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The Electricity Sector in Paraguay and its Regulation Framework: Analysis and
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 Políticas Energéticas para a Sustentabilidade
25 a 27 de agosto de 2014
Florianópolis – SC

The Electricity Sector in Paraguay and its Regulation Framework:

Analysis and Perspectives

Thauan Santos1
Luan Santos2
Amaro Olímpio Pereira Junior3

RESUMO
A energia elétrica é um serviço vital na economia. É um insumo na produção de
quase todos os outros bens e serviços, e também é um importante bom final,
consumida pelas famílias. Durante o final do século passado, muitos países
desenvolvidos e países em desenvolvimento iniciaram reformas do setor elétrico.
Estas reformas tiveram lugar dentro do contexto de uma mudança mais ampla de
paradigma de propriedade estatal e organização centralizada de indústrias de
infraestrutura para a propriedade privada, a regulação pública e estruturas
orientadas para o mercado. Neste contexto, este trabalho analisa o caso do setor de
energia elétrica no Paraguai e a discussão recente sobre sua regulamentação.
Assim, inicialmente não serão analisadas as principais motivações e benefícios da
regulamentação do setor de energia elétrica , considerando uma perspectiva teórica
. Em seguida , o setor elétrico paraguaio será descrito, após a análise da Agência
Nacional de Energia Elétrica , que é suposto ser o órgão responsável pela regulação

1
PhD student at the Energy Planning Program (PPE/COPPE/UFRJ) and Professor at the Faculty of
Economic Science of the State University of Rio de Janeiro (FCE/UERJ). E-mail:
santos.thauan@gmail.com; Contato: +55 21 3938-8761.
2
PhD student at the Energy Planning Program (PPE/COPPE/UFRJ) and Professor at the Faculty of
Business Administration and Accounting of the Federal University of Rio de Janeiro (FACC/UFRJ). E-
mail: santosluan.br@gmail.com; Contato: +55 21 3938-8761.
3
Associate Professor in the Energy Planning Program (PPE/COPPE/UFRJ). E-mail: amaro@ppe.ufrj.br;
Contato: +55 21 3938-8761.
1
do setor no Paraguai. Finalmente, a principal conclusão será discutida ,
considerando não só um ponto de vista econômico, mas também uma perspectiva
político-social .
Palavras-chave: Regulação do setor elétrico, Agência Reguladora de Energia
Elétrica, Paraguai

ABSTRACT
Electricity is a vital service in the economy. It is an input in the production of nearly all
other goods and services, and it is also an important final good, consumed by
households. During the final of the last century, many developed, transition, and
developing countries have embarked on electricity sector reforms. These reforms
have taken place within the backdrop of a wider paradigm shift from state ownership
and centralized organization of infrastructure industries to private ownership, public
regulation, and market-oriented structures. In this context, this work analyzes the
case of electricity sector in Paraguay and the recent discussion about its regulation.
Therefore, initially there will be analyzed the main motivations and benefits from the
electricity sector regulation, considering a theoretical perspective. Then, the
Paraguayan electricity sector will be described, following the analysis of the Electrical
Energy Regulatory Agency, which is supposed to be the agency responsible for the
regulation of the sector in Paraguay. Finally, the main conclusion will be discussed,
considering not only an economic point of view, but also a social-political perspective.

