Document of The World Bank FOR OFFICIAL USE ONLY ,-tl,',''. ',:1 75';.. rsli v.:s>I -i t I- ;'J JlfEN i F1 r i F ,; T iitxer4* tp .Ar M M Report No. 11250-BUL * i!;:~ P~cnvHr- 137 er 3J STAFF APPRAISAL REPORT BULGARIA ENERGY PROJECT FEBRUARY 3. 1993 Industry and Energy Operations Division Country Department I Europe and Central Asia Region 7 his document has a resticted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQVE2 Currency unit lev (plural leva), abbrev. Lv USS1 18.2 Lv average 1991 US$1 = 232 - 23.5 Lv est average 1992 WEIGHTS AND ASURES 1 Megawatt (MW) 1,000 kilowatts (103 kW) 1 Gigawatt (GW) 1 million kilowatts (106 kW) 1 Gigajoule (GJ) = 239,000 kilocalories (kcal) 1 Terawatt (TW) 1 billion kilowats 1 kilocalorie (kcal) 3.968 British Thermal Units (btu) 1 Gigacalorie (Gcal) 1 million kilocalories 1 Joule (J) .24 calories I Gigajoule (GJ) = IV0 joules or .948 million btu 1 kilowatt hour (kWh) 3411 BTU, 859.6 kcal 1 kilovolt (kV) = 1000 volts 1 kilogram (kg) 2.2 pounds (Ib) 1 tonne (T, metric tonne) = 1,000 kg = 2,205 lb 1 meter (in) = 3.281 feet (ft) lklometer (km) = 1,000 m = 3,281 ft I billion m (bcm) = 35.3 billion ft3 1 hectare (ha) = 4.47 acres 1 mega pascal (MPA) = 106 pascals = 102T/m2 1 tonne coal equivalent (TCE) = 7 x 10' kcal ACRONYMS CEC Commission of European Communities CMEA Council of Mutual Economic Assistance COE Committee of Energy COM Council of Ministers COP Commission on Prices CHP Combined Heat and Power EIB European Investment Bank EBRD European Bank for Reconstruction and Development EMS Energy Management System PGD Flue Gas Desulfirization FSU Former Soviet Union IAEA International Atomic Energy Agency ICB International Competitive Bidding IEA International Energy Agency IPS interconnected Power System (of CMEA) MA.S.L Meters above sea level MCE Maximum Credible Earthquake MOF Ministry of Fimance NDC National Dispatch Center NEK Natsionaina Elektricheska Kompania NMP Net Material Product NODRC National Organization of Dams, Reservoirs and Cascades PIU Project Implementation Unit (within NEK) RDC Regional Dispatch Center SCADA Supervisory Control and Data Acquisition System SRDC Sub-Regional Dispatch Center UCPTE Union for the Coordination of Production and Transport of Electricity (West European Grid) VDF Union of Democratic Forces USAID US Agency for International Development USTDP US Trade and Development Program WANO World Association of Nuclear Operators WASP Wien Automated System Plnning Mod_l FISCAL YEAR January I1- December 31 FOR OMCLAL USE ONLY 1WXMJA CUM PROZO Table of Contents Page No, LOAN AND PROECT SUIlhRY. . ... ... . . . . . . . . I. . . . . . . . . .. . . . . . . . . . . . . . 1 II. THESENERGYSEG . .... . . . . . . . . . . . . . . .. 5 A. Background ........ .. .. ... .. .. .. . 5 B. Power Subsector ...... .. . .. . .. . .. . . 9 III. INt . . . . . . . . . . . . . . . . . . . . . . . . 14 IV .8ROJECT A. Project Setting ................... . 18 B. Project Objetcives .................. . 19 C. Rationale for Bank Involveent . . . . . . . . . . . . . 19 D. Project Description . . . . . . . . .. . . . . . . . . . . 19 B. Project Origin .................... . 20 P. Project Costs ............. ..... ... . 22 G. Project Financing Plan .23 H. Retroactive Financing .24 *. Procureent .24 J. Disbursement .26 K. Special Account .26 L. Project Implementation Aspects . . . . . . . . . . . . . 26 M1. Dam Safety Aspects ....... .. .. .. .. . .. . 27 N. Envirormental Aspects ................. . 28 0. Benefits ....................... . 29 V. IhNANC& ASPE TS ..................... . 30 A. Background ...................... . 30 B. Balance Sheet ..................... . 30 C. Income Statement ................... . 33 D. Summary of Sources and Uses of Funds . . . . . . . . . . 35 VI. BER? WS MND RISKs . ..37 A. Project Benefits .37 B. Least-CostInvestmentProgram . . . .39 C. EconomicRateofeturn .39 D. Risks .40 VII. R>]OF SUMRECHD ............... . 41 This document has a restrctod distribution and may be used by rcipients only In the performance of their ofkci dutiesL Its contnts may not otherwis be disclsed without World Bank authofization. VIII. ANMNS AnnexA - Organization Chart of Sector . . . . . . . . . . . . . 43 AnnexB - Energy Balence 1990 ............... . 44 Annex C - Estimates of Electricity Demand . . . . . . . . . . . 45 Annex D - Electricity Data .................. . 48 Annex E - Articles of Association - NEK . . . . . . . . . . . . 51 Annex F - Organization Chart - NEK . . . . . . . . . . . . . . . 56 Annex G - Belmeken and Chaira Dams . . . . . . . . . . . . . . . 57 Annex H - Dam Safety Organization. . . . . . . .74 Annex I - Recommendations of the Panel of Experts. . . . . . 76 Annex J - Project Monitoring Guidelines . . . . . . . . . . . . 81 Armex K - NEK's Capital Investment Program ... . . . . . . . . 83 Annex L - Load Management with Chaira .... . . . . . . . . . 86 I{aP No.: IBRD 24233 EPER6 r EC Loan and Protet SUgmar!, Natelonalna Elektricheska Kompania (NEK) Guarantor: Republic of Bulgaria Augsutzt: US$93 Hillion Equivalent Te=ua Seventeen years, including a four-year grace period, at the Bank's standard variable interest rate. Oblectivsos The Project has the following objectives: (i) improve the operating efficiency and reliability of the power system, thus reducing supply disruptions; (ii) improve voltage control and frequency regulation; (iii) realign the level and structure of electricity tariffs to rationalize consumption of electricity, reduce imports, reduce the pollution associated with electricity generation, and mobilize resources for NEK; (iv) improve and depoliticize the tariff setting system by establishing an independent regulatory mechanism to set electricity tarlffs; (v) reduce the need for electricity imports or other high cost sources to meet peak demand; (vi) reorient the operations of NEK along more commercial lines; and (vii) strengthen dam safety at the Belsken and Chairs dams and associated saddle dam. Dig eLition: The Project consists of three components. First is improvement of the supervisory control and transmission network system for NEK. The second is completion of units 3 and 4 of the pumped storage project at Chaira, which is owned by NMK. Third is technical assistance, primarily to help NEM in operating more efficiently and in a more commercial manner. These components were chosen becuse they could be implemented relatively rapidly, would maximize the impact of Bank funds (by completing projects underway), and would have a major beneficial Impact on the electricity subsector. proleatrBenefit The Project follows from the Bank's recent gray cover Energy Straterr Stuy (Report 10143) and Envroment Strategy Studv (Report 10142) for Bulgaria. These reports, especially the Ener=y Strategy Study, outline an approach to improving the problems in Bulgaria's energy sector by increasing energy conservation and - ii - efficiency of energy usage, and by encouraging domestic production of energy. This Project, building on these studies, would: (a) increase efficiency in electricity production, transmission, distribution and usage; (b) improve the stability of the electric grid; (c) improve voltage and reactive power control; and (d) increase domestic output of electricity relative to imports. Riska. The major risks to the Project occur from three sources. First, for the project to succeed, the Government must be willing to increase electricity tariffs substantially and to create an independent regulatory mechanism to set these tariffs in the future, both of which will be politically difficult. The second risk is the willingness of the Government to increase NEK's depreciation or reduce taxes in order to provide it with sufficient funding to carry out more of its investment program. Finally, the Beneficiary (NEK) is a new organization with very limited commercial experience, having been spun-off from the government at the beginning of 1992. This lack of experience will require a fairly high degree of involvement in this project by the Bank in the first couple of years. Estimated Pro1ect Costs: - _uc~~~~~~~~~al Foreig Total (US $ millions) Chaira Pumped Storage 10.4 29.9 40.31 Improvements in Control and 6.0 35.5 41.5' Transmission Network Systems Technical Assistance 0.3 .2L 6.5 Total Baseline Costs 16.7 71.6 88.3 Physical Contingencies 2.0 6.9 8.9 Price Contingencies M.A _.7. 17.5 Total Project Costs 29.5 85.2 114.7 Interest During Construction .5 7.8 _11, Total Financing Required 2 9 126.0 J/ .mbisovw# &5N _l. qeby l4mdnoudadil. a/ miis $5mll_5a_-y etby 4pamsoaio sis - iii - Finanig Plan: L&oal 1 Ua (US$ millions) Bank Loan - 93.0 93.0 NUK - 330 Total Estimated Bank Disbursents 3 IBRD FISCAL EASS (US$ millions) 94 2 2i 22 21g Annual 13 31 29 15 5 Cmulative 13 44 73 88 93 Egonomic Rate of Retrn: 191 S/Dm os ZSSiht*.SNFS rNrgpuu I. THE EL 9 1.01 jjs14ggjn. Bulgaria, one of the maller countries of Europe in terms of area and population, emerged from World War II with an economy based primarily on private agriculture, supported by a relatively small industrial sector. The Communist Government that assumed power in 1946 declared the country a People' s Republic and embarked on a program aimed at rapid industrialization. Private industry was nationalized and production in both industry and agriculture was increasingly organized to facilitate central planning and to capture perceived economies of scale. The development of the industrial sector, particularly the choice of industries, was heavily influenced by the country's strong ties with the Council of Mutual Economic Assistance (CMEA) block, especially the former Soviet Union (FSU). 1.02 In support of this strategy detailed annual plans were prepared, specifying input and output levels, marketing arrangements and wholesale/retail prices. To insulate domestic prices from international trends, taxes and subsidies were centrally administered and a complex system of multiple exchange rates was determined administratively. This strategy, together with access to the CMEA market and cheap raw materials - especially energy from the former USSR, resulted in high rates of growth. According to the official statistics, the economy grew over the next two decades by an average of 7 to 8X annually, with the share of industry in Net Material Product (NMP) increasing from about 261 in 1948 to about 492 in 1970. 1.03 The structural transformation of the Bulgarian economy during this initial phase, as well as the abrogation of the traditional policy instruments, created many of the deep seated problems which have persisted since the decade of the 7Os. These problems include a longer term decline in productivity growth, a slow pace of technological change, the misallocation of resources through the iposition of overambitious investment plans without regard to efficiency and quality and the channelling of resources into producer goods industries at the expense of higher return activities in consumer goods and the agricultural sector. Administered wages and prices also worsened the terms of trade for agriculture and further compounded the problem of under-investment in the sector. Although the strong orientation of trade towards CNEA countries provided a ready market for the country's g.,owing maanufacturing sector, it made Bulgaria more vulnerable to developments in those countries and, because of the isolation, less competitive in Western markets. 1.04 Economic growth, though positive, slowed down substantially during most of the 1980s, and the first decline in NMP since World War II was reported for 1989. This deterioration reflected, in general, many of the common problems that had begun to emerge in most centrally planned economies and in the case of Bulgaria in particular, the continued poor performance of the agriculture sector throughout the 1980s as well as a more marked slow down in industrial growth during the second balf of the decade. The increases in money wages, the expansion of credit and extensive price controls that accompanied this decline, led to the emergence of a large monetary overhang and shortages of goods. Moreover, Bulgaria's external position, which was characterized in the mid-1980s by a persistent and increasing deficit with convertible currency countries and a surplus with the CMIA, worsened during the latter half of the decade. The current account deficit with convertible currency countries increased and payment arrears began to accumulate on sizeable export credits that Bulgaria had extended to developing _ountries. As the resulting deficit was financed primarily through -2- borrowing in convertible currencies from private commercial banks. frequently with short maturities, the country's foreign debt increased from US$3.2 billion in 1985 to US$9.2 billion In 1989. 1.05 Recent Developments.- In November 1989, following the rapid and momentous political changes, the monopoly position of the Communist Party was abolished and, after almost four and a half decades, the first free multi-party elections were hold in the country In June 1990. The new Government, which was dominated by the Bulgarian Socialist Party (BSP), took office in September 1990, but it failed to mobilize support for its reform program and in the midst of a national strike resigned and was replaced by a coalition government composed primarily of the BSP and the opposition, the Union of Democratic Forces (UDF). 1.06 The combination of the political changes and adverse external shocks during 1990, delayed the implementation of the required reforms measures and resulted in economic performance deteriorating rapidly. The initial disintegration of the CMEA trade and payments arrangements, coupled with the overall contraction of East European economies, disrupted supplies of vital imported inputs and caused a considerable decline in Bulgarian exports. The Gulf Crisis further exacerbated the external imbalances through higher oil prices, the curtailment of oil supplies from Iraq, and a sharp reduction in trade with both Kuwait and Iraq. Faced with declining convertible currency earnings, a bunching of amortization payments and the depletion of foreign exchange reserves, the Government declared a moratorium on most debt obligations and the country lost access to foreign commercial bank lending in mid-1990. Largely because of these developments, GDP declined by an estimated 11.81 in 1990, with industry, agriculture and services declining, respectively, by an estimated 16.32, 6.71 and 6.41. Fueled by both increases in nominal wages and a large monetary overhang, inflation accelerated to an estimated average annual rate of 26X and the budget deficit increased on a cash basis from 1.41 of GDP in 1989 to 8.52 in 1990. 1.07 In order to contain the decline in GDP and address the structural imbalances in the economy, the coalition Government that assumed office in February 1991 launched a radical and comprehensive economic reform program with the support of: (a) the IMF through a Stand-by Arrangement (SDR 279 million) attached to which was an external contingency mechanism for crude oil and natural gas prices; and (b) the World Bank through a Structural Adjustment Loan (SAL) of US$250 million and a Technical Assistance Loan of US$17 million. As envisaged, priority was initially accorded to the implementation of reforms aimed at reducing the economic imbalances to sustainable levels and to establishing market based relative prices, necessary to create an environment conducive to supporting the systemic reform of the real economy. Accordingly, price controls imposed by the central government were removed - except for energy products, a unified market-based floating exchange rate was adopted and all barriers to international trade were substantially reduced. A tight monetary policy was adopted, including substantially higher interest rates, supported by an incomes policy designed to reduce real wages by 351 to contain inflationary pressures. Industry, transport and dwmnstic trade were demonopolized and a two-tier banking system was created. 1.08 The economy in 1991, however, contracted at a faster pace than was envisaged under the stabilization program, due to the collapse of trade with CKHA countries, a sharp contraction in domestic demand and the lower than anticipated access to foreign financing. Output declined by about 231 in real terms and unemployment increased significantly, from 1.61 at the beginning of the year to -3- 10% by December, with another 2X of the work force on unpaid leave. Following the liberalization of prices, monthly inflation, after having slowed downed, picked up slightly in the last few months of the year. Measured real wages fell by about 35X in the course of 1991, though this needs to be interpreted in the context of a large rise in wages in the last quarter of 1990 and the use of official prices in the base year. Inability to borrow from foreign commercial banks due to the moratorium on foreign debt payments constrained economic activity. The accompanying import compression, however, resulted in a modest trade surplus. 1.09 Despite the worsening economic situation, the Government continued to implement its reform program, albeit, at a markedly slower pace after July 1991 as the various political parties began to position themselves for the elections. The new Government that was formed In November 1991, after the election, reaffirmed its commitment to the reform program with particular emphasis on the development of an efficient and large private sector. In support of this program, agreement was reached with the Fund on a Second Stand-by Arrangement, involving the implementation of a combination of fiscal, monetary and exchange rate policies to reduce inflation to 2X per month and structural reforms to contain the decline in GDP to about 42. 1.10 Reflecting the satisfactory implementation of the adjustment program, the encouraging trade trends that became evident in late 1991 have continued, with exports in convertible currencies showing unexpected buoyancy. This has resulted in a small surplus in the trade account for the first half of 1992 and has also offset to a limited extent the contraction in domestic demand, thus limiting the decline in GDP. Inflation, however, has been higher than expected, ranging between 4-5 percent per month, due to adjustments in the prices of some energy products and the decontrol of food prices. To further dampen inflation, wage ceilings have been adjusted only partially, implying a further decline in real wages in 1992. 1.11 Given the emphasis accorded to the development of private sector, the Government has removed all legal barriers to new private business activity. A comprehensive privatization law, covering both small and large enterprises, was enacted in April 1992, which provides for a flexible and multi-track approach to privatization, including its initiation by the Government, the Privatization Agency, municipalities, enterprises and investors. The regulations and institutions required to implement the law have established and are expected to become operational shortly. 1.12 Following demonopolization, the state enterprises have now been transformed, under the Company Law of July 1991, into smaller commercial companies with new boards of directors and managers to prepare them for privatization. To foster this process, and improve efficiency and accountability in the state enterprise sector, financial discipline is being strengthened through the removal of budgetary subsidies, introduction of tight credit and interest rate policies and control over wage bills. In the agricultural sector, the Government has adopted a comprehensive amendment to the Land Reform Act, which will greatly reduce obstacles to the reform process and help create a land market. In the financial sector, two basic laws were enacted during the first half of 1992 that establish an independent Central Bank and create conditions for universal as well as specialized commercial banks. In addition, the Government has agreed with the Bank on medium-term strategy for restructuring the energy sector. -4- 1.13 Notwithstanding the progress made by the Government in establishing the framework for restoring the country's growth potential, domestic policy reform by itself will not be sufficient to support continued economic recovery, given the external shocks and the dislocation resulting from the reform program. These have already reduced domestic consumption and imports to levels where further substantial cuts could jeopardize the sustainability of the program. This, together with the prevailing resource constraints, clearly augment the need for a negotiated resolution of the present debt overhang and for channelling, over the medium-term, official financial assistance toward priority investments to sustain the restructuring of the economy. The Project, which is an integral part of the agreed medium-term strategy, is designed to assist the Government in meetlng the forecast demand for electricity at least cost. II. THE Y NLJ G SC¶Y) A. 3 kund 2.01 Energy Resources. Bulgaria's endowment of commercial energy resources is extremely poor. The very limdted initial reserves of oil and gas have declined steadily and are now estimated at about 3 million tonnes of oil equivalent, representing less than 3 months of the country's petroleum consumption. The hydropower potential is also limited as most of Bulgaria's rivers are small, except for the Danube which, however, has a fairly small drop in altitude where it forms the country's northern border with Romania. Largely because of this constraint, hydro capacity accounts for about 16X of the country's total installed generating capacity and an even smaller percentage of generation. The reserves of the presently active coal mining areas are estimated at about 2.6 billion tonnes, with lignite accounting for about 90X of these reserves and sub-bituminous and bituminous coal for the remaining 10X. The latter are spread thinly across the country, which renders their extraction uneconomic. As for the lignite reserves, over 95% of these are located in the southeast of the country, at Maritza East, and are sufficient to meet the requirements of the existing three mine-mouth power plants and the briquette factory for another 75 years. Because of the generally favorable mining conditions, which are characterized by an easily accessible terrain, low overburden to lignite ratio, a thick lignite seam and the absence of groundwater problems, the reserves at Maritza East are likely to remain the country's principal economically exploitable energy resource in the medium to long term. However, as the lignite is of poor quality (heating value of about 1,500 kcal/kg, a sulfur content of about 2Z), and cannot be transported economically over long distances, it would continue to be the main source of primary energy for the generation of electricity at pit-head power plants and for the production of steam for industries located in the vicinity of the mines, as has been the case tbhs far. 2.02 Sector _XOr ization. Until November 1991, when Decree 46 of the Council of Ministers (COG) was promulgated, the energy sector was dominated by two large, vertically integrated groups: (i) an integrated coal, electricity, and heat supply enterprise under the Committee of Energy (COE); and (ii) an oil refining and petrochemicals conglomerate, an oil product distribution company, and a gas import and distribution company, all under the purview of the Ministry of Industry and Technology. As with most industrial enterprises in Bulgaria, the efficiency of these organizations was masked by the complex of administratively set prices and exchange controls on all inputs and outputs. 2.03 Following the promulgation of Decre. 46, the energy sector was reorganized and the operating entities involved in the sector were established as Joint stock or limited liability companies, with the Government as the sole share holder. The entities that are responsible for the day-to-day management and operations include: the Natsionalna Elektricheska Kompania (National Electric Company or NEK), which is responsible for the generation, transmission and distribution of electricity throughout the country; Neftochim, which is responsible for the operation of the country's largest refinery at Burgas; Petrol for the distribution and marketing of petroleum products; Toplivo for the marketing of coal, propane/butane and briquettes to the household sector, as well as for activities outside the sector; Bulgargaz for the transmission of gas; Sofia Energy Company for the largest district heating system in the country in Sofia; and the Oil and Gas Exploration and Production Company. In addition, -6- there are about 16 coal mining companies, including the three at Maritza East, two small refineries, a briquette factory, district heating companies in the major cities and towns, and service organizations. 