REGULATORY AND COMPETITION-RELATED REFORMS IN KENYA’S POWER AND PETROLEUM

SECTORS

By

C. Onyango, G. Njeru and B. Omori

21st October, 2009

PRESENTATION OUTLINE

Study Context Terms of References Methodology Literature Review Main Findings Constraints & Challenges Conclusions Recommendations

1 CONTEXT OF THE STUDY

MOTIVATION OF THE STUDY

Effective management and regulation of restructured energy sector

Need to support on-going utility reforms Efficiency in service delivery and

enhancement of consumer welfare Promotion of synergies and cooperation

amongst regulators

1 CONTEXT OF THE STUDY

TERMS OF REFERENCE

To assess the institutional framework and structure of the national competition policy;

To review and evaluate the competition-related regulations and institutional framework in the energy sector;

To undertake a comparative analysis of competition and regulatory framework in energy sector in other countries.

1 CONTEXT OF THE STUDY

Tasks

Evaluating the independence, transparency and clarity of existing regulations;

Assessing the market structure and performance of the electricity and petroleum sub-sectors;

Evaluating the institutional framework and capacity for enforcement of competition-related laws and regulations in the electricity and petroleum sub-sectors;

Establishing and assessing the existing administrative procedures for enforcement of competition laws in the electricity and petroleum sub-sectors;

Evaluating the relevance of existing laws and enforcement powers;

1 CONTEXT OF THE STUDY

Tasks…..cntd Assessing the quality, service delivery and dispute

settlement mechanisms; Evaluating the coordination and information exchange

between the competition authority and the energy sector regulator;

Assessing the level of awareness about competition-related regulations among stakeholders;

Identifying implementation and enforcement challenges and constraints.

2 ENERGY SECTOR IN KENYA…cnt’d

Major regulatory statutes: RTPM&PC Act 1989; Energy Act 2006;

The case for regulatory reforms– Incentives to regulated firms– Cost Reduction– Efficiency and service delivery– Realization of Vision 2030

2 ENERGY SECTOR IN KENYA…cnt’d

Domestic Consumption/SalesA: Electricity Large/medium commercial users (56.2%) Domestic and small commercial (37.4%) Rural electrification (4.5%)B: Petroleum Retail pump & road transport (51.4%) Aviation (18.1%) Industrial, Commercial (15.4%) Power generation (11.5%) Agriculture (1.2%)

3. METHODOLOGY

a. Scope of study

Electricity and Petroleum sub-sectors:

b. Sample Design

Study Population: (i) key institutions and organizations; and (ii) key informants and users of energy

(i) Key institutions and organizations: Regulators and regulated firms

(ii) Key informants: The private sector players and associations, consumer organizations, professional associations and selected Civil Society Organizations (CSOs)

3 METHODOLOGY

c. Data Sources & Analysis

Questionnaires: Interviews with Key institutions and informants: Regulatory institutions, Industry players, private sector, CSO & consumers

A total of 70 (out of 100 targeted) interviews across 4

regions (Nairobi, Mount Kenya, Western and Coast)

Review of various reports, policy documents and internet sources. Documents were obtained from the MOE, ERC, Ministry of Trade, MOF & other government agencies

Qualitative & statistical methods

3. METHODOLOGY

Study Limitations

Weak databases of regulatory institutions

The Triton scandal at the time of the survey

Financial constraints

4 ANALYTICAL FRAMEWORK

Figure 1: Regulatory Framework Design

Regulatory Governance

Regulatory Incentives

Institutional Endowments

Source: Adapted from Levy & Spillar (1994)

4 ANALYTICAL FRAMEWORK……CNTD

Governance structures: Regulatory

discretion , contractual obligations Incentive structure: Rules governing utility

pricing, subsidies, entry, interconnections

Institutional endowments: Institutions (Legislative, executive & judicial institutions); customs and norms; social interests, ideologies and administrative capabilities

5 BEST-PRACTICES AND EXPERIENCES

a. Best practice features of CAs (UNCTAD, 2005) Independence Transparent, well-designed administrative mechanisms,

regulations and procedures Separate investigation, prosecution and adjudication

functions Checks and balances with rights of appeal, reviews of

decisions and access to information on legal and economic interpretations

Expeditious and transparent proceedings with safeguard sensitive business information

Provisions for imposing significant penalties

5 BEST-PRACTICES AND EXPERIENCES

b CA and Sector Regulators Models (UNCTAD, 2006)

I. Technical and Economic regulation: Enforcement of competition exclusively done by CA

II. Technical and Economic regulation: Regulator has some or all competition law enforcement functions

III. Technical and Economic regulation: Coordination btw CA with Regulator to enforce competition law

IV. Technical regulation done by sector regulator, while economic regulation within the CA

V. Reliance on competition law enforced by the CA

5 BEST-PRACTICES AND EXPERIENCES…

c. Country ExperiencesBrazil: Type I - Competition law fully applicable to

regulated sectors and CA in charge of enforcement in cooperation with sector regulators

Mauritius: Type II - Some sector regulators have competition competencies.

