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QUALITY OF INFRASTRUCTURE REGULATION: COMPARATIVE CASE ANALYSIS - ELECTRICITY, OIL AND GAS INDUSTRIES

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QUALITY OF INFRASTRUCTURE REGULATION: COMPARATIVE CASE ANALYSIS - ELECTRICITY, OIL AND GAS INDUSTRIES By Dr. Cezley Sampson Regulatory Consultant – PowerPoint PPT presentation

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Title: QUALITY OF INFRASTRUCTURE REGULATION: COMPARATIVE CASE ANALYSIS - ELECTRICITY, OIL AND GAS INDUSTRIES


1
QUALITY OF INFRASTRUCTURE REGULATION COMPARATIVE
CASE ANALYSIS - ELECTRICITY, OIL AND GAS
INDUSTRIES
  • By
  • Dr. Cezley Sampson
  • Regulatory Consultant
  • Delhi Conference
  • 18-20 April 2011

2
Objectives of Quality Regulation
  • The research seeks to provide answers to what is
    quality regulation
  • The assumption is that the delivery of quality
    regulatory services by independent regulators
    lead to improved consumer welfare
  • The research seeks to assess the relationship
    between the quality of regulation and outputs in
    selected regulated industries electricity, oil
    and natural gas,
  • Ask the questionis there a relationship between
    the quality of regulatory services provided by
    independent regulatory agencies and increased
    welfare benefits increased access, increased
    investments improved utility services to
    consumers?

3
Field of Study
  • Empirical evidence is drawn from the regulatory
    environment of three case countries Brazil,
    India and Kenya representing the, Latin American,
    Asian and Sub-Saharan regions respectively.
  • India and Brazil with federal and state levels-
    multi-tier regulatory structure and for Kenya
    single national level
  • Reflects on the phenomenon of the rapid rise of
    independently created stand-alone agencies
    created by governments to regulate utilities
    outside the hierarchal structure of the sector
    ministry since the 1980s
  • Occasioned by the new right economic or
    neoclassical economic thinking of Milton Friedman
    and the Chicago School and pushed by the
    Washington Consensus liberalization,
    de-monopolization of markets and privatization

4
Definition of Regulatory Quality
  • Very limited literature exist on the quality of
    regulation
  • It is the standard or quality of services
    provided by the regulator-not an assessment of
    the quality of services provided by the regulated
    firm
  • Similarly separate from the wider programme of
    improving the economic environment for private
    business development by eliminating bureaucratic
    controls and red tape introduced since the 1990s
  • Regulation touches on the three aspects which are
    crucial determinants of consumer welfare price,
    quality and access to services
  • The regulatory problem is to determine the price
    quality relationship and distribute rent among
    the key players regulated firm, government and
    consumer.

5
Political Economy of Regulation
  • The political control of economic activities
    whereby government institutes legislation to
    regulate social and economic activities
  • Looks at the collective process through which
    regulatory institutions are created and
    regulatory decisions made
  • How governments interact with the other players
    in the regulatory field consumers, special
    interest groups, regulated firms- degree, form
    and level of state interaction
  • Important requirement is credible commitment of
    governments- property right issues

6
Development of the Regulatory Framework
  • Looks at the overall regulatory institutional
    framework in the country
  • Looks at the regulatory mandate and specific
    regulatory institutional framework for
    electricity, oil and natural gas sectors
  • The role of the Competition Authority (CA) and
    the relationship of regulators with CAs
  • Independent regulation requires independence of
    the judicial system
  • Regulation is influenced by institutional
    endowment of the country - (Levy, Spiller and
    Sampson 1996)

7
Rationale for Regulation
  • Public interest or welfare school-originates from
    the desire of government to intervene in industry
    in order to create social and economic justice
    (Pigu1933)
  • Regulation introduced to tackle market failure
    the product being public good, characterized by
    natural monopoly, information asymmetry and
    externality or market susceptible to destructive
    competition.
  • Regulation introduced to protect the public
    interest

8
Rationale for Regulation
  • Private Interest School skeptical of the
    so-called public interest of bureaucrats and
    politicians-they are motivated by self-interest
    - regulation often benefits particular interest
    group - leads to process captured by regulated
    firm or politician, hence regulatory failure -
    worse than market failure
  • Institutional theories emphasize the
    interdependency of the state and non-state actors
    in pursuit of public interest and private
    benefits within the regulatory environment. Looks
    at institutional dynamics of regulation and how
    this often shapes outcomes given the preference
    of particular groups.