Keywords: Electricity sector regulation, Electrical Energy Regulatory Agency,

Paraguay

1. INTRODUCTION
During the final of the last century, many developed, transition, and
developing countries have embarked on electricity sector reforms (APEC, 2000).
These reforms have taken place within the backdrop of a wider paradigm shift from
state ownership and centralized organization of infrastructure industries to private
ownership, public regulation, and market-oriented structures (OECD, 2000). The
recent trend towards electricity sector reforms is not due to breakthroughs in
economic theory. Rather, it reflects a general dissatisfaction with the performance of
traditional public organization and regulation of the industry and the desire to improve
the efficiency of the sector.
2
 However, the wave of structural change in the electricity industry is not
immediately clear: why reorganization of this industry occurred/is occurring, what
were/are the driving forces, and whether there will be an international convergence in
its structure? As we can see from the story of the electricity industry in various
countries, a variety of solutions have been found to the problem of balancing the
interests of consumers and governments while still enabling efficient investments.
This current move toward liberalization of the electricity supply industry has
been characterized by substantial variation across countries in the timing and
approach to reform. Generally, regulatory reform is focused on functional separation
of generation and transmission, introduction of competition in generation, and
expanded network access. According to Gilbert and Kahn (1998), the solutions
available to any jurisdiction are constrained by politics, history, endowments,
technology, and the state of the economy.
A few OECD4 countries, for example, have implemented new regulations to
stimulate competition by attempting to liberalize the industry, focusing reform efforts
on functions that do not possess a natural monopoly component (Steiner, 2000). In
particular, some OECD countries have passed legislation to introduce competition in
electricity generation and retailing by unbundling these functions from the “wires” part
of the business, providing mechanisms for new entrants to access existing networks,
and creating markets where price is determined by supply and demand.
Even in the case of these early reformers, implementation of reform has been
a slow process, so that at most a handful of countries can point to actual progress
toward competition. During the first decade of this century, other OECD countries
were on the cusp of liberalization, particularly European Union countries, which face
the implementation deadlines of the European Commission Electricity Directive to
establish a single internal market for electricity in Europe.
According to Fisher and Serra (2000), Latin American countries began
reforming their electricity sectors in the early 1980s and these countries also
experimented with a wide variety of systems, ranging from early administered
systems to recent systems which give the market a broader role. Reforming Latin
America’s electricity sector occurred within a process of “learning by watching”, and
regulations evolved as reform has spread over the region.

4
Organization for Economic Co-operation and Development.
3
 In this context, this work analyses the case of electricity sector in Paraguay
and the current discussion about its regulation. Therefore, initially there will be
analyzed the main motivations and benefits from the electricity sector regulation,
from a theoretical perspective. Then, the Paraguayan electricity sector will be
described, following the analysis of the Electrical Energy Regulatory Agency
(Agencia Reguladora de Energía Eléctrica – ANREE), which is supposed to be the
agency responsible for the regulation of the sector in Paraguay. Finally, the main
conclusion will be discussed, considering not only an economic point of view, but
also a social-political one.

