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Three keys for regulating public services

Three regulatory principles for promoting private investment and providing adequate coverage of public services were put forward by Sergio Espejo Yaksic, Supervisor of Electricity and Fuel in Chile, at a seminar held at the IDB. Using Chile's successful experience as a model, Espejo pointed out that sound regulation of rates was essential for promoting private investment in public services. Good regulation should enable investors to earn a reasonable profit, and at the same time ensure that consumers receive the services they need.

The first principle involves encouraging competition as much as possible. “As a general rule, we must have competitive markets,” Espejo said. “Prices should only be fixed in markets where competition doesn't exist or is very inadequate.”

The second principle, centered on monopolistic markets, suggests that regulators fix rates that cover production costs and give consumers the price-quality ratio for which they are willing to pay. “The rates, however, must not be related to efficiency and equity,” emphasized Espejo. “The objective of price fixing is to obtain rates equal to those achieved in a competitive equilibrium. Equity objectives, no matter how reasonably the government may aim to achieve them, must be met either by directly subsidizing the most vulnerable sectors or through other mechanisms unrelated to rates.”

The third principle involves stable regulations and mechanisms adequate for resolving conflicts. “These elements,” said Espejo, “are crucial for reducing transaction costs and making regulation more efficient.” The electricity expert stressed the importance of two recent legal developments in Chile: the court for the defense of free competition and a panel of experts on electricity matters. These institutions, both of which are independent and whose members govern during specific periods of time, bring about timely conflict resolution and establish rules designed to reduce uncertainty and stimulate competition. According to Espejo, “Transparency is fundamental, both at the technical level and with respect to a country's ability to immediately resolve conflicts. These elements are essential for giving full guarantees to foreign investors in public services.”