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Regulatory Governance and Chile's 1998-1999 Electricity Shortage

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  • Ronald Fischer

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  • Alexander Galetovic

    ()

Abstract

In the early eighties Chile completely reformed its electricity sector, introducing a regulatory framework that became extremely influential in the rest of the world. In 1998 and 1999, however, when the La Niña phenomenon brought one of the worst droughts on record, the price system collapsed. Random outages and three-hour long rotatingelectricity cuts occurred. This paper studies the interaction between regulatory incentives and governance during the 1998-1999 electricity shortage. We present evidence showing that it was feasible to manage the supply restriction with no outages. The shortage can be blamed on the rigidity of the price system, which was unable to respond to large supply shocks, and on deficiencies in regulatory governance, which led to a weak regulator that proved unable to make the system work. We show that the weakness of the regulator did not stem from lack of formal powers. The problems originate in the vulnerability to lobbies and lack of independence. Moreover, the regulator seems not to have fully understood the nature of the incentives in the price system during supply restrictions. We conclude that the Chilean shortage shows the limitations during crisis of a rigid price system requiring heavy regulatory intervention. This suggests that countries where governance structures are ill suited to fill in 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.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 84.

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Date of creation: 2000
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Handle: RePEc:edj:ceauch:84

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  1. Serra, Pablo J., 1997. "Energy pricing under uncertain supply," Energy Economics, Elsevier, vol. 19(2), pages 209-223, May.
  2. Bernstein, Sebastian & Agurto, Renato, 1992. "Use of outage cost for electricity pricing in Chile," Utilities Policy, Elsevier, vol. 2(4), pages 299-302, October.
  3. Pablo Serra & Gabriel Fierro, 1996. "Outage Cost in Chilean Industry," Documentos de Trabajo 10, Centro de Economía Aplicada, Universidad de Chile.
  4. Nesbakken, Runa, 1999. "Price sensitivity of residential energy consumption in Norway," Energy Economics, Elsevier, vol. 21(6), pages 493-515, December.
  5. Sanghvi, Arun P., 1983. "Optimal electricity supply reliability using customer shortage costs," Energy Economics, Elsevier, vol. 5(2), pages 129-136, April.
  6. Federico Basañes & Eduardo Saavedra & Raimundo Soto, . "Post-Privatization Renegotiations and Disputes in Chile," ILADES-Georgetown University Working Papers inv117, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
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Cited by:
  1. Yu, W. & Pollitt, M.G., 2009. "Does Liberalisation cause more Electricity Blackouts? Evidence from a Global Study of Newspaper Reports," Cambridge Working Papers in Economics 0911, Faculty of Economics, University of Cambridge.
  2. M. Pollitt, 2004. "Electricity reform in Chile. Lessons for developing countries," Competition and Regulation in Network Industries, Intersentia, vol. 5(3), pages 221-263, September.
  3. Galetovic, Alexander & Muñoz, Cristián M., 2011. "Regulated electricity retailing in Chile," Energy Policy, Elsevier, vol. 39(10), pages 6453-6465, October.
  4. Arango, Santiago & Dyner, Isaac & Larsen, Erik R., 2006. "Lessons from deregulation: Understanding electricity markets in South America," Utilities Policy, Elsevier, vol. 14(3), pages 196-207, September.
  5. Murillo, Maria Victoria & Foulon, Carmen Le, 2006. "Crisis and policymaking in Latin America: The case of Chile's 1998-99 electricity crisis," World Development, Elsevier, vol. 34(9), pages 1580-1596, September.

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