Second Generation Reforms in Latin America and the California Paradigm

In this paper we discuss second-generation electricity reforms being formulated in Latin America and how they are being reshaped by the California crisis, which had stood as a paradigm, at least in theory, for fully competitive markets. We argue that the main lesson policy makers in Latin America should draw from the experience in California and other electricity markets around the world is that the liberalization of wholesale markets will not result in more competitive outcomes where market concentration is significant, final consumers are isolated from actual marginal production costs and capacity is tight. At least in the case of Argentina and Chile, the California crisis has had a “positive externality” by persuading policy makers, at least momentarily, to postpone liberalization reforms and make them realize the complexities in implementing competitive markets. Latin American electricity supply industry The electricity supply industry in Latin America has faced a profound transformation, with no parallel worldwide. Challenges are diverse in the region, all countries requiring high investment to respond to very large growth of demand. While industrialized countries have an average annual growth of 1 to 2%, the Latin American subcontinent has an average growth of over 5% and higher in periods where their economies are expanding. Chile is a good example of growth rates present in the region (Fig. 1). Figure 1. Demand growth rates, Chile Figure 2. Per capita electricity consumption and PGB 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 1986 1987 1988 1989 199