2.04 The responsibility for coordinating the activities of the operating entities is vested in a number of Ministries and organizations, as is shown in Annex A. The Ministry of Industry has jurisdiction over gas transmission, refining, petroleum distribution and marketing of transport and household fuels. The Committee of Energy (COE), which reports directly to the Council of Ministers (COM), oversees the power, coal and district heating subsectors. The Committee of Geology and Mineral Resources, also an independent body reporting to the COX, is responsible for oil and gas exploration and production and minerals exploration. The Commission on Prices (COP), in addition to overseeing prices, assists in setting the prices of electricity, heat and coal. In addition, also involved in the energy sector is the Commission to the Council of Ministers on Energy and Raw Material Supplies for the country, which is essentially a standing committee, comprising representatives of various ministries and energy organizations. However, it has no staff and meets only as required for dealing with immediate criaes. 2.05 The Government has realized the implications of this fragmentation of responsibility among numerous ministries and organizations and is favorably disposed to establishing a new agency for coordinating the activities of all the operating entities involved in the sector. Decisions relating to the exact structure and location of this agency, however, are pending. 2.06 Energy PrLcing. Under the Communist Government, energy prices were administered by the Government and were kept at levels substantially below those in market economies, though this was masked by the overvaluation of the official exchange rate of the leva relative to convertible currencies. Since 1991, with the launching of the reform program, prices of petroleum products were liberalized and are now set monthly based on formula established by the CON, which links the retail price to world market prices and provides for freight, taxes and duties as well as a fixed margin for marketing and distribution. Likewise, the price of natural gas was partially liberalized and is now linked to petroleum product prices. As part of its mandate, COP monitors the developments in the price of petroleum products and natural gas. 2.07 As for the price of electricity, heat and coal, these continue to be set administratively. However, these also have been increased four times since the Government launched its reform program, first in February 1991 and then again in June 1991, May 1992 and finally, in January 1993 (though this last price increase excluded coal). Adjustments in the prices of these products are approved by CON, based on the recommendations of COP. which are not binding. Consequently, in setting prices, which is still a politically sensitive issue, CON bases its. decision on a combination of political, economic and financial considerations. The distortions resulting therefrom are failing to provide the consumers the signals needed to rationalize the consumption of energy and denying the sector the resources required for meeting the demand at least cost, as is discussed below. 2.08 Electricity. While the average electricity tariff is set by CON, the structure of tariffs that would yield the approved average tariff is determined jointly by COP and COE. During the past two years, the average electricity tariff has been increased about twelve fold in nominal terms, from .0524 leva/kUh 7- in late 1990 to .57 leva/kWh in Kay 1992 and an estimated .64 leva/kWh in January 1993. In addition to these increases, a uniform structure of tariffs was also introduced in May 1990, which, as is shown below, differentiates between consumers at the various voltage levels (high, medium and low voltage), and varies by season, time-of-day and peak/off-peak. The high voltage category includes industrial consumers such as steel, cement, fertilizer, etc. The medium voltage category includes all small industries and municipalities whose voltage ranges between 10 kV and 35 kV. The low voltage category encompasses all other consumers except households. Though differentiated by time-of-day, tariffs for household consumers are substantially lower than those paid by all other consumers, implying that the latter are subsidizing the consumption of the former. E~~~~~~~~Tm L | 2.09 Overall, the prevailing tariff structure, with the notable exception of the cross-subsidization of households, is generally consistent with the structure dictated by the principles of marginal cost pricing; that is, tariffs are differentiated by time of day and season to reflect the differences in cost incurred by the utility in meeting the consumers demand for electricity. Despite the improvements in the level and structure of tariffs, COR's estimates show that the average tariff does not reflect fully either the economic or financial cost of supply. The average cost of supply is underestimated primarily because depreciation is based on historical costs, which are far below not only replacement costs, due to changes in the value of leva and the high rate of inflation over the past two years, but also below the cost of maintaining the existing assets. Therefore, in view of prevailing resource constraints, agreement was obtained during negotiation of the Project on adjustments in the level of tariffs that should enable NEK to finance 301 of its investment program from internal sources (see para 5.11). 2.10 District Hea. District heating plants supply hot water to about 222 of the households and meet 58X of the requirements of industry for hot water and steam. In addition to heat, some of these plants also produce electricity which is sold to NEK. Most of the largest industrial plants and a few of the smaller ones that use heat are metered and billed on the basis of their specific consumption, while the other are billed on the basis of estimated consumption. By contrast, the consumption of hot water by households is not metered and their heat bills are based on cubic meters of living space. As of May 1992, the price of heat was 334 leva/Gcal for industrial consumers and 115 leva/Gcal for households, representing, respectively, a 19 and an 11 fold increase in the price of heat for the two categories of consumers during the past two years. (Effective January 1, 1993, prices were increased an additional 10 for industry and 201 for households.) 2.11 The estimated average revenue of about 260 leva from heat in 1992 is substantially less than the estimated average cost of supply of about 420 leva/Gcal. This is largely due to the underpricing of heat for households, which is less than one half the cost of fuel used in its production. Furthermore, the January 1993 price Increase for heat will have only a small impact on this situation. The price of heat to households is kept low not only for political but also for equity reasons, given that households have no control over their heat bills. In the absence of a mechanism that would allow individual consumers to regulate their heat bills, upward adjustments in prices are unlikely to promote the efficient use of heat by households. As a first step toward addressing this constraint, the Government has initiated a study for the district heating system in Sofia, financed by the Danish government, to test the viability of metering and regulating the consumption of heat by households. For the same system, another study is to be carried out with the assistance of consultants financed by the US Trade and Development Program, to identify the means for improving the efficiency of the heat supply system. These studies are expected to form the basis for a project to be financed by EBRD. 2.12 CaAl. Based on COP's recommendations, COX sets a reference price for domestically produced coal. This reference price is for a tonne of coal equivalent (tce) with a heating value of 7,000 kcal/kg. As the quality of coal in Bulgaria is poor and varies significantly, its price is set in relation to the reference price, taking into account the heating value and other factors such as moisture and ash content. Presently, there are about 400 different prices of domestically produced coal. The prices of imported coal, by contrast, are not set administratively except for a very small amount sold on the retail market for which the pricing mechanism is the same as for domestically produced coal. 2.13 The reference price of coal, like other energy prices, has been increased significantly between July 1990 and May 1992, from 20 leva/tce to 606 leva/tce for industrial consumers, including the power subsector, which absorbs the bulk of the domestically produced coal, and from 28 leva/tce to 506 leva/tce for households. Largely because of these increases, the retail price of coal for industrial consumers is now at about 821 of the average cost of production for the sector, estimated at about 737 leva/tce and about 201 higher than the cost of production at the main mining complex at Maritza East, which is estimated at about 510 leva/tce. The average cost of production for the sector as whole could be reduced substantially through a restructuring program, including the phasing out of uneconomic mines and the rehabilitations and upgrading of the economic ones, such as taritza East. The Government, as a part of its overall reform program, has already identified the largest loss makers in the mining sector and is in the process of developing programs for restructuring their operations. 2.14 The price of coal for household consumers, like the prices of other energy products, is kept low for social and political reasons. Moreover, of the coal that is currently being consumed by households. the bulk is in the form of briquettes, produced at the Naritza East plant. These briquettes have a heating value of 4,300 kcal/kg and are sold by Toplivo at 340 leva/t while their cost of production is estimated at about 1250 leva/t. The losses incurred in meeting the demand for briquettes by households are only partially covered by a subsidy from the Government, and as a result, the briquette factory has built up large accounts payable with the Naritza East Nines and NEK. As a first step towards improving this situation, the Government is being assisted by consultants financed by the Dutch government to identify the means for reducing the cost of briquette production. This study would form the basis for adjusting the price of briquettes. 2.15 Medium-Term Prospects for the Sector. As was noted earlier (para 1.01), the Communist Government upon assuming power in 1946 embarked on a strategy aimed at the rapid industrialization of Bulgaria, with priority being accorded to the development of heavy industry and organic and inorganic chemicals. Given the limited endowment of domestic energy resources, Bulgaria has had to rely heavily on imported energy, mostly from FSU, to support this strategy. Historically, the relative share of imports in gross domestic consumption of energy has ranged between about 701 to 751. In 1991, almost all of the oil, gas and nuclear fuel, 30X of coal (by heat content) and about 101 of the electricity that was consumed in the country was imported. Energy imports continue to be the single largest import item, typically 20-251 of total imports. Details relating to the supply and consumption of energy in 1991 are shown in Annex B. 2.16 The emphasis on rapid industrialization and the accompanying increase in its share of total output, has resulted in Sulgaria's total consumption of energy per unit of GDP being higher than that of most western countries; about 201 to 251 higher than for a comparable market economy when national incomes are compared on the basis of parchasing power parity and about 351 higher when national incomes are compared on the basis of conventional exchange rates. For most industries, energy intensity per unit of industrial output is also higher than in the West: for example, 321 for cement and about 671 for cardboard. 2.17 Given the structure of the economy, it is unlikely that in the short to medium-term there will be a rapid decline in the energy intensity of Bulgaria. The decline in aggregate energy consumption that has occurred over the past two years is more a reflection of the economic difficulties than a fundamental structural change, which is likely to be a protracted process, as it would involve reducing the relative importance of industrial production and of energy intensive branches such as chemicals. The Government's recent initiatives, especially the large upward adjustments in energy prices, are expected to contribute to this process of transformation and to the rationalization of consumption; however, these would have to be supplemented by non-price measures to further reduce aggregate energy consumption and hence imports, to alleviate the pressures on the external balances. One such non-price measure to which priority has been accorded by the Government is the improvement in the efficiency of the power sub-sector, the single largest consumer of primary and secondary energy in Bulgaria. B. Power Subsector 2.18 Until November 1991, COS was one of the two vertically integrated enterprises in the energy sector. It had, under its purview, the production of coal, briquettes and heat and the generation, transmission and distribution of electricity. As the operator of the national grid, it was also responsible for imports and exports of electricity and for the purchase and distribution of electricity produced by power plants owned and operated by industry. Following - 10 - its reorganization, all of COE's operating responsibilities have been assigned to NEK, except those relating to the production of coal, briquettes and district heat which were assigned to other operating companies. 2.19 Develogments in the Consumption and Sunly of Electricity. Between 1980 and 1988, gross domestic consumption of electricity increased at an average annual rate of about 3.2Z, from 38.7 TWh in 1980 to an all time high of 49.2 TWh in 1988. Since then, however, it has declined rapidly, dropping to about 41.0 TWh by 1991. Further declines are expected through 1995, after which consumption is expected to start increasing again (see Annex C). The decline is attributable to contraction of economic activity, some restructuring of the economy and to capacity constraints, which became particularly acute in 1991 when emergency assistance was provided by the Commission of the European Communities (CEC) to minimize load-shedding. 2.20 As is summarized in Table 2.2 below, the sectoral shares in the gross consumption of electricity have been changing over time especially since 1988. Losses in transmission and distribution have increased significantly, as a share of gross consumption and in absolute terms. Partially, this is caused by higher household consumption of electricity, with low voltages where losses tend to be greater, but there are also indications that misappropriation of electricity is increasing. Industrial use of electricity (which includes construction) is declining both as a share of gross consumption and absolutely, as a result of the deterioration in the Bulgarian economy and the restructuring which is underway. Household use of electricity is increasing both in terms of its share of gross consumption and absolutely as individuals have shifted to heating with electricity due to the sharp rise in the price of home heating oil. The share of the public sector in electricity consumption has decreased somewhat, while the shares of agriculture and transport are largely unchanged. ~~ _ 2.21 Bulgarias's total installed generating capacity increased from 8,854 NW in 1980 to 12,074 KW in 1991, wLth almost all of the now capacity that was added to the system being in the form of nuclear power. This simply reflects the continuation of the Goverrnment's policy of expanding nuclear generating capacity, which was adopted in the 1970s, as a means for offsetting the constraints aris:ing from the country's limited endowment of commercial energy resources. The firsit nuclear reactor (unit 1), a Soviet designed and built VVER - 11 - 440, model 230, with a capacity of 440 MW was commissioned at Kozloduy in 1974. Over the next 16 years, another 3,320 MW were added to the plant at Kozloduy, comprising 3 X 440 MW (VVER 440, model 230s, units 2-4) and 2 X 1000 MW (VVER- 1000s, units 5-6). The last unit of 1000 MW, unit 6, was brought on stream in 1991 and is in the process of being commissioned. As a result, the share of nuclear in total Installed capacity has more than doubled, from 151 in 1980 to 311 in 1991, while that of thermal and hydro has declined correspondingly: from 641 to 53X for the former and from 211 to 161 for the latter, respectively. Details relating to the growth in capacity are presented in the Table 2.3 below. Further information is provided in Annex D. 1~~~~~~~L1 198 E . 2.22 While the rapid growth in Bulgaria' s nuclear capacity and generation, over the past two decades, reduced the need for imported power or fossil fuels, it has resulted in considerable concern about the safety of the Kozloduy nuclear plant. In particular, the International Atomic Energy Agency (IAEA) in their 1991 report on this plant expressed concern about its condition, primarily the VVER 440s, units 1-4, which lack many safety features considered standard in the West. Over the past 18 months, major technical assistance has been provided for these units, primarily by the CEC, in conjunction with the World Association of Nuclear Operators (WANO) and their operations have been improved. 2.23 The issues involved in the safety of units 1-4 are difficult. In the short run, they are needed to meet winter demand due to: (a) operational problems with existing thermal plants; (b) fuel shortages; (c) the low availability of units 5 and 6; and (d) the high cost and uncertain availability of imports. In the medium term, with increased availability of power from the thermal plants and units 5 and 6, the need for the VVER 440s would greatly diminish. However, these units are the lowest cost source of power, aside from hydropower, for the country and their replacement by thermal power plants would involve a major economic cost for the country. Nevertheless, the continued operation of these units in the medium term without major upgrading of their safety systems and perhaps even with it, would be unacceptable to much of the international community. No decisions - 12 - have yet been made about what to do with units 1-4, though studies on this issue are on-going including work requested by the 0-7 summit meeting in Munich. 2.24 Chart 2.1 provldes the details relating to fuels used by the COE's Electricity Generation in 1991 COE to generate electricity in In Percent by Fuel Type Bulgaria in 1991. The Koaloduy nuclear plant provided about 37X of the electricity, domestic lignite (mostly the Naritza asst Complex), Nuclear Pewi provided 33.71, Imported coal (mostly used at the Varna plant) provided 14.31 and there were small amounts generated by fuel oil, gas and by .. .... hydro plants accounting cumulatively for 14.61 of the total. Historically, O5. S 12 very little gas has been used in power 7.54 generation, with gas primarily bT.,T1" reserved for industrial uses. While 14.3 it would be advantageous, for environmental reasons, to expand gas Chart 2.1 usage in power generation, COB and NEK are opposed at this time to a major expansion because the country has only one source of supply, Russia, which is not viewed as being very stable and the gas pipeline to Bulgaria also has to traverse the Ukraine and Romania. 2.25 The development of Bulgaria's power subsector was dictated more by the availability of fuels, technology and unit sizes from the CMEA block countries, especially the FSU, than by the requlrements for its optimal operation as an isolated system. As a result, Bulgaria depends not only on imports of fuels from FSU for about 20X of the country's thermal capacity and almost all of the nuclear fuel, but also on imports of energy and capacity from the CMEA (mostly Ukraine) for meeting its peak demand, as well as the operational requirements of the system for spinning reserves and frequency control. 2.26 Interconnection and Electricitv Exchange. The Bulgarian power system is interconnected with all neighboring countries including Ukraine, Romania, Turkey, Greece, and Yugoslavia. The country is linked with Ukraine through a 750 kV line and a 400 kV line, with Romania through two 400 kV lines and a 220 kV line, and with Greece, Turkey and Yugoslavia through 400 kV transmission lines. In the past, about 800 MN could be imported from the FSU (Ukraine) at periods of peak demand with about 4-5 TWh imported yearly. Although the contract was to be renewed annually, experience in 1991 suggests that Ukraine may be unable or unwilling to provide the energy and capacity that was previously supplied and for which the 750 kV transmission line was originally installed. 2.27 The interconnection with Romania, near Kozloduy, was to serve largely as a means for wheeling the power from the Ukraine through Bulgaria and for the trade of electricity between the two countries. However, Bulgaria's trade in electricity with Romania, Greece, Turkey and Yugoslavia remains small. Trade with Romania will remain very limited because both countries suffer from available capacity shortages, trade with Greece is also limited by capacity, trade with Yugoslavia is currently restricted by the embargo (though it was never large), while electricity trade with Turkey is limited by technical factors and costs. - 13 - 2.28 The interconnections to the Ukraine and Romania are in parallel (synchronized systems) whereas those to Yugoslavia and Greece are operated on the "isolated Island" principle which allows synchronized operation of an isolated part of one power system with the other. The 'isolated island" method of operation limits flexibility and Bulgaria's ability to import power and energy, but this is necessitated by the fact that Bulgaria (as well as the other countries of the former CNEA) belongs to the Eastern Europe interconnected system known as IPS or more informally as MIR (Peace); whereas Greece and Yugoslavia belong to the Western Europe interconnected system known as UCPTE. The difference in the standards of the two systems does not allow synchronization of the systems at the present time. Turkey, on the other hand, is not a member of either system and operates its own independent power grid. This gives it more flexibility to interchange power with either system. However, being a member of a large system has major advantages in that the immediate availability of power through the system interconnections contributes to a higher reliability than would be the case without them and, if rationally utilized, also to a more economic operation of the interconnected system. 2.29 Bulgaria is in tripartite discussions with Greece and Yugoslavia for enhancing future exchanges, strengthening of the interconnections and possible synchronization. This would require the adoption by Bulgaria of the UCPTE standards including adequate generating capacity, peaking units, and frequency and voltage regulation which they currently cannot meet. Also at present, it is questionable whether Bulgaria could do without imports of electricity from Ukraine at peak periods and, therefore, it may not be able to join UCPTE until that issue is resolved. There are, however, ongoing discussions between UCPTE and IPS about establishing closer links and eventually even synchronizing the two systems and if this occurs it would eliminate the necessity for Bulgaria to make a decision between the two systems. The completion of the supervisory control system, a component of the Project, would facilitate Bulgaria's consideration for membership in UCPTE at a later date, and allow parallel operation of the Bulgarian power network with the UCPTE network. The Chaira pumped storage project would also help by providing peaking capacity and limited reserves. 