of the effectiveness of the use of their regulatory instruments (such as the methodology to calculate tariff readjustment) or the quality of stakeholders’ involvement in public consultations. Rather it is aimed at capturing the institutional conditions necessary to achieve good regulation regardless of their scope and impact on the sector’s performance (Correa _et al._ , 2006). While we considered some practices (informal regulation) of agencies’ governance, the indicators used are referred to the operationalization of particular aspects of agencies’ governance but did not measure their full effectiveness.

In this paper we combine our data on electricity agencies’ governance with data collected at the company level and assess the impact of regulatory agencies on utility performance in the electricity sector of the LAC region. This research fills a gap in the literature on the subject as previous attempts to interrelate the notions of governance of agencies and performance of the electricity sector have focused on very limited factors, affecting the scope and explanatory power of the research. On the governance side, previous research has only focused on the existence of an agency, a legal framework, or particular aspects of its governance, mainly its autonomy, emphasizing formal attributes. On the performance side, only electricity generation per capita was used as an indicator related to governance (Stern and Cubbin, 2005). Estache and Rossi have recently written a paper exploring the relationship between the establishment of an agency and the efficiency of the utilities as well as the welfare of the consumers (Estache and Rossi, 2007).

In this paper, we go further as we create an aggregate index with different critical aspects of the governance of regulatory agencies and we relate and relate it to several factors that represent the performance of utilities and assess its impact on sector performance. Based on the hypothesis that agencies (and their governance) have a positive impact on performance, we develop a methodology where we ran different models in order to explain the contributions of change in ownership and different characteristics of the regulatory agency and of its governance on the performance of the utilities. The results suggest that the mere existence of a regulatory agency, independent of the utilities’ ownership has a significant impact on performance. Furthermore, after controlling for the existence of a regulatory agency, the ownership dummies are still significant and display the expected signs. We also proposed an experience measure in order to identify the gradual impact of the agency on performance. Our results confirm this hypothesis.

In measuring governance, we explore two different approaches: (i) we use an aggregated measure of regulatory governance (Electricity Regulatory Governance Index, ERGI); and (ii) we decompose several dimensions of agencies governance into three main principal components related to both informal and formal aspects of autonomy, transparency, and accountability; we also include agencies’ attributes in setting tariff structure and levels as an independent variable together with the formal and informal dimensions of autonomy, transparency, accountability, and tools. The results suggest that governance matters and that it has significant impacts on performance when we simulated a standard deviation in each of these indexes.

The paper is organized as follows: The next section is a review of the literature on institutional design of independent agencies as well as on the impact of private sector participation on sector performance. The third section proposes an analytical framework for regulatory governance. Section 4 presents the empirical approach for measuring the impacts on performance and section 5 describes the data. Section 6 provides a detailed the different institutional arrangements on sector performance and on institutional quality outcomes, the cross-regional nature of our research and the limited resources to undertake this task convinced us of this approach as the most convenient.

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