Impact of regulation on the quality of electricity service in Latin America and the Caribbean

Impact of regulation on the quality of electricity service in Latin America and the Caribbean

The quality of electricity service is essential for human well-being and development. In addition, every day, a quality service becomes more important to guarantee the economic competitiveness of the countries of Latin America and the Caribbean (LAC), in the midst of the advancement of the new industry 4.0 that appears with digitalization.

According to the Latin American Public Opinion Project (LAPOP), from the point of view of the general population, one in three citizens in LAC is not satisfied with the quality of service provided by electricity distribution companies. Despite there being a significant heterogeneity between different companies, supply interruptions appear as a challenge to be faced in most of them.

The quality of the electricity supply depends on the proper functioning and coordination of the entire chain of the electricity system: generation, transmission and distribution. Distributors are still in charge of supplying electricity to final consumers through a low-voltage and high-voltage network infrastructure. Due to the high initial investment costs required in infrastructure, this activity is characterized by presenting economies of scale that motivate the existence of a single distribution company in a local territory. This implies that, for each geographical area, the provision of the distribution service is generally in charge of a single company, configuring itself in a natural monopoly in each zone.

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Therefore, regulation plays an important role in promoting better quality electricity service. However, in practice, information asymmetries tend to affect the effectiveness of regulators. In parallel, the absence of reliable and comparable information makes it difficult to assess the impact of the different types of regulation between different countries in similar situations.

In this way, the IDB study presents evidence of the effectiveness of regulation on the quality of electricity supply in countries of LAC; Between 2000 and 2019, improvements in the continuity of electricity supply were observed in LAC countries). From a sample of 143 electricity distributors, it was estimated that the average duration of interruptions per customer / year (SAIDI) has decreased by 40% and the average frequency of interruptions per customer / year (SAIFI) by 45%. . During this same period, several countries adopted regulatory instruments to measure quality indicators, and establish minimum standards or incentives to reduce interruptions in the electricity supply.

To understand the relationship between the improvement of the indicator with regulatory measures, the IDB study applied an econometric model using public data available from regulators and companies in each country to analyze the impact of quality regulation on the SAIDI, SAIFI indicators. and equivalents, in addition to the influence of other characteristics of the distribution companies on said indicators. The analysis was carried out in only nine countries of the region due to the unavailability of data for the others: Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Panama, Peru and the Dominican Republic. The results are consistent with what was previously expressed: having effective regulatory instruments improves the quality of supply.

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Using these SAIDI and SAIFI data, the estimates show that quality regulation had a beneficial effect in reducing the average duration and frequency of interruptions per customer in the companies evaluated in the sample; and that this improvement tends to increase over time. The publication of the electricity supply continuity indicators of the distribution companies on the regulator’s website in a transparent manner also seems to contribute to the improvement of the companies’ SAIDI indicator. It is important to highlight that, looking at the descriptive statistics, public companies have a higher SAIDI and SAIFI on average, but the dispersion of these indicators is greater in private companies, the latter having the worst performance indicators in the sample. Therefore, the comparison between public and private companies in terms of performance in continuity of supply is not conclusive.

However, the study allows us to raise other questions about the type of quality regulation and the need to carry out more regulatory impact studies in order to move faster and with better practices. It would also be interesting to evaluate other variables in the model estimates, such as: climate, presence of underground networks, existence of a marketer, losses, income of the population, and the difference between urban and rural regions. Indeed, the analysis of the impact of these variables on the SAIDI and SAIFI of the companies would be interesting to assess the relationship between climatic and socioeconomic issues, with the quality of the continuity of the electricity supply. Studies of this type would help to verify if it is important to include instruments in quality regulation that allow reducing such effects and regional inequalities.

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Finally, the results of the IDB study point to the importance of regulation on the quality of electricity service implemented in LAC countries. However, there are limits in promoting the quality of services. There are always strategic calculations by regulated agents and complex situations of political economy, mainly when they involve public companies. Incentives for investment in digitization and other new technologies can be complementary mechanisms to achieve sustainable and lasting improvements in service quality.

The full study can be found on the IDB Publications website.

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