2. ELECTRICITY SECTOR REGULATION: MOTIVATION AND BENEFITS

The economic and technological features of the electricity supply industry
have stimulated the evolution of its regulation, ownership, and market structure. In
this sense, regulation of the electricity supply industry is primarily motivated by the
existence of natural monopoly conditions, externalities, and public good
characteristics. These results from a number of unique economic characteristics:
electricity cannot be stored or inventoried. The non-storability of electricity reduces
the size of markets according to the time dimension; the size of the market is
determined by instantaneous demand rather than demand over a longer time period
(Pérez-Arriaga, 2013).
Electricity distribution firms typically enjoy a natural local monopoly. This
creates a need to regulate the sector. In the theory of regulation, for example, it is
well known that the “cost-of-service” type of pricing does not provide incentives for
the electricity distribution firms to minimize the cost (Laffont and Tirole, 1993). As a
consequence, it is more likely that a single firm can supply consumers in a given
market at minimum efficient scale.
According to Gilbert and Kahn (1998), when a single firm can provide a range
of specific goods or services at lower total cost than a set of firms can do, we say that
a natural monopoly exists. Given the large sunk costs and the lengthy periods
required to recoup investments, Levy and Spiller (1996) emphasize the importance of
regulatory institutions as a mean of ensuring investment in an area in which it is easy
to expropriate firms. However, this cost condition is not itself sufficient to justify a
monopoly structure. The cost advantage would need to be sufficient to offset the
4
additional costs of regulating the resulting monopoly. More competitive structures
may raise production costs, but reduce regulatory costs or allocative inefficiencies
sufficiently to provide the service at lower total social cost.
Additionally, externalities occur because the operation, function, and
malfunction of each generator affect system conditions throughout the entire
interconnected network. Moreover, investment in generating capacity involves
difficult dynamic optimization in facing of uncertainty, externalities (in the sense that
any addition or deletion of capacity affects the entire network), and public good
characteristics (in the sense that additions to a transmission network benefit all
producers and consumers). The externality and public good aspects of electricity
suggest the need for planning and co-ordination of the electricity supply network,
roles that may also be most efficiently performed by a natural monopolist (Steiner,
2000).
Thereby, network natural monopoly industries like electricity must inevitably
be subject to social control. Scale economies and specific assets (those with high
cost for consumers to switch suppliers), particularly in distribution, provide the
network owner with considerable market power. Then, the political and social
demand control of this market power arises from (1) the nonstorability of supply, (2)
the dependence of the consumer upon the supplier, and (3) the essential natural of
the service. Local or central governments have therefore always stood ready to
require suppliers to guarantee access on fair terms. Because suppliers need rights of
way, governments have the leverage to impose an obligation on supply (Gilbert and
Kahn, 1998)
While electricity supply is characterized by conditions of natural monopoly,
externalities, and public goods, some of its functional segments do not possess these
economic features. The electricity supply industry can be functionally divided into
generation, transmission, distribution, and supply. This functional division is
particularly important for understanding recent regulatory developments. The distinct
functions are differentiated technologically and economically, and regulatory reform
has tended to proceed at this level of disaggregation.
Most policy makers and economists agree that liberalization of the electricity
sector should enhance consumer welfare by reducing prices; however, there is no
consensus on the specific regulatory reforms most likely to achieve the benefits of
competition (Steiner, 2000). Among countries that have initiated reforms, some have
focused on liberalizing their electricity supply industry, others have privatized
5
segments of the industry, and still others have pursued both liberalization and
privatization. The variation in country approaches to liberalization and privatization
provides a platform for the empiricist to explore the benefits of reform (Fisher and
Serra, 2000).
At a general level, one can examine whether the introduction of competition
leads to real improvements in the efficiency and prices of electricity supply. Similarly,
one can assess the impact of privatization, itself, or in concert with liberalization, on
performance in the electricity supply industry. From a policy perspective, at a finer
level, one may assess which reforms are most likely to result in increased
competition, as well as which institutional and ownership patterns are correlated with
improvements in performance.
From Steiner (2000), most countries have just begun to consider and to
implement regulatory reform in the electricity supply industry. Furthermore, early
efforts at liberalization and/or privatization, while creating legal access for competition
in generation, are slow to meet with actual entry and competition in generation. Also,
the most common pattern of liberalization begins with attempts to introduce
competition in generation by unbundling generation from transmission and expanding
legal access to the transmission network. The most far-reaching reforms also create
spot markets for trade in electricity and allow consumer choice of supplier for some
consumers.

3. THE CASE OF PARAGUAY

Paraguay is one of the few countries in Latin America that has maintained an
integrated public monopoly on electricity. Hydropower comprises nearly 100 percent
of electricity in Paraguay; 90 percent of generated energy is exported, with
neighboring Argentina and Brazil receiving the majority. Paraguay is one of the
world’s largest electricity net exporters (ESMAP, 2006).
Because of the dominance of hydroelectricity, tariffs (mostly residential) are
remarkably below the averages for the region. However, despite the abundance of
resources, the Paraguayan electricity system faces a difficulty due to the lack
of investment in transmission and distribution networks (World Bank, 2010). In
addition, distribution losses are among the highest in the region.
Responsibilities in the Paraguayan electricity sector are concentrated in a
single, vertically integrated public monopoly, the National Electricity Administration
(Administración Nacional de Electricidad, ANDE). ANDE, Paraguay’s state-owned
6
utility, controls the country’s entire electricity market, including generation,
transmission and distribution.
In this context, Law 167/93 indicates that the Vice Ministry of Mines and
Energy (under the Ministry of Public Works and Communication) is responsible for
establishing and guiding energy policy, as well as for the study of the technical,
economic, financial and legal aspects that promote energy use. However, the Vice
ministry does not have the adequate resources to effectively performs its functions
(World Bank, 2010).
In practice, all the energy responsibilities are concentrated in ANDE, which
also elaborates the tariff structure that is then analyzed and approved by the
Economic Council of the Executive Power. The Council usually sets lower tariffs to
the ones proposed by ANDE, which leads to a lack of resources for the necessary
investment for adequate performance of the electricity system.
Furthermore, it must be highlighted that ANDE controls the country’s entire
electricity market, including generation, transmission and distribution. Considering
the dynamic of the electricity sector, Paraguay operates two binational hydroelectric
dams. Itaipu dam, by far the largest power station in the country, is operated
with Brazil and has an installed capacity of 14,000 MW (82.6 percent of Paraguay's
generation capacity). Yacyretá, the second largest hydroelectric dam, has an
installed capacity of 3,200 MW (15.7 percent), and is operated with Argentina. A third
plant, Acaray has an installed capacity of 210 MW (1.6 percent).

