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Govt intervention seen distorting power markets, delaying investments in Latam

Chris Hunkeler/Flickr

Political intervention, institutional weakness undermine LatAm regulators: panel

- Ideological charge unavoidable, but technical expertise needed
Regulatory stability key for investments

By Sheky Espejo/Platts

Petroleumworld 03 15 2021

Despite being at different stages of development, Latin American power markets share one common challenge: the political pressure on their regulatory bodies due to institutional weakness, experts from Argentina, Chile, Mexico and Uruguay said March 10 during a webinar on the role of energy regulators in the region.

This hampers their ability to foster competition and secure benefits for the population, the panel experts -- who have all served as members of their respective regulatory bodies -- said.

The region's energy sector has been largely politicized throughout history, and repeated government intervention has created distortions in the market. These distortions in turn have had impacts on investments, according to the panelists.

In Argentina, when financial crises hit in 2002 and 2018, the government renegotiated contracts with private companies denominated in US dollars, which created uncertainty and has delayed investments, said Griselda Lambertini, a former director of ENARGAS, Argentina´s natural gas regulator.

In Chile, when the US dollar hit record strength in recent years, the government intervened to stabilize electricity prices and created a mechanism to phase out payment to generators, said Andrés Romero, the former executive Secretary at CNE, the country's energy regulator.

In Mexico, the current president has just modified the law of the electricity sector, eliminating the economic dispatch to allow the plants of the state utility CFE to have priority over private, newer, greener plants, said Susana Cazorla, former head of the natural gas unit at CRE, Mexico's energy regulator.

"The political and ideological charge of the energy sector cannot be avoided, but it should also have technical expertise and that takes decades to develop," said Daniel Greif, former president of URSEA, Uruguay's energy and water services regulator.

In Uruguay, the reforms that allowed for energy transition came late, allowing the country to learn from others' mistakes, Greif said. Uruguay is ranked first in the Americas in terms of clean energy adoption with almost all of its consumption coming from renewable sources, including hydro power, he said.

Weak institutions

Total independence of the regulators from the political power is still a challenge in the region, Romero said, adding that their week institutional structure is partly to blame.

Regulation must be based on evidence, and should include a serious analysis of alternatives, he said.

"Potential impacts of all new regulation must be shown, as well as the path to their implementation and their objectives," he said.

The legal structure of a country and its capacity to respect rules are part of its reputation, and that reputation is directly related to their attractiveness to investors, panelists said.

"There is no business model in the world that works in a country without reputation," Cazorla said, adding that politicians and lawmakers in Mexico are partly to blame for the institutional weakness of the regulators in Mexico, who were easily influenced by the federal government.

"We fell short in the design of the regulator; we failed to make it completely independent," she said.

Chile has learned from its mistakes and has developed an efficient market that has brought prices to consumers down, Romero said.

"We learned we had to maximize the use of our own resources to reduce our dependency from imported fuels, but we also learned it had to be done using market rules," Romero said.

In order to create a market, however, regulatory stability is key, he said.


By Sheky Espejo from S&P Global Platts
03 11 2021



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