Regulation policies towards utilities and competitive industries. The case of Argentina

Abstract

Old theories of regulation of utilities considered a full -informed benevolent regulator that d eals with a monopolist who achieved its market power through economies of scale or economies of scope that gave it cost advantages. The regulator was supposed to maximize the sum of producer and consumer surpluses, setting prices equal to marginal costs. B ut as most utilities have decreasing costs, marginal cost pricing produces losses for the monopolist that might be compensated through budget transfers or two -part tariffs. If these options are not possible, the benevolent regulator might use Ramsey prices, trying to minimize the welfare cost of obtaining the revenues necessary for the firm to recover its costs. In this framework competition is not necessary, either because it is not possible, or because the full-informed regulator can perfectly mimic what competitive forces do in other industries. More recent theories point out that these assumptions about the regulators are not real. They usually have their own agenda, they have an information disadvantage viz. a viz. the regulated firm, they face politic al restrictions (current and intertemporal) and they may lack instruments that allow them to make commitments (and this augments the risk of opportunistic behavior). Moreover, the regulated firm may face competition in some segments of its activity. Therefore, the regulation of utilities is naturally imperfect and the social goals are not fully met. In this more realistic scenario, the possibility of introducing competition to some activities of the private utility allows the regulator to reduce its inform ative disadvantage and gives better incentives to the regulated firm to reduce costs. By reducing the discretion of the regulator competition reduces the risk of opportunistic behavior and makes cross -subsidies unlikely. However, both instruments of regul ation (competition in some segments of the market and regulation) are imperfect. The best mix of both instruments to achieve social goals will vary from one case to another. Finally, there is a strong correlation among three aspects of the reform process of public utilities: the design of the privatization process, regulatory practice and contractual adaptation. The instruments used to sell the public firms may affect the degree of competition in the market of the regulated firm and depending on the transparency of the auction they may ease or make more difficult contractual adaptations that may be necessary to overcome unexpected events at the time of the privatization. In any renegotiation of the contract the risk of “low balling” is always present, where firms make unrealistic bids to win the auction, and later attempt to change the contract in a bilateral negotiation with the government. This paper reviews the Argentine experience with privatization and deregulation. In 1989 Argentina initiated a massive program that included energy, telecom, water and sanitation, railways, ports, airlines, pensions and highways. In some cases, the privatization was accompanied by the deregulation of the whole market or some parts of it, in other cases exclusive rights were granted for a period of time to the new owner or concessionaire.