**_Electricity Sector Reform in Developing Countries, Jamasb, Mota, Newbery, Pollitt_**

regulatory framework for effective competition and privatisation on the one hand, and transference of efficiency gains to customers on the other, is increasingly recognised and stressed in the reform literature (Brown, 2002). This emphasis on the importance of regulatory reform is also in line with the findings of the econometric studies reviewed in this paper.

Chisari, Estache, and Romero (1997) use a fixed-price, general equilibrium model and data from 1990/91, 1993, and 1995 to quantify the importance of effective regulation when Argentina deregulated its infrastructure industries. The findings suggest that between 1993 and 1995 the savings from operational gains for all utilities sectors combined amounted to 41% of household expenditure on utility services (i.e. US$ 2.3 billion or 0.9% of the GDP). Using a flexible-price model, the gains from efficient regulation are estimated at about 16% or US$ 0.9 billion. The results also suggest that while the operational gains (in term of percentage of household expenditures on utilities services) to the high-income groups were larger, gains from effective regulation also benefited low-income groups. Moreover, between 1993 and 1995, the gains from electricity generation with fixed-price and flexible-price models amounted to 0.05% and 0.1% of the GDP, while the gains for electricity distribution amounted to 0.17% and 0.21% respectively.

Mota (2003) also stresses the importance of regulation on welfare distribution. The paper presents a social cost-benefit analysis of privatisation of electricity distribution utilities in Brazil between 1993 and 2000. The paper found significant efficiency gains from cost savings and increased labour productivity. The estimated efficiency gains amount to about $US 12 billion. of which approximately $US 2.2 billion accrued to consumers (at 12% discount rate). The results indicate that, although consumer surplus showed signs of growth, companies were allowed to retain most of the achieved gains. These findings are in line with a shortcoming of the reform design: tariff restructuring and privatisation occurred before a regulatory agency was established.

Estache, Guasch, and Trujillo (2003) argue that price-cap regulation in privatised sectors in Latin America has generally not been very successful. The paper argues that firms have improved efficiency under price cap regime, but price-caps have tended to increase the cost of capital, and hence, tariffs. At the same time, due to regulatory weakness and lack of government commitment, as is the case of electricity distribution utilities in Argentina, much of the gains have either remained with companies or have been captured by the government.

Low rates of public approval for reform may be linked to an inequitable distribution and low level of customer gain. Lora and Panizza (2002) refer to surveys of public opinion in 17 countries in the region that show a growing disapproval of the reforms, in particular among the middle classes. Without visible benefits and strong support from public opinion the sustainability of the reform process can easily be undermined. At the same time, it may be argued that some mistakes and problems are inevitable during the early years of reform.

For example, with regard to incentive regulation of distribution networks, the initial price-caps appear to have underestimated the cost saving potential of the utilities and/or 34