REGULATORYAND COMPETION POLICY ISSUES IN THE PRIVATIZATION OF PUBLIC UTILITIES: THE CHILEAN EXPERIENCE

SUMMARY OF PRESENTATION 1.The Regulatory Framework 2.Lessons From the Chilean Experience 3.Institutional Regulatory Reform

1.The Regulatory Framework

Chile opted for a system of incentive based regulation  Innovative use of benchmark regulation through the development of the “efficient firm” model.  Non exclusive concessions  Mandatory interconnection  Cross subsidies have been replaced for direct subsidies and prices were rebalanced prior to privatization.  Universal service obligation for network monopolies  Each sector has its own regulatory authority appointed by the government operating within government ministries

Electricity Regulation  Regulatory framework assumes competition in power generation and in supplying large customers.  Assumes that electrical transmission and distribution are natural monopolies  Prices for small customers are regulated. The regulated price is the sum of the node price and distribution charges.  The Economic Load Dispatch Center coordinates short term operation dispatching with short term marginal cost.  Distribution charges are set to provide a return on assets for an efficient firm.  Regulation has been changed only once to establish mandatory compensation in case of rationing to regulated customers (even in an extremely dry year).

Telecommunications regulation  Active regulation and deregulation to promote competition  The Antimonopoly Comission forced separation of CTC and Entel.  Long distance legal monopoly abolished in 1994  Only local phone rates are regulated  Regulation of access tolls in 1993  Cellular phone prices are freely determined  Cable TV companies are allowed to provide local phone services and Internet connection.

2.Lessons from the Chilean experience

A. It has promoted important increases in the internal efficiency of firms In electricity:  Energy losses in electrical distribution companies were reduced from 30% to 6%.  The number of clients per worker doubled from 300 to 600  GWH generation per worker doubled from 4,5 to 9. In telecom :  The number of phone lines per worker rose from around 70 to 250. The privatization and regulation of public utilities has worked well in two respects

B. In general it has promoted investment and increased coverage In electricity:  Electricity coverage increased from 92% to 98%.  Significant private investment in power generation  The quality of electricity distribution service has not improved significantly

 Outgoing international traffic increased from 20 million minutes to 200 million minutes.  Mobile phones approaching 4 million, exceeding the number of fixed lines (10% of local service traffic)  The local phone network, fully digital in 1993  Chile has the highest penetration of Internet 9% in Latin America, and currently combined services of cable TV, Internet access and telephone are available.  Waiting list have been almost eliminated in fixed phone services  Choice of providers are available in many places In telecommunications :  Fixed telephone lines rose from 600,000 to 3,500,000 in 10 years, 30% penetration, the highest in Latin America

Poor performance regarding: A. Above normal rates of return particularly in regulated segment of the sectors RATES OF RETURN ON EQUITY Electricity Distribution Electricity Generation (1995) 30% 15% Basic Telephony (1996) Long Distance % 43% 8.4%

B. Prices significantly above efficient level particularly in regulated segment Average Household Bill International Call (Chile-USA) Basic Telephone US$ per minute (Ch$ ) Node Price of electricity US$ per kWh ,082 0,132 0,089 0,10

C.Unnecessary entry delays with associated welfare losses D. Years of interconnection-to the network-related lawsuit in basic telephone and electrical distribution and transmission E.Lengthy and costly resolution of conflicts F. No new entry since privatization of electricity generation G. High barrier to entry into local phone services until 1999

 Consumers have benefited from the increased efficiency with reduction in prices and better quality of services only in cases where competition has emerged  The restructuring of utilities prior to privatization was insufficient Conclusions: A. Regarding Promotion of Competition  Privatization processes should be implemented focusing in promoting competition whenever possible.

B. Regarding the regulation of monopolistic segments  Significant i nformation asymmetries  Lack of technical capacity of regulators vis a vis the companies being regulated  Sheer economic and political power of utilities has led to regulatory capture

 Turnover rate of regulatory professional to the private sector has been considerable  Unresolved overlapping jurisdiction across agencies particularly antitrust regulators and environmental agency.  Failure of regulation during electricity shortage.  Signals of short-term political influence in the regulatory process

3.Institutional Regulatory Reform

Basis for the Restructuring of Regulatory Institutions Principles for Reform 1.Promotion of Market or Yardstick competition 2. Independence  In order to shield regulation from political interference and reducing risk of political capture  The selection process should involve both the executive and the legislative, branches.  The creation of independent regulators also reduces the problem of lack of commitment by political principals.

 Sector –specific independent professional regulators are vulnerable to capture by the very industry they regulate.  Independence can reduce democratic accountability. How to increase Accountability while maintaining independence: “ Highly complex regulation can be monitored and kept politically accountable only by a combination of control instruments: Legislative and executive oversight, strict procedural requirements, public participation and substantive judicial review” Scott Jacobs OECD  Sector-specific independent regulators can reduce political will for real reform that encourages competition Independence also has some problems:

3. Autonomy  Agencies have to have access to their own funding sources  Flexibility in hiring qualify staff with market salaries and specialized external consultants. 4. Check and Balances and Separation  The introduction of different agencies having specific oversight functions regarding the utility with well established procedures improves commitments and reduces the risk of capture.

 Interaction between the firm and the independent regulator, the independent antimonopoly commission, the government Ministry, the Environmental Agency  Appealing to specialized economic courts within the judiciary 5. Regulatory Commissions versus Individual regulators  With members overlapping over time reduces the risk of capture.

6. Multi sector versus sector Regulators  Bundling utilities with natural monopoly characteristics into a single commission network  Allows taking advantage of economies of scale regarding technical regulatory capacity  Keep overlapping responsibilities with other agencies  Reduce regulation induced asymmetries in pricing  Lost yardstick competition among sector regulators