Light and Lightning at the End of the Public Tunnel: Reform of the Electricity Sector in the Southern Cone

23 Pages Posted: 20 Apr 2016

See all articles by Antonio Estache

Antonio Estache

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Martin A. Rodriguez Pardina

MacroConsulting S.A.

Date Written: May 1998

Abstract

Competition, rather than privatization, is the key to transforming the electricity sector in Latin America's Southern Cone-and not just head-to-head competition. Competition for the market and against yardsticks are also important instruments for regulators. Estache and Martin Rodriguez-Pardina provide an overview of recent privatization experiences in Argentina, Brazil, and Chile. They focus on both achievements and outstanding problems in the electricity sector. They pay special attention to the issue of whether regulators can enforce compliance and sustain the spirit of reform-bringing the forces of competition to the sector-despite the unavoidable adjustments and fine-tuning that effective regulation requires. Among the lessons: Competition, rather than privatization, is the key to transforming the sector. For competition to work, several conditions must be met: 1. The primary energy source must be competitive for competition in the wholesale market to work. (In Chile, the fact that most of the water rights have been allocated to the major generator company seriously limits efficiency in the sector.) 2. Monopolistic stages must be formally separate from other stages, with clear rules for third-party access. (Here, the structure adopted by Argentina seems superior to that adopted by Chile.) 3. New entry into the system is the ultimate test of competition. The main gain from competition in electricity generation comes from the decentralization of decisions about when, how much, and what type of generation has to be brought to the market, rather than from short-term gains from minimizing costs. Overall, vertical and horizontal separation in the sector increases rather than reduces the burden and complexity of regulation. In a disintegrated system, the issues that arose in a traditional monopoly situation (fair rate of return, asset base, tariff to final consumers, and so on) are significantly increased. New issues include third-party access, the promotion of competition, interconnection pricing, and consistency of regulations across stages of competitive development. Restructuring and privatization are still in their early stages so lessons drawn from experience must be considered tentative. This paper - a product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation. Antonio Estache may be contacted at aestache@worldbank.org.

Suggested Citation

Estache, Antonio and Rodriguez Pardina, Martin A., Light and Lightning at the End of the Public Tunnel: Reform of the Electricity Sector in the Southern Cone (May 1998). World Bank Policy Research Working Paper No. 2074. Available at SSRN: https://ssrn.com/abstract=597211

Antonio Estache (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
32 (0)2 6503838 (Phone)

Martin A. Rodriguez Pardina

MacroConsulting S.A. ( email )

Lavalle 190
Piso 5° Oficina i
Buenos Aires, C1047AAD
Argentina

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