The country urgently needs an electricity reform

In recent years, concerns over electricity costs and the impact of such costs on the country’s productivity have increased. According to a recent CINDE study, the price of electricity in Costa Rica has risen significantly compared to that of other countries with which it competes in attracting investment.

This cost is, in large part, a product of the laws and regulations that govern the industry. According to OECD data, regulations to the electricity sector are among those that have the greatest impact on the economy. It is no surprise that the billing rates of regulated services grow much more rapidly than services with free-market pricing.

Although the issue is often discussed in the press and elsewhere, the solutions proposed so far solve only part of the problem. Hence, it is necessary to propose a comprehensive systemic reform.

The current regulatory model in Costa Rica is, with certain nuances, that of a vertically integrated monopoly. This is the typical model whose use began 70 years ago, when it was effective in ensuring the coverage and supply of electricity across practically the entire national territory, and eventually carried over to the introduction of renewable energy sources. However, the once progressive framework has become a stagnant and costly barrier to change.  It is well past time to introduce far greater efficiency and lower service costs.

To implement the best international practices in the matter, a modern regulation must be adopted that includes the following:

Separation of activities: The different activities of the industry must operate separately and independently of each other. Some of these segments (transmission and distribution) are natural monopolies, and others are susceptible to introducing competition (generation and commercialization). For each of these divisions, specific regulations must be designed to promote efficiency effectively. These rules must include non-discriminatory access to transmission and distribution networks and assets; restructuring of the electricity generation monopoly to allow greater competition; and the creation of a modern, independent system operator.

Abandoning the notion of “public service”: The current conception of public service excludes the free participation of rival providers of such services under a free market regime since the State assumes ownership of the activity and unilaterally decides whether to allow third parties to provide it and the terms of such concession. The concept of “Economic Service of General Interest” which has been successfully applied in other countries should be adopted.

Efficient regulation of rates: The ARESEP Law requires setting rates under a “rate of return” model, which encourages an increase in costs and leads to overinvestment. Instead, other regulatory tools have been developed (such as price caps, model companies, and yardstick) that promote efficiency and simulate competition, resulting in obvious benefits for users.

The role of the regulator: Competent reform would also imply strengthening the powers and independence of the regulator, including the possibility of dictating policies, flexibility to adjust them as required, timely review of actions taken, etc. The foregoing would establish a system of “regulation by objectives,” with a constant evaluation of the results of the regulation and changes to the regulatory model as required.

Competitive neutrality: All market operators, public or private, must have the possibility to compete on equal terms, without any type of preference beyond competition based on merit.

Competition and regulation are allied: Regulation should not be eliminated, but rather used as a vehicle to seek a competitive model that promotes greater efficiency, reasonable rates, a guarantee of supply, and better-quality energy output for users.

Certainly, modifying regulation is a slow process. However, if the changes are done properly, they can generate an effective and lasting solution, making our efforts to attract international company operations much more competitive.


Author: Uri Weinstok

BLP Partner

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