Lessons from deregulation: Understanding electricity markets in South America * Santiago Arango a,b , Isaac Dyner b , Erik R. Larsen c, * a System Dynamics Group, University of Bergen, PO 7800 5020 Bergen, Norway b Energy Institute, Universidad Nacional de Colombia, AA 1027, Medellı ´n, Colombia c Faculty of Economics, University of Lugano, Via Buffi 13, CH-6904 Lugano, Switzerland Received 15 January 2005; accepted 19 February 2006 Abstract South America has been the most progressive region in the developing world in terms of deregulating the electricity industry. In this paper we compare the evolution of deregulation, from initiation to the current state, in four South American countries: Argentina, Brazil, Chile, and Colombia. These four countries are similar in many dimensions, such as culture, language and macro-economic development. They are also all depending, to a large extent, on hydro-generated electricity. All four countries have implemented different deregulated systems, allowing a unique possibility to compare the performance of different implementations of deregulation on one continent. We describe the course under- taken by these countries and the results attained so far, and also compare and contrast the development of the different electricity industries. Finally, we discuss what can be learned from these countries and what they can learn from each other. Ó 2006 Elsevier Ltd. All rights reserved. Keywords: Electricity markets; Deregulation; Latin American energy 1. Introduction After two decades of electricity market deregulation in South America, we have accumulated broad experience of the process of deregulation, and it is important to codify some of these experiences. This is not only important for fur- ther development in South America but also relevant to other regions that are in the middle of liberalizing their electricity markets. While deregulation has already taken place in a variety of countries and regions it is interesting to compare countries in South America, which in some respects have many economic and demographic similarities but have chosen very different routes towards deregulation. Their institutional, and to some extent market, arrangements present significant differences. Furthermore, as deregulation has taken place at very different times during the last 20 years, it is fair to ask if the latecomers to deregulation have learned from the earlier experiences of neighboring countries. We believe that before assessing the impact of deregulation on a global scale we need to have a much better understanding of national and regional issues. The aim of this article is to contribute to the growing body of analysis of deregulation. By providing more case studies of the deregulation processes we improve our understanding of liberalization already underway, draw lessons from a com- parison of experiences, and most importantly, make it possible to avoid repeating the failures while replicating the successes. Electricity reform focuses on replacing monopolies with open and competitive markets. The underlying motivation * An earlier version of this paper was presented at the 26th Annual Confer- ence of the International Association for Energy Economics, Prague, June 4e6, 2003, with the name of ‘‘Past, Present and Future of the Latin-American Electricity Markets’’. This paper presents part of ongoing research that has been undertaken by the authors since early 2002. * Corresponding author. Tel.: þ41 (0)58 666 4639. E-mail addresses: santiago.arango@student.uib.no (S. Arango), idyner@ unalmed.edu.co (I. Dyner), erik.larsen@lu.unisi.ch; e.r.larsen@city.ac.uk (E.R. Larsen). 0957-1787/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.jup.2006.02.001 Utilities Policy 14 (2006) 196e207 www.elsevier.com/locate/jup