2.30 Ongoing Technical Assistance. The power subsector and NEK are currently receiving considerable technical assistance. The part of this technical assistance which deals with the Kozloduy nuclear plant is discussed briefly at para 2.22 above. The non-nuclear technical assistance to the power subsector is quite broad and extensive (approximately 15 studies) and is being provided primarily by the Phare program of the Commission of the European Communities (CEC), the US Trade and Development Program (USTDP) and USAID. It is aimed primarily at analyzing; what additional investments need to be undertaken in the power sector to improve efficiency and stability in the short and long run (including rehabilitation needs), the likely future levels of demand, how the sector should be organized including the organizational structure for setting electricity tariffs, how pollution created by the power plants should be reduced, and at developing recommendations on tariff structures. These studies would mostly be completed between the end of 1992 and late 1993. They should provide the COE with, inter alia, a more detailed least-cost investment plan for the subsector including timing and costs of rehabilitation, an estimate of NEK's long run marginal costs, organizational recommendations and recommendations on how electricity tariffs should be set. The Government is awaiting the results of these studies before finalizing its plans for the sector. - 14 - III. THE BORROVER 3.01 Ogygie. Following the promulgation of Decree No. 46 of the Council of Ministers dated November 7, 1991, the Natsionalna Elektricheska Kompania or National Electric Company (NEK) was established as a joint stock company on January 1, 1992, and took over the assets from COE for the centralized supply of electricity. As a successor to COE, it is charged with the responsibility for (a) the construction, operation and maintenance of the centralized system for the generation, transmission and distribution of electricity; (b) purchase and sale of electricity generated by autoproducers and district heating systems; and (c) the import and export of electricity. The Government is the sole shareholder of NEK, which has an authorized capital of 2 billion leva, all of which has been subscribed and paid. NEK's articles of association are presented in Annex E. 3.02 Mmnagimen. The overall responsibility for the management of NEK is vested in a Supervisory Board, a Managing Boa d and a Board of Branch Nanagers. The Supervisory Board, headed by a Chairman, oversees the operations of NEK on behalf of the state as the sole share-holder. The Chairman is elected from amongst the seven Board members, appointed by the Council of Ministers (COM) for a period normally of five years. The tenure of the first Board, however, is limited to three years. The Supervisory Board, required to meet once every three months by the Articles of Association, approves all decisions that could materially affect the ownership and structure of the company, including: (a) the acquisition, transfer or closing down of operations or substantial parts thereof; (b) all long-term contractual arrangements; and (c) the appointments and dismissals of members of the company's Managing Board and senior officials. In addition, it also adopts resolutions on legal issues within its competence, verifies the company's annual reports, including financial statements, and subject to the approval of CON, approves the distribution of profits. 3.03 The responsibility for the day-to-day management of NEK, including the 43 branches, is vested in the Managing Board, comprising five members, appointed by the Supervisory Board for a period of five years. The President of the Nanaging Board, who is also the Chief Operating Officer of the Company, is elected by the members of the Managing Board. The Board of Branch Managers, headed by a Chairman who is elected, comprises 43 members. It is simply a consultative group that makes recommendations to the Managing Board regarding decisions that effect day to day operations of the utility. The members of the Board are managers of a branch, which is the basic structural unit of NEK. The managers are selected on a competitive basis and appointed by the Managing Board. 3.04 In addition to the President, NEK has four Vice-Presidents: one for generation; one for distribution, sales and commercial operations; one for development and investments; and one for forecasts and finance. The President is also assisted by three directors, one each for foreign relations and protocol, legal, and administration. As shown in Annex F, the management structure of NEK is more appropriate for a public agency than a utility mandated to operate along commercial lines. As a first step towards addressing this constraint, NEK has been working with consultants under financing from the USAID to review the organizational structure of the utility with a view to streamlining its operations. 3.05 As per its Articles of Association, NEK is mandated to operate along commercial lines. Despite this, both the accounting and financial functions continue to have a less prominent profile than is accorded the technical - 15 - functions: two of the company's four Vice Presidents basically have technical function (generation and distribution), while both finance and accounting are the responsibility of a third level executive reporting to a Vice President. Moreover, neither the finance nor the accounting function is adequately staffed and the systems and procedures have yet to be developed. In order to address these shortcomings, technical assistance is being provided under the Project for the implementation of a financial management improvement program, which is aimed at strengthening NEK's accounting and financial functions to reorient its operations along commercial lines (para 4.13). Also, at negotiations. agreement was reached for NEK to submit. by July I. 1993. a plan for streamlingin decision- making and strengthenLng its accounting and finMane _funtions with a timetable for the implementation of this plan. 3.06 ggeratlpns. As presently constituted, NEK, in addition to its headquarters and the National Dispatch Center both of which are located in Sofia, has 42 branches: one for each of its 11 thermal, nuclear and hydro power stations; 28 electricity distribution branches, two for the supply of electricity to the district of Sofia and one for each of the other districts; and three service companies for investment and maintenance. All of these branches, except for the five, which are under the direct control of NEK, have considerable autonomy over decisions relating to their day-to-day operations, including staffing, operational planning and maintenance. In fact, branches appear in some situations to have excessive autonomy though whether this is in fact the case should emerge in the course of the work mentioned in para 3.04 above. 3.07 NEK's operations are fairly efficient in the sense that it is a relatively low-cost electricity producer on a sunk cost basis due to its high proportion of nuclear power, with low fuel costs, the relatively low costs of electricity production from Maritza East and from hydroplants. However, the quality of service offered by the company is low, with the occurrences of major outages at periods of peak demand and poor frequency control. The latter problems are due to insufficient available capacity (see para 3.09) and lack of flexibility in the system, including limited reserves. 3.08 EXisting Facilities. At the beginning of 1992, total installed generating capacity owned and operated by NEK was 10,460 KW, comprising 4730 KW of thermal capacity, 3,760 MW of nuclear capacity and 1,970 KW of hydro capacity. NER also has access to about 1,614 KW of generating capacity owned and operated by the district heat producers and industrial plants and, in theory, up to another 600 KW from Ukraine. Details relating to NEK's installed capacity are presented in Table 3.1 below. - 16 - ..~~~~~~ . ~~N g w -.. . Q. 4 .' - ~~~gg Whe NEK wasquf ftvm thmo eld CEatB te Xef of , thie sda heaig q 3.09 As was noted, the installed generating capacity to which NEK has access is, in theory, more than adequate for meeting the country's demand for electricity, which over the medium term in not expected to exceed the 1989 peak of 8,332 M4W. However, because of operational problems stemming from the disruption in the supply of fuels - including the depletion of domestic reserves, shortages of spare parts and equipment, poor msintenance and safety concerns. the available capacity is likely to fall far short of the installed capacity. As a result, in the short to medium term generating capacity constraints are likely to persist. 3.10 NEK's main transmlssion system consists of 85 km of 750 kV lines, 1,844 km of 400 kV lines and 2,283 km of 220 kV lines. In the distribution system, the high voltage network conmists of 7,809 km of 110 kV linbs, the medium voltage level consists of 48,928 km of 20 kV lines and the low voltage level of 66,397 km. The total installed capacity of transformers is about 29,872 NVA at the High Voltage substations. As d Aoted, the Bulgarian power system is intercomected with Ukraine, Romedia, Yugoslavia, Turkey d nd Greece and at 750 kV with a nucleer plant in Ukraine. 3.11 of pae. The total number of regular staff employed by NEK rs of January 1992 cap about 30,360 of fhich 7 are professionals, 78t skilled workers and the remsining 15t are unskilled workars. the total staff at NEl's headquarters in Sofia is 130 of which 25 are administr.tive staff. Relative to most western utilities, NEK, except for the headquarters operation, is seriously overstaffed. However, part of this may be explained by the hiv h level of servHies provlded sn-house and part by the bllllnn system isich requires a large number of outlying offTces for cash payments. Even takfng mlto account these factors, howemr, there would still appear to be ovrstaffhng. T t e project will, therefore, provide funds for a redundancy study hl thst NEK cwi dhrveloP a plan - 17 - to reduce its labor force at the least social cost in liaison with the Ministry of Labor and Social Welfare's employment sorvice. 3.12 In the longer term, the Government would be interested in privatizing IUE. However, in the short and modium term, other government owned companies are much more attractive for privatization. NEK is currently unattractive for private investors siace it is has significant financial problems (see paras 5.04 to 5.17) with a relatively high level of current liabilities and very inadequate cash flow. Furthermore, its financial condition is largely out of Its own control w$th electricity tariffs being set, somewhat arbitrarily, by the Council of Ministers based on a mixture of political and economic considerations. Once an independent regulatory mechanism is created for establishing these tariffs and it seen to work, the company would becoms much more attractive. A second major problem for any outside investors interested in NEK would be its environmental liabilities. The foremost of these is the Kozloduy nuclear plant which is currently far below western safety standards and presents a major potential liability. Also, MU generates a large amount of SOZ from the power plants at the Maritza East Complex which use inexpensive but high sulfur local lignite as fuel. An outside investor, especially one from the EC, might be under considerable pressure to bring these plants into compliance with SC standards, which would be very expensive. These environmental liabilities might, however, be of less importance to private Bulgarian investors and the company could possibly be floated on the domestic Bulgarian market after its financial health is secured. - 18 - IV. I MW= A. Project Setting 4.01 The development of the Bulgarian economy was heavily influenced by the country's ties with the former Council of Mutual Economic Assistance (CMEA) block, especially the former Soviet Union (PSU). In the power subsector, in particular, the expanslon of the system was dictated more by the availability of fuels, technology and unit sizes from the CMEA block, than by the requirements for its optimal operation as an isolated system. As a result, about 20X of the country's thermal generating capacity has been dependent on supplies of coal from CGEA (Ukraine); about 30X of the country generation capacity consists of nuclear units supplied by the FSU and dependent on it for fuel; and the Bulgarian system has depended on CMEA (Ukraine and Russia) for reserve power to meet peak demand, frequency control and for spinning reserve requirements for the 1000 MW0 nuclear units at Kozloduy in the event of an unplanned outage. The 750 kV high capacity transmission line, linking the Bulgarian system with that of the CMEA, was installed to provlde, inter alia, for such contingencies. 4.02 Following the dissolution of the Soviet Union, supplies of coal from Ukraine have become less reliable and, based on the experience of last winter, there is considerable uncertainty about previous arrangements for meetlng emergency electricity imports and peak demand. In addition, the bulk of the existing installed generating capacity in Bulgaria operates at substantially below nameplate capacity as it is in need of retrofitting and rehabilitation and often short of fuels. Also, nuclear safety issues related to the Kozloduy nuclear power plant have a serious impact on power system operations (see para 2.21). 4.03 The Government has increased the prices of electricity four times since late 1990 (see para 2.07) and has reorganized the Committee of Energy, which resulted in the creation of: the Natsionalna Elektricheska Kompania for the generation, transmission and distribution of electricity (NEK); 16 coal mining companies; and 22 district heating companies. A quick Probabilistic Risk Assessment study has been completed for Kozloduy units 1 to 4, and a decision on whether and how to proceed with improving safety at these units is pending. The Government has agreed with the Bank on a medium-term strategy, which is aimed at addressing, in an integrated fashion, the key issues impeding the efficient operation and development of the energy sector. 4.04 As per the agreed strategy, the Government has launched a number of initiatives in the power subsector under financing from, inter alia, CEC, USAID and USTDP. These include the preparation of: (i) a load forecast for the medium and long-term; (ii) a least cost generation and transmission expansion program; (iii) a tariff study; (iv) a study for the reorganization of the sector (see below); and (v) a feasibility study for the rehabilitation and retrofitting of the thermal power plants. Pending the recommendations of these studies, the Government has given high priority to promoting the efficient operation of the power system and reducing the cost of supply through the completion of ongoing projects and commercializing the operations of NEK. - 19 - B. Projeet Ob1ectives 4.05 The objectives of the Project are to assist the Government in: (a) improving the operating efficiency and reliability of the power system; (b) realigning the level of electricity tariffs to rationalize consumption of electricity, reduce pollution associated with electricity production and mobilize resources for NEK; (c) improving and depoliticising the electricity tariff setting mechanism; (d) improving voltage control and frequency regulation; (e) reducing the need for electricity imports; (f) reorienting the operations of NEK along more commercial lines; and (g) strengthening dam safety at the Bel.mken and Chaira dams and the associated saddle dam. C. vArtiomale for Ban# Involvement 4.06 The Project, which is fully consistent with the Bank's Country Assistance Strategy for Bulgaria since the latter emphasizes the importance of the electric and telecoms iafrastructure of the Country, follows from the Bank's recent EgrgMy Str&tgy SUt&y for Bulgaria (Report No. 10143-BUL). That study recommended a strategy of: (i) increasing efficiency of energy use through more realistic prices and energy saving investments thereby, reducing energy imports, pollution and costs; (ii) expanding domestic production and reducing costs of this production thereby reducing imports and costs; and (iii) substantially improving safety and reducing the environmental impact of the electricity industry. This strategy has been accepted by the Bulgarian Government and by most of the other donors, many of whom participated in its development. The present project is designed to support this overall strategy by assisting the electricity subsector. It would also continue the Bank's active dialogue with the Government on energy issues. The particular components were chosen because: (a) they could be implemented rapidly; (b) would have a major beneficial impact on the Bulgarian electricity grid by increasing efficiency and stability; and (c) would maximize the impact of Bank financial resources toward the needed strengthening of the Bulgarian power system. Also, by improving the efficiency of the electricity subsector, the Project fits well with the environmental strategy contained in The Bulgarian Enviroment Jtrar&g) Suay (Report No. 10142- BUL), a joint product of the Bulgarian Government, the US Government and the Bank. Finally, tho Project will increase the safety of two major hydro- electricity dams in Bulgaria, Chaira and Belmaken, and a secondary dam. D. PEoject Description 4.07 The Project would provide for the implementation of the following three components: (a) Improvement of the supervisory control and transmission systems of the electricity grid in order to increase its stability and efficiency. This would involve the installation of: (i) improved communication links including power transducers, PLC channels, radiorelay lines, and tolegyr extension at the first and second hierarchy levels of the supervisory control system; (ii) hardware and software for improving supervisory control at the National Dispatch Center; (iii) unit control systems as part of the automatic generation control system; (iv) shunt reactors and fault recorders on the 400 kV transmission network; and (v) technical assistance of varying degrees in the design, installation and implementation of the above items; - 20 - (b) Completion of units 3 and 4 at the Chaira pumped storage project, thus providing additional peaking power and improved system control and spinning reserves. This would involve: (1) the supply of steel for the lining of penstock No. 2; (ii) the manufacture of the lining tubes; (iii) preparatory work; (iv) supervision of installation of turbo-generator sets Nos. 3 and 4; (v) miscellaneous equipment; (vi) civil works and installation of turbo-generators; (vii) technical assistance for procurement and construction management; (viii) instrumentation for seismic monitoring; and (ix) dam strengthening as recommended by a panel of experts (see para 4.27); (c) Technical Assistance. This would cover primarily the services of consultants for reorienting the operations of NEK along commercial lines through the implementation of a financial management improvement program covering: (i) establishment of a cost accounting system and development and implementation of a cost analysis model; (ii) the design, development and implementation of a modern accruals based accounting system that conforms to international accounting standards; (iii) the design and implementation of an improved billing, collection and cash management system; (iv) the development and implementation of an improved control budgeting system; and (v) the design and implementation of a computerized management information system for NEK. It would also cover: (1) a water usage optimization study for the Belmeken/Chaira catchment area; (2) overseas training in dam safety monitoring; and (3) technical assistance for the installation of instrumentation for seismic monitoring of dams; and (4) a redundancy study for NEK. E. Project Origin 4.08 ImDrovement of the Sunervisory Control and Network Systems. The 'Supervisory Control System' consists of NEK's Supervisory Control and Data Acquisition System (SCADA) and the Energy Management System (EMS). NEK's Supervisory Control System includes the National Dispatch Center (NDC), four Regional Dispatch Systems (RDC) and 28 sub-Regional Dispatch Centers (SRDC). The NDC operates the power system by controlling the basic generating capacity participating in load/frequency control, the transmission network and exchanges with the neighboring countries. The RDCs operate the smaller power stations and transmission network in their regions. The SRDCs operate the distribution networks in their regions with voltage rated less than 110 kV. The Supervisory Control System is designed to provide operators with an accurate picture of the bulk electricity system, the status of interconnections with neighboring power systems and better control over this system. All major generating, transformer and switching stations throughout Bulgaria would be monitored and an updated picture of network system conditions would be provided to the dispatchers. With state of the art EMS software and hardware, operators would be able to maintain system security, minimize the cost and environmental impact of generation and control power flow. 4.09 Project preparation for the Supervisory Control System was originally undertaken in the period 1980-1982. Project implementation started in 1983 under contract with Landis and Gyr. This Company was selected from among five candidates: Landis and Gyr, (Switzerland), Brown Boveri (Switzerland), Hitachi - 21 - (Japan), Toshiba (Japan) and Ofred (France). Because of embargo restrictions upon the supply of hardware from the USA, the execution of the project was interrupted and had to be resumed in 1987, after it has been redesigned. At the same time the nwmber of RDCs was increased (from three to four). After the political changes in Bulgaria in 1989-90, power system interconnections to UCPTE (the Western grid) became important to the Bulgarians and for this an advanced supervisory control system is required. The proposed System would include these additional requirements. About US$35 million equivalent has been spent on the Supervisory Control System, so far. Under the Project, the Supervisory Control System would be improved and completed. 4.10 Since 1989, problems have been experienced with high voltages on the 400 kV system. The rises in voltages are largely attributable to the drop in system load, as a result of the sharp drop in GDP, leading to a dominance of capacitive effects on the 400 kV and 200 kV lines. The voltage levels associated with system loads below 4,000 NU are a matter of serious concern, both within the Bulgarian network, but also when interconnected operation with adjacent countries takes place. NEK has tried to reduce over-voltages through a number of operational procedures, but these measures have been insufficient to overcome the problem and voltages up to 440 kV on the 400 kV system have been reported. Given that the system load factors are not expected to reattain their 1989 level until well after the year 2000 and that voltages must be better controlled, NEK studied a number of options for improving voltage control. Their conclusion, which has been supported by outside consultants, was that two shunt reactors should be installed on the 400 kV transmission network, probably at the Varna and Sofia substations. In addition, the company has requested fault recorders to improve the security of the transmission network. The Project would include the funding of these shunt reactors and fault recorders. 4.11 Chaira Pumned Storage Plant. Bulgaria has a complex electricity system, with a large nuclear plant, base load lignito plants, plants running on imported coal, CHP plants, hydro power plants, and industrial power plants. Such a system needs substantial amounts of peaking capacity and reserves. In the past, a substantial part of this peaking cap&city and spinning reserves were provided by the Interconnected Power System (IPS) of the OKA group of countries. With the shift of the Eastern European countries towards market based systema and the dissolution of the Soviet Unlon, peaking capacity and reserves are much less available to Bulgaria from the IPS System and they have to be provided to a greater extent by the Bulgarian System. One of the most commonly used methods of obtaining this capacity is a pumped storage plant. 