Table 1 - Installed Capacity in Paraguay (VCC, 2013)

Source Installed capacity Installed capacity (% of
(MW) total)
Itaipu 14,000 82.6%
Yacyretá 3,200 15.7%
Acaray 210* 1.6%
Others (Thermal) 6.1 0.1%

ANDE operates 2,100 miles of transmission lines in the Interconnected

National System, divided in 6 subsystems, and 670 miles of distribution lines. It is
also responsible for all of the distribution, with two exceptions: CLYFSA (Compañía
de Luz y Fuerza, S.A.), which has a concession to distribute and commercialize
electricity in Villarrica, and the Empresas Distribuidoras Menonitas del Chaco Central
(ESMAP, 2006).

7
4. THE REGULATION IN PARAGUAY AND THE ELECTRICAL ENERGY
REGULATORY AGENCY (AGENCIA REGULADORA DE ENERGÍA ELÉCTRICA –
ANREE)
Paraguay is the only country in the region, and probably in the continent,
which does not have a regulatory framework in its electricity sector, besides
maintaining for years the same organizational model for the generation, transmission
and distribution of energy, being the National Electricity Administration (ANDE) the
only and exclusive responsible for such model.
However, in this June the Bill “Of Electricity Sector Regulatory Framework for
the Republic of Paraguay” (“De Marco Regulatorio del Sector Eléctrico para la
Republica del Paraguay”) was approved by the Congress members, and its objective
is to create the Electricity Regulatory Agency (Agencia Reguladora de Energía
Eléctrica – ANREE). It would be an autonomous entity decentralized with legal
capacity responsible for ensuring adequate provision of electricity transmission and
distribution.
According to the Bill:

“This project aims to become a viable and effective tool for power sector reform,
which involves the sustainable use of resources, efficient use of energy, to allow the
emergence of new business actors, and changes in the organization, in the
operating modes of the system, also in transparency, coordination and control,
among other things. It is clear that reform is not synonymous of privatization, in the
sense of selling the assets, but it can be one of its components.” (Paraguay, 2009). 5

To the deputy Justo Zecarías, impeller of the initiative in the House of

Representatives, the Bill aims to be a solution to the energy crisis caused by the
increase of energy demand and the scarce public investments in the sector 6.
Moreover, in the explanatory memorandum, it is said that:

5
Translation of the authors. Original passage: “El presente Proyecto pretende convertirse en una
herramienta viable y eficaz para la reforma del sector eléctrico que implica el uso sustentable de los
recursos, el uso eficiente de la energía, permitir el surgimiento de nuevos actores empresariales,
cambios en la organización y en las modalidades de funcionamiento del sistema, transparencia,
coordinación y control, entre otras cosas. Cabe aclarar que reformar no es sinónimo de privatización,
en el sentido de venta de los activos, pudiendo ser uno de sus componentes.”
6
Available in:
<http://sur1810.com/nota/3787/regulacion_del_sector_electrico_paraguayo_iquest_retroceso_o_avan
ce/. August 21th , 2013.
8
 “The main problems in the electricity sector are: the unmet demand (...); the quality
of supply, reflected in the continuing cuts and flashes of electricity, and lack of
adequate public resources to expand energy infrastructure, all consequences of not
existent plan or a national energy policy; moreover, it must also be added the
inexistence of public security policy and the resulting number of deaths by
electrocution and fires caused by poor electrical installations.”7

