Corporate Governance

Restructuring the Power Sector

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Its only May and Mr. Daniel Tadesse, Lumiland?s Ministry of Energy, just announced the third round of load shedding. Given the persistent water shortages and Lumiland?s dependence on hydropower, the Ministry has not been able to supply constant and reliant electricity. After having invested billions in the much-needed increase of generation capacity and years of subsidizing consumption aiming to increase electricity access, Lumiland's state own utility (LEPCo), has not been able to recover these high investment costs, leaving a debt of $7.3 billion behind. Under these circumstances, LEPCo is no longer able to sustainably supply energy let alone keep financing the much-needed increase in electrification and generation capacity. It is clear to Mr. Tadesse that the only way forward is to restructure the vertically integrated state-owned utility. The question remains: what structural reform will be able to transform LEPCo into a competitive firm, attract viable private investment and ultimately improve quality and access to electricity?
Bibliographic citation: MARTÍ, G., PELIZAN PAVLAK, L., RAHNEMA ALAVI, A. (2020). Restructuring the Power Sector. Improving Quality and Access to Electricity. IESE, OP-623-E.
Date: 01/12/2020
Author(s): Gina Martí; Leticia Pelizan Pavlak; Ahmad Rahnema Alavi
Document type: Occasional Paper
Department: Financial Management
Sector:
Languages: English
Learning objective This case aims to serve as a base for discussion around the main problems that state-owned utilities may face in developing countries and why most of them become indebted over time, using the example of a fictitious country named Lumiland, and also to teach about potential models of reforms to restructure the power sector. The real cases of Mexico and Philippines are used to illustrate and discuss how restructuring and unbundling utilities can bring private financing into the power market, help diversify the energy power mix, increase generation capacity and ultimately improve quality and access to electricity at an affordable price for the customer and also to discuss the downsides and risks of such restructuring reforms. It also touches on the introduction of the electricity wholesale market, pricing and the role of regulators and public administration on the supply of public services.