ABSTRACT:– In Colombia electricity is provided at subsidized prices to 90% of residential customers during the study period. The system is financed by contributions from higher income consumers and commercial and industrial sectors. This cross-subsidy system was implemented after restructuring the sector in 1994 following a severe energy crisis in 1992. The system under-collects requiring budget subsidies from the government of around 15%.
In addition, there are near one million homes in the first income decile for which monthly electricity bill represents approximately 90% of the household income. This research presents a macro-level study that proposes several alternatives to improve the performance of the current system. These alternatives are based on the current allocation system and on an income-based allocation system. They give full subsidy to low income consumers and do not require budget subsidies. However, these alternatives before implementation required changes in policies and regulations to allow increasing the contribution factors and redefining the size of the subsidized and contributing groups. It is shown in this research that the current allocation system can not collect enough money by contributions from residential customers alone since it would require excessive increases in the residential tariffs. It is also shown that by increasing the size of the contributors with more reasonable tariff increases the system could give full subsidies to low income consumers. The analysis presented here requires further detailed studies involving all the stakeholders in setting, defining and implementing energy policies in Colombia to reach feasible agreements that can improve the performance of the subsidy system while respecting the social goals established in the restructuring of the sector.

KEYWORDS: electricity tariffs, cross-subsidy, Colombia, income-based allocation, deregulated electricity sector.