Taking Stock of Economic Regulation of Power Utilities in the Developing World

The model of power sector reform that emerged during the 1990s placed considerable emphasis on the creation of an independent regulatory agency, with a strong orientation toward technically-driven tariff-setting procedures. Despite widespread uptake of regulation, implementation has proved to be challenging in the developing world. Regulators were seldom as independent as originally envisaged, with widespread divergence between the formal regulatory framework and the day-to-day practice of regulation. In practice, many developing countries operate with “advisory regulators” whose main role is to provide technical support to the ultimate political decision makers. Nevertheless, there is some evidence that regulation has had a positive performance impact, particularly where utilities are privatized and in middle-income settings. But the impact is more questionable in cases where regulation is primarily directed toward state-owned enterprises, which lack the commercial incentives to respond to regulatory instruments. On the choice of regulatory regimes, the ongoing debate between price cap and rate of return regulation suggests that the latter may be better suited to developing country environments where the priority is to provide predictable returns to support large capital investment programs. Furthermore, the advent of technological disruption in the power sector demands an adaptation of the way in which regulatory instruments are designed and applied. Regulators will need to pay closer attention to providing the right incentives for utilities to innovate and become more energy efficient, and for consumers to take economically grounded decisions on distributed generation. Finally, the literature leaves many important questions unanswered, such as how regulatory design affects regulatory effectiveness and the impact of tariff regulation on cost recovery.