Role and Functions of the Regulator

Transcription

1 Role and Functions of the Regulator Prepared by Prof. Vidmantas Jankauskas Vilnius Gediminas Technical University www. erranet.org

2 Agenda 1. What is regulation? 2. Some theories of regulation 3. Energy sector regulation 4. Different approaches, independent regulatory models and institutions 5. Main requirements to the regulators 6. Energy regulators in the EU 7. Regulator s relationships with the Governmental organisations 2

3 1. What is regulation 3

4 What is regulation? Government has 3 functions: tax, spend and regulate Regulation is Government s intervention direct: primary and secondary legislation indirect: telephone calls, friendly advice, personal favors, etc. Economic regulation is a (bad) substitute of competition 4

5 Major types of regulatory intervention Antitrust regulation - in case of potentially competitive industries Economic regulation - in case of concentrated industries (mostly monopoly activities) Technical regulation - standards, norms, regulations Social regulation - health care, environmental protection 5

6 Major areas of economic regulation Price- and tariff regulation - access pricing Service quality regulation - minimum service quality standards Regulation of entry and exit - licensing Market monitoring / regulation 6

7 Different approaches Regulation of conduct prices, investment, quality Regulation by exposure to competition competition from alternative sources (gas vs. oil) Regulation by contract establishing and enforcing rights and responsibilities of individual market participants Ex-post regulation abuse of dominant position competition policy 7

8 2. Some theories 8

9 Two theories of regulation Normative Positive Regulation is to correct market failures and improve social welfare (public interest theory) Regulation is to serve the interest of powerful groups (capture theory) 9

10 More theories (1) Social-contract theory Acceptance of the obligation to serve and regulation in exchange for an exclusive franchise and protection from competition Historical evolution Identifiable periods in the history of regulation marked by policy or paradigm 10

11 More theories (2) Rational-behaviour theory - Supply and demand for regulation and the rational, maximising behaviour of participant Life-cycle Regulatory agencies proceed through a predictable life cycle, losing energy and sense of purpose over time 11

12 Different objectives Regulator Regulated company Welfare maximisation price reduction without endangering the long term viability of the company Profit maximisation (price increase) 12

13 Asymmetry of information Regulator Regulated company Decisions to be made on the basis of best available information Distort information in order to serve the profitability objective (shareholders interest) 13

14 3. Energy sector regulation 14

15 Energy sector regulation Why do we need to regulate it? How to regulate it? Why do we need an independent regulator? 15

16 Objectives of regulation (why?) Protection of consumers Ensuring the financial viability of the companies Promotion of competition Collection and dissemination of information 16

17 How to regulate? No regulation Self regulation Command and control Independent regulation 17

18 Command and control (old style) regulation Energy, water, telecommunication companies - state owned monopolies Government approves minor operating decisions Sectorial ministry is an owner and a regulator State owned enterprise is protected from competition but may be not allowed to cover all its costs Subsidies and cross-subsidies are allowed and politically supported 18

19 Need for a new type regulation Emerges with an introduction of a private capital Investors want to secure themselves from the Government intervention Increases with the liberalisation of the sector (unbundling, introduction of competition) Regulation of the liberalised, privatised sector require new tools and approaches 19

20 New versus old type regulation Old type regulation was performed, in general, through setting prices and technical standards, using ownership as a control mechanism It was unclear, non-transparent, unpredictable The goal of a new type regulation is to encourage competition (where it is possible) to regulate monopolies by using clear, transparent rules and mechanisms 20

21 Need for an independent regulator To protect investors from unacceptable risks To protect consumers from the monopoly power abuse To give to all the market players clear, transparent stable rules of the game 21

22 Why to protect investors? Utilities are heavily capital intensive and have very long-life assets Investments are large and immobile, with long pay-back periods Investors require clear rules of the game Distrust of the investors reduces credibility of the country and increases the cost of capital 22

23 4. Different approaches, independent regulatory models and institutions 23

24 Comparison of regulatory approaches Specialized knowledge Ministry Independent regulator Competition authority Judicial system high very high low very low Risks of capture depends depends low very low Speed in decision making high high low very low Trustworthiness depends high low high 24