9
Research Methodology
  • Regulation is addressed as an institutional
    phenomenon
  • Proxy indicators (set of variables) are taken
    with the assumption made that quality regulation
    is associated with these proxy variables
  • Quality regulatory environment is said to exist
    where these proxy variables exist.

10
The Proxies Used a Measure of Quality
  1. Good governance structure
  2. Operation and financial independence of the
    regulatory institution
  3. Accountability of the regulator
  4. Transparency/consistency - clear and consistent
    rules
  5. Existence of an appropriate coordinating
    mechanism

11
Theoretical Assumption
  • Normative Position
  • Depicts what an agency providing quality
    regulation should look like
  • Problem of theoretical institutional analysis is
    that it is rarely assessed on quantitative
    variables
  • Theory focuses on the ideal type
  • Empirical analysis seeks to determine the extent
    to which the ideal exists
  • Comparison is then made in the form of a set of
    variables set as a matrix

12
Governance and Personnel
  • An independent legal entity outside the
    hierarchal structure of a ministry
  • Executive and legislature branches involved in
    the appointment process
  • Appointments for fixed terms
  • Removal from office for cause and stated in law
    or for gross misconduct - protection from
    arbitrary removal
  • Staggered terms which do not coincide with
    election cycle
  • Professional criteria for appointment of
    regulators and technical staff

13
Operational and Financial Independence
  • Operational Independence
  • Arms Length relationship from political
    bureaucracy, regulated industry and powerful
    consumer groups and insulation from improper
    influences
  • Discretionary decision-making powers over
    substantive matters tariff, technical standards
    and dispute resolution
  • Exemption from restrictive civil service salary
    scale and rules that make it difficult to
    attract well qualified staff
  • Financial Independence
  • Earmarked funding, independent of central budget
    levy on consumers or industry not subject to
    ministerial approval .

14
Accountability
  • Mechanism for appealing the agencys decision
    existence of Appeals Tribunal and subject to
    Judicial Review by the Courts
  • Scrutiny of the Agency's budget by the Auditor
    General and Parliament
  • Scrutiny by external auditors or a public
    watchdog - subjecting the regulators conduct to
    efficiency scrutiny
  • Consultation on matters affecting stakeholders -
    involving the stakeholder in the decision-making
    process

15
Transparency
  • Mandating rigorous transparency, including open
    decision making, giving reasons for decision
  • Prohibiting conflicts of interest
  • Avoiding revolving door-movement of staff between
    regulated company and regulator
  • Ensuring procedures are produced and widely
    distributed.
  • Ensuring consistency in the application of rules

16
Coordination and Interface
  • Relationship with anti-trust, and environmental
    regulatory agencies
  • Roles of each regulator clearly established if
    more than one agency is involved and where roles
    overlap
  • It is preferable to have one agency and agency
    law with primacy over regulatory decision
  • Cooperative agreements with other agencies
  • Sits on respective boards

17
Assessment of Inputs and Outputs
  • Assessment of investment levels
  • Assessment of service quality and choice within
    the respective industries
  • Assessment of real prices
  • Distribution of efficiency gains between
    profits, producers surplus and economic rent and
    lower prices and improved services consumer
    surplus

18
Quantitative Assessment
  • Quantitative analysis of regulatory quality was
    looked at, however very few examples of RIA
    being carried out in the case countries
  • RIA, which is more a cost benefit analysis on
    proposed regulatory measures - is a procedure
    used in the developed countries, especially EU
  • Information insufficient to draw any conclusion

19
Brazil - Findings
  • Initiated liberalisation, de-monopolization and
    privatisation of infrastructur sectors in 1990s
  • Liberalization of electricity commenced 1995
    with establishment of National Electricity
    Regulatory Agency (ANEEL) 1996 and new policy
    framework 2004
  • Agency hierarchical but connected to Ministry of
    Energy
  • Restructuring remained unfinished with
    Electrobas, being a vertically integrated SOE
    dominating generation and transmission and with
    distribution subsidiaries
  • Regulator lacked financial and administrative
    independence also faced problem in getting
    Electrobas to carry out its decision
  • Lack of clarity of Minister and regulators roles
    encouraged political interference

20
Brazil -Petroleum Oil and Gas
  • Constitutional change in 1995 brought
    discontinuation of Petrobas monopoly in the
    market and restructuring of Petrobas as a limited
    liability Co, majority state owned but with first
    right to own new fields - Distribution mainly
    under state governments
  • For natural gas, Petrobas dominates the market
    also owning the pipeline
  • Independent Regulatory Agencies- ANP and CNPE
    established in 1997
  • Although, theoretically ANP has financial and
    decision making autonomy, with Petrobas having
    90 control of proven reserves and ownership of
    the transmission pipeline company able to ignore
    both the regulator and the ministry at times
  • Tension between Ministry, Regulator and Petrobas
  • Lulas politicization of the industry brought
    uncertainly as to the independence of the
    regulator

