Regulatory lag, efficiency, and performance. Lessons from a case study

Abstract

Our main contribution is to identify the risks implied by the existence of prolonged regulatory lags. We hypothesize that a likely first response is to reduce OPEX, increasing efficiency. If the lag persists for enough time, a vicious circle of inefficiency, disinvestment, and reduced performance can follow. We use a regulatory episode affecting natural gas distributors in Argentina as a natural experiment, controlling with other Latin American countries’ utilities not exposed to the same regulatory stimuli. We evaluate the relative efficiency of fourteen firms for five countries, in seven years, using Stochastic Frontiers Analysis (SFA). Thus, we perform a regulatory impact analysis (RIA) to assess the consequences on the performance of two idiosyncratic regulatory policy instruments applied in the distribution gas industry in Argentina in the 1998–2021 period (the 2002 Public Emergency Law and the 2016 Integral Tariff Review).