Abstract
We study regulatory incentives and governance during the 1998–1999 electricity shortage in Chile. We argue that it was feasible to manage the shortage with no outages. The outages can be blamed on the rigid price system and deficiencies in regulatory governance, which led to a weak regulator unable to make the price system work. The shortage shows the limitations of a rigid price system requiring regulatory intervention. It suggests that countries where governance structures are weak should rely as much as possible on market rules that clearly allocate property rights and leave contract terms to be freely negotiated by private parties.
Highlights
Until 1980,electric regulationin Chile followedthe usual patternof contemporaryelectricalsystems: stateowned firmsthat were verticallyintegratedand subjectto rate of returnregulation.The operationof electric generationcompanies(gencos)was inefficient,a consequenceof the statenothaving an independent regulatoryagencycapableof regulatingits ownfirms and of pricesthat were set in order to respondto short term politicalobjectives.This structurewas drasticallyreformedin the earlyeighties.!What was thena revolutionaryprice systemwas introduced,electricgenerationwas decentralizedand functionallyseparated from transmissionand distribution,and incentiveregulationwas introducedin distribution.Thesemassive changes in regulatoryincentiveswere supplementedwith the creationof a newregulatoryagencywith a ministerialrank, the Comisi6nNacionalde Energia(henceforthCNE), followedby the privatizationof the industry in the late eighties2
As we have mentionedbefore, when energysuppliesare restrictedthe spotprice shouldrise to the outage cost andgencos willpay regulatedusers the differencebetween the outagecost and the nodeprice for non-deliveredenergy.This meansthat all marketparticipantssee the opportunitycost of energyat the margin,andno shortageoccurs:
In the previous subsection we have argued that the rules of the Chilean price system cannot accommodate large supply restrictions
Summary
In the early1980sChile reformedits electricitysector, introducinga regulatoryframeworkthat became influentialworldwide.But in 1998and 1999La Nifia broughtone of the worst droughtson record, causinga pricesystemcollapse,random poweroutages,and threehour rotatingelectricitycuts. Fischerand Galetovicstudythe interactionbetween regulatoryincentivesand governanceduring the 199899 electricityshortage,showingthat the supply restrictioncould havebeen managedwithoutoutages. The shortagecanbe blamedon a rigid pricesystem, whichwasunableto respondto largesupplyshocks,and on deficientregulatorygovernance,whichled to a weak regulatorunableto makethe systemwork. The authorsalso showthat the regulator's k'eakness stemmednot from lackof formalpowershut from vulnerabilityto lobbyistsand a lackof independence. The regulatorseemsnot to havefully understoodthe incentivesin the pricesystemcluring supplyrestrictions. The authorsconcludethat the Chileanshortageshows the limitationsof a rigid pricesystemrequiringheavy regulatoryintervention.This suggeststhat cou:ntries whosegovernancestructuresare illsuitedto dlealingwith loopholesleft by the law shouldrelyas muchaispossible on market rulesthat clearlyallocateproperty rightsex ante and leavethe terms ofcontractsto be freely negotiatedby privateparties. The PolicyResearchWorkingPaperSeriesdisseminatesthe findingsof work in progressto encouragethe exchangeof ideasabout developmentissuesA. Av. Republica 701, Santiago,Chile.Ph: +56/2/6784065; Fax: +56/2/6897895; email: agaleto(dii.uchile.cl
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