4.12 The Chaira pumped storage project has been under construction for a number of years and needs to be completed expeditiously to provide this peaking capacity and reserves. The Chaira pumped-storage project is the second stage of the Belmeken-Sestrimo hydro power development (Rila Complex) in operation since 1974. Stage 1, constructed between 1964 and 1974, includes the Belmeken rockfill dam and a cascade of three hydropower plants, namely Belmeken (installed capacity 375 Nil), Sestrimo (installed capacity 240 NW) and Nomina Klisura (120 NW). Stage 2, the Chaira pumped storage plant presently under construction, consists of penstocks, an underground powerhouse (capacity of 864 MW), and the Chaira concrete gravity dam. (Expenditures taus far for stage 2, which is around 90% complets, are estimated at upwards of US$600 llion.) The two Belmeken-Chaira penstocks connecting the Belmeken reservoir with the Chaira power plant are 4 km long and consist of a headrace tunnel (diameter 4.2 m), a surge tank and a pressure tunnel. The head between the Belmeken reservoir and the Chaira - 22 - powerhouse is quite high at 752 m. The powerhouse is constructed to be equipped vith 4 vertical staff Francis type reversible pump-turbine units of 216 RV each. The first two units are being installed. However, the installation of units 3 and 4 has been financially constrained. The Project would complete the required civil works and the installation of units 3 and 4. Once completed, these units would add substantially to the country's peaking capacity and reserves and thus help stabilize the power system. The Project involves two major dams, which are already constructed. The Chaira dam is a 85 m high concrete gravity dam with total fill volume of 380,000 ma. The Chaira reservoir impounded by the Chaira dam is the lower reservoir of the Chaira pumped storage scheme. The upper reservoir is the Belmokon reservoir which serves both the Chaira pumped storage scheme and the Belmeken-Sestrimo hydropower complex. The Belmeken dam, which impounds the Belmeken reservoir, is a 88 m high rockfill dam and has a fill volume of 3.33 million m3. Both the Chaira dam and the Belmeken dam are well designed, solidly constructed, in good condition and well maintained. However, some strengthening and/or improved monitoring is required sLice at the time they were designed and built insufficient allowance was made for the seismicity of the area. Also, there is a small saddle dam associated with the Belmeken reservoir which requires strengthening (see para 4.26-4.28). 4.13 TZabiLcal Assistance. Prior to being spun-off the old COE, at the beginning of 1992, NER had no experience functioning as a commercial entity. As a result of this origin, NEK currently has an organization and management structure which is more appropriate for a public agency than a utility and it lacks modern accounting, control and financial systems (see Chapter 3). In order to operate along commercial lines, as is required by its mandate, NEK has recruited consultants under financing from USAID who are working with it on organizational improvements aimed at stream-lining decision making, delineating lines of responsibility and identifying staffing imbalances and organizational weaknesses. Building on the results of this work, the Project would assist with the commercialization of the company by the introduction of a financial management improvement program focussing on improving accounting, financial, control budgeting and general management information systems and organization. F. Project Co 4.14 A summary of the cost estimates for the Project is given below in Table 4.1. - 23 - Table 4.1 tweet Cost S8av I Total BL illin 1188 WUllioam X loreiwi Sas, ~~~~~~a huaZCs u " ~ts A. Caire P_md Storage 1. Stel for penstock .2 0.6 27.9 28.5 0.0 1.1 1.1 08.0 1.2 2. Wmzfcturta of linings 38.1 36.1 72.2 1.4 1.. 2.8 50.0 3.2 3. Site prteation 16.3 81.6 47.0 0.6 1.2 1.8 66.0 2.1 4. Consultany serices 3.7 69.8 93.S 0.1 3.5 3.6 96.0 4.1 5. Civl Works 6 intalation 161.9 407.6 569.5 6.3 15.7 22.0 73.5 24.0 6. Het pwp intallatieo 0.8 40.7 41.5 0.0 1.6 1.6 08.0 1.8 7. Miscelatwous equiuast 0.5 22.0 23.4 0.0 0.9 0.9 08.0 1.0 6. Den streagtbening 50.5 117.8 168.3 1.9 4.5 6.5 70.0 7.4 Sub-total 270.4 "74.4 1044.8 10.4 29.9 40.3 74.1 45.7 B. Improvement of ControlIetwok 1. Autamatic dispatch cotrol 15.3 274.7 290.1 0.6 10.6 11.2 94.7 12.7 2. Automatic generation ottl 09.9 171.0 240.9 2.7 6.6 9.3 71.0 10.5 3. letwork iinprovsent 1R20 64.7 U73.0 437.7 2.5 14.4 16.0 85.2 19.1 4. Cousultancy services 5.3 100.9 106.2 0.2 3.9 4.1 95.0 4.6 Sub-total 155.2 919.6 1074.6 6.0 35.5 41.5 85.5 47.0 C. Teoanical Assistance 6.4 159.9 168.3 0.3 8.2 6.5 95.0 7.4 ot-alB lellhn Costs 434.0 1854.0 2288.0 16.7 71.6 86.3 61.0 100.0 lbysical contingeneles 51.4 177.9 229.4 2.0 6.0 8.9 77.6 10.0 Price contingencies 800.1 1653.3 2453.4 10.8 8.7 17.5 38.1 19.8 Total Project Costs 1285.6 3665.3 4970.8 29.5 65.2 114.7 74.2 129.8 interest during ecamtnaction 147.7 343.1 400.8 3.5 7.8 11.8 69.9 12.8 Total financins required 149.3 4026.4 5461.6 .0 03.0 126.0 . . G. Project Financing Plan 4.15 The financing plan for the Project is summarized in Table 4.2. The total foreign cost of the Project including interest during construction is US$93 million and is to be financed by a Bank Loan to NEK. The Bank Loan would finan¢e: (a) 100l of foreign cost and 1001 of local ex-factory cost of supply of material, equipment and erection; (b) 1001 of consultancy services; and (c) 661 of civil works and installation. In view of the high degree of illiquidity of NEK (current ratio .74) and its very limited cash flow relative to its needed investments (see paras 5.14 -5.17), the loan amount will cover the interest during construction (IDC) of the Bank Loan. The local costs (US$33 million equivalent) will be financed from internal cash generation. Table 4.2 Project Financing Pln USS Million Local Forein Total X Bank Loan - 93 93 73.9 NEK 33 - 33 26.1 3 .......2................ Total 33 93 -126 J62 - 24 - R. Retroacstiv . n.n5.g 4.16 In order to accommodate the time schedule of the Project, retroactive financing of up to US$5.0 million would be allowed to -over eligible expenditures. This would primarily cover some preliminary work for the financial management improvement program [para 4.07 (c)], the cost of beginning work on dam strengthening including hiring a new panel of experts, and technical/design work related to the dispatch center and network improvements. I. PkogHeOU 4.17 The project elements, their estimated costs, and the procurement arrangements for the components to be financed by the Bank are summarized in Table 4.3. 4.18 All equipment and materials to be financed from the Bank loan proceeds would be procured in accordance with the Bank's GuLdelines for Procurement under IERD Loans nd IDA Credits (May 1992). Bulgarian manufacturers competing under International Competitive Bidding (ICB) would receive a preference in bid evaluation of 15X of the CIF price or the prevailing custom duty applicable to non-exempt importers, whichever is less, provided they can prove that the value added to the product in Bulgaria exceeds 202 of ex-factory bid price. One of the requirements for the equipment contract would be that before signing the contract, the successful bidder shall arrange to be represented by an agent in Bulgaria, equipped and able to carry out the contractor's delivery, installation, maintenance, repair and spare parts-stocking obligations. Table 4.3 SUIay of Procurement Arrangements Procurement Packages Procurement Method ICB LCB Other Total 1. Equipment & Goods 45.6 (36.5) 4.1 (0.0) 2.2 ( 2.1).LV 51.9 (38.6) 2. Civil Works & Installation 32.1 (23.3) 2.4 (0.0) 34.5 (23.3) 3. Technical Assistance 18.6 (17.4)1V 18.6 (17.4) 4. Dam Strengthening 9.3 ( 5.5) 0.4 ( 0.4)1' 9.7 ( 5.9) 5. IDC 11.3 ( 7.8) 11.3 ( 7.8) …- _ __ -_ , _ , _ -_ _ _ -,_ ____ _-___ ,,,___ __-_-,_ ____ _-- Total 87.0 6.5 32.5 126.0 The Bank (65.3) (0.0) (27.7) (93.0) I,/ ?Ut.reAtIu m8 nt* as) Dicwt cCStZ.OUUSt , cmsuLtiug SezVIoe - 25 - 4.19 Equipment and materials to be financed by the Bank will consist of computer systems and peripherals, software systems, telecommunications, transducers, shunt reactors, fault reactors, frequency control units and steel for penstock lining. These will be grouped in about nine procurement packages costing between US$900,000 and US$15,000,000. Contracts for equipment and materials estiwated to cost more than US$200,000 equivalent each will be procured through International Competitive Bidding (ICB), using the Bank's sample bidding documents modified to suit the requirements of individual project packages. International Shopping (IS) with at least three quotations from three eligible countries will be used for procurement of transducers in contracts estimated to cost less than US$200,000 with an aggregate limit of US$1.2 million. Direct Contracting (DC) up to an aggregate amount of US$1.0 million equivalent will be allowed for items of a proprietary nature or i t_s required to ensure compatibility with the already installed equipment. This includes the telegyr extensions which are needed to connect to equipment already installed by Landis and Gyr (Switzerland) (see para 4.09). Local suppliers are not expected to bid on most of this equipment. The ICB procedure will be used for the civil works and installation without prequalifications of the potential contractors. Postqualification would be applied. There would be no domestic preference for civil works. Local Competitive Bidding (LCB) would be followed for: (i) Preparatory Works; and (ii) Manufacturing of the Penstock Lining Tubes. The Bank would not finance these contracts, which, in any case are small, highly labor intensive and appear to be of little interest to international bidders. It is the mission's judgement that the LCB procedure is the most appropriate for these two contracts and that local competitive bidding procedures are acceptable from the stand point of procurement efficiency and economy. 4.20 Consultancy assignments will involve both individual consultants and consulting companies. Consultant services would be required for the following tasks with their estimated costs (including contingencies) in parentheses: (a) project management for Chaira (US$4.6 million); (b) supervision of the installation of units 3 and 4 (US$2.0 million); (c) implementation of the dispatch center improvement project (US$2.5 million); (d) implementation of the network improvement project (US$1.9 million); (e) financial management improvement program for NEK, including software and some hardware (US$6.7 million); (f) water optimization study for the Blmaeken/Chaira catchment area (US$0.6 million); and (g) redundancy study for NEK (US$0.3 million). In addition, there will be funding for training, continuing work by a panel of experts and certain expert advice for the safety of the major dams altogether adding to about US$0.4 million. Selection of consultants and/or experts would be in accordance with the Guidelines for the use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981). However, a sole source consultancy contract with Toshiba would be allowed for the supervision of the installation of the turbo-generators 3 and 4. Due to the existing licensing agreement for the manufacturing of this equipment by a Bulgarian manufacturer, the operational warranty could be granted only if the installation is supervised by Toshiba. Local consultants with the requisite experience and background are rare and, therefore, their participation in the project is expected to be limited, though some joint venture consulting arrangements are anticipated. 4.21 Due to the former centralization of procurement in Bulgaria, the knowledge by the project implementation agencies of international commercial practices and the Bank's procurement procedures is limited. The procurement activities under the project will be managed by a procurement unit in NEW, which - 26 - is already established and with staff that has some training provided by the Bank and some experience with EBRD procedures. To ensure compliance with Bank guidelines, all contracts awarded through ICB and all consulting contracts will be subject to prior review by the Bank. All other contracts, would be subject to ex-post review. It is estimated that around 90X of the total funds will be spent for contracts requiring prior review. J. Disbursemt 4.22 The proceeds of the loan would be disbursed over three years (1993-1995) on the following basis: (a) 100l of the foreign costs and 100l of local ex-factory eoost of supply of material and equipment; (b) 100l of consultancy services; and (c) 66X of the civil works and installation. 4.23 Shown below is the estimated Bank disbursement profile for the Project, based on a standard Bank profile for energy projects. IBRD Fiscal YeEtre (US$ millions) 94 95 96 229 2 Annual 13 31 29 15 5 Cumulative 13 44 73 88 93 K. Sgecial uccount 4.24 A special account for NEK with an initial deposit of US$5.0 million would be established at a conmercial bank on terms and conditions satisfactory to the Bank. The Bank would also permit the use of statements of expenditure (SO) on contracts valued at US$100,000 or less to assist NEK in making timely payments on the contracts. NEK would retain the supporting documents and make them available for inspection by Bank supervision missions and by external auditors. Full documentation would be required for expenditures on contracts over US$100,000. No applications for reimbursements or direct payments for less than US$100,000 would be accepted. An audit of the special account would be carried out by independent auditors and the audit report would be submitted to the Bank within nine months after the end of the fiscal years. The private auditors who would be contracted to audit NEK's annual accounts would prepare a special report to include a statement verifying the amounts disbursed against the SODs. L. Proiect Implementation AsDects 4.25 Technical Audits. Technical audits of the control and network systems were needed because these systems have been under implementation for about 10 years and an audit was required to, inter alia, assess both the functional capability of the equipment installed as well as its compatibility with the equipment to be financed under the Project. NEK, with the assistance of the PIU, (a CEC financed consulting unit within NER) had such an audit carried - 27 - out by consultants with their report submitted to the Bank in October 1992. Also, a technical audit was needed of Chaira units 3 and 4. The Chaira pumped storage scheme, was started more than ten years ago and so far two of the units have been installed (units 1 and 2). These are expected to be commissioned around March 1993. A technical audit was required to verify the status of the work for- units 3 and 4 and secondarily the cost estimates of the equipment, materials and works to be financed under the Project for completion of the installation of units 3 and 4. NEK has carried out such an audit with the assistance of the staff at the PIU and also submitted its report to the Bank in October 1992. Both audits confirmed the conclusions of the appraisal mission, though as a result of the audits, the cost estimates for the project, especially the supervisory control and transmission network component, were increased. 4.26 Imolementation Schedules and Project Completion Date. The Project is in a state of preparation which would permit timely implementation because: (i) work is underway at Chaira (primarily covering units 1 and 2, but also to some extent units 3 and 4); (ii) Terms of Reference for detailed studies of the dispatch center's requirements are being drawn up; (iii) certain required studies of the transmission system (primarily funded by the CEC) are underway; and (iv) initial Terms of Reference for the financial management improvement program have been prepared. Based on the stage of preparation, the construction schedule for the project foresees bidding documents for major packages ready by May 1993, major contracts awarded by October/November 1993 and project completion by the end of 1995 or early 1996. The activities related to completion and connection of Chaira to the power grid will occur in 1993-95 and the two last units should be commissioned in the last quarter of 1995 or early 1996. Completion of the improvement of the dispatch and transmission network systems is planned during the same time period. The technical assistance component should be largely completed by the end of 1994 - early 1995. However, on the basis of the experience reflected in the Bank's disbursement profile of energy projects and NEK's lack of experience in procurement matters, the disbursements might be completed later due to unexpected delays. The loan closing date, therefore, in order to be conservative, would be December 30, 1997 which is fully consistent with the Bank disbursement profile shown above and allows for significant delays. 4.27 Progress Rports. To monitor the progress of the Project and permit its evaluation on completion, NEK would maintain records on the matters shown in the Project Monitoring Guidelines in Annex J and submit a quarterly progress report to the Bank. On completion of the Project, NEK would prepare their part of an implementation completion report. M. Dam Safety Asnectg 4.28 Dam Safety Review. Based on the appraisal mission's detailed review of the designs of Chaira and Belmeken dams (concrete gravity and rockfill respectively), the quality control data available from construction and a detailed site inspection including dam safety instrumentation; these dams appear to have been well designed and constructed. The designs and the a-ailable data on construction of the Belmeken and Chaira dams were also reviewed to ascertain the safety of the existing structures by Electrowatt, a well known engineering firm with extensive experience both in concrete and rockfill dams and their detailed ssessment is outlined in Annex G. However, at the time of their design and construction, seismic risk analysis was undertaken with very low seismicity. A revised analysis was needed, given the high seismicity of the area in which the dams are located, based on the maximum credible earthquake according to the - 28 - latest design standards. A dynamic analysis for the critical seismicity of the area was recently completed by Electrowatt and Energoproekt for the Belmeken main dam and the Chaira Concrete dam and the findings are also summarized in Annex C. 4.29 International Panel of Exuerts. An independent Panel of International Experts was established to carry out a comprehensive review of the designs, construction details, and the findings and recommendations of Electrowatt on safety aspects of the dams and the appurtenant structures with specific consideration of the structural, geologic, hydraulic, soil mechanics and the seismic aspects. The Panel consisted of two well-known experts with relevant expertise in earth/rockfill and concrete dams, respectively. This Panel has now issued its final report (see Annex I). Taking into consideration the panel's recommendations, the Project provides financing for: (i) strengthening measures for the Belmeken main dam, Chaira concrete dam, and the Belmeken saddle dam; and (ii) additional monitoring instrumentation. Furthermore at negotiations, agreement was reached for NEK to: (a) establish a new indegendent Ranel of e m rts. by June 30. 1993. for the purpose of providing assistance with dam safety issues: and ( b) carry out a number of actions. by December 31. 1995. to LmUrove dam safety including stabilitv analysis of the Belmeken saddle dam. imulmentation of the recoymendations of th l ae of experts, -raining of dam safety professionals and procurement of seismoegxahs/instrumentation. 4.30 Dam Safety OrganizationlResulations. The National Organization of Dams and Reservoirs and Cascades (under the Ministry of Defense) is responsible for larger dams in Bulgaria, and it has established special regulations on monitoring and observation for every single project. A yearly dam safety report is presented to an internal or external committee of experts for review and recommendations. The Department of Civil Defense is responsible for the establishment of emergency preparedness plans, which exist for the Belmeken and Chaira dams. The details on Regulations and Rules on Dam monitoring are summarized in Annex H. N. Environmntal Aspets 4.31 The main environmental benefit of this Project is enhanced dam safety as discussed above and in Annexes G, H and I. Other environmental benefits are less important though positive and the project was, therefore, given a B rating. The supervisory control system and network strengthening component will have a beneficial Impact on the environment by increasing efficiency and, therefore, reducing electricity losses. Since the marginal sources of electricity generation for Bulgaria are domestic generation from fossil fuel fired generating plants or imports from the Ukraine, where the marginal source also appears to be fossil fuel fired plants, this component will certainly lead to a reduction in CO2 emissions. To a lesser extent, SO? emissions will also be reduced since the Bulgarian marginal fuels for electricity generation are higher sulfur coal or lignite, while the Ukrainian marginal fuels appear to be natural gas and high sulfur residual fuel oil. 4.32 The impact of the completion of units 3 and 4 at Chaira on the environment is minor. Most of the civil works are completed, including the penstocks, dams and reservoirs. The remaining civil works are largely underground where one penstock needs to be lined with special steel and the power house completed. There will, however, be some reforestation of a very limited area around the Chaira dam. In terms of its operations, the environmental impact of Chaira will depend largely on the relative polluting characteristics of the - 29 - generating plants which Chaira replaces at periods of peak electricity demand compared with the generating plants which are used to pump water to the upper reservoir (Belmeken) durlng off-peak periods. For example, when electricity from the Kozloduy nuclear plant is used to pump water into the Belmeken reservoir off- peak and this water is then used to generate electricity which replaces fossil fuel fired peak generating units in Bulgaria or the Ukraine, then the environmental impact is positive. On the other hand, when fossil fuel fired generating units are used to pump water to the upper reservoir and these same type of units are replaced by Chaira at periods of peak demand, then the net effect on total emissions of the thermal plants involved is likely to be slightly negative, since the pumped storage plant uses more electricity to pump water than it produces. 4.33 Issues normally associated with dms such as fish passage, dredging, and water quality are not significant in this particular case. No dredging will be required, water quality is extremely high and fish migration is not an issue given the location of the main Belmeken reservoir at about 6000 feet in the mountains and fed by run-off and melting snow from adjacent mountains. Also variations in the water level at the Belmeken reservoir caused by the pumped storage project will be minimal given that the Chaira reservoir when filled is 3X of the size of the Belmeken reservoir. 4.34 Finally, as electricity tariffs are increased under this Project and this leads to lower electricity consumption and production, the environment will benefit from reduced emissions of CO2 and SO2. 0. Benefits 4.35 The major measurable benefits attributable to the Project are discussed briefly below and in more detail in Chapter 6. These benefits are in summary lower costs and increased reliability for the Bulgarian power system. More specifically they consist of: (a) increased capacity for active load management; (b) automatic generation control including primary and secondary regulation; (c) voltage and reactive power control including reducing transmission losses. Active load management consists largely of the use of the Chaira pumped storage project, to replace expensive peak power with cheaper off peak power by pumping water into the upper reservoir during off peak periods and generating power by letting water run down from the upper reservoir to the lower reservoir during peak periods. The operation of Chaira will, moreover, be significantly strengthened by the improved supervisory control system, which will also be installed as part of the Project. Automatic generation control including grimarn and secondary regulation consists primarily of increasing the efficiency and stability of the system. Automatic generation control would improve merit order dispatching. The automatic generation control capacity of the system combined with the Chaira project should also result in substantially improved primary and secondary system regulation, including a lower loss of load probability and better frequency control. Voltage and reactive power control will primarily be improved by the investments in strengthening the transmission network especially the shunt reactors. However, improved system controls and the Chaira project will also assist in this area. - 30 - V. ZINANQU ASH= A. Background 5.01 The borrower, NEK, is a new organization which came into existence in its present form with the break-up of the old COE on January 1, 1992. There Is, therefore, no historical financial information. NEK, working with the new COE, has prepared a balance sheet for May 1992 and a rough income statement is available for the first 11 months of 1992. 5.02 There is no tradition of independently audited financial statements in the ex-communist countries of Eastern Europe. The controlling financial documents were budgets and five year plans rather than balance sheets and income statements. As part of the Project, the Bank has reached an agreement with NEK. that NEK will groduce financial statements for 1992 and thereafter (income statement. balance sheet. statement of cash flows) according to international accounting principles. and will have these statements audited by independent accountants in accordance with international auditing standards. 