By Luis Pellerano

In recent years, the Dominican Republic has enacted a wide variety of new laws intended to enhance foreign investment in the country. These include new tax, foreign investment and environmental statutes.

Recently, the government enacted a new general law of electricity. This new law recognizes the importance of the private sector in the generation, transmission, distribution and commercialization of electricity. The law also seeks to achieve expansion of the industry and more efficient service, while allowing the government to maintain the exclusive right to regulate the industry.

Background

The national electric system in the Dominican Republic was created in 1928, when the formation of the Electric Company of Santo Domingo was authorized. That company was responsible for generating, building, rehabilitating and extending the electric transmission and distribution networks.

In 1954, the Dominican National Congress approved a law that declared it important for the government to acquire all the companies that were then producing, transmitting and distributing electricity to the public in general. The following year, the Dominican government modified the energy industry by acquiring the Electric Company of Santo Domingo and by creating the Dominican Electricity Corporation (CDE), which was assigned the responsibility of maintaining, expanding and generating all the electric energy in the country.

The next major developments in the industry occurred in the mid-1960s, when the Department of Industry and Commerce was created, and then in the late 1970s, when the National Energy Commission was established. In the early 1990s, the CDE was restructured after the Dominican government engaged in consultations with international organizations about the best way to reform the Dominican electric system. As a result of these consultations and subsequent works, the country's President introduced a General Electricity Bill before Congress in December 1993, which led to the capitalization of the CDE.

As a result of the capitalization process, five new companies were created with contributions from the CDE's properties. Two of these companies were engaged in the generation of electricity (Empresa Generadora de Electricidad ITABO and Empresa Generadora de Electricidad Haina). The other three companies were in the business of supplying electricity (Empresa Distribuidora de Electricidad del Norte, Empresa Distribuidora de Electricidad del Este and Empresa Distribuidora de Electricidad del Sur). Each one of these companies received the assets from the CDE that were necessary to conduct their activities. All other assets, including those relating to transmission and hydroelectric generation, remained with the CDE.

New Law's Objectives

The Dominican Republic's new electricity law has taken effect within this context. The basic objectives of the new electricity law are the following:

1. To promote and guarantee the electricity supply required by the country under adequate conditions of quality, safety and continuity, with optimum use of resources and due consideration to environmental concerns.

2. To promote private participation in the development of the electricity industry.

3. To promote competition in the generating area, stimulating investment and prices to be determined by the market.

4. To regulate transmission and distribution prices based on economic criteria of efficiency and equity.

5. To ensure that electricity supply is carried out with neutrality and without discrimination.

6. To ensure protection of consumers' rights and compliance with their duties.
It is important to point out that the new electricity law establishes that the government's essential functions are of a regulatory, promotional, and monitoring character, to be exercised by the government through the specialized institutions created by the law.

Concessions

In accordance with the provisions of the new electricity law, electric concessions may be granted to companies national or foreign companies.

The new electricity law requires a "concession" for companies interested in electricity distribution and generation except in interconnected systems or when maximum power demand is less than that established in the regulations. However, concessions can be granted when they are requested by interested parties.

The law establishes two types of concessions. A "provisional concession" is a type of concession that occurs when the owner of the land or the electric company, in this case the concessionaire, reaches a consensual agreement that allows the concessionaire access to the land, whether personal, state or belonging to the municipality, to carry out studies, analysis or surveys that contribute to the improvement of electric service.

The term of a provisional concession shall be established by the parties and cannot exceed 18 months if the land belongs to the state or the municipality. It should be pointed out that once a provisional concession is granted, it will be published in a newspaper with nationwide distribution within 15 days, two consecutive times.

The other concession is a "definitive concession." This type of concession must be garanted by the Executive Branch. In harmony with the provisions of the new environmental law, the new electricity law provides that under no circumstances will concessions be granted to install electricity generating units that involve the use of toxic waste, whether foreign or local, that degrades the environment and the national ecologic system. To this end, the new electricity law states that the Department of Environment and Natural Resources must issue a certificate of non-objection prior to its approval.

All requests must include a study of the effect of the installations on the environment and the measures the company will take to mitigate it, in any case subject to the provisions and official agencies responsible for the matter.

Definitive concessions will be granted for a term not to exceed 40 years. However, the concessionaire may request its renewal, not less than one year and no more than five years before its expiry date. The establishes that public distribution and generation services cannot be transferred in whole or in part without the prior authorization of the Department of Electricity.

Of great importance are the provisions of the new electricity law with respect to the receipt of several requests for the same definitive concession. Should this occur, the Department of Electricity will carry out a public bidding for the rights of the concession according to the terms established in the regulations for the enforcement of the law.

The definitive concession acquires a contractual character when the Executive Branch approves a proposal, and authorizes its implementation. The authorization for a definitive concession of a public services establishes the limits of the concession area.

For the electric generation works that are not subject to granting of a concession, the General Law of Electricity foresees the granting of permits so that said works may use and occupy national or municipal properties for public use. These permits will be granted after consultation with the Department of Electricity, or by the relevant authorities as provided in the regulations.

The law foresees three ways to end concessions. They may be terminated due to expiration, non-compliance with the obligations of the concessionaire, or resignation.

Electricity Pricing

The price of electricity for final consumers shall, in general, be unrestricted when transactions are carried out under competitive conditions.
The rates applicable to regulated consumers will be subject to regulation within the concession zones of the distributing companies. These customers shall be considered public service customers and the rates shall be set by resolution of the Department of Electricity.

Also considered as regulated rates are those rates applicable to other services provided by the electric distributing companies to public service consumers, except that, given their competitive characteristics, the regulation does not subject them to price control.

Supplies that are carried out under special quality of service conditions will not be subject to price regulation, or those whose duration is of less than one year, as well as other supplies expressly stated in the law.

For the sale of electricity with long-term contracts, the new law establishes that the sale of electricity of a generating company to a distributing one will be done at prices resulting from competitive procedures of public bidding. These biddings will be governed by the conditions established by the Department of Electricity, which will supervise the bidding and awarding process and will require copies of the contracts. Each contract must contain, at least, its term, points of purchase, prices of electricity and the power at each purchasing point, indexing methodology, treatment of increases of power demand, and established guarantees.

With the objective of guaranteeing that generation prices represent reasonable values in the electric market, the Department of Electricity will ensure that the sale of electricity through contracts is not greater than eighty per cent of interconnected electric energy demand, guaranteeing that the spot market represents in the annual balance of energy and supplied electric power, a minimum of twenty per cent of the total national consumption of the interconnected system.

Conclusion

The Dominican Republic's new electricity law, and the regulations under that law, mark the beginning of true management of this important industry and its sustainable development in this country. Foreign investors interested in becoming involved in the electric industry will find a country that is interested in having them.

BIO: Luis R. Pellerano is a partner with the Dominican Republic law firm of Pellerano & Herrera. He regularly represents foreign investors in transactions in the Dominican Republic and throughout the Caribbean and Latin America. Mr. Pellerano may be reached at [email protected].