Regulated electricity retailing in Chile

While some countries have unbundled distribution and retailing, skeptics argue that the physical attributes of electricity make retailers redundant. Instead, it is claimed that passive pass through of wholesale prices plus regulated charges for transmission and distribution suffice for customers to benefit from competitive generation markets.We review the Chilean experience with regulated retailing and pass through of wholesale prices. We argue that when energy wholesale prices are volatile and prices are stabilized, distortions emerge. Regulated retailers gain little by mitigating or correcting them. On the contrary, sometimes price distortions increase their profits. We estimate the cost of three distortions that neither regulated retailers nor the regulator have shown any interest in correcting.

► We review Chile's experience with regulated electricity retailing. ► Distortions emerge when energy wholesale prices are volatile and prices stabilized. ► Regulated retailers gain little by mitigating or correcting distortions. ► Sometimes price distortions increase retailers' profits. ► We estimate the cost of three distortions, which retailers have not corrected.