21
Indian Electricity Reforms
  • One of the most entrenched symbol of state led
    development prior to 1990, with 70 of genco,
    transco and discoms in state sector by 1991
  • Liberalization of generation market in 1991-
    entry of IPPs- constrained lack of capital was
    not the problem more lack of conducive
    environment
  • State of Orissa in 1993 led the way with
    unbundling, liberalization and privatization -
    Reform Act in 1995 creating SERC-followed by
    several other states
  • Independent Central Electricity Regulatory
    Commission (CERC) created in 1998 regulating
    bulk electricity and transmission tariffs
  • Electricity Act of 2003 mandating unbundling and
    liberalization of SEBs and requirement of MYT by
    the SERC and establishment of bulk electricity
    market
  • With huge state sector regularly faced major
    problem of ministerial interference and getting
    SOEs to accept its decisions.
  • Massive cross subsides remain a major problem

22
Indian Reform of Oil and Gas Sectors
  • Huge SOE sector created with1970s industry
    nationalization
  • New policies introduced towards end of the 1990s
    permitting private entry into oil exploration
    and production - foreign firms not allowed in
    down stream refining and distribution
  • Massive cross subsidies, state fixing of retail
    prices discontinued in 2002
  • Independent regulator established in early
    1990s Petroleum and Natural Gas Regulatory Board
    (PNGRB) to operate alongside the Directorate of
    Hydrocarbons (DGH) to regulate the industry
  • Portfolio Minster failed to issue notification
    order, stifling PNGRB regulatory powers for
    several years
  • Massive interference of Ministry and excessive
    SOE power

23
Reform of Kenya Energy Sector
  • Much smaller country than Brazil and India with
    national regulator regulating electricity, oil
    and natural gas.
  • Country has no oil or natural gas- mainly down
    stream activities in oil and gas
  • Reforms introduced in 1990s and accelerated in
    2002
  • Electricity Act of 1997 provided for unbundling
    of KPLC the electricity utility and
    liberalization of generation market entry of
    IPPs and creation of new Electricity Regulatory
    Board (ERB)
  • Further regulatory reforms in 2004 and
    replacement of ERB with Energy Regulatory
    Commission (regulation of electricity, oil and
    gas)
  • Government 30 equity in genco KenGen sold in
    2006

24
Economic Outcomes
  • In Brazil some measure of improvements in quality
    and efficiency in the sectors, but investment and
    capacity expansion remain behind demand- no
    significant expansion of private sector and
    competition
  • In India situation seems to have deteriorated -
    peak capacity remains 10-15 below demand
    deterioration in system loss private sector less
    than 20 of industry in the sectors subsidies,
    especially in agriculture distorts the market
  • No evidence that independent regular in Kenya
    resulted in increased access, and investments -
    access at 22 below level for similar developing
    countries.
  • In the case countries, except for
    de-monopolization of the electricity in Kenya,
    vertically owned and controlled SOEs dominate
    electricity, oil and gas industries exercising
    market power and distorting competition, giving
    the regulator very little room for independent
    decision and encouraging new entrants.

25
General Findings
  • Creation and functioning of independent
    regulators still a long way off in case countries
  • Political economy environment such that
    ministerial bureaucracy continues to exert
    significant influence on regulatory
    decision-making, denying de facto independence
  • Customs, norms and traditions of a historically
    command and control decision-making process
    impose constraints on independent action of
    regulators
  • Informal practices serves to circumvent the
    statuary rules
  • Boundaries between sector regulation and sector
    policies which are not clearly defined or where
    there is dual jurisdiction in areas of licencing
    provide room for political interference and
    operate to restrict market entry

26
Main Conclusions
  • Whilst legislatively creating accountability and
    independence is a necessary condition for better
    quality regulatory services of the regulator,
    empirically the political economy of the
    environment may operate to stymie de facto
    independence
  • Creating structurally independent agencies out
    side the hierarchical framework of the portfolio
    ministry is a necessary condition for
    independence, singularly it is not sufficient
  • Securing independent regulation is more a
    commitment issue and willingness of the
    bureaucracy to change prevailing custom, norms
    and tradition and complete sector reform exercise
  • There has been a failure to complete the
    structural market reforms with sectors left with
    large vertically integrated state monopolies
  • There is a difference between legislatively
    creating independent institutions from creating
    de facto independent regulation.
  • Legislatively creating independent institutions
    is no guarantee of de facto independence and
    good quality regulatory services
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