Monitoring Utility Performance and Resolving Conflicts

Transcription

1 31 st WEDC Conference and NWSC Monitoring Utility Performance and Resolving Conflicts Sanford V. Berg Distinguished Service Professor, Economics Director of Water Studies, Public Utility Research Center University of Florida Kampala, Uganda: October/November 2005

2 Topics: 1) Indicators of Regulatory Process Quality 2) Regulatory Oversight and Sector Performance 3) Regulatory Leadership: Resolving Conflicts and Making Choices 4) Dimensions of Performance 5) How do regulatory decisions and managerial decisions affect sector performance? 6) What are we doing at PURC? 2

3 This presentation draws from Crisis, Concern, and Complacency: Managing Conflict in Water Supply, ply, by Sanford V. Berg (PURC) A Manual for Evaluating the Effectiveness of Infrastructure Regulatory Systems, forthcoming World Bank book by Ashley Brown, Jon Stern and Bernard Tenenbaum Regulatory Effectiveness: the Impact of Regulation and Regulatory Governance Arrangements on Electricity Industry Outcomes, Stern and Cubbin,, World Bank Policy Research Working Paper 3536 (March 2005) Leadership and the Independent Regulator, by Mark Jamison, World Bank Policy Research Working Paper 3202 (June 2005) 3

4 1. Indicators of Regulatory Process Quality The performance of the sector is the ultimate indicator of Regulatory Performance Productivity advance: : reflecting cost containment and adoption of new technologies New service introductions (example, wastewater treatment) Returns to investors commensurate with the risks they bear and the alternative investments they face Private participation: nature of the contract Public ownership: national development banks and Ministries of Finance F are investing on behalf of citizens (alternatives=hospitals, schools) Prices that reflect minimum optimum costs Expansion of basic services to particular customer groups 4

5 2. Regulatory Oversight and Sector Performance Bad Regulation Bad sector outcome Always Good Regulation? Good sector outcome This is not about assigning blame for mistakes 5

6 2.1 Some Influential factors not controllable by the Regulators 1. Inability to enforce regulatory decisions (due to lack of legal authority) 2. Inappropriate process for reviewing regulatory decisions (weak legal system) 3. Government (political) interference and/or usurpation of authority 4. Inadequate power or discretion granted to regulator and other agencies or institutions 5. Constitutional or other legal constraints 6. Adverse macro-economic circumstances, currency problems, fiscal or monetary policies 7. Inadequate professional, technological or financial resources 8. Perception of overall country risk by private investors 9. Natural disasters or shortages of essential resources 6

7 2.2 External & Internal Factors Affecting Outcomes Macro economic conditions Interest rates Currency fluctuations Management skills Political and social conditions Market structure Regulatory Processes and governance Regulatory Decisions Sector Outcomes 7

8 2.3 Bad Outcomes Arising from Regulatory Inaction: Sins of Omission Failure of systematically collect and effectively analyze all information required for regulatory decisions Inadequate or absence of auditing regulated enterprises Insufficient or inadequate definition of regulatory methodologies in place Lack of setting adequate standards where needed Failure to consider public feedback and critiques of regulatory decisions 8

9 2.4 Bad Decisions Taken by Regulators: Sins of Commission Light penalties assessed for serious deficiencies Using inaccurate data or misapplying accurate data Providing perverse incentives (encouraging over investment or discouraging service quality) Using inadequate methodologies (price, cost of capital, financial sustainability) Inappropriate differentiation of different classes and type of customers 9

10 2.5 Why Is It So Difficult to Evaluate the Quality of Regulatory Decisions? Regulatory Decisions Generally have Winners and Losers Conflicts 10

11 3. Regulatory Leadership: Resolving Conflict and Making Choices Number Of New Connections 5000 Utility will spend $700,000 in OPEX. With $300,000 in CAPEX, the utility claims it can provide new connections OR A B Produce an increase of six points in the water quality index, OR Be at another point on the Frontier (A, B, or C) C Change in Index of Water Quality 11

12 Regulator: Source of Conflict? 1.Authority Conflicts: : lack of clarity of roles 2.Cognitive (Factual) Conflicts: : disagreements regarding current or historical facts and causal linkages 3.Value Conflicts: : conflicting priorities and different weights on outcomes 4.Interest Conflicts: : stakeholders benefit differentially from decisions (from Shabman, 2005) 12

