Importance of Effective Independent Economic Regulation

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Importance of Effective Independent Economic
Regulation

• Cornel van Basten
• October 2008

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Introduction

• Network utilities essential input, crucial
  importance to economic growth and international
  competitiveness
• Naturally monopoly elements create need for
  economic regulation
• Why then the need for independent economic
  regulation?
• Protection of customers from potential market
  power abuse
• Implementation of government policies
• Facilitation of investment creation of a level
  playing field especially where SOEs are operating
  need transparent process to attract private
  capital
• Important in the SA context - need to attract
  private capital for infrastructure investment
  (investors need to be satisfied that incumbent
  will not receive any special treatment)

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Questions Purpose

• Evidence suggests that success of independent
  economic regulation in developing countries
  debatable, because of half finished reforms,
  conflicts of interest, uncertainty wrt political
  commitment capacity issues
• So, in SA context wrt network utilities
• Are there clarity about and completion of
  industry reforms?
• Are there any conflicts of interest? (Conflict
  between policy statements legislation?)
• Are there uncertainty wrt political commitment?
• Capacity issues?
• Purpose of presentation In this context what is
  important for a regulator to be effective
  efficient?

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Regulatory failure a real threat

• Regulatory failure is not a concept that is often
  raised, however it is a real threat
• Concepts that affect the success of economic
  regulation
• Institutional context regulatory framework
• Information asymmetries
• Investment subject to a threat of
  delays/cancellations
• Regulatory capture
• Effectiveness (doing what it is supposed to do)
  and efficiency (least cost)
• Competition where possible and regulation where
  necessary

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Economic regulation how? (1)

• Controlling market forces this is invariably
  unsuccessful in the long-term
• Facilitating market forces in the public
  interests. It follows that
• Where market forces operate freely regulation is
  not required e.g. wellhead pricing in USA
• Where market forces cannot operate freely
  regulation is required e.g. networks
• Dimensions associated with the facilitation of
  market forces Access to the market and
  transparency

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Economic Regulation how? (2)

• Results of facilitation of market forces
• Investment is facilitated
• Abuse of dominance is mitigated
• Customer choice (competition) with lower prices
  and better service
• Optimal use of resources e.g. small gas fields,
  small power stations can be exploited

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What is good regulation?

• IEA regulatory principles good guideline
• Rule of law
• Transparency
• Neutrality
• Predictability and consistency
• Independence (industry/consumer/political)
• Accountability (performance funding)
• Resources in terms of human skills, expertise
  and financial resources
• How are SA regulators faring against these
  principles?

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Breadth of economic regulation (1)

• Industry/sector/multi-sector regulators
• Important to consider regulation in a
  co-ordinated and coherent fashion, e.g.
  resources, costs, characteristics and synergies
  across industries and sectors
• Human resource limitations?
• Costs of number of regulators vs. single
  multi-sector regulator?
• Decisions affecting one industry also affect
  others?
• Importance of consistency in regulatory
  approaches?
• Compliance, resource and time related costs
  involved for regulated entities
• Consumer participation in regulatory processes
• Possible improvement in effectiveness and
  efficiency if multi-sector entity?
• Concern that smaller industries might not receive
  sufficient focus in a multi-sector entity?
• More/less potential for regulatory capture?
• Power to resist political interference?

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Breadth of economic regulation (2)

• Conclusion re. breadth of economic regulation
• SA Regulators established in silos ? difference
  in organisational structure, conduct and
  legislation
• What was the main reason for creation of
  independent economic regulators in SA promotion
  of investment and competition
• Should there be a rethink as to the design of
  regulators?

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The South African situation (1)

• Various independent economic regulators
  currently exist similar objectives but
  divergent in nature
• Difference ito clarity application of
  regulatory principles
• Legislation generally focuses on necessity of
  competition and private sector involvement. Is
  this still the thinking?
• 1980s Security of supply because of sanctions -
  controlled by gov officials
• 1990s Followed world trends into liberalisation
  private participation
• 2000s Security of supply because of global
  issues - controlled by gov officials (will not
  attract private investment)

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The South African situation (2)

• Some general occurring themes regarding SA
  regulators performance
• Policy clarity and coherence clearly defined
  roles responsibilities essential as is
  demarcation between policy and implementation
• Unusual for regulators not to write regulations
• IEA on role of SOEs SOEs should not be involved
  in policy except as a general stakeholder

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The South African situation (3)

• Regulatory independence (political/consumer/indust
  ry)
• What does it mean? Definitely not that the
  regulator can do what it wants. It must be able
  to make binding decisions within legal framework
  of limitations and requirements without
  fear/favour
• Currently different levels of independence,
  e.g. NERSA, Ports and Telecommunications.
• What is the advantage of having an independent
  sector regulator? Minister sets the framework and
  the regulator administers the framework any
  court cases to be dealt with by the regulator

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The South African situation (4)

• Regulatory certainty
• Important role for independent regulators are to
  create a climate of investor comfort through
  explained regulatory decisions
• SOEs will continue to be a considerable force in
  the development of infrastructure important to
  create an investor-friendly climate for all
  potential investors while still protecting
  captive customers
• Competition where possible and regulation where
  necessary role for RIAs
• Regulatory capacity

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The South African situation (5)

• Regulatory transparency overall improvement
  especially energy
• Consultation, Public meetings, comment phase,
  decisions with reasons
• Important especially because of SOEs dominance
  perceptions can be created that regulator will
  decide in favour of the SOE if no transparency
• Disappointing participation by stakeholders
• Regulatory governance
• Vary across network industries
  part-time/full-time/combination
• Distinct differences in regulatory governance
  approaches

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Regulatory constraints/pitfalls

• Importance of policy clarity, demarcation of
  policy and implementation
• Lack of trust in regulators
• Piecemeal sector-by-sector development of
  regulators
• Strong incumbent monopolies vs. weaker
  regulators

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Conclusion

• Regulation is complex and is a balancing act
  affordable and accessible services vs. economic
  growth and investment
• Have to deal with industry structure, conflicts
  of interest, uncertainty wrt political commitment
  capacity issues
• Multi-sector regulator makes sense, BUT other
  models can also work. What is essential
  compliance with basic regulatory principles
  should be non-negotiable, e.g. transparency,
  explained decisions and rule of law.
• Regulatory framework should fit the local
  circumstances (e.g. where lack of capacity)
  therefore learn from international experiences
  but keep local circumstances in mind (adopt,
  adapt and reject according to local
  circumstances). IEA regulatory principles good
  guidance
• SA in need of improved service delivery,
  competitive prices and investment in network
  industries SOEs will not be able to do it alone
  important to ensure a conducive investment
  climate while protecting captive customers