25 Different regulatory models Ministry s model Government Regulator Utility Advisory model Regulator Government Utility Independent model Government Regulator Utility 25

26 Comparison of regulatory approaches Ministry Independent regulator Competition authority Judicial system Specialized knowledge high very high low very low Risks of capture depends depends low very low Speed in decision making high high low very low Trustworthiness depends high low high 26

27 If regulatory capacity is limited In many developing countries, regulatory skills are in short supply, and there is no (good) regulatory track-record In these cases, it may be desirable to: use regulatory contracts contract out some regulatory functions to private consultants limit regulatory discretion, and pay special attention to the rules on how it will be applied 27

28 Regulation by contract Regulatory regimes (including multi-year tariff setting) defined in a law, concession agreement, PPA, licenses, etc. 3 options: tariff setting formula administered by the contractual parties some provisions for the third parties tariff setting formula agreed in the contract (concession, license) but administered by a regulator 28

29 Principles of regulation by contract Tariff system (formula) covering several years Benchmarks for controllable costs and passthrough for non-controllable Benchmarks or targets should be combined with incentive mechanisms Pass-through costs like fuel costs should be done frequently and automatically Review of new investments Private investors should only be assigned risks that they can control or mitigate 29

30 Advisory models/expert panels Weak and strong advisory regulator models Expert panels may arbitrate disputes between regulators and utilities Rules for the functioning of such advisors/experts Ad hoc or constant 30

31 Contracting out some regulatory functions Considered when there are some suspicions about credibility of the regulator or regulator needs additional support It can increase regulatory competence through access to specialised knowledge It may allow a new regulator to outsource more functions at the beginning and take them back with an improved capacity Many regulators outsource at least some of their functions 31

32 Regulatory commitment Regulatory choices High Advisory model Expert panels Independent regulator Regulatory contracts Regulatory contracts with contracting out Low Institutional and human resource capacity High Source: A. Eberhard 32

33 Different regulatory models in developing countries Anglo-Saxon model Independent regulatory agencies Considerable regulatory discretion in setting tariffs and service standards But bounded and accountable Common law (case law precedents) Appeal system often uses ordinary Francophone model Regulatory contracts (e.g. concession contracts) Pre-specified tariff regimes Low levels of discretion Civil law Contract renegotiation (e.g. for adverse government action or unexpected constraints Source: A. Eberhard 33

34 U. S. regulatory framework Independent commissions Responsible for all economic regulation, including rate-setting, rule making, enforcement, financial and managerial auditing, deciding disputes, etc. Public hearings Decisions are final with a right to appeal to the court Require significant resources (human, financial), procedures are long lasting 34

35 U. S. regulatory commissions Federal sector-wide commissions (FCC, FERC, etc.) State multi-sector commissions (3-7 members) Approved by a governor (sometimes, elected) for a fixed term Staggered terms Removed only for cause Responsible for all economic regulation Financed from fees 35

36 Regulatory agency One director general of the agency Decisions final, but sometimes could be appealed to the Competition Commission or another agency Require less resources than the U. S. Commissions, less formalized Some functions (e.g. granting licenses) left to the Ministry Decisions are taken faster, but less predictable 36

37 Commission vs Agency Advantages of an Agency speed of decisionmaking accountability for decisions less resource demand predictability of decisions Advantages of a Commission less vulnerable to individual preoccupations less vulnerable to improper influences potential to reflect multiple perspectives potential to stagger terms to enhance stability and weaken links with particular government 37

38 Industry coverage Industry specific - separate agencies for electricity, gas, etc. (USA, earlier in Romania, Ukraine, UK) Sector-wide - separate agencies for energy, transport, etc. (most of EU countries) Multi-sectorial - single agency for all or most of utilities (US state commissions, Germany, Latvia, Armenia) 38

39 Multi-sectorial agency Advantages Problems saves resources, reduces cost reduces risk of industry capture facilitates learning among sectors increases risk of political capture does not facilitate decentralization of decision making 39

40 Local versus national agency Advantages of a local regulator better knowledge of local conditions more direct accountability more effective monitoring of the regulated enterprises better coordination with local governments Shortages of a local regulator technical sophistication of regulators, leading to economies of scale in regulation shortage of local experts presence of external effects which may require both a single set of rules and a single agency the increased likelihood of industry capture of an agency 40