5.03 NEK does not have a corporate plan currently. This is understandable given the newness of the company. Also, because of the rapid changes which have been occurring in the Bulgarian economy, the degree of uncertainty attached to any plan is unusually high. Nevertheless, NEK needs a long range, strategic corporate plan. This plan should indicate the company's goals and its strategy for attaining those goals and provide long range projections of its outputs, sales and financial statements. This corporate plan could then be used to monitor the performance of the company and provide early warning of impending problems. Therefore at negotiations, the Bank reached an agreement with NEK that: (a1) the- comnany will orenpare ye2arlX, a rolling fiv_e-ye2ar cgrRgrate olan including pro_ected financial statements and: (b) that this plan will be furnished to the Bank and the Government. by October 31 of each year. for dis nu.2U, B. Balance-Sheet 5.04 Table 5.1, shows the Balance Sheet of NEK as of May 31, 1992. The balance sheet shows that the total value of NEK's fixed assets, which are in service (land, buildings, machinery, other) including all generation, transmission and distribution facilities, is 4,473 million leva after depreciation or about US$90 million dollars at the 1992 average leva/dollar exchange rate. On an undepreciated basis, these fixed assets are valued at 8,253 leva or about US$350 million at the average exchange rate. These valuations are less than 10X of the replacement cost of NEK's current electricity system including the 10,460 MW of generating capacity. For example, new generating capacity typically costs anywhere from US$.7 million to US$2.5 million per MW, depending on the type of plant constructed. At an average price of say US$1.2 million per MW, this would put the replacement value of NEK's generating capacity alone at over US$12 billion, not including transmission and distribution investments which often are around 75X or so of the cost of generation facilities. Even taking into account depreciation and the need for some of NEK's facilities to be rehabilitated, the valuation of these fixed assets on NEK's balance sheet is extraordinarily low. - 31 * *ths uj or _=ndervaluation E cmaftyr disctsionce ithe fiprncialtiontrtatlon undersalued the se ofie 8I anrsset in thepseciadioalfo NE. ic..wol euete opnf s ofym1992. ln192 dexprects io fo8E,frtx9upss1a be l db that as a. reult oeprthisto o 91 hc a lraywytolwsnei reaslbatidon, thestrbalancss tngtain.te akrahda temn siheetb for ercembe 31 E ht a o 93 NKsdaeito o a 1992se wiull sho fhred ie h ee fis19 ercain o a assoets oS:3Mff 1aron .L.adNKwudtk tersesw hwudhv h prSeliminaryo NER erstimaes .£fud fom.tena..uce} ad.. S (Thi3swilhl feer tox buoes wi k.l5x3t. s ,vinxel e s ta - 32 - within a five eax period, it is a& a level consistent with its revalued fied assets (or NEK and the Government will take other stews whlch will have the s-ge effect on NEK*s generation of funds from internal sources l. The forecast of NEK's income statements for 199241995, shown in Table 5.2, reflect these assumptions, with the 1992 depreciation being set at 1.5 times 1991 depreciation in leva, as required by MOF, while in the latter years depreciation rises rapidly in real terms. NEK is proposing to issue its 1992 income statement using depreciation based on the revalued fixed assets, though this depreciation will not be tax deductible, and whether this would be acceptable to HOF is unclear. 5.06 A second important type of fixed asset for NEK is the value of construction work in progress. The total value of these assets, as shown on the balance sheet, is 4,313 million lova at historical costs. This consists largely of three projects: unit 6 at the Kozloduy nuclear plant, the Chaira pumped storage project and the partially completed Belene nuclear plant. Two of these projects should be completed. Unit 6 is operating, albeit at less than design capacity, but has not yet been officially licensed and will probably not be removed from the construction work in progress category until it is given an official license to operate, which should occur in 1993. Units 1 and 2 of the Chaira pumped storage plant should be finished by NEK in aarly 1993, while the completion of units 3 and 4 is part of the current Bank Project. Currently, there are no plans to complete Belene, in which about 1.0 billion old leva were invested. NEK has also revalued the construction work in progress and it is expected to be valued at about 37.1 billion leva on the December 31, 1992 balance sheet. 5.07 With the major decline in the Bulgarian economy and the sharp itncrease in prices, Bulgarian firms' profitability and cash flow have deteriorated markedly at the same time as their requirements for working capital have increased rapidly. This has resulted in a severe liquidity shortage for most firms which has been met by the rapid growth of inter-company debts. NEK at least in May was a beneficiary of these inter-company debts. Its accounts receivable were 4.11 billion leva while its accounts payable were 7.67 billion leva. On balance, therefore, it was the net recipient of 3.56 billion in credit from its suppliers. The main suppliers who were extending credit were the coal mines at Maritza East, vho were not paid for much of the coal they produced, and certain electri y exporters to Bulgaria. On the other hand, NEK was extending credit to certaiu4 of its customers especially the briquette factory at Maritza Last. 5.08 The Government has been working on a solution to this problem of the rapid expansion of inter-company debt and has developed a plan to deal with it. This will, however, take some time to implement. However, the current situation at NEK is clearly unsatisfactory, though it is somewhat advantageous to the company. Based on the May 31, 1992 balance sheet, NEK has a current ratio of less than 1.0. With the current liquidity shortage in Bulgaria, NEK will need sometime to achieve an acceptable current ratio, though it is moving steadily in this direction having significantly improved its liquidity between May and November. At n gotiations - the Bank reached an agreement with the Government and NEK that no later than the end of 1993. NEK should have a current ratio of 1.2. 5.09 Long term loans to NERK at 6,244 million leva exceed shareholders equity of 4,687 million leva. This creates a very poor debt to equity ratio, which will, however, be greatly improved by the revaluation of fixed assets discussed in para 5.05 above. The long term debt is about half owed to the - 33 - Government and half to various Bulgarian banks. NEK was not paying interest on these loans through most of 1992 and could not afford to at current interest rates and tariff levels for electricity. The governmont loans should probably be conmerted to equity in order to improve the company's financial condition. Over time the company should begin to service the bank loans or alternatively convert them also to equity. (These loans were accumulated by the former Committee of Energy when it was a Government department and represented, at the time, intra-government loans). C. 1ncome tAteM 5.10 Table 5.2, shows a forecast of the income statement of NEK for 1992- 95 based on information and forecasts provided by COE, NEK and MOF and analyses based on the Rnersg Strategy Study. They show tax deductible depreciation, which rises rapidly over time, as a result of agreements reached with the Bank; not NEM's proposed depreciation, which is mostly not tax deductible (see para 5.05). The range of possible financial results for NMK over the next several years is quite large, ranging from significant losses to moderate profits. The most important factor determining the company's profitability is the level of electricity tariffs. However, other important factors are: (a) demand for electricity; (b) inflation and the extent to which it raises costs; (c) the value of the leva (which impacts mainly on fuel costs); (d) the availability of power from various plants especially Kozloduy, the lowest cost major source; and (e) imports and exports of power (imports are relatively expensive and exports relatively profitable). The forecast shown in Table 5.2, makes reasonable estimates of all of these variables and produces modestly optimistic financial results for NEK. 5.11 Given that electricity tariff levels are so vital to the financial health of NEU (and important also for reducing the energy intensiveness of the economy), the Bank. at negotiations. reached an agreement with the Goverraent and MEg on two basic amroaches with resnect to these tariffs. F-rst. She Government will: (a) as a condition of effectiveness. increase the average electricitv Rrice to the equivalent of 2.9 US cents/fkWh: (b) on or before SepteMber 1. 1993. incrgase the averape price to the equivalent of 3.5 US cents/kVh: and (c) thereafter, maintain an averaZe electricity price equivalent to 3.5 US centsZkWh. until the new average level of tariffs specified immediately below is implemented. Secondly, the Government will: (a) by June 30, 1994. estiblish a Dew indUendent regulatory mechanism for setting electricity tariffs: and (b) bv Seutember 30. 1994. enable that mechanism. drawing on the gtudies of th8s issue which are underway (see Dara 2,30). to set the average price ecual to the greater of the long-run mars inl cost of supplying electricity or that average price required for NEU to generate sufficient net revenues to provide a debt service coverage ratio of 1.5: and generate sufficient funds from internal sources to meet on averase 30X of the investments required for its inyestment nrogram (the latter to be assessed annuallY based on a two-_ye1ar mgnbg average). - 34 - |~~~~~~~* iE i 1 L,. 9 '1'5 i |~~~~~~~~~. i.ig3 iS141 #0 1 1.3 1. 3 . ~ UKtiI14~bM. _4 SI 34 *13 111 115 ,r*#." QGO 15# gP~ 410 2455 S,W ~p~ 5.12 While higher electricity tariffs would increase NEKR's pretax profits, profits after taxes and other levies would remain very constrained. Currently, NEK is paying about an 80X average government tax and levy rate on its pretax profits. This rate results from a 52X income tax rate, the non-deductibility of balf of interest expenses, and a 50X levy on after tax profits in favor of the Fund for Energy. (The actual average rate resulting from this system can vary between about 75X to over 10OX depending on the relative size of interest payments.) 5.13 The current tax and levy system means that increases in electricity tariffs beyond the level required to cover costs, primarily result in higher taxes and levies for the government with only about 24X of the incremental increase in pre-tax profits flowing through to NEK. It is, therefore, very iwportant that, as discussed above in para S.05, tax deductible depreciation charges by NEK be increased sharply. Thiese would increase the company's cash flow directly. Alternatively, the tax and levy system for NEK, which is similar - 35 - to other companies in Bulgaria, would have to be changed to increase its cash flow and allow it to carry out its required itnvestment program. D. Sumaary of Sources and Uses of FundE 5.14 Table 5.3 shows forecasts of NEK's sources and uses of funds over the period 1992-1995. These forecasts have been prepared on the basis of the projected income statements shown in Table 5.2 and of planned investments, which are consistent with a least-cost investment program constrained by environmental criteria. (The major items in this program are discussed in Annex K.) The financing sources are the company's own cash generation from operations, the Bank Loan and other borrowings - primarily loans already approved by the RIB and EBRD. Therefore, these forecasts are a reasonable estimate of NEK's cash flow situation, given the same assumptions as used in the forecast of NEK's income statement. .~ ~ ~ ~ ~ ~ ~ ~ ~~ _ ... .- . l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ E ~~~~.S E - 5 5 . 5.15 NERs investment program as shown in table 5.3 is low for a utility with over 10,000 MW of capacity and with domestic sales of 26-27 TWh. This largely reflects the company's severe financial constraints, but also the expected low level of demand (see Annex C) which calls for no new generating plants for the next several years (unless replacements are needed for parts of Kozloduy). 5.16 Over the next four years, the company intends to concentrate on four major Investments which all involve completion of existing projects. These are: (a) completion of Chaira 1 and 2; (b) the Bank Project covering completion of Chaira 3 and 4 and completion and strengthening of the supervisory control and transmission network systems; (c) the RIB/MMRD project consisting of the completion of unit 8 at the Naritza East II Power Plant including a flue gas desulfurization unit; and (d) completion of certain investments at Kozloduy and commissioning of unit 6, which is already operating on a limited basis. In addition, NEK has indicated that if it is able to obtain financing it would also: (a) rehabilitate certain of its existing thermal plants; and (b) carry out major - 36 - investments at Kozloduy to substantially improve the safety of its older reactors, the VVSR 440 model 230's. Table 5.3 reflects the four major projects shown abo,e and assumes that in 1994, N0K either begins major safety improvements at certain of its older Kozloduy nuclear reactors or begins the rehabilitation of one of its thermal power plants, possibly Varna. If it were to undertake both, a significant increase in external borrowing would be required, above the amount shown in the table. 5.17 In 1992, due to the low level of electricity tariffs and the high rate of taxation and levies to which NEK is subject, the company's cash flow from operations is insufficient to cover even the extremely limited investment program shown. Assuming that the tariff level is increased steadily in real terms in 1993 and depreciation allowances are sharply augmented, NEK should generate sufficient cash flow in 1993 and 1994 so that some of the short term debt and excess accounts payable built up in 1992 could be eliminated. - 37 - VI. B=PS AND RISKS A. Progect BansfIts 6.01 The major project benefits were described briefly in Chapter 4. This Chapter expands on that description, quantifies the major benefits and explains certain additional benefits which, while they are important are not easy to quantify. The major benefits of the project in general to the Bulgarian Power System are lower costs and increased stability. More specifically they consist of increased capacity for: (a) active load management; (b) automatic generation control including primary and secondary regulation; and (c) voltage and reactive power control. These major system benefits are analyzed below. (Secondary system benefits include reduced system minimum loading and improved frequency regulation.) Both the Chairs pumped storage component and the improvement in supervisory control and network transmission systems component contribute to these systems benefits though in different proportions. Non-system benefits include improved economic and managerial efficiency due to the technical assistance component, increased flexibility in the use of water from the reservoirs connected to hydropower plants and environmental benefits, especially enhanced dam safety. Because of computational difficulties, no effort was made to measure secondary system benefits and non-system benefits though in total these are quite significant. 6.02 Active Load HAnaomen. The Chaira pumped storage project on completion will greatly increase the country's capacity for active load management by substantially expanding peaking capacity. With the Chaira project, in off-peak periods water can be pumped from the lower, Chaira reservoir to the upper Belmeken reservoir. During periods of peak electricity demand, water can flow down the penstocks from the upper to the lower reservoirs generating electricity. The major benefit of the Chairs project is that it should reduce the cost of peak power by allowing lower cost base load plants, such as nuclear plants or more efficient coal plants, to pump water off-peak with most of this electricity then being recovered at peak periods when the stored water is used to generate electricity. The savings are the difference between the cost of using Chaira in conjunction with base load power plants to meet peak electricity demand, compared to the cost of other means of meeting peak demand including imports and higher cost Bulgarian power plants. Chaira will also delay by one to three years depending on the unit, the need for additional capacity after 2000. In order to estimate the benefits from Chaira, a Was model which simulates the Bulgarian power system, was optimized with and without Chaira for the poriod 1996-2010. These runs indicated monthly how much electricity was required from Chaira at periods of peak demand to economically replace imported power and higher cost Bulgarian plants (see Annex L). The value of Chaira's power at peak was estimated at 3.5 cents/kNh in constant 1992 dollars. This value is the current cost of imported power to Bulgaria in its barter relationship with the Ukraine, is a measure of willingness to pay and is in the lower part of the current range of rough estimations of Bulgaria's long run marginal cost of electricity (3.5 -4.5 cents/kWh). The cost of Chaira power is primarily the cost of electricity to run its pumps (generated by base load lignite and nuclear units), as well as operating and maintenance costs. Benefits are the difference between the value of the electricity generated and its costs. These benefits build after 1996, when the units are assumed to come on stream, due to increasing utilization of Chaira and average around US$9 million net per annum (1992 dollars) after 2000. The return from Chaira could be further improved if it were to be used in the early years to provide peaking capacity for - 38 - other countries. This opportunity will be investigated by the Bulgarians when the project is completed and there may be some potential to supply peak power to Greece or perhaps other neighboring countries depending on their supply and demand situation. In calculating benefits from this component and for the project as a whole no account was taken of this latter possibility. 6.03 Automatic Generation Control. There are two different benefits from improved automatic generation control which are: (a) better primary and secondary regulation; and (b) better unit control primarily leading to more efficient dispatching. Primary and secondary regulation require a system capacity reserve related to peak load and to the largest unit size. The peak load in Bulgaria varies in the range of 4000-7000 NW, while the largest capacity units are the 1000 MW nuclear units at Kozloduy. For system regulation, reserve capacity of about 700 MK is requlred. This reserve can be provided in Bulgaria or contracted from other power systems or a combination of the two. The estimated price of obtaining this capacity from other systems, which is far less than building the capacity in Bulgaria, is around US$100,000 per year per MW of regulating range. Currently, Bulgaria is short of reserve capacity and it is estimated that on average units 3 and 4 at Chaira will contribute around 40 MW to the country's reserve capacity. (The units have 432 MW of capacity, but are only available when not already in use for peaking purposes and the water has been pumped to the upper reservoir, both of which conditions will be met for only a limited time period.) On this basis, the value that Chaira contributes to primary and secondary regulation is around US$4 million per year. Without automatic dispatch and generation control systems linking Chaira and other units to the dispatch center the value of this reserve would be significantly reduced. 6.04 Improved generating unit control as a result of the improved supervisory control system including automatic dispatch of generation units is estimated, based on experience in other countries, to reduce system operational costs by about 11. This implies savings of about US$5.0 million per year. 6.05 Voltage and Reactive Power Control. The shunt reactors will play the dominant role in improving voltage and reactive power control though improvements in the supervisory control system will help as will the fault recorders, which provide information on transmission system status. It is estimated that as a result of the project, transmission losses would be reduced by about 90 GWh which is equlvalent to US$1.7 million per year at NEK's reported average electricity cost of 1.9 U.S. cents/kWh for 1991. NEK's actual costs, including a better estimate of depreciation and a return on capital, are probably closer to 3.0-3.5 cents/kNh (see Energy Strategy Report 10143-Bul). These higher values of electricity would imply snnual savings of US$2.7 million to US$3.2 million. 6.06 Economic and Managerial Efficiency. The technical assistance component should lead to major improvements in M4EVs financial controls and improved financial performance. Specifically, it should result in better estimates of costs (thus, allowing the merit order dispatching for power plants to work with better data), better control over costs through improved accounting and budgetLig, better control over accounts receivable through improved billing systems, and enhanced cash management thus, reducing interest costs. In addition, it should lead to enhanced managerial efficiency since the improved information should allow better decision making. No effort has been made to estimate these benefits, but they are likely to greatly exceed the cost of this component. - 39 - 6.07 Hydro Plant Generation Scheduling. The existence of Chaira will allow greater flexibility in the use of the existing hydro plants. These are now used for peaking, as well as off peak generation when needed. They are generally the lowest cost units in the system. Furthermore, the water from the reservoirs at the hydro plants is used for irrigation and for supplying cortain cities with drinking water. With Chaira in operation, the need for these hydro plants to provide some peaking capacity will be reduced and thus, the flexibility in using the water in their reservoirs will be increased. This increased flexibility should allow better use of the water and increase its value. 'Whlle estimates can be made of the benefits in terms of reduced costs of electricity generation obtainable from this increased flexibility, assuming it is all used to optimize the timing of hydro production (around US$2 million per year), this estimate is incomplete since it does not take into account the impact on irrigation or other uses. A complete optimization study of water usage, which should be carried out under this project, would need to be done to accurately estimate this benefit. However, it is significant. 