## Industry Restructuring and Regulation -Building a base for sustainable growth

- each company within the size group is asked to estimate the efficient level of operating costs; and

- a weighted average of the studies carried out by the NEC and the companies is used.

Clearly, the incentive for companies is to boost the value of their estimate since they will gain from the higher value (equally, the regulator has an incentive to push values down). During the 1992 price review, discrepancies of 50% were found.

## **Argentina electricity**

Transmission investment is considered a problem in Argentina at the moment. More than 90% of power outages in the system have their origins in transmission problems that could be substantially avoided with increased investment. Yet the investment has not been forthcoming. One of the primary reasons for this problem is the transmission pricing system that was established during the reforms. An element of the transmission price is an administratively set congestion charge - this has been found to be insufficient to meet the costs of investment required to overcome system congestion and constraints. This means that alternative sources of funding are also required.

A further consideration for investment in transmission is that the rules governing investment decisions only define generators as beneficiaries (not distributors or large consumers). This impacts on the investment decisions since it is the beneficiaries that are levied to finance the project and, correspondingly, if sufficient beneficiaries object the project isvetoed. These issues are under review with several options for improving the system being proposed.

# 3.4 **Transitional problems**

The issues that so far have been discussed in this section arose from deficiencies in, or constraints/problems with, the designs of the reform packages. There is, however, another series of problems that need to be considered. These arise from:

- a lack of reform in other areas of the economy; or

- a mismatch in the timing of reform.

The former can lead to unforeseen problems that run for a significant amount of time while the latter leads to a more transitional problem.

At the heart of this discussion is the fact that reforming the utility and infrastructure sector leads to a series of demands being placed on the economy. These demands include:

- the ability to handle an influx of workers that have been released from the utilities as part of the efficiency drive;

- the necessary depth of financial markets to meet domestic investment requirements; and

- a suitably flexible institutional arrangement, both within the utility and infrastructure sector and outside of it, that is able to meet the unforeseen consequences of the reform package.

> 24 A recent paper, Tumell (1999), considers three key conditions that should be met to ensure the success of the restructuring and privatization. These are the establishment of unitary control rights, hard budget constraints and a non-corruptible judicial system linked with transparent bankruptcy procedures. Turnell also addresses the question of whether reform should be initiated when some, or all, of the conditions have not been met. Depending on the probability of other political windows of opportunity for privatization and the conditions that have not been met the answer seems to relay on a fram ework of trade-offs, with no hard and fast answer.

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