41 5. Main requirements to the regulators 41

42 Environment of regulators Legislator Ministry Regulator Theory Industry Consumers 42

43 Relationships between the main players Government Political and legal interests Utility Management Staff Shareholders Market share Jobs Regulator Social Environmental Interests groups Max share value High quality at low price Consumers

44 Main requirements to a new regulator 4 a: autonomy (independence) authority accountability ability 44

45 What is independence? outside ministerial structure does not require approval for changing tariffs granting licenses settling disputes clear separation of roles 45

46 The reason for independence to ensure that Government can give credible commitment to consumers and investors politicians find it difficult to resist temptation to keep tariffs low independent regulators may give a commitment that investors can trust, as they are better protected from political pressures 46

47 Independent regulator is good for the politicians blame shifting for unpopular decisions get rid of technically complicated and boring tasks without much appeal to the public implement the EU policies gives an opportunity to demonstrate credible commitment 47

48 INDEPENDENCE LEVEL FUNDING APPOINTMENT/ DISMISSAL Simple dismissal process controlled by politicians Strict rule based system Industry levy State budget Division of the Ministry Agency

49 Characteristics of independence Appointment of Commissioners staggered terms quality criteria who makes appointment Exemption from civil service? Government salary rates Financing the agency/commission license fees budget approval Removal from office for cause only 49

50 Issue of independence No government agency is truly independent: general policy directions appeal budget Capture by politicians, industry or other interest groups 50

51 Different roles of regulators In the USA: to protect consumers from vertically integrated monopolies independence from utilities In emerging market economies (such as Asia, Latin America, Central and Eastern Europe), one of the main objectives is mitigating regulatory risk for investors independence from politicians In developed countries: balance the powers of ministries, interests of consumers and operators in energy sector 51

52 Major threats for regulatory independence In case of monopoly regulation: the direct conflict is more with profit oriented companies capture In case of depressed prices: the direct conflict is more with politicians politically influenced / modified prices Insufficient resources - low quality decisions lack of enforcement lack of information 52

53 Accountability or who regulates the regulator Decisions are taken after open discussions All relevant parties are involved Decisions and methodologies justified by the regulator Generally, clear rules of the game 53

54 Characteristics of accountability Public participation and transparency Annual Report and audit Appeal of decisions to courts only Budget review Code of ethics Removal from office for cause only 54

55 Different types of appeals To the regulatory authority: stakeholders ask the regulator to reconsider a decision To an administrative court: checks whether the law was followed by the regulator To a court system: consider whether the regulator was substantially correct or not To a legislative body or President: the idea is to change the law under which the regulator operates 55

56 Transparency Regulators often under suspicion- especially in transitional economies Regulators first act, often, is to increase prices to cover costs Regulators should convince the public that increases come with elimination of subsidies and cross-subsidies All process should be very transparent: methodologies widely and openly discussed decisions taken after consulting all interested parties involved meetings are open to general public, etc. 56

57 Perception and reputation Independence of a Regulator means also that it has sufficient credibility and public support Effective regulation is closely related with the reputation of the Regulator Prestige of a Regulator in the society can be enhanced through an effective public relations strategy 57

58 Ability (expertise) Regulators should employ the appropriate resource to fulfill their role Regulators have sufficient knowledge of the industry they are regulating to make informed decisions Regulators should employ staff with the right skills (e.g. economics, finance, law, administrative, project management and engineering) and experience of the regulated industry 58

59 Regulation is giving incentives Regulators will never know as much about the utility business as the regulated (information dependence) If they did, then states should directly provide utility services Instead, regulators set up incentives for performance Regulators need not know everything, or micromanage, to regulate effectively Regulators can acknowledge what they do know and especially what they don t know 59

60 General principles of good regulation transparency accountability efficiency expertise targeting consistency (and predictability) proportionality (a clear) legislative mandate Source: Stone and Webster 60

61 Consistency (and predictability) Regulators should use a stable set of decision criteria to ensure that changes in regulatory methodology are minimised. Similar events and facts should lead to similar regulatory decisions and outcomes by regulators. Changes to regulatory methodologies and rules should be limited wherever possible to those which can be reasonably foreseen or anticipated as a logical and necessary development of existing methodologies and rules 61