6.08 Environmental Benefits. This project will result in an increase in dam safety since the dams involved in the Chaira project will be strengthened and/or monitored better. It will also lead on balance to reductions in CO2 and S02 emissions (see para 4.32). However, these benefits, especially the dam safety benefits, are difficult to value. B. Least-Cost Investment Program 6.09 For most of the components of this project there were no clear alternatives. This includes the hardware and software for the dispatch center, the shunt reactors and fault recorders and technical assistance. However, for Chaira there were potential alternatives including installing new units, as well as delaying the completion of the project for as long as possible - that is continuing to use imports and higher cost domestic plants to meet peak demand. In order to analyze whether the Chaira pumped storage project was better than the next best alternative, the Wasp model was used to develop this alternative based on data and assumptions provided by NEK. This next best alternative turned out to consist of the status quo to 2004 with additional capacity required between 2004 and 2010 including peaking capacity. The Chaira pumped storage project is preferable to this next best alternative since: (a) it provides peaking power at lower operating costs by reducing the need to use higher cost thermal plants and imported electricity; and (b) it delays the need for some of the additional capacity required in the next best alternative case. The rate of return on Chaira relative to the next best alternative was 17X in real terms (see Annex L). C. Economic Rate of Return 6.10 An Economic Rate of Return (ERR) was calculated for the project. This was done by valuing all electricity saved and the peaking electricity produced by Chaira at 3.5 cents/kWh for the reasons given in para 6.02 above. (This value, while reasonable for Bulgaria, is very low compared to most other countries and, therefore, tends to produce a conservative estimate of the ERR.) The benefits from automatic generation control and voltage control were those indicated in paras 6.03 and 6.04. Costs are as given in Table 4.1, excluding contingencies. The technical assistance component was excluded from costs since no benefits were attributed to it; however, the costs for dam strengthening were included in total project cost since they are an integral part of the Chaira pumped storage component, even though their benefits could not be quantified. - 40 - No adjustments were made to the exchange rate, which is freely floating and therefore is a market rate, or to wages. On this basis, the ERR for the project is 19X. (Including all contingencies shown In Table 4.1, the ERR v.iuld be 131.) The ERRs for the individual elements were also calculated on the same basis. For Chaira the ERR was 22X, for the supervisory control component 19X, and for the transmission component 112. These individual ERR. are slightly misleading in that all of the components of this project work together to strengthen the Bulgarian power system and the elimination of one, for example the supervisory control system would have a negative impact on all the others. Also, as mentioned above, all estimates are quite conservative. C. Risks 6.11 There are three major sources of risk for the project. First, in order for NEK to be financially viable over time, electricity tariffs must be increased in real terms and an independent regulatory mechanism established to set and periodically adjust such tariffs. The present system of having the Council of Ministers set electricity tariffs makes the establishment of these tariffs into a highly political issue and results in extremely low electricity prices, which generate insufficient cash flow to fund a reasonable part of NEK's capital budget. However, the necessary increase in real electricity prices and the establishment of a new tariff system will be politically difficult to accomplish. To reduce this risk, an increase in the average electricity price to 2.9 US cents/kWh from the current level of about 2.5 US cents/kWh will be a condition of effectiveness. Second, NEKI's cash flow must be increased significantly and raising electricity tariffs will not alone accomplish this because of the very high tax and levy rate the company pays on profits. This risk is in turn reduced by a several agreements with NEK and the Government (see paras 5.05 and 5.11), which require a major increase in NEK's cash flow. Finally, the beneficiary, NEK, is a very new company having been spun-off from the Government at the beginning of 1992. It has little experience with the Bank or with Western methods of munaging projects. Such experience is also rare in Bulgaria in general. This lack of experience will require a fairly high degree of Bank involvement in the project during the first couple of years. This should decline fairly rapidly, however, since the Bulgarians and NUK have strong technical capabilities and are expected to rapidly adapt to management approaches used in market economy countries and to Bank procedures. 41 - VII. SsKARY OP AGURENENTS REACHED 7.01 During negotiations, agreements were reached with the Government on the following covenants: (a) the Government will, on or before September 1, 1993, increase the average price of electricity to the equivalent of 3.5 US cents/kWh, and thereafter, maintain an average electricity price equivalent to 3.5 US cents/kWh, until the new average level of tariffs specified iumediately below is implemented (para 5.11); (b) by June 30, 1994, the Government will establish a new independent regulatory mechanAsm for setting electricity tariffs, and enable that mechanism, by September 30, 1994, drawing on the studies of this issue which are underway, (see para 2.30) to set an average price equal to the greater of the long-run marginal cost of supplying electr city or that level of tariffs required for NEK to generate suffle ent net revenues to provide a debt service coverage ratio of 1.5, and generate sufficient funds from internal sources to meet on average 30S of the investments required for its investment program (the latter to be assessed annually based on a two-year moving average). (para 5.11). 7.02 During negotiations, agreements were reached with the Government and NU1K on the following covenants: (a) for 1993, NMK's depreciation for tax purposes would be three times the level of its 1992 depreciation, for tax purposes, (or the Government and MRM would take other steps which would have the same effect on NEK's generation of funds from internal sources) (para 5.05); (b) that NEK's depreciation for tax purposes will be increased steadily in real terms so that within a five year period, it is at a level conslstent with its revalued fixed assets (or NIK and the Government will take other steps which will have the same effect on NEK's generation of funds from internal sources) (para 5.05). 7.03 During negotiations, agreements were reached with NEK on the following covenants: (a) that NEK will produce financial statements for 1992 and thereafter (income statement, balance shest, statement of cash flows) according to international accounting principles, and will have these statements audited by independent accountants in accordance with international auditLng standards (para 5.02); (b) the company will prepare yearly, a rolling five-year corporate plan including projected financial statements, and that this plan will be furnished to the Bank and the Government, by October 31 of each year, for discussion (para 5.03); - 42 - (c) starting in 1993, the company will generate sufficient funds from internal sources to finance 30X of its average capital investments (para 5.11); (d) starting in 1993, it will also generate net revenues equal to at least 1.5 times its debt service (para 5.11); (e) by the end of 1993, NEK will have a current ratio of 1.2 (para 5.08). (f) by June 30, 1993, it will establish a new independent panel of experts for the purpose of providing assistance with dam safety issues (para 4.29); (g) it will carry out a number of actions, by December 31, 1995, to improve dam safety including stability analysis of the Belmeken saddle dam, implementation of the recommendations of the old panel of experts, training of dam safety professionals and procurement of seismographs/instrumentation (para 4.29); (h) for NEK to submit, by July 1, 1993, a plan for streamlining decision-making and strengthening its accounting and finance functions with a timetable for the implementation of this plan (para 3.05). 7.04 A special condition of effectiveness is that the Government will increase the average electricity price to 2.9 US cents/kWh (para 5.11). .AJaX.nl.ra1ar - 43 - BULGARIA CURRENT ORGANIZATION OF THE ENERGY SECTOR |COUNIL OF NIN t l COSUTTEE CUUITTEE RINRUR OF CUISJ OF ENERGY Of GE0tO6Y INDUtmRY ON PRItCES NATIUAL OIL AnI GS EL£CTIUti OO-. 1 so COWlANlf NIVERAL IEfTOCHINI COL NINS EXPUATION CW*IES com| IES |IW l mbj.3UIZA BULOARIA: ENERGY BALANCE 1991 sdntites in thosands of tows of coal equia Coal Crude LPG Gaso- Die8d Gas Heavy Keo- Otder Ndur. Hydro, E17ci- Heat Totdal Oil hine Fuel Oil Fuel sem Petol Gas NueL oiy Do_ __________ PrOztil t ' _ ' to Prod. & 0h- DOeiproduction 6i i0 - -1 1142 ir 67W -J33 i 2611 6455 - - 1 - 6 1 2 S 6224 0 4- - 171W _ _ _, _ ._-1i l - - O -s -1 -313 -T3 - -21 567 -2 1 2 -154 1- - 1 -0s - -I ~232 319 350 IR -- - LINPUT I m 62 3 950 -18 1249 MDZ75 ff -5 13D WGG Res - -2 6 1 o 324s - 10 - -1 -874 Ow ma* Losse - - - - -6 --- -7 "rT~ 17f ~1F mm 03 a at-6 - - - - - -m - -- -M - lOwn Us08 A & - -383-1173 -:OW- 9 _- -1 OTAL I-NDUSTRY 998_ 25 100 387 221 269 2 726 3481 0 1700 3757 14090 Iron A Steel 2 _ 0 4 1 8 0 36 442 0 28S 95 873 *chricals _ 483 - 1 9 15 22 1103 0 205 2242 0 SSS 1575 6210 Nom-FenrmsMewas 3 - - 3 27 4 104 0 35 10 0 1099 69 445 CouliFsbcai Mateids 78 0 8 22 19 194 0 24 426 0 85 165 16741 GHass 6 9 1 3 12 104 0 9 269 0 39 68 520 M ____o ____ _i_ C 44 14 23 54 50 237 0 190 70 0 248 393 1324 Food,Drink& Tobacco 99 1 27 94 68 574 0 90 22 0 130 713 1818 Paper,Pulp,&Pritin 5 0 2 3 2 195 0 8 0 47 .165 426 Wooad& WoodProduts - 17 - O i iS 4 138 0 95 - 0 32 168 481 Textile,Cloliaig &Leatber 23 0 8 9 26 34 0 18 0 63 2981 479 Indusry n.e.s. 238 0 8 142 13 0 16 0 28 47 2315 TOTAL TRANSPORT 8 0 72 736 16 322 274 218 0 148 27 9639 TOTAL OTHER 1137 40 786 959 440 435 87 426 31 0 2060 1414 7816 Cons uction 6 _ 0 90 186 19 30 0 75 0 0 74 S9 540 Agricultue IS - - 1 522 75 245 0 199 25 106 211 1509 Serviex and Other 109 - 0 75 87 126 160 87 107 6 0 206 236 1199 Households 1008 40 510 164 220 1 44 0 1673 908 4568 NOT SPECIFIED 21 _ 2 53 384 0 33 - 100I 0 0 89 692 Sources: CentralStatistical Office, Cormmittee of Energy, mission emates - 45 AnLex-C page 1 of 3 BULGARIA ESTIMATES OF ELECTRICITY DEMAD 1. Electricity demand in Bulgaria has declined very sharply since 1989. In 1991, domestic consumption of electricity including losses but excluding exports was 40.9 TWh down from 48.6 TWh in 1989. In 1992, domestic consumption is estimated at about 38.0 TWh of which 27 TWh would be IEK's domestic sales, 8.9 TWh losses, and the rest industries' and district heating plants' own consumption of power from cogeneration. The total decline in domestic consumption from 1989 to 1992 would thus be 22X, which is very high. (For example, the largest decline in U.S. consumption since the 1940's was 31 in 1982.) Nevertheless, the decline in electricity consumption for Bulgaria is still significantly less than the decline in real GDP (around 372). 2. Forecasts of electricity consumption for Bulgaria are extremely lifficult to make given the uncertainties associated with the Bulgarian economy and the restructuring process which is now ongoing. To make such forecasts requires estimates of CDP and judgements about: (a) the impact of economic restructuring on the industrial structure of Bulgaria and its intensity of electricity use; (b) household consumption of electricity; (c) the impact of alternate fuels on industries and households; and (d) relative electricity prices. All of these issues are extremely uncertain. 3. Two longer run forecasts of electricity consumption were available at appraisal. These are the forecasts in the Ep2My Strategv Study and recent forecasts prepared by NER. The methodology used for the forecasts in the Ener ,SategE Studv is described at some length in Chapter IX and Annex VII of that report. In summary two methods were used. The first approach is based on short run forecasting equations which predict aggregate electricity consumption using data on macroeconomic variables and electricity prices to industrial users. The equations were estimated for a large sample of East and Vest European countries over the period 1960-88 and take account of the dynamics of adjustments in electricity demand in response to changes in economic activity. The second approach relies upon more detailed industrial data (including a large input/output table) and takes account of inter-fuel substitution by industry, relative growth rates of different industries, changes in intensity of energy use as well as the macroeconomic development of the country, but it is not as suitable as the time series equation for making short term forecasts. Taking account of the strengths and weaknesses of these two approaches a single foreca"t was reached. UKe's approach to forecasting energy and electricity consumption is similar to the second approach used in the Energy Strategy Study though it uses different macro economic assumptions and presupposes less restructuring of the industrial sector. 4. The two forecasts, that of NEK and the Energy Strategy Study, are quite different for 1995. The original NEK forecast called for domestic consumption including losses of 43 TWh though this has now been modified to 41 TWh. The Energy StrategX Study forecasts about 32.5 TWh. After 1995, however, the two forecasts begin to converge. In 2000, the Inug4CtrAegEW SIA - 46 - Anx C page 2 of 3 forecasts consumption of 41 TWh while NEK is forecasting 46 TWh. The EAMUz Strategy-Study did not make forecasts beyond 2000. However, if the forecast 1995-2000 electricity consumption growth rate of the Study is extended to 2005, it would imply 52 TWh of consumption in that year compared with the 50 TWh forecast by NEK. 5. Short term electricity consumption forecasts were required for making projections of NEK' a financial statements. The forecasts in the Rnergy Strategv AMdy were used for this purpose since NEK's short run forecasts of electricity consumption tend to be quite optimistic and their earlier forecast for 1992 was considerably above current estimates; while the Energy StateVgl Study's forecast for 1992 appears to be very close to current estimates. The short term forecasts used are shown in the table below. g g~~~~~~~~K M... ~ ~ ~ ~ ~ .~~ ~ ... 4.-ffi.-4 i~~~~~ RI V. R ..M~~~~~~~~~~~~~ ' .. . n/om ila adn eratiank - 47_ Ane page 3 of 3 6. Longer term electrielty forecasts were required for estimating the benefits to be obtained from completion of units 3 and 4 at the Chairs pumped storage project. These units are unlikely to start operation before about 1996 and would then run for 30 or 40 years. The rate of return for these units was, however, calculated over the period 1996-2010. NEK's forecasts for this time period were used since no others were available. However, as pointed out above IEK's forecasts and those of the Knsrgy Strategy Studs appear to be converging after 1995 and are fairly close by 2000. 7. While short and long term electricity forecasts were required for financial projections and estimating rates of returns from this project, the financial projections shown and the estimated rates of returns are not very sensitive to the levels of electricity consumption. NEK's financial projections are primarily sensitive to the level of tariffs government taxation and secondarily to unit costs, while the return from Chaira is primarily sensitive to the shape of the load curve and the level of consumption relative to power availability by source - not so much to the absolute level of electricity consumption. The benefits obtained from the supervisory control and network transmission systems component are also fairly insensitive to changes in electricity demand. aAnez c BULGARIA Infron an te, Commtte of Enwgy for th Perlod 1965-1 91 Avrag Ret Prie for 1 M h la 0IWm 0.0 0.05 2.06 0.053 0.0052 Q304 CGt br 1 WA hI lWa 0.036 0.037 0.038 0a039 0.040 00 0381 Avea Re Proi for 1 13al n I a 1Wm19 16008 119 17.64 17.740 17.46 136 Cost for 1 Goal h WI a 22M778 2.02 2M00 27.148 28 3100 217.4 Rneom E Ic hou s lva) 1296073 1.784,097 1638 1,923,471 ta193192 1,034,90 9,9453 BEpendkw for Eeccy thouad v 1.2878 1,7.466 1,371,224 1,424,192 1,476,838 195,6 1046 Prit from ecty tho nds lva) 23,16 60632 605,014 499.M 464.554 29345 (1. R_ es fom Thermal Eneg hosads W) 214.681 224,688 24397 281,87 m2 247,878 1,oss,279 " E*pndtu for Them Energy (ousands Isa 302333 32.868 44097 433,80 439,28 454.003 2, Loss fom Thena Energ housands lv (87,462) 8170) (194*0) (152,002) (165 (20125) (1,091,144) Prft/Lo hi thousa d Ilw (135,414) 37m3 180.764 16,8? 7W,7 0 2 (2,010 -*d mIw ftM) Stat St les (to sa d lma 146,384 42,0 4076 2,010,000 Total La Otaad from Stae and 3,023,565 2,9327 4,282S7 5.%199,622 5M0,182 6239 76ss109 Banks on December31 (thous lev Soure Commi d Ener m:li*Wnrfton.btd Tal of the Cost of Keatelty by roeo nt, I IO.-UlB 1967t 2868 2869 16 199 Pearn limit 1st Net Met Met Mlw _atpw GO" 0utc Cost cot Cost 0oat _lma) (1UViM) (tl.VAb) (Wm) ( .M ( ) (l..l) (1Jvi) (maim clvta) 1hSn1: nitt Blst 1 1,56 0.039 1.359 0.040 1.149 0.042 645 0.045 M55 0.30 SI,t4S last it 3.987 0.042 4.056 0.042 4,317 O.041 4,497 0.045 4,09t 0.2B5 H tt lest III 4,597 0.0a5 87,68 0.O3J 4,345 0.035 3.f30 0.037 3,632 0.294 sab_ D4 a.s3 0.031 2,02 0.327 2,183 0.033 I'm13 0.038 1,420 0.321 lq.bqubk. 335 0.053 $09 O.05 267 0.078 176 0.003 18 0.483 lm*xnb 5 *.143 9 0.135 0 0.230 1 0.101 _ Mextts. 512 0.049 262 0.064 220 O.m" 226 0.074 121 0.4U £VlM Steeie 117 0.047 94 0.044 90 0.046 13. 0.054 101 0.410 Stas 45S 0.044 446 0.0 34O 0.08U 420 0.03 sn o.227 a t. Ko.te 280 0.040 356 O.034 535 O.039 445 0.04 454 4.37S OhevIw 196 0.035 21U 0.035 213 0.039 18 0.04 U3 0.394 VWens ,663 0.031 5.355 0.03 5,374 e. a 5,850 0.032 3.432 o.29 _m,. Istook 8a9 0.041 751 0.043 5sl9 O.OU 544 0.054 397 0.494 3ua.-q pd 4 0.091 2 0.121 1 0.289 7 0.084 5 0.645 Issealak 35 0.037 33 0.037 33 0.038 23 0.852 12 0.401 sh_m 20 0.050 33 0.040 35 0.039 34 0.043 23 *.33O sbsuwe S4 0.OSS S5 0.041 S1 0.048 36 0.059 a 0.6 3Lsv. 52 0.058 57 0.045 54 0.045 52 0.050 81 0.411 leot m 2.52= 0.013 2,586 0.013 2.6B1 0.012 1.643 0.021 2,432 0.0t Teatl Mtseg 11.510 0.012 14.?56 0.017 13.480 0.016 13,486 0.019 12,430 0.114 N Mt cotput veln04s pimite' ma us of eleotlity. '| Emeg cinttos o ets, SE|E *mnt>\e ftq. I MAJokowt.bal~~~~~~~~~~~~~~~~~~~~~~~~~~ - 50 Annex D page 3 of 3 BULGARIA Cacity of Mor Hydro Pnit - m~~~Am InatldW Not annual Plnt cay Head Dichage No. of output (NMW (m}) $Iefc) Sets (GWh) Bomernkn /pumped sta 375.0 /110.0 690.0 62.5 3 + 2 570.0 Sesmo 240.0 534.0 56.6 2 265.0 AntonaN_ i (pumped 160.0 111.8 160.0 3 + 1 178.6 storae) K orgigev 125.0 580.0 25.0 5 360.4 Momhia K4bura 12.0 251.0 56.6 2 126.8 |vsailowrad 108.0 45.3 279.0 3 181.0 Kurdzhl 106.4 80.5 178.0 4 69.7 Krlihim 80.0 162.0 61.0 2 166.8 Dealn 80.0 138.0 72.8 2 132.5 Alie 64.8 265.0 30.0 3 147.0 Stu.enKl_deret 60.0 59.5 120.0 4 194.5 Source: Committ of Eny nrjMhdm\pIaW -51- Annex- page I of 5 ArticLes of Association of the *hsionlm- Elktrchaska Kompia Art. 1.(1) The name of the State stock-holding company is "Natsionalna Elektricheska Kompaniaw (NEK). (2) The names of the branches of the company are to be formed by adding the word "branch" to the existing names of branches and information about the activity and the domicile of the branch. Art 2. The NEK head office is in Sofia. Art 3. NEK has the following areas of activity: (1) generation, transmission and sales of electricity; (2) supplementary production of heat energy; (3) import and export of electricity and energy resources; (4) buying electricity from other domestic producers; (5) construction and repair activities in the field of electricity and heat generation; and (6) investment activity. Art 4. The capital of NEKR is 2 billion leva. Art 5. The capital of the company comprises 2 million of registered shares, each of 1000 leva nominal value. Under the decision of the Supervisory Board the shares are issued in series of 10, 100, 1000, and 10000 shares. Art 6. At the time of its establishment, NEK shall receive the entire nominal value of its assets. Art 7.(1) The governing bodies of the company are the General Shareholders Meeting, the Supervisory Board and the Managing Board. An advisory body to the Board of Directors shall be established, the Board of Branch Managers. (2) Until appropriate legislation is passed, the rights of the General Shareholders Meeting are executed by the State as the sole owner through the Council of Ministers. Art 8. All issues delegated by law to the General Shareholders Meeting shall be in the exclusive competence of the sole owner including the participation of the company in other companies. Art 9.(l) The NEK Supervisory Board shall consist of seven (7) people. (2) The members of the Supervisory Board shall elect a President and a Vice-President from among their members. Art 10. The Supervisory Board shall be appointed for a period of five (5) years. The mandate of the first Supervisory Board shall be three (3) years long. - 52 - page 2 of 5 Art 11.(1) The NEK Supervisory Board must approve: (a) acquisition, closing or transfer of enterprises or substantial parts thereof, including purchases or sales of real estate; (b) significant changes in the activity of the Company; (c) significant changes in the organizational structure of the company; (d) long term cooperation with third parties, which shall be of great importance for the Company, as well as terminating this cooperation; (e) establishing and closing branches; (f) appointment and dismissal of officials with respect to a list to be established by the Supervisory Board; and (g) receiving loans and guarantees of these loans of an amount more than 201 of the capital of the Company. (2) The Supervisory Board shall elect and dismiss the members of the Managing Board . Art 12.(1) The Supervisory Board shall sit officially at least once in three (3) months. The President of the Nanaging Board shall participate in the sessions with a deliberative vote. (2) The President of the Supervisory Board shall notify the members of the Supervisory Board about the next session, through a written invitation, including fax, telex or cable. Each member of the Supervisory Board, as well as the members of the Managing Board may request a meeting of the Supervisory Board. (3) A meeting of the Supervisory Board is legitimate provided there is evidence that all members and the President of the Managing Board have been invited and at least 50X plus one are present. (4) Each member of the Supervisory Board may be represented by another member of the Board. The President of the Managing Board may be represented by another member of the Managing Board empowered by him. A written power of attorney shall be required and filed with the minutes. A member present cannot represent more than one absent member. (5) The Supervisory Board shall take decisions by a simple majority of the members attending the meeting, with the exception of cases under Art. 11, Section 1. items (a) and (e) which need 2/3 majorities of the members present. (6) The Supervisory Board may take decisions without convening if all of its members have provided written confirmation of their support for said decision. Art 13.(l) The NEK Managing Board shall consist of five (5) persons. (2) The Managing Board, with the approval of the Supervisory Board, shall appoint a Preosident from among its members. The President shall represent the Company. (3) The Managing Board shall be assisted In its activity by the Board of branch managers which includes the mangers of all of the company's branches. - 53 - Amex1 page 3 of S Art 14. (1) The Hanaging Board shall meet at least once a month. The President of the Board of Branch Nanagers shall participate with a deliberative vote. (2) The Managing Board shall make decisions by a simple majority vote of all members present at the session, with the exception of cases under Art. 11, Sect. 1, items. (a) to (e) inclusive, which need a unanimous vote. (3) The Managing Board may also take decisions without convening if all of its members have declared their written agreement with the decision. Art 15. The members of the Managing Board are appointed for a period of five (5) years. Art 16.(1) The Managing Board shall report quarterly to the Supervisory Board of the company. (2) The Managing Board shall notify immediately the President of the Supervisory Board about all circumstances of great importance to the company. (3) The Supervisory Board has the right at any time to require from the Managing Board information or a report on any matter of relevance to the company. (4) The Supervisory Board may conduct any studies and audits it finds necessary and may employ experts for this purpose. Art 17. The President of the Managing Board of NEK shall: (1) be responsible for the implementation of the decisions, made by the General Shareholders Meeting, the Supervisory Board and the Managing Board; (2) organize the activity of the company and be responsible for the company's property; (3) enter into and cancel contracts with the staff of the company, except in cases under Art 11 para 1 item f and Art 22 para 5; (4) conclude, with the approval of the Supervisory Board, contracts with the branch managers of the company; (5) carry out all actions included in his mandate under the condition set by Art. 21 and Art. 22 of the Commercial Law. Art 18.(1) The members of the Managing Board shall be responsible for the implementation of the decisions made by the Managing Board in the following areas: (1) operating activities; (2) distribution and commercial activity; (3) research, development and imestment; (4) economic forecasting and financial activities. - 54- Amex E page 4 of 5 (2) the President of the Managing Board may appoint one of the members to undertake his obligations under Art. 17 (1,2,3,4) in his absence. Art 19.(1) The members of the Supervlsory Board are entitled to be paid for their participation in that body with the compensation determined by the General Shareholders Meeting; (2) The members of the Managing Board are entitled to be paid for their partlcipation in that body with the compensation determined by the Supervisory Board. Art 20.