Working Paper
The Reform of the Utilities Sector in Spain

This paper analyses the reforms that have taken place in the utilities sectors in Spain, with a focus on the political role in shaping the process of these reforms. We argue that the deregulation process was marked by the historical close collaboration between the government and the industry, which led to the formation of powerful interest group and to the insufficient development of strong independent regulatory institutions. Further, the government gave the priority to other political objectives through the privatization programme which are not compatible with the introduction of competition. Political constraints also limited the scope of tariff rebalancing and delayed removal of the cross-subsidies embedded in the inherited tariff structures. We assess the distributional impact of the actual and expected changes in fixed and variable charges on the welfare of households, particularly with regard to lower-income and most vulnerable consumers. Our results show that all categories of households gained on aggregate through lower prices over the period 1996-2000, though the most vulnerable consumer groups benefited less than average. Further, the poorest households lose chiefly from tariff rebalancing in telecommunications. In addition, our estimates show that further expected rebalancing of prices would result in larger losses, because of the substantial increase in fixed charges across all utilities. However, such a negative impact would be compensated by the overall elimination of the profits that firms obtain from the domestic market as competition develops.