During the late 1970s and early 1980s most of the earlier nationalized firms were being given back to their earlier owners and massive government companies, for instance electricity firms were enticed to trade on a commercial basis. Government firms were breaking even and by the late 70s and early 80s there were indications that electricity firms specially showed improving rates of return on capital.
The macro economy and most of the major economic indicators started to indicate substantial improvement. Inflation dropped and GDP started to grow at a considerable pace especially after 1985. This healthy economic trend grew further during the late 1980s and accelerated further to 6.2 p.a. during the early 1990s. The electricity reforms in Chile follow most of the features found in the electricity systems of developed nations. Since Chile has a small population (15.5m in 2002), thus the capability to take advantage of economies of scale, if at all is moderate2. Even though Chile's electricity consumption per person is low when compared to developed countries, it is increasing fast at (6% per annum). The electricity making system has a big installed hydro capacity base, however as demand rises fossil fuels have become more vital. Most probably there is a difference between Chile and other developing countries as the strength due to the fact that it was administered by military rule for a long time.
i. Reform in electricity - History
The Electricity Act enacted in 1982 is up to now the most vital legislation in the sector. In January 2004 there were some significant changes to the regulations governing the sector after the passage of Lay Corta.
The electricity sector inChilebasically depends on thermal and hydro power generation. Shortage of natural gas led the government to increase the supply by building a first liquefied gas terminal with more capacity of generation. The new project started in the year 2007. Re-gasification plant terminal near the capital city ofSantiagois intended to increase and stabilize power supply for its existing and projected gas-fired thermal plants. There was a consideration to further expand the constructions in various new hydropower and coal-fired thermal plants. Chile's electricity sector reform was very efficiently implemented by the authorities and because of the success of the reforms many other governments followed the same to improve power generation in their respective countries3.
Figure 4: Chile's Natural Gas Total Consumption (2003) - Total Annual Demand 8.73 BCM
Source: www.lyd.com/english/noticias/restructuring.ppt -Chile4
Adaptation of many initiatives like vertical and horizontal unbundling ofpower generation, regular transmissionanddistributionand large scale privatization brought billions of institutional investment to the electricity sector due to electricity shortage of the country5. The 1982 Electricity Act was amended three times in 1999, 2004 and 2005 respectively in Chile's parliament. Even though during the 1980s there weren't many markets from which Chileans could draw inspiration, the officials visited UK, France and Belgium. From the knowledge gained from these countries they came up with the idea of separate generation and distribution firms where payment was done in accordance with a formula based on cost. This apart they also came up with a dispatch