(1) The Board of Branch Managers is composed of all managers of the branches of the company. The members of this Board shall appoint a President from among them; (2) The Board of Branch Managers or its individual members may make proposals to the Board of Directors, concerning the activity of the company within the competence of the Managing Board and the Supervisory Board; (3) The advisory decisions of the Board of Branch Managers are made by a majority vote of all its members; (4) The Board of Branch Managers may bring to the attention of the Supervisory Board any cases where it considers the decisions of the Managing Board to be unreasonable. Art 21.(1) The organizational structure of the company shall be determined by a regulation proposed by the Managing Board and accepted by the Supervlsory Board; (2) The branch is the basis structural unit of the company. Art 22.(1) The branches are administratively, economically and territorially sutonomous production and non-production units of the company. They are self-supporting and they make their own income statements. (1) The branches shall have checking accounts. The credits used by them are guaranteed by NEK. (2) The positive financial result of any branch's activity are estimasted taking into account all taxes and fees which the joint stock company pays to the state and local budget. (3) The branches shall remit to the head office depreciation and profits at a rate determined by the Managing Board. (4) The branch's manager is elected and dismissed by the Managing Board following a selection procedure open to competition. (5) The branch"s manager shall be entitled to carry out all activities authorized under Art 21 and Art. 22 of the Commercial Law. - 55 - Anne a page 5 of 5 (6) The branch's manager may conclude employment contracts with branch staff and fixes their wages. (7) The branch's manager is responsible to the Managing Board for the financial results of the branch. Art 23. The financial relationships between the head office and its branches shall be established in accordance with the law and these Articles of Association and in detail they are determined and are regulated by the rules established by NEK. Art 24. In all cases when NEU obtains government subsidies for its production activity, they are to be distributed by the Managing Board between branches on the basis of the principle * addition to the internal cost." Art 25.(1) NEK shall form a reserve fund whose sources are: (i) 1/10 of profit to be used for this purpose until the amount in the reserve fund reaches 1/10 of NEK's capital; (ii) dividends from associated company; (iii) funds received above the nominal value of the shares at the time of their issue. (2) Research and Development shall be financed by a special fund defined by rules established by NEK. (3) the Managing Board may decide to establish other special funds. Art 26.tl) Each year before the end of February the Managing Board shall prepare an annual report and financial statements. These financial statements shall be audited by certified public accountants, elected by the General Shareholders Meeting. (2) After receiving the report from the certified public accountants the Managing Board shall submit to the Supervisory Board the annual report, the financial statements, the report of the certified public accountants and a suggestion for profit's distribution. (3) The Supervisory Board verifies the annual report, the financial statements and the suggestion for distribution of profit and after their approval calls for the General Shareholders Meeting. (4) The Managing Board publishes these financial statements in the State Gazette after they have been approved by the General Shareholders Meeting. Art 27. The joint stock company may be dissolved according to procedures established by the law. Art 28. Upon the dissolution of the joint stock company it should be liquidated according to legal procedures and thereafter the company shall be deleted from the trade register upon the request of the liquidators. - 56 - Annex WLGARIA NATSIONALNA ELEKTRICHESKA KOMPANIA (NEK) COUNCIL OF NINISTERS |Comnittee of Energy Managing Board _ | | ~~~~~~~~President | = - PY1~~~~Vce Presildent _Vice Presidentt Vice-President _Vice-President _Nwe rr of the ....~~~~~~~~~~-- .... ---- --------- -------- _ B_________________oard Board of 6eneration Distribution. Developnt Corporate. --- the Branch ...... ... Sales.Business and Finance pbnger of the Managers Activities Investment NP lKozlodw_ Foreign Generation Central Research Econwmic Relations in TPPs. HPP - Dispatch and - Forecasts and and districts Control Development and Internal Protocol heading PPs Contracts Legal Generation In Electricity Investment Accounting and Department | PPs Supply Financial Contra] Preparation Operation and Electricity Inetment for Defence & fire | lort and Financng Mobilization Protection Export 4 Personnel | aSpecial ansad and Share |of Transport |Holding Activities| AAdministrative and Public Labor and Services Salaries Office of the President - 57 - page 1 of 17 AND CH&RAII MM 1. The supplemental information on the Belmeken and Chaira dams contained in this annex summarizes an analysis of these dams undertaken by Electrowatt Engineering, on behalf of the Bank. OCKFILLD General Description and Purposos of the Dam 2. The Belmeken Dam, built between 1964 and 1974, is a 88 m high (measured from river bottom) and 725 m long (at the crest) rockfill dam with a central, relatively narrow clay core and a fill volume of 3.33 mio m9. Its crest elevation is at 1923.0 meters above sea level (m.a.s.l.). In plan, the dam is a curve with a radius of 500 a. It is located in south-west Bulgaria, near the city of Velingrad. 3. The average slope, including the berms, is lV:1.8H on both, the upside and downside. The core is founded on sound granite, whereas parts of the shells are founded on weathered granite, described to have an internal angle of friction of 34 degrees. On both, the upside and the downside, three layers of different filters are placed between the central clay core and the rockfill shells. 4. Grouting works included a deep grout curtain up to 56 a in depth and a blanket grouting (depth up to 25 i). A grouting gallery underneath the clay core was constructed, from which readings of the stand pipe piezometers installed in the downside part of the foundation can be taken. Other monitoring Instruments provided are: - pore pressure cells in the core (hydraulic and electric), installed in three sections - earth pressure cells - settlement gauges - geodetic survey network 5. The reservoir impounded by the Belmeken Dam has a total storage of about 145 mio m3, 142 mio m$ of them are useful. The maximum operational level is 1920.5 m.a.s.l, the minimal one 1953.7 m.a.s.l. Under full spilling conditions, the maximum reservoir level is 1921.0 m.a.s.l. leading to a minimal freeboard of 2 a. The water stored in this reservoir is collected by a 270 km long system of canals and tunnels. The reservoir itself is located on the top of a saddle in the Rila mountains. Therefore, the proper catchment area of the Belmeken reservoir is very small; in fact, it covers only the reservoir surface and some adjacent mountain slopes. Subsequently, the probable maximum flood for which th6 spillway is designed for is very small (14 m3/sec). The capacity of the bottom outlet (intake elevation 1854 m.a.s.l) at maximum reservoir level is 16 m3/sec. Emptying the reservoir by means of the bottom outlet and the pressure tunnel to the Belmeken powerhouse takes about 32 days. - 58 - Annex G page 2 of 17 6. The main purposes of the Belmeken dam are: (a) To provide water for Belmeken - Sestrimo - Momina Klisura Power generating cascade and furthermore for the irrigation of 250,000 ha of land; (b) To provide water to the Chaira pumped storage scheme; and (c) To supply water for domestic and industrial use. Geology of the Project Area, Dam Foundation Conditions and Reservoir Slope Stability 7. The Belmeken dam site is located in the Rila mountain granite massive. The rock formations in this area consist mainly of sound, hard and compact granite. In the area of the Belmeken dam, the weathering depth of the granite varied between 5 and 15 m. As the dam is located on the very upstream end of a small river, the thickness of alluvial deposits is very limited. S. The site investigations were carried out in three phases between 1952 and 1965. They included extensive subsurface investigations, in-situ and laboratory tests of the construction materials as well as hydrogeological investigations. The investigations showed, that the bed rock is sound. The results of the uconfined pressure tests (on cubical samples) varied between 1100 kg/cm2 and 1200 kg/cm2 (dry samples), corresponding well with the expectations and experience for sound granite. The water pressure test results indicated, that the permeability of the rock foundation is rather low, especially in the deeper zones. As a result of these favorable geological conditions, reservoir tightness or the stability of its slopes has not created any problems during the nearly 20 years of operation. Rydrological Iuvestigations 9. During the design of the Belmeken - Seatrimo cascade in the 1960s, hydrological data from two hydrometric stations starting in 1935/36 and from 20 additional stations installed in 1951 were available. The evaluation of the figures obtained thereof in combination with an analogy analysis lead to a yearly design inflow into the Belmeken reservoir of 240 mio i3, collected by its 270 km long feeder canal system (the active storage volume of the Belmeken reservoir is 142 mio m3 per year) for design purposes a very small compensation release of 0.32 m3 per year was anticipated. These figures were in line with the Bulgarian law valid at that time. Additionally, some 12 mio =3 per year were expected to be distributed for other purposes, e.g. domestic and industrial water supply. Therefore, the prediction on the available yearly quantity of water from the Belmeken reservoir to be used for energy production was 228 mio n3. Iffective Available Amto of Vater and Produced tergW at the Belmeken Sestrimo Cascade 10. Since the first year of operation, the effective available amounts of water from Belmeken reservoir are considerably less than predicted - 134 mio m3 instead of the predicted 240 mio m3 (55X). - 59 - a page 3 of 17 11. A first evaluation of the available data showed, that the main reasons for the significant difference of 106 mio ma/year at the Belmeken reservoir are: (a) Hydrological reasons: It is estimated, that about 23X of the difference between predicted and effective inflow quantities are due to hydrological reasons (ca. 25 million m3/year). (b) Evaporation losses at the Belmeken reservoir, which were not considered in the design phase (ca. 10 mio ml/year). (c) Unconstructed or only partly finished feeder canals, leading to an average loss of 25 mio ml/year. (d) Significant higher diversion of water for domestlc, industrial and ecological use: In the average of the years 1978 to 1991, some 42 mLo en per year were diverted from the Belmeken reservoir for the above reasons. A significant increase in the amount of water diverted occurred in 1983, when a direct link between the Beleken feeder canal system and the Iskar reservoir (water supply of Sofia) was taken into operation. The average amount of water diverted by this means to the Iskar reservoir in the years 1983 to 1991 was 65 mio ml/year with peaks up to 100 million m'/year. In future, an annual average of 100 million n3 will be diverted to Sofia in order to satisfy the city's increasing water demand. (e) Operational reasons, like open gates etc. are responsible for the remaining part of the losses (ca. 4 mio i3/year). Static Dam Design and Dam Construction 12. The Belmeken dam was designed and constructed according to the codes and regulations valid in Bulgaria in the early 1960s. Considerable information on the various results obtained from the regular performance tests during construction Is available with Energoproekt, indicating very good quality control during construction. Freeboard Design 13. The design of the freeboard (minlmum 2 m) is in line with the corresponding Bulgarian codes. Comparisons with similar western regulations, showed, that the parameters considered for the freeboard design and the calculation methods (e.g. wave height) are comparable. embaakm.nt Material Properties 14. During the site investigations, numerous laboratory tests to determine the soil mechanic characteristics on the embankment materials were carried out. A comparison of these results with the ones obtained from the quality control tests during construction showed, that the predicted values were - 60 - Annex G page 4 of 17 very close to the effective ones. Table G.1 gives an overview on certain important parameters: Table 0.1 Soil mechanical parameters of the Belmken dom *n baniment materials .0 15. The core consists of clay material containing minimum 501 of fines (particles < 0.06 -). The clay content itself (particles < 0.005 mm) is 181 on average. 16. The filters were strictly designed according to the Terzaghi criteria. Unless natural material was available In the vicinity of the dam, the required granulometry was obtainAed by means of washing and sieving. 17. The photos taken during construction shoo, that the rockfill is of a high quality and well graded. Interlockinkg effects are to be considered for the determination of the shear strength. The dam beight does not require a reduction of the shear strength due to high confining pressures; therefore, an overall # value of 400 to 410~ as shown In Table 0.1 Is certainly justified and lies on the conservative side. Static Stability Analyasi 18. The static stability calculations were carried out from 1966 to 1967 by means of circular sliding surface methods (Fellenius, Bishop simplified, Therzaghi * Soviet stand&ard methods). Thereby, the following minimal factors of safety for the load cases considered were obtained: - 61 - AnnMexrg page 5 of 17 Table G.2 Results of the static stability analysis of the Belmeken dar carried out from 1966 to 1967 SX~~~~~~~~ 3 1) a full rapid draw down was assumed to take 32 days. 19. For the stability analysis of the Belmsken dam, a prediction on the pore water pressure condition in the core- after construction was established. As, however, the construction time was about 10 years, no excess pore water pressures could be observed at the beginning of impounding. In 1977, a new stability analysis using computer facilities was carried out. The factors of safety obtained therefrom confirm the general impression obtained from the comparison of the results shown in Table G.2 with the embankment material properties - that the factors of safety obtained from the design calculations are conservative. Da Construction 20. The dam was constructed from 1964 to 1974. Due to the alpine climatic conditions of the construction site, works were carried out only during summer time. Special care was taken for the foundation treatment of the core area. The photographs taken during construction proved, that the rock surface was carefully cleaned and treated with slush grout where required. The core was compacted at around the optimum water content in layers of 25 cm by means of an 8-tonne vibratory roller. Each layer has been scarified before a new one was placed. Quality control tests were taken regularly from each layer. Directly above the foundation (contact zone), high plastic clay was placed at high water contents in 10 cm layers and compacted with pneumatic hand equipment. The same procedure was applied for contact zones concrete - clay. In order to accelerate the construction works (enabling embankment construction In late autumn), it was decided to replace the core between elevation 1911 m.a.s.l. and 1921 m.a.s.l. by weathered granite of the same type as used for the filters directly beside the cores. Both, filter and rockfill were compacted. Operation and MNintenance Manuals 21. A detailed operation and maintenance manual was prepared by Energoprojekt towards the end of construction. It included predictions for the performance of the various instruments as a function of the reservoir levels. These predictions have also been adjusted during the lifetime of the dam. - 62 - Annexa page 6 of 17 Regional Seisicity and Dynamic Analysis of tho Dam 22. During the lifetime of the Belmeken dam, the knowledge of the seismicity of Bulgaria in general and of the local seismicity of the Belmeken area in particular increased enormously. Today one knows, that both, the Belmeken and the Chaira dam are located in an area with one of the higher seismic risks within Bulgaria. During the design of the Belmeken dam in 1964, knowledge on the seismic risk within Bulgaria was less developed and only pseudostatic calculations with a horizontal ground acceleration of °.058 were carried out to analyze the behavior of the dam under earthquake loading. While this is quite low, as indicated above, a number of very conservative assumptions were made in dam design. 23. Soundly design rockfill dams on solid foundations (as in the case of Belmeken) are in principle safe inherently against dynamic loads. However, in order to confirm that the deformations of the dam during an earthquake are within an acceptable range, a detailed seismic an&lysis was considered essential, accordingly recommended, and was undertaken. Dam Instrumentation Concept 24. The main components of dam instrumentation are: (a) 17 standpipe piezometers, installed in the foundation on the downside of the grouting gallery. A manometer equipped with a valve also allows measurement of the outflow from the piezometer. (b) 32 pore water pressure cells in the core, installed in three cross sections on two to four levels. At each location, an electric Mayhak and a hydraulic Ruggenberger cell have been installed. So far, the hydraulic cells operate well, whereas all electric cells are out of order. Readings were taken regularly until 1988, when the manometers were removed from the measuring chamber in the grouting gallery in order to protect them from dust and dirt from the reconstruction works on the grout curtain. Unfortunately, the manometers have not been reinstalled until now. (c) 8 earth pressure cells located in the maximum cross section of the core. These instruments do not work and are, therefore, not monitored. (d) 4 settlement gauges: Also these instruments failed before or soon after the completion of the construction works. (e) Surface survey network to monitor the settlements and horizontal movements of the dam. - 63 - page 7 of 17 NAMO NKRVCO2 =ECI AMD MaI yORKS Slur Trench Wall 25. No clay core was constructed between elevation 1911 and 1922 m.a.s.l. in order to accelerate construction works. As certain doubts arose on the long term stability of the weathered granite under steady seepage conditions (suffusion/erosion), it was decided to construct a slurry trench wall from the dam crest down to the elevation 1907 m.a.s.l. The slurry trench wall penetrates about 4 m into the core. A cement - bentonite mortar has been used for this purpose. Its coefficient of permeability is about 10-6 cm/sec. The works were carried out between 1988 and 1990. These works caused a partial destruction of the bench marks used for the geodetic survey. Therefore, new ones have been installed in 1990/1991. Additional Grouting 26. According to the information obtained from the National Organization of Dms, Reservoirs and Cascades, a certain increase of the water pressure and the water quantities (with open manometer valves) measured at the piezometers installed in the grouting gallery led to the decision to regrout an approximately 400 m long section in the central part of the dam. These works were carried out from 1989 to 1990. As a possible reason for the increasing water pressure on the downside of the dam, chemical dissolutions of grout components (mainly cement) by the very soft water impounded in the reservoir was assumed. Such dissolution processes are in fact also known from other dam sites, e.g. Mattmark in Switzerland. BRIEF AALYSIS OF THE DAM IN5TRAJE9MT0 R TS AIDR TE ACTUAL CONDITION OF TSR DTH General 27. The evaluation of the dam monitoring results is made by the National Organization of Dams, Reservoirs and Cascades (NODRC) normally on a yearly basis. Plots showing the longtime behavior of the instruments are partially available, for instance for the geodetic survey. 28. The Belmeken dam was visited several times and the grouting gallery has been inspected. The impressions obtained from these inspections is, that the Belmeken dam is visually in a good condition and properly maintained. Pore Water Pressure Cells Located In the Core 29. Readings are partly available until 1988. Since then, the manometers have been removed due to grouting works and unfortunately have not been reinstalled yet. Unfortunately, the readings have not been plotted over a period of several years. For a detailed judgment, a time consuming processing of the available data would be required. - 64 - Armex G page 8 of 17 30. Based on the discussions with the people responsible for the monitoring of the Belmeken dam, the behavior of the pore pressure cells corresponded always with the expectations, i.e. the core is impervious. In view of the -quality of the core material, its placing and the long construction period, this conclusion corresponds with the experience for similar dams. 31. Piezometers were also installed in the upper part of the core (above el. 1911). The results obtained showed very clearly, that seepage occurred through the weathered granite placed instead of clay. This led in 1986 to the instruction to impound the dam higher than el. 1911. To repair this situation, the decision to construct the slurry trench wall described above was taken. New piezometers were then installed in the upper part of the dam on both, the upside and downside of the slurry trench wall. Regular readings are taken since February 1991 in case the reservoir level is higher than 1911 m.a.s.l. The available results so far prove the good performance of the slurry trench wall. Stand Pipe Piezozeters Located In the Dam Foundation 32. From the water pressures and water quantities with open valves measured at the stand pipe piezometers located in the grouting gallery in the central part of the dam, one can conclude: (a) The water levels measured in the piezometers followed generally the fluctuations of the reservoir level. (b) The increase of the water level measured in the piezometers varies between 20X and 401 of the increase of the reservoir level, proving the good efficiency of the grout curtain. (c) The maximum and minimum water levels measured in the standpipe piezometers in the foundation remain constant in the period considered (1.1.1982 to 31.12.88). Please note that regrouting works started in 1989, leading to a lack of data. (d) The time lag between an increase/decrease of the reservoir level and the corresponding reaction at the piezometers is small. No changes can be observed during the period considered. This type of observation has also been made at similar dams and foundation conditions and is to explained by the fissuring of the rock. (e) The same results aa for the water pressures apply generally for the water quantities measured with open valves. The total "seepage quantity measured by this method was always below 1.5 1/sec, which is a very small amount. 33. Suumarizing these facts, it is considered essential and is accordingly recommended to install the piezometer immediately and to resume the regular readings in order to enable a continuous monitoring of this important dam. - 65 - page 9 of 17 Geodetic Survey 34. The geodetic survey consisted of the measurements of the settlement and horizontal displacements along the dam crest and the berms. During the construction of the slurry trench wall the measuring points along the dam crest were partly destroyed. In 1991, they were replaced by new ones and the regular observations were resumed. The total measured cumulative settlements from 1977 to 1988 at the dam's maximum cross section are 98 cm, whereby a clear tendency towards attenuation was observed. The yearly additional settlements were less than 2 to 3 cm towards the end of the observation period. This total settlement corresponds to about 1. SZ of the dam height. The horizontal deformations towards downstream vary between 10 cm at low reservoir levels and 16 cm at the highest reservoir levels. The basis for these figures is a zero measurement taken before impounding started. All deformations measured by means of the geodetic survey are well within the expected range for this kind of dam. Impacts of the Chaira Pumped Storage Scheme on the Belmeken Dam 35. At the higher reservoir levels, the maximum possible reservoir draw down resulting from power generation at Chaira is I to 2 m in 8.5 hours. For these conditions, the rockfill can be considered as free draining and does not require any additional investigations. At very low reservoir levels, e.g. el. 1870 to 1880 m.a.s.l., the same operating conditions may lead to a draw down of up to 5 m in 8.5 hours. Under these conditions, the rockfill is only partly free draining. The stability of the dam, however, will certainly not be affected by this fact. Conclusions and Recommendations 36. The Belmaken dam is a well designed rock fill dam on a sound rock foundation. The construction materials used are of a high quality and were properly placed. 