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.Wehypothesize that a likely first response is to reduce OPEX, increasing efficiency. If the lag persists forenough time, a vicious circle of inefficiency, disinvestment, and reduced performance can follow. We usea regulatory episode affecting natural gas distributors in Argentina as a natural experiment, controllingwith other Latin American countries’ utilities not exposed to the same regulatory stimuli. We evaluatethe relative efficiency of fourteen firms for five countries, in seven years, using Stochastic FrontiersAnalysis (SFA). Thus, we perform a regulatory impact analysis (RIA) to assess the consequences on theperformance of two idiosyncratic regulatory policy instruments applied in the distribution gas industry inArgentina in the 1998–2021 period (the 2002 Public Emergency Lawand the 2016 Integral Tariff Review).