13 3.1 Authority Conflict Authority conflicts reflect different views regarding where decisions will or ought to be made. m Jurisdiction may not yet be assigned or the issue might be addressed by multiple agencies. Stakeholders will go jurisdiction-shopping shopping selecting selecting the agency or the level of government most likely to support its interests in policy design and implementation. Appeals procedures within the judicial system can delay implementation. In such situations, benefits delayed are (effectively) benefits denied. Issues include: Finance Ministry vs. Water Ministry, Environmental Regulator vs. Sector Regulator 13

14 Authority Issues Facing Regulators Number Of New Connections 5000 Who decides where to expand networks? Who funds network expansion? Who determines when prices are financially sustainable? Who monitors water quality? Who sets water quality standards? Who decides environmental requirements? Who makes water resource allocation decisions? Change in Index of Water Quality 14

15 Regulator: Conflict Resolution-- --Authority Seek Changes in the Law legal clarity Cooperate with Sister Agencies (avoid turf wars) Establish Task Forces to Address Issues Educate the Courts and Promote Transparency Improve Appeals Procedures 15

16 3.2 Cognitive Conflicts Cognitive conflicts are disputes over factual matters: What is? For example, How many new connections can be made with $300,000? Technical disagreements reflect cognitive conflicts. Such conflicts can be reduced through comprehensive data collection and analysis. 16

17 Factual Issues Facing Regulators Number Of New Connections A D B E With $300,000 in CAPEX, Citizens claim the utility can provide 5000 new connections OR Produce an increase of 10 points in the water quality index, OR Be at another point on the Frontier (D, E or F) C F Change in Index of Water Quality 17

18 Regulator: Conflict Resolution-- --Facts Benchmarking Studies: Input Data (physical and monetary) Output Data (connections, water delivered, continuity, quality) Financial Sustainability Studies Income Statements Balance Sheets Cash Flow Statements Examine Incentives and Estimate time to reach the frontier 18

19 3.3 Values Conflicts Values conflicts are more ideological in nature, reflecting the different preferences or values of groups. Is there a political consensus over the weight assigned to particular outcomes, especially outcomes involving non-monetary impacts? Targets: Preferred outcomes depend on citizen attitudes. 19

20 Values Issues Facing Regulators Number Of New Connections D E Once the utility is on the Frontier Should more than $300,000 be invested? Which Target: D? E? F? Who sets the Target? F Change in Index of Water Quality 20

21 Regulator: Conflict Resolution-- --Values Public Education Publish Performance Comparisons Identify Trade-offs Report to the Legislature Promote Citizen Participation Talk Radio News Conferences Citizen Advisory Boards Limit the Rhetoric: Articulate a Vision 21

22 3.4 Interest Conflicts Interest conflicts reflect the differential impacts of policies on various stakeholder groups: For whom is the policy? If the situation is actually a zero-sum game, one group benefits at another s s expense (unless there is compensation). Special Interests: : The political economy of regulation suggests that when the beneficiaries of a particular policy are concentrated (and per capita benefits are high) the beneficiaries will lobby. If losers are diffuse (and the per capita damages are low), the result is a policy that benefits well-organized stakeholders even even when the costs to the losers outweigh the benefits to the winners. 22

23 Special Interest Issues & Regulators Number Of New Connections D E Pipe suppliers want to sell pipe. Unions seek particular work rules. Should more than $300,000 be invested? What should prices be to different groups? Un-served citizens want D Current Customers want F F Which Group has Political Power? Would some recommendations lead to being inside the frontier? Change in Index of Water Quality 23

24 3.5 Strategies for Managing the Four Conflicts Cost-Benefit Analysis Balance competing goals Uses money as the common denominator Cycle between different objectives Focus sequentially on specific values Address citizen confusion over episodic approach Compartmentalization through specialized agencies Develop professional skills Target specific goals Collaborate with other agencies (environment, sector) Case by Case Resolution Rely on precedents (and analogies) to make decisions Avoid general decisions on weights assigned outcomes (from Thatcher and Rein (2004) 24

25 Regulator: Conflict Resolution-- --Interests Do not pretend there are no conflicts View from the Balcony step back from stakeholders Take a Leadership Role in Identifying Benefits and Costs Eg.. OFWAT and EU Environmental Standards Collected compliance cost information from utilities Presented costs of meeting targets: current deadline vs. delay Politicians make Final Decision (Accountability) 25

26 Informal Survey Consider how you would answer the following: 1. Authority: : Is the regulatory agency used to help resolve key issues or is it by-passed? Are you in the middle of turf wars? 2. Facts: : Has benchmarking been used to improve sector performance? Are contracts and targets based on reality? 3. Values: : Does the regulatory agency help clarify how the targets reflect goals or stated political objectives? 4. Special Interests: : Have regulatory decisions been inconsistent due to the influence of special interests? 26