37. During the lifetime of the Belmeken dam, the knowledge on the seismic risk in Bulgaria increased enormously. Today one knows, that both, the Belmeken and the Chaira dam are located in an area with one of the higher seismic risks within Bulgaria. However, a detailed seismic risk analysis was not carried out. As during the detailed design of the Belmeken dam in 1964 knowledge on the seismic risk in Bulgaria were missing, a horizontal ground acceleration of 0.05g was assumed for the pseudostatic stability analysis, which is low. 38. In principle, soundly designed rockfill dams on solid foundations (as Belmeken) are safe inherently against dynamic loads. In order to demonstrate, however, that the deformations during an earthquake are within an acceptable range, a detailed seismic study was considered essential, accordingly recommended and was undertaken for the main Belmeken dam during September/October, 1992. 39. Generally, the readings of the major instruments have been taken more or less regularly in an adequate frequency. Nevertheless, it is suggested, to avoid in future lack of data due to not reinstalling manometors, etc. The executed repair and maintenance works as well as the visual section showed, that - 66 - page 10 of 17 the dam is properly maintained and in a good technical condition. The pumped storage operation at Chaira does not affect the stability of the Belmeken dam. SummarLzing the findings on the Belmeken dam, one can conclude, that the dam is safe, generally properly monitored and maintained. CE&TRA CONCRET GRVI DAN Gentral Description of the Dam 40. The Chaira concrete gravity dam is located on the northern slop of the Rila mountains in the water catchment area of the Chairska river. The dam is 85 a hlgh and 305 a long at the crest and is straight in plan. It is divided into 12, normally 28 m wide, blocks separated by construction Joints running normal to the dam axis. Its key figures are: Height 85 m Fill volume 380'000 m3 Slope upside lV:0.05H Slope downside lV:0.72H Crest elevation 1263.0 m.a.s.l. Maximum operating water level 1260.0 m.a.s.l. Maximum spillway discharge (PMF) 75 m3/sec Minimum free board at PMF 1.70 m Minimum operating water level 1231 m.a.s.l. Total storage of the reservoir 5.57 mio m3 Useable storage of the reservoir 4.38 mio m3 41. The dam construction itself is nearly completed, however, impounding has not been started yet, as construction works at the intakes are still ongoing. The capacity of the bottom outlet (intake elevation 1188.6 a.a.s.l.) at maximum reservoir level is 21 m3/sec. Emptying the reservoir down to bottom outlet elevation takes approximately four days. 42. The design concrete strength requirements (180 day strength on cubes), depending on the stress prevailing at the relevant sectlon, varied between 15 MPa and 20 MPa (see Figure 4.3). At the spillvay chute, a minimal strength of 40 MPa was required. These figures are generally ln line with other projects of the same size. As an example, for the 175 m high Karakaya arch - gravity dam, the corresponding figures varied between 15 and 28 MPa. Figure C.3 shows a typical cross-section of the ChaLra dam. - 67 - A~uL page 11 of 17 Geological Conditions and Da igure G_3 Poundation CHAIRA DAM 43. The bedrock at the Chaira dam site consists of amphibole-Biotits and occasionally granite-gneisses. In the old river bed, alluvial deposits of up to 6m thickness were encountered during E the site investigations started in 1970. In view of the dam type foreseen, the geological investigations were carried out in much more detail than at the I Belmeken dar site. For the Map detailed investigations of some I tectonic zones, addits were made to investigate the exact location of these zones, for filling of j l potential cracks and to determine _ by means of in situ tests the l I. mechanic properties of the bed rock, mainly its deformation module. The value considered for * the latter in the design of the dam is E - 30 GPa for fresh rock. 44. The shear strength h properties of the rock were determined by means of triaxial * laboratory tests. Typical results g * . . . . obtained are: - for fresh rock T - 5.48 + 0.83 a ( 80X probability) - for weathered rock v - 5.22 + 0.75 a (100 probability) The water pressure test results (WPT) evaluated according to the Russian standards varied between 0.18 Vmin m'bar at relatively shallow depths (6 a) and 0.03 Vmin m'bar at 85 m depth. The bearing capacity of the rock was found to be absolutely sufficient for the load of the dam. 45. Based on the above summarized results of the geological and rock mechanic investigations, the general rock conditions have to be judged as favorable for this kind of dam. This is also proven by the extremely good conditions encountered during the excavation of the huge underground power house cavern located in the same local geological area. 46. Another result confirming the above statement, are the takes recorded during the execution of the grout curtain, showing that on the average only 25kg of cemont per linear meter were used. Details are given in Table G.4 - 68 - Annex G page 12 of 17 Table 0.4 Chaira Dan - Details on Grout Sakes -~~~~~~~~~~~~~~~F g Regional Seisaicity 47. The Chaira dam, which is close to the Belmsken dam, is located In an area with one of the higher seismic risk in Bulgaria. Although these facts were known at leasnt to a certain extent during the design and the construction of the Chaira dam, no detailed seismic risk investigations and/or dynamic stress calculations were carried out. A ground acceleration of 0. 12g, which Is also not in line with the 1987 code, was taken as an input for the pusudostatical calculations. It is also too low. As there is little distance between the Chaira, and the Beilmeken dams, and the geological/tectonic conditions of the two sites are very similar, a combined seismic risk analysis was recommended and the sam-e has since been carried out. Hydrology and Spillway Design 48. The Chaira dam is located in the small valley of the Chairska river. The hydrology of this river shows, that the 10,*000 years flood (considered as peak maximum flood, PNF) is 75 m3/sec. The spillway incorporated in the dam crest, as well as the channels through the villages are designed accordingly. Hydraulic model tests were carried out for the design of the spillway. In order to prevent spilling due to generating or generation in c-ases of high floods (the rated discharge of all four turbines together is up to 144 mu3/sec), the turbines will be automatically stopped once the reservoir level exceeds the maximum operation water level (equal to spillway water level, 1260 a DAM DESIGAN D DAN OSBTIO Static Stability Analysis 49. The static stability analysis was prepared according to the regulations and methods for class 1 dams set forth in the relevant Bulgarian, and if necessary, Russian codes. The design of the drainage system is very common, - 69 - page 13 of 17 and consists of two drainage rows. The first one, drilled from the main drainage gallery (drainage I row), is 13 degrees inclined towards the downside. Its maximum depth is elevation 1151 m.a.s.l., about 26 m below the sound rock foundation. The second one (drainage II row), starting from-the axis parallel galleries (distance between the galleries is normally 14 a), is vertical with a n=imum depth at elevation 1158.0 m.a.s.l. (about 19 m below sound rock foundation). Based on this drainage system, the uplift forces in the static stability analyses correspond well with common engineering practices for this kind of dam. 50. Special in situ shear tests were carried out to determine the friction parameters between concrete and bedrock, showing a cohesion of 548 kN/e and 39.70 for the angle of internal friction. The Bulgarian codes for the design of large dAs give also computation rules for the tension zone in the foundation. A rough check of these calculations showed, that the results for the various load cases are reasonable. Also, the other design loads (hydrostatic loads, sediments, dead load, tailwater, etc.) were inserted in the static stability calculations according to common engineering practice and standard. The results obtained, thereof, are summarized in Table G.5. Table G.5 Static Stability Analysis of Chaira Concrete Gravity Dam Summary of Results I | 11!I l 011 I I ~~111,001 51. Parallel to the static calculations, a pseudostatic *dynamic' stability analysis was prepared with a horizontal ground acceleration of 0.12g. The factors of safety for the load cases shown in Figure 4.5 vary between 1.86 and 2.33. Concrete Stress Analysis 52. The main stresses in the concrete of the dam body and in the foundation were analyzed by means of a Finite Element computer program, considering also stresses as a result from temperature gradients. The results showed, that: - 70 - page 14 of 17 (a) under static conditions, no tension zones occur; (b) the stresses in the concrete are within the design limits; (c) the maximum stresses occur in the upside lower edge and are in the range of 8 to 10 MPa. Dynamic Stress Analysis 53. No dynamic stress analysis of the Chaira concrete gravity dam was carried out. In view of the importance of the completed Chaira dam, it was recomended to have the dynamic stress analysis carried out in context of the analysis for the Belmeken dam, and the same was undertaken during September/October, 1992. Dam Construction 54. The dam was constructed between 1985 and 1991, concrete was placed from 1986 to 1989. For the first time, the so called 'long block construction method" was applied in Bulgaria. Thereby, the experiences obtained from two similarly constructed dams located in the former Soviet Union, Toktogul and Korupai on the Narin river (Tian - Shan district), were used. The characteristic of this method is to divide the dam into very long blocks, in the case of Chaira about 28 m. This is about twice the common figure for the block length in concrete gravity dams. The advantages of this method are mainly to be found in the higher progress rate and, of course the smaller amount of construction joints. Disadvantages are to be expected from higher thermal stresses. 55. Detailed investigations and studies made for the Chaira dam prior to construction showed, that an application of this method at this particular site with an average annual temperature of 6.7°C is feasible. However, measures to regulate the temperature regime were unavoidable. During summer time, ice flakes were added instead of water and the placed concrete was sprinkled continuously by cooled water. A special sprinkling installation was required for this purpose. In winter time, concrete placing was stopped when air temperature felt below -5°C. Other measures against too excessive cooling during winter consisted in covering the surfaces of all blocks with several layers of a geotextile or heating the concrete aggregates with hot air. 56. The temperature in the concrete blocks was monitored continuously. The maximal measured concrete temperature during construction time is reported to be 240C. Concrete was placed itn layers of 0.5 to 1.0 m thickness and compacted with Russian type vibrators. Two cable cranes have been installed. The progress rate achieved in view of the climatic conditions was 360'000 m3 of concrete within calendar 19 months. Due to the climatic conditions, the major part of the concrete works was carried out in the summer months. 57. In order to check the tightness of the concrete placed at the upside face of the dam, monitoring boreholes were drilled and water pressure tests executed. As a result, high concrete permeabilities were observed. As a repair measure, a 15 cm thick gunite layer brought up in 5 layers of 3 cm has been placed on the upside face from the dam toe up to elevation 1211.0 m.a.s.l. Between the second and third gunite layer, a reinforcement net (bars with diameter 6 mm) was placed. Apart from this gunite layer, additional grouting of - 71 - AM G page 15 of 17 the concrete joints on the upside face up to elevation 1231.0 m.a.s.l. led to an improvement of the concrete tightness itself. Above elevation 1231.0, additional grouting was required only at block #7. The visual impression on the dam is- good. Instrumentation Concept 58. A total of about 300 instruments are placed in the body and the foundation of the Chaira dam. About 80X thereof are installed in three cross sections, the maximum one and two at 56m on its left/right side. Table G.6 gives an overview of the instruments installed at the Chaira concrete gravity dam. Table G.6 Overview of the Instrumentation of the Chaira Concrete Gravity Dar S ;E g SE N~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~;~.~~~ ................ 59. The main conclusion from the above table is that the instrumentation concept of the Chaira dam includes all important elements for a dam of thLs size. The evaluation, especially the interpretation and compilation of the results to an overall assessment an the dam behavior will be a very interesting and substantial work. This is also the main reason. that the readings of the maJor - 72 - Annex G page 16 of 17 part of the above mentioned instruments will, when the dam is in use, be made automatically by means of a sophisticated centralized computer system. A first evaluation of the data obtained, including graphical presentations, will be done also automatically by the computer installed in the control center of the power house. In case of a break down of the automatic system, manual readings of the instruments are possible. 60. The computer system is not yet installed, however, experience with similar systems shows that technical problems may arise during the first time of operation. In many cases (and probably also at Chaira), this time corresponds with the very important period of first impounding. In such a case, a break down without parallel manual readings would lead to a loss of very important data. It is, therefore, highly recommended, to take manual readings regularly during the test phase of the computer system, in order to prevent lack of data and allow a comparison of the computer readings and evaluations with the manual ones. Conclus ion and Recommendations 61. The Chaira concrete gravity dam is properly designed for the static load cases. Based on extensive geotechnical in-situ and laboratory investigations, all state of the art calculations for the static design of a dam of this size were carried out. The results obtained thereof are reliable. For the construction, the so called "long blocks" method was applied. The related special technical problems, especially the temperature of the concrete, were obviously handled successfully. Quality control tests showed, that a part of the upside concrete face, especially the construction joints, did not fulfill the tightness criteria. Appropriate measures have been taken to repair and improve the particular areas. No computations to analyze the behavior of the dam under major dynamic loads, e.g. earthquakes were prepared. Situated in the zone with one of the higher seismic risk in Bulgaria, such analysis was considered essential, accordingly recommended and was undertaken during September/October, 1992. 62. Detailed Seismic Analysis. The detailed seismic analysis for the Belmeken main dam and the Chaira concrete dam for a maximum credible earthquake (NCE) of 0.5g was recently completed by Electrowatt and Energoproekt and indicates that: (a) elmeken Rockfill dam Vt The static stability analysis of the dam showed, that the safety of the dam is warranted, also during the maximum possible reservoir draw-down. The reservoir operation conditions resulting from the Chaira pumped storage scheme do not have any negative impacts on the stability of the Belmeken dam. (ii) The maximum crest settlements obtained by the dynamic analysis for the NCE are approximately 1.1 m. - 73 - AnnexG page 17 of 17 (iii) The freeboard calculations showed that the crest elevation is not sufficient when earthquake induced waves and settlements are considered. (iv) The alluviums below the two shells consist of materials (GP and GW) are with a considerable factor of safety not susceptible for liquefaction. (b) Chaira Concrete dam (i) The design of the Chaira concrete gravity dam for static loads is adequate. (ii) The maximum crest acceleration obtained by the dynamic analysis is 3.8g. This value, although relatively high, is reasonable. (iii) The dynamic analysis leads to a maximm compression of -10 MPa. This is within the acceptable limit for mass concrete. (iv) Maximum tension reaches more than 5 MPa for larger areas along the upstream and downstream faces of the dam. (v) The compressive concrete strength measured on cores taken from the mass concrete of the center part of the dam (60 - 70 samples) is 24 EPa. Taking IOZ of this value as admissible value for tensile strength leads to 2.4 MPa. This value is confirmed by the tensile strength tests on 30-40 samples, which shows a result of 2.28 MPa. (vi) At the toe of the dam on both, the upstream and downstream face, limited areas exist, where the tensile strength reach about 10 MPa. Although these values are not very exact due to the relatively coarse mesh at these locations and pronounced stress variations in these zones, they clearly indicate the probability of cracks. (vii) In spite of these cracks which may form during a strong earthquake, the safety of the dam will most likely not become critical. .:\G 74 -AnnexLH page 1 of 2 SLANDOIAALO Da Safety Organization 1. The National Organization of Dams and Reservoirs and Cascades (NODRC) is responsible for monitoring larger dams and employs 900 persons. In its 45 years of existence, no major accident occurred on a dam monitored by NODRC. To a certain extent, the NODRC is supervised by the Civil Defense Department (Ministry of Defense), whLch additionally undertakes some monitoring works, especially on the hydromechanic installations, e.g. bottom outlets. 2. A total of 41 large dams, 671 kms of tunnel and 500 small hydraulic structures are monitored by the NODRC. At each of the 41 dam sites monitored and maintained by the NODRC, permanent monitoring staff is responsible for: - taking regular readings of the instrumentation, * carrying out the normal geodetic survey work, - the regular visual inspections of the dams, and - minor maintenance works. 3. The NODRC acts also as a contractor for maintenance and repair works. Minor works are directly executed by the maintenance and repair groups of the dam districts. Major works, e.g. the regrouting of a part of the Belmeken dam foundation, are made by the central construction and repair section. NODRC's laboratory analyzes the samples taken at the different dam sites, chemically and physically. Regulations and Rules on Dam Nonitoring 4. Special laws on dam safety and dam monitoring do not exist in Bulgaria. However, the Ministry of Social Welfare established rules and regulations. In addition, the NODRC has established special regulations on monitoring and observation for every single project. These regulations also lncluds regulations on the frequency of the readings to be taken and on the visual inspections of the dams and its appurtenant structures. The common frame of all these specific regulations are the four general principles on dam monitoring, established by the NODRC: (a) There is an obligation for dam monitoring; (b) Monitoring has to be carried out periodically during the entire life time of a dam; (c) Readings of instruments, geodetic survey and visual iLspections of dams have to be carried out simultaneously; (d) A constant comparison between the data obtained and the predicted behavior is mandatory. - 75 -zmuLlH page 2 of 2 5. The data collected by the monitoring staff are transmitted to the head office in Sofia, where an evaluation and interpretation takes place. The main criteria for the assessment on the condition of a dam is the comparison between the readings obtained and the corresponding predictions established by the design engineer at the end of the construction phase. 6. A yearly dam safety report has to be produced by the NODRC and presented to an internal or external coumittee of experts. It is a rule, that at least every two years, an external committee evaluates these reports and recommends on possible or required changes in the reading frequency, on required maintenance or repair works or on additional investigations to be carried out. In addition, the Civil Defense Department (part of the Ministry of Defense) has to monitor the dams separately, mainly in view of the functionality of bottom outlets and other hydromechanical equipments. Emergency Preparedness Plans 7. The Department of Civil Defense is responsible for the establishment of emergency preparedness plans, .e.g evacuation. In case of emergency, the NODRC has to immediately inform the Department of Civil Defense on the type of risk or occurrence. For this purpose, special telephone lines, telex lines and radio telephones are installed at the dam sites. At each dam site, so called "emergency reserves" of construction materials (e.g. cement, gravel, etc.), equipment and personnel are available. a:\.nE- -76 - Annex I page 1 of 5 DWAU ENERG PROJECT Reen -rdtions of the Panel of1 gOerts Below are the recommendations of the panel of experts with respect to the Belmeken dam including the saddle dam, and the Chaira dam: Belmeken Nain Dam and Rezervoir 1. Belmeken main dam has been in operation since 1975 and has performed entirely satisfactorily. In the Panel's opinion, based on detailed review of the available reports/documentation, and instrumentation monitoring data and the detailed site visit, the dam appears to have been well designed to international standards and well constructed with apparently good quality control. 2. Under the proposed Maximum Credible Earthquake loading with a peak acceleration of 0.45 - 0.5g. studies indicate that slumping/settlement of the crest may amount to about 1.0 m. 3. Although the dam would be able to operate satisfactorily at maximum reservoir level after such slumping, it is prudent to raise the crest level by 1.0 m at this time. 4. Since no filters are present between the foundation and downstream rockfill shell, erosion of weathered material in joints in the foundation could possibly occur progressively with time. While there are no such visible indications, it is recommended that all water seeping through the dam and its foundation be intercepted at the downstream toe of the dam and monitored throughout the life of the project. 5. The core of the dam, which is widely graded and of very low plasticity, is borderline regarding being self-filtering. 6. Considering that the water for Belmeken Reservoir is brought to the site primarily by a canal and tunnel collection system, which has limited capacity and which can be shut off, the existing spillway, outlet works, and power water ways provide adequate release capacity for the reservoir. 7. The piezometers from the grouting gallery should be maintained and should continue to be read for the life of the project. They should be opened periodically and seepage from them measured. Changes in such seepage would indicate a change in foundation conditions. 8. Recording seismographs should be installed at the crest of the dam, on the lower part of the dam, and on sound bedrock close to the dam. Belmeken Sa&dle Dam 9. The Earth Saddle Dam has been in operation since 1975 and has performed satisfactorily. Wlth the reservoir at maximum level, significant saturation of the downstream shell of disintegrated granite occurs. It is entirely possible that in the future, the reservoir could be maintained at high -77- Annex I page 2 of 5 level for longer periods of times than in the past. Because the undrained residual strength of saturated disintegrated granite probably is very low, the stability of the downstream slope of the saddle dam becomes questionable particularly during an earthquake; but also if the saturation reaches the downstream face without earthquake loading. 10. It is important therefore to install a cut off in the disintegrated granite from E1 1911 to crest of dam to prevent saturation of the downstream shell. Preferably, this cuc