62 Proportionality Alternatives to regulation are fully considered The impact on all those affected by the regulation is identified, establishing the right balance between risk and cost; no needless demands on those being regulated think small first A regulatory decision or action should be in proportion to the scale of the event in question 62

63 How to protect the authority of the regulator Firm belief in the regulatory mission High level of knowledge, skills and permanent education trough cooperation with other regulatory authority, science and experts Highly motivated members of the board and staff lead to avoidance of corruption and commitment to work Avoidance of any unofficial/informal contact with company during the decision making procedure Correct relation with the media and general public No formal or informal (empty) promises or statement regarding the expected decision to the company or to users 63

64 What is left for the Ministry? Sector planning and policy, including its restructuring Privatisation Development of a legal framework Approval of investments important for the security of the state Support of R&D 64

65 Regulatory risk? Effective regulation was seen as key to infrastructure reform and attracting private investment It was hoped that regulation would insulate tariff-setting from opportunistic political interventions thus enabling cost-recovery and more predictable revenue streams Some now argue that regulators are actually exacerbating the problems they were meant to solve They argue that regulators lack true independence, are unaccountable and make non-credible, inconsistent decisions Regulatory risk in now often an additional cost to investment A. Eberhard 65

66 Lack of regulatory commitment Some regulators only advise the Minister who makes the final decision Independent regulators often also need informal Ministerial approval In many cases, tariff setting is still highly political Political difficulties when prices are not revenue sufficient & need to rise Members of regulatory boards are frequently replaced despite legal protections Gap between law and practice A. Eberhard 66

67 It is very difficult to sustain independent regulation when Legal framework is underdeveloped Competition policy is absent Political pressures typically dominate over economic and commercial factors There is little or no separation of political powers 67

68 Ukrainian regulator (NERC) One of the oldest in Europe (established in 1994), rather experienced But Chairman is always replaced with the change of the Government Decisions of the Regulator were frequently questioned by other Governmental agencies Law on Regulator was drafted in 2006, but was passed by the Parliament in 2016 only Government today interferes also tries blocking some decisions of the Regulator 68

69 Turmoil in the Bulgarian energy sector in 2013 pressure from the Government on the Regulator to reduce end-user prices blaming greedy private DSOs 5 Chairmen resigned during one year prices were reduced 1 DSO sold its assets, another 1 was also challenged situation improved in 2016 only Protesting against high electricity prices, Sofia, February,

70 6. Energy regulators in the EU 70

71 Energy regulators are rather young in the EU Year 1986 UK (gas) 1989 UK (electricity) 1994 Hungary 1995 Italy, Finland Countries 1997 Lithuania, Poland, Portugal, Spain 1998 Estonia, Sweden 1999 Ireland, Netherlands 2000 Belgium, Denmark, France, Greece, Latvia, Slovenia 2001 Austria, Czech Republic, Slovakia 2005 Germany 71

72 Different regulatory bodies in the EU In the EU there are 2 main structures of the regulatory authorities: agencies and commissions Northern countries in general prefer agencies (U.K., the Netherlands, Denmark, Sweden, Finland, Poland, Czech R., Hungary, Estonia, also Romania) Commissions are preferred in the South (Italy, Greece, Bulgaria, Spain, Portugal, France, Belgium, but also Slovakia and Lithuania) 72

73 Different historic background A number of countries (Ireland, UK, France, Italy, Greece, new MS) have a long history of stateowned monopolies To make liberalization credible in these countries calls for a regulator with a broad mandate Nordic countries, Germany, the Netherlands have a different background with a much more decentralized industry structure, less state ownership and tradition of self-regulation Approach to market regulation in these countries is less ambitious, building on existing institutions that gradually are modified to cope with the changing situation 73

74 EU Electricity Directives on a regulator Ministry 1 st directive Not defined 2 nd directive Independent from industry 3 rd package Independent from politicians, more powers 74

75 Regulatory independence under the 3 rd Energy Package Member States must ensure that the Regulator is an independent legal entity which has: authority over his own budget sufficient human and financial resources to carry out its tasks management which is appointed for a nonrenewable term of at least five years strict rules on the conditions under which management may be removed from office 75

