Regulatory Governance and Chile's 1998-1999 Electricity Shortage

Posted: 4 Dec 2003

See all articles by Alexander Galetovic

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA)

Date Written: November 2001

Abstract

When the La Niña drought hit Chile in 1998-99, the country's recently reformed electricity sector suffered a price collapse. Power outages followed—but were they inevitable? No. The electricity shortage can be blamed on the rigid price system and deficient regulatory governance.

In the early 1980s Chile reformed its electricity sector, introducing a regulatory framework that became influential worldwide. But in 1998 and 1999 La Niña brought one of the worst droughts on record, causing a price system collapse, random power outages, and three-hour rotating electricity cuts.

Fischer and Galetovic study the interaction between regulatory incentives and governance during the 1998-99 electricity shortage, showing that the supply restriction could have been managed without outages. The shortage can be blamed on a rigid price system, which was unable to respond to large supply shocks, and on deficient regulatory governance, which led to a weak regulator unable to make the system work.

The authors also show that the regulator's weakness stemmed not from lack of formal powers but from vulnerability to lobbyists and a lack of independence. Moreover, the regulator seems not to have fully understood the incentives in the price system during supply restrictions.

The authors conclude that the Chilean shortage shows the limitations of a rigid price system requiring heavy regulatory intervention. This suggests that countries whose governance structures are ill suited to dealing with loopholes left by the law should rely as much as possible on market rules that clearly allocate property rights ex ante and leave the terms of contracts to be freely negotiated by private parties.

This paper - a product of Governance, Regulation, and Finance Division, World Bank Institute - is part of a larger effort in the institute to increase the understanding of infrastructure regulation. The authors may be contacted at rfischer@dii.uchile.cl or agaleto@dii.uchile.cl.

Keywords: Electric regulation, hydrological risk, regulatory governance

JEL Classification: L51, L94

Suggested Citation

Galetovic, Alexander and Fischer, Ronald D., Regulatory Governance and Chile's 1998-1999 Electricity Shortage (November 2001). World Bank Policy Research Working Paper No. 2704; CEA Working Paper No. 84. Available at SSRN: https://ssrn.com/abstract=278873

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

Ronald D. Fischer (Contact Author)

University of Chile - Center of Applied Economics (CEA) ( email )

Republica 701
Casilla 2777
Santiago
Chile
+56/2/678 4055 (Phone)
+56/2/689 7895 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
224
Abstract Views
1,642
rank
140,740
PlumX Metrics