While Paraguay is known internationally for being the largest hydropower

exporter in the world, the domestic economy suffers from regular outages and high
system losses. Because of that, regulation of the Paraguayan electricity sector
should (i) allow the security of the long-term electricity energy supply with quality
criteria and economy, (ii) encourage the non-monopoly of production, transmission,
distribution and marketing of electricity with free entry of new operators in the activity,
(iii) consider the complementary participation of private investment to support growth
needs, (iv) transform ANDE in a more trading company that competes with others in
standing equal circumstances, and (v) strengthen the planning capacity of the State,
so that the government would be responsible for the planning of the electric sector
and set clear and precise rules to ensure supply.
Furthermore, members of the Committee on Energy, Mines and
Hydrocarbons, chaired by deputy Pedro Britos, held a meeting with engineers from
the Faculty of Engineering of the National University of Asunción (FIUNA), who
defend the Bill. The Engineer Nelson Cristaldo, FIUNA's representative, said that the
initiative aims to create conditions for optimizing resources and improving the
electrical service.
He also explained that part of the project concerns the transfer of state
assets to the private sector, what will give the opportunity to the electricity sector
negotiate regional energy markets. “In Paraguay we cannot sell anything because we

7
Translation of the authors. Original passage: “Los principales problemas actuales del sector eléctrico
son: la demanda insatisfecha (…); la calidad del suministro, reflejada en los continuos cortes y
parpadeos de la electricidad y la falta de recursos públicos para expandir adecuadamente la
infraestructura energética, todo ello consecuencia de no existir un plan o política energética a nivel
nacional; además hay que adicionarle a esto, la inexistencia de una política de seguridad pública y su
consecuente cantidad de fallecidos por electrocución e incendios causados por instalaciones
eléctricas precarias.”

9
have no idea about how our energy costs, due to the fact that our rate is fixed by a
decree rather than the market index.”8
In the opinion of Engineer Guillermo López Flores, power sector consultant,
one of the benefits of having a regulatory body, in addition to protecting consumers,
is “to help ANDE to demand quality and safety parameters”. He adds that “this way
ANDE can defend itself from the incursion of the State in its financial resources”. 9
Flores also says that regulation is so important to society that OECD countries, the
organization of the 31 richest countries in the world, compete for the regulatory
quality. “Quality regulation requires a complex institutional building, long-standing,
and it is a continuous adjustment process, often by trial and error.”
However, the intention to "privatize" the electric sector of Paraguay is being
challenged by the Workers Union of ANDE (Sindicato de Trabajadores de la ANDE –
SITRANDE). During the last months of this year, numerous demonstrations were
held against the Bill, which already passed the House of Representatives. Such
events represent a series of acts that may culminate in a national strike if the
government insists on approving the proposal.10
The workers claim that the intention is to open to private initiative the
production, distribution and sale of electricity in the country, leading, for example, to
the increase in tariffs and layoffs.11 Thus, besides asking for the definitive shelving of
the proposal, workers also demand an increase in the budget of the state company.
The House of Representatives will hold further discussions on the project,
which has had general approval in the House. The measure will go to the Senate for
a permanent approval. It is noteworthy, in this context, that workers demand a larger
debate about the possible consequences of the approval of this project, stating that
their opinions are not taken into account.