27 4. Dimensions of Regulation: Formal & Informal Formal elements of governance 1.Clarity of roles and objectives 2.Autonomy 3.Accountability for utilities (benchmarking) for customers Informal elements of governance 4.Participation 5.Transparency 6.Predictability Stern & Holder (1999) framework for appraising Regulatory Systems 27

28 4.1 Dimensions of Regulation: How & What How Governance: Institutional and legal design Independence and accountability Relationship between the regulator and policy maker Processes by which decisions are made Organizational structure and resources available to the regulator What Substance: content Tariff levels and structure Quality of service standards Classification of customers Handling consumer complaints Regulatory System = Institutions + Laws + Processes 28

29 4.2 Evaluating Performance 1. Criteria for evaluating Regulatory Process and Governance 2. Criteria for judging Regulatory Decisions Quality of decisions (Process & Impacts) Factors influencing decisions 29

30 4.3 Processes and Outcomes Regulatory Processes and Governance Formal legal power and attributes + Regulatory Substance + Regulatory Decisions Output of the System: Performance Means by which regulatory agencies Interpret their power and duties Any evaluation of the regulatory System will be incomplete if it is Limited only to regulatory process and governance 30

31 5. How do regulatory decisions and managerial decisions affect sector performance? Many studies focus on institutional and legal characteristics Regulators implement policy by creating Incentives Managers face internal incentives Attempt to quantify the impact of regulation on sector performance requires substantial resources and robust methodologies 31

32 5.1 From Managing Conflicts to Promoting Best Practice Independence Financial Decision Making Management Regulatory Principles Institutional and Legal characteristics 32

33 5.2 Baselines, Benchmarks, and Progress E V A L U A T I O N The point of any evaluation should be to provide the basis for learning Any evaluation requires consulting with wide possible range of affected parties First task for evaluation is to define current state of the sector Data needed for several years B E N C H M A R K I N G 33

34 5.3 Evaluating Decisions and Sector Performance Self Examination: risk of denying symptoms that are obvious to everyone but the regulator Needed: Balanced: Evaluations should be performed by those whose judgment and recommendations are perceived as fair and objective Broad Sample: Views from Inside and Outside the Country Comprehensive: Account for different types of regulatory mechanisms and regulated entities (e.g. public and private). 34

35 5.4 Benchmarking as a Tool Benchmarking represents an important tool for documenting past performance, establishing baselines for gauging improvements, and making comparisons across service providers. In the water sector particularly, valid comparisons can contribute to improved performance. Rankings can inform Policymakers and policy implementers, Providers of investment funds, and Customers regarding the cost effectiveness of different service providers. 35

36 5.5 Relating Regulatory Outputs to Sector Performance Collecting data on the following indicators allows a judgment on the role of the regulatory framework in achieving improved sector outcomes: 1. Output and Consumption 2. Efficiency 3. Quality of Supply 4. Financial Performance 5. Capacity, Investment and Maintenance 6. Prices 7. Competition (yardstick comparisons) 36

37 6. What are we doing at PURC? Regulatory Body of Knowledge Literature Survey Links to Glossary Links to Papers Links to Self-paced Testing (in-house training) Water Benchmarking Support System (with extensions) Benchmarking Methodologies: Strengths and Limitations Leadership vs. Authority: Alternative Conflict Resolution Mechanisms 37

38 6.1 Water Benchmarking Support System The Public Utility Research Center is funded by the World Bank to prepare a Water Benchmarking Support System that will include a Survey of Benchmarking Methodologies and a Benchmarking Check List. These will become part of a new Benchmarking Toolkit for regulators around the world, and included as an IBNET resource. PURC will work closely with Regional Benchmarking Task Forces on the technical portion of the report addressing the strengths and limitations of different methodologies for comparing performance trends over time and for ranking utilities. 38

39 6.2 Benchmarking Methodologies Performance Indicators Partial methods Summary index ( Overall Performance Index ) Performance Scores Based on Production and Cost Estimates Mean and Average Methods (OLS) Frontier Methods Data Envelopment Analysis Stochastic Frontier Analysis Engineering/Model Company Approach Process Benchmarking Customer Survey Benchmarking 39

40 Leadership: You are invited to attend the PURC/World Bank International Training Program on Utility Regulation and Strategy January 9-20, 2006 University of Florida Gainesville,, Florida 40

41 Thank you Our Shared Objective: Leadership in Infrastructure Policy