Consideration of Sustainable Development in the Regulatory Schemes of Utility Companies. Application to the Chilean Context
Utilities are intrinsically related to the sustainable development of society. They provide essential services that support the economic and social development. Their activities consume important amounts of resources with considerable environmental impacts. Infrastructure implies high and early sunk costs. Its economic success depends on the long-term relationship with its surroundings.
A review of historic and modern literature about theory and practice of regulation is used as a basis to support the inclusion of sustainable development principles in the regulation. An analysis of Incentive Regulation schemes, Demand Side Programmes and Product Quality is used to identify the dynamic interrelationships. The representations of the systems, individually and comprehensively, are carried out using a System Dynamic approach. Chilean regulatory policies and context of the natural gas sector are used as case study to apply some of the results of the initial analysis.
Regulatory approaches focus on the natural monopoly aspect and how to control utility services on behalf of consumers. In practice, regulators grant certain degrees of protection to monopolies in order to promote infrastructure development and/or other social objectives. In its evolution, regulation has considered all aspects of sustainable development, especially the balance of economic and social development. This makes it a valid and proper tool to support and guide a sustainable development of society.
This report discusses that regulation focused on sustainable development needs a more dynamic approach. The current approaches to promote efficiency and innovation can be separated into supply and demand-side. The first mechanism aims to encourage the firm to reduce costs and produce more efficiently. The demand-side focuses on promoting efficient use in the final consumer, in which efficiency is analysed as as cost-effective measure.
In a comprehensive system, supply and demand-side schemes could be counterproductive. If the focus of regulation is creating incentives that promote sustainability as value, there will be spaces to promote a broader system. A comprehensive view allows using incentives cooperatively, strengthening effects, reducing uncertainty and giving a coherent signal to the market.
The Chilean regulatory framework appears to have the potential to include several of these measures. It is necessary to include explicitly the objective of sustainable development in regulatory agencies, promoting public participation and changing the focus from auditing cost to incentive creation. Under such principles, it will be possible to include coherent and complementary incentives in the supply and demand side.