kilometers. This represents 24.5% of the continental territory. That...