Bustos A., Galetovic A. (2007).

Monopoly regulation Chilean style: the efficient firm standard in theory and practice. In Chisari O. O., Regulatory Economics and Quantitative Methods: Evidence from Latin America, Chapter 4. Edward Elgar Publishing.




The core of public utility regulation in Chile is the concept of the efficient firm-defined as a hypothetical firm that produces the quantity demanded at the lowest cost that is technically possible. Although efficient firm regulation has been used in Chile for nearly 20 years now, there is still considerable controversy surrounding its conceptual underpinnings. For example during the most recent price-setting processes for telecommunications and water and sanitation companies, bitter disputes arose between the regulator and the firms over the correct way to include depreciation in the price calculation. This chapter presents a simple model that makes it possible to consistently analyse the microeconomic foundations of efficient firm regulation; it compares this with the best known alternatives, namely regulation based on rate of return and the price-cap; and it analyses the extent to which the formulas used to set prices among water companies, electric power distributors and dominant phone companies correctly reflect the microeconomic principles that underpin them. One of the chapter’s contributions is to highlight the common structure and foundations underlying public utilities regulation in Chile.