76 Regulatory independence (cont.) Member States shall guarantee the independence of the regulatory authority and ensure that it exercises its powers impartially and transparently. 76

77 Regulatory independence (cont.) For this purpose, Member State shall ensure that, when carrying out the regulatory tasks, the regulatory authority: is legally distinct and functionally independent from any other public or private entity; ensures that its staff and the persons responsible for its management: act independently from any market interest; and do not seek or take direct instructions from any government or other public or private entity when carrying out the regulatory tasks. 77

78 Hard to sustain independence Politicians are not always happy that the Regulator takes independent resolutions and want to reduce its powers Regulators independence was restricted by changing legislation in Bulgaria, Slovakia, Poland, Slovenia There are numerous examples when politicians were pressing on the regulator to take a different decision or to change the one already taken Many examples when the regulators were replaced before the end of their tenure (Hungary, Romania, Bulgaria) 78

79 Regulatory transparency and accountability More transparency budget spending decision making public consultation yearly activity report to: Government, Commission, ACER More legal accountability decision fully reasoned & justified decision subject to judicial review decisions to be made public 79 79

80 Creation of ACER To provide a framework for national regulators to cooperate, especially with regard to regional cooperation, cross-border issues and the convergence and later on harmonisation of grid-codes Regulatory oversight of the cooperation between transmission system operators Individual decision powers for exemption requests concerning infrastructure assets of European interest and the regulatory regime applicable to infrastructure in trans-national issues General advisory role: advisory role towards the European Commission, especially with regard to review of existing legislation and identification of best practice and to exemption requests 80

81 ACER duties Issue opinions and recommendations addressed to transmission system operators; Issue opinions and recommendations addressed to regulatory authorities; Issue opinions and recommendations addressed to the European Parliament, the Council or the Commission; Take individual decisions based on specific cases related to the national regulatory authorities, cross border infrastructure and other tasks; and Submit to the Commission non-binding framework guidelines. 81

82 ACER and the EU structure of energy regulation EC CEER ACER NRA ENTSO-E TSO RRA DSO 82

83 7. Regulator s relationships with the Governmental organisations 83

84 Parliament Parliament adopts new laws and other strategic documents Regulator usually presents the Annual Report to the Parliament Regulator (its staff) takes active part at discussions at the Committee on Economics (Energy) and submits proposals and comments Regulator actively participates in the lawmaking procedures comments and proposals on the draft legislative documents 84

85 Prime Minister and Cabinet of Ministers Regulator submits proposals and comments on the draft Government decrees Regulator informs the PM about the major planned price increases, etc. But does not wait instruction from the PM or CM CM approves regulations related with the security of supply Issues permits for cross-border interconnections 85

86 Some duties are shared Cabinet of Ministers or Prime Minister may approve some regulations, concerning the energy market (Licensing rules, list of public service obligations, etc.) But licenses are issued and licensees controlled by the Regulator 86

87 Ministry of Energy Main partner (not a competitor or foe) in regulation of the energy sector Both sides comment the other side s drafted legislative documents, but do not impose one s opinion Some duties could be shared: the Ministry approves the rules for the connection of new customers, the Regulator approves connection fees The Ministry sets technical standards, the Regulator controls how they are applied by the licensees 87

88 Consumer protection organizations Usually there are too many of them, they compete among themselves They should be invited to take part at the meetings and public hearings organised by the Regulator Sometimes discussions are far from fruitful Some organizations take too much time requiring a lot of additional information, explanations, etc. Some organizations is a real nuisance as fighting the Regulator may give them additional political capital (especially, before elections) 88

89 Competition office Traditionally was not involved in the energy sector assuming it was a natural monopoly Now there is more common areas of interest EC tries to coordinate work of the two watchdogs: several joint meetings, a questionnaire In few countries (Estonia, the Netherlands) the two agencies are merged 89

90 Media It is a very important power (so called, the fourth power) and it is not an enemy Always inform them beforehand Always answer all their questions trying to explain them in simple words Regulated companies may spend much more on PR: they publish articles, interviews paid by themselves hard to compete 90

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