5. CONCLUSIONS
The timing and scope of regulatory reforms, as well as the response of
market participants varies considerably across countries. In the Paraguayan case,
Law 167/93 indicates that the Vice ministry of Mines and Energy (under the Ministry

8
Available in: <http://www.nanduti.com.py/v1/noticias-mas.php?id=76229&cat=Nacionales>. August,
20th, 2013.
9
Available in: <http://www.ultimahora.com/paraguay-es-el-unico-pais-la-region-que-no-tiene-sector-
electrico-regulado-n626782.html>. August 28th, 2013.
10
Available in: <http://www.cut.org.br/destaque-central/52691/paraguaios-protestam-contra-
privatizacao-do-setor-eletrico>. September 2nd, 2013.
11
Available in: <http://www.ciudadccs.info/?p=434619>.
10
of Public Works and Communication) is the institution responsible for delineating
sector policy and strategy, for planning and monitoring, for setting technical
regulations and quality of service standards, and also for developing new programs.
The National Electricity Administration (ANDE) is in charge of administering
the electric sector, so there is no regulatory entity for the electricity sector in
Paraguay. Public service tariffs including electricity tariffs are set by the National
Economic Team. The current legal framework, Law 966 that created the state
utility ANDE in 1964, does not entertain the possibility of private sector participation.
Thus, Paraguay's state-owned utility, controls the country’s entire electricity
market. It must be highlighted that attempts to privatize ANDE in the past have failed,
as the Government reportedly faced stiff resistance from Government employees.
However, there is a Bill on the Regulatory Framework for Electricity that seeks to
promote modernization and competition in the sector through the participation of
private investment in the generation, transport and distribution of electricity based on
a system of concessions. This Bill also provides for the establishment of a wholesale
electricity market and a new regulatory body for the sector, independent of ANDE.
Some say that there are lots of benefits from such regularization. It would be,
for instance, a possible solution for the energy crises, guarantee the consumer’s
protection, ensuring the highest quality and security, and develop the private
participation in the sector, favoring greater investment. However, there are also
positions contrary to the regulation of the sector, arguing that this would be a way to
start the privatization of the sector, causing a rise in tariffs, possible layoffs and lose
of the sovereignty. Thus, the unionists claim that this Bill should be discussed and
debated, and threaten to hold a national strike if it is approved in the Senate.

6. REFERENCES

APEC, “Electricity Sector Deregulation in the APEC Region”. Asia Pacific Energy
Research Center, March 2000, Tokyo, 2000.

ESMAP – Energy Sector Management Assistance Program, Paraguay: “Estrategia

para el Desarrollo del Sector Eléctrico”. Technical Report 122/08, 2006.

FISHER, R.; SERRA, P., Regulating the Electricity Sector in Latin America.
“Economía”. Vol. 1, N. 1, Fall 2000, pp. 155-198 (Article), 2000.

GILBERT, R. J.; KAHN, E. P., “International Comparisons of Electricity Regulation”.

Cambridge University Press, 1998.

11
 LAFFONT, J.-J., TIROLE, J., “A Theory of Incentives in Procurement and
Regulation.” MIT Press, Cambridge, MA, 1993.

LEVY, B.; SPILLER, P., “Regulations, Institutions and Commitment: Comparative

Studies of Telecommunications”, 1–35. Cambridge University Press,1996.

OECD, “Regulatory reform in network industries, in OECD Economic Outlook No.

67”, Organization for Economic Co-Operation and Development, Paris, 2000.

PARAGUAY, “De Marco Regulatorio del Sector Eléctrico para la Republica del
Paraguay”. Congreso Nacional. Ago, 2009.

PÉREZ-ARRIAGA, I. J. (Ed.), “Regulation of the Power Sector”. Power System. Ed.

Springer, 2013.

STEINER, F., “Regulation, Industry Structure and Performance in the Electricity

Supply Industry”, OECD Economics Department Working Papers, No. 238, OECD
Publishing, 2000.

VCC – Vale Columbia Center on Sustainable International Investment. “Leveraging

Paraguay’s Hydropower for Sustainable Economic Development”. A draft for
consultation, 2013.

WORLD BANK. “Project Appraisal Document for the Energy Sector Strengthening
Project”, Report No: 57459Cpy, 2010.

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