The reform of the electricity industry in Spain was announced as a drastic move towards freer markets and more competition. We argue that the reform is better seen as a lost opportunity for the rapid introduction of competition within the Spanish electricity sector. Although the new legal framework introduced an innovative spot market mechanism, the pro-competitive potential of this innovation was wasted by a seriously flawed privatisation program, by allowing continued vertical integration between generation and distribution and by limiting the liberalisation of supply activities. Furthermore, the Spanish case provides a useful example of the pitfalls of regulatory reform in countries with a long tradition of detailed state intervention and opaque regulatory systems. We conclude by suggesting a number of measures that, in spite of previous irreversible policy mistakes, could still enhance the competitiveness of the Spanish electricity markets. Pablo Arocena and Pierre Regibeau gratefully acknowledge financial support from the Spanish Ministry of Education under a FPI grant, and from the European Community under a TMRgrant, respectively. The second set of authors also gratefully acknowledges partial financial support from the Spanish Electricity Regulator (CNSE). Peer Reviewed