Did Unbundling and Incentive Regulation in Electricity Boost Efficiency Gains in Latin America?

Since the 1990s, different reforms have been implemented in the electricity sector of many Latin American countries. Those embraced vertical disintegration, privatization, and the introduction of incentive regulation, while vertically integrated public monopolies prevailed in other Latin American countries. We explore the technology of the electricity distribution sector in Latin America to analyze productive efficiency. We use a parametric stochastic distance function which includes controls, companies’ features, private versus public property, vertically integrated versus unbundled sectors, and the regulatory model which defines the pitch, among others. The focus is on the distribution segment within the electricity industry. We examined a sample of 73 electricity distribution companies from 9 countries over 14 years and found a 70% average efficiency. This study differs from the preceding literature (discussed extensively) because: (1) it encompasses several Latin American countries (while most existent studies focus on national cases); (2) it uses a specially developed database, which standardizes variables and covers longer periods than preceding studies to employ econometric estimation techniques; (3) it addresses various aspects of the efficiency discussion. The results reveal differences in efficiency scores (being the unit an indication of full efficiency) by regulatory regime, with the best average results for Reference Firms (0.74) concerning Price Cap (0.66) and Cost-Plus (0.71). Private companies show higher average efficiency levels (0.72) than public ones (0.66). Vertically integrated monopolies, on average, behave poorly in efficiency comparative terms (0.46 versus 0.71 of unbundled firms). Nevertheless, the quantitative differences are not overwhelming, except in the last case.