Presenter:

Date:

Importance of Effective Independent Economic Regulation

Cornel van Basten

October 2008

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)

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?

Regulatory failure is not a concept that is often raised, however it is a real threat

Concepts that affect the ‘success’ of economic regulation:o Institutional context – regulatory frameworko Information asymmetrieso Investment subject to a threat of delays/cancellationso Regulatory captureo Effectiveness (doing what it is supposed to do) and

efficiency (least cost)o Competition where possible and regulation where

necessary

Regulatory failure – a real threat

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:o Where market forces operate freely regulation is not

required e.g. wellhead pricing in USAo 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

Results of facilitation of market forces: o Investment is facilitatedo Abuse of dominance is mitigatedo Customer choice (competition) with lower

prices and better serviceo Optimal use of resources e.g. small gas

fields, small power stations can be exploited

Economic Regulation – how? (2)

IEA regulatory principles – good guideline:o Rule of lawo Transparencyo Neutralityo Predictability and consistencyo Independence (industry/consumer/political)o Accountability (performance & funding)o [Resources in terms of human skills, expertise and financial

resources]

How are SA regulators faring against these principles?

What is good regulation?

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:o Human resource limitations?o Costs of number of regulators vs. single multi-sector

regulator?o Decisions affecting one industry also affect others?o Importance of consistency in regulatory approaches?o Compliance, resource and time related costs involved for

regulated entities o Consumer participation in regulatory processeso Possible improvement in effectiveness and efficiency if

multi-sector entity?o Concern that smaller industries might not receive sufficient

focus in a multi-sector entity?o More/less potential for regulatory capture?o Power to resist political interference?

Breadth of economic regulation (1)

Conclusion re. breadth of economic regulationo SA Regulators established in silos → difference

in organisational structure, conduct and legislation

o What was the main reason for creation of independent economic regulators in SA – promotion of investment and competition

o Should there be a rethink as to the design of regulators?

Breadth of economic regulation (2)

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)

The South African situation (1)

Some general occurring themes regarding SA regulators’ performance:

o 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

The South African situation (2)

o Regulatory independence (political/consumer/industry) 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

The South African situation (3)

o 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

o Competition where possible and regulation where necessary – role for RIAs

o Regulatory capacity

The South African situation (4)

o 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

o Regulatory governance Vary across network industries –

part-time/full-time/combination Distinct differences in regulatory governance approaches

The South African situation (5)

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

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