South Africa: Type III - Sector regulators have concurrent jurisdiction. However, the competition act neither explicitly claims precedence over it. CA negotiates agreements with sector regulators

South Korea: Types I, II, III - Moving towards III

5 BEST-PRACTICES AND EXPERIENCES…

d. Energy Sector Models Unbundling of Generation from Transmission and

Distribution (ISOs model): Latin America – Chile 1978-1988; Argentina -1992; In Africa – Senegal, Uganda and Nigeria.

Asian IPP Model: Incumbent owns transmission & Distribution and purchase from IPPs

EU Reform Model: Independent incentive-based regulation; no requirement for ownership of unbundled transmission;

The SE Europe: Wholesale competition, legal unbundling of networks, a fully independent regulator, price or revenue cap with a 3-5 year incentive period

5 BEST-PRACTICES AND EXPERIENCES…

Major lessons Learnt

Adequate legal backing in statutory law Good leadership Adequate staffing resources in terms of staff numbers

and skills Political and economic independence Institutional Collaboration: Domestic & external informal exchanges of information and pooling of

resources between national regulators

6 Main Findings of the Study

a) Weak enforcements of competition-related laws i.e. no proven cases for anti-competitive practices

b) Inadequate technical regulatory capacities e.g. MPC had 32 employees of which 21 are Economists; ERC has 36 employees against an establishment of 56;

c) Poor delivery of services: At importation, refinery and storage; Suspect quality of petroleum products despite surveillance and quality inspections; Shortages, price fluctuations, blackouts, accidents & settlement of disputes etc

d) Poor co-ordination and information exchange btwn ERC, MPC & other govt agencies. No clear legal provisions for co-ordination;

6 Main Findings of the Study

f) Limited awareness about competition policy and laws by stakeholders. ERC has been engaging the public in the recent past particularly on formulation of wholesale and retail pricing. However, room to improve transparency in providing information & documents.

g) Performance and Market structure

1. Electricity

KenGen accounts for 76.6% of effective production capacity; EPPs (11.5%) and IPPs(11.3%);

A near zero reserve margin i.e. in 2008 max output was 1,267 MW against Total Systems Demand of 1,044 MW

High vulnerability i.e. Hydro accounts for 54.6%; thermal & Geothermal (45.4%)

Fuel costs account for largest component of purchase costs (Table 7)

6 Main Findings of the Study

Positive financial performance i.e. generation and supply subject to rate-of-return regulations and prices negotiated through PPAs

Low consumption per capita i.e. 121 per capita and national access rate of 15% compared to 32% for SSA

Large commercial and industrial users (41.8%); Domestic users (24.9%)

Increasing unit costs i.e. 37.3% increases btwn 2003/04 and 2007/08 i.e. from ksh 5.92 per kw to ksh 8.13 per kw

6 Main Findings of the Study

Tariff Customer category Ksh/GWh2003/04

Ksh/GWh2007/08

A* Domestic, small & commercial

6.44 9.46

B Commercial & Industrial (M) 6.51 8.09

C Commercial & Industrial (L) 5.24 7.03

D Off-peak 4.95 5.97

E Street-lighting 7.29 15.23

Total 5.92 8.13

6 Main Findings of the Study

2. Petroleum sub-sector

Oligopolistic mkt structure i.e. – HHI was 1649.16 (see table 12); – Market concentration Ratio was 76.7% i.e. Kenol (24.8%);

Shell (20.9%); Total (19.5%) and Chevron(11.1%)

7 MAIN CONSTRAINTS AND CHALLENGES

a Competition-Related Regulations

Limited regulatory independence of MPC and ERC i.e. both subject to State Corporations Act; MPC funded by exchequer; Ministerial involvement in decision-making etc

Limited funding thus affecting staff recruitment, M&E and enforcement for the MPC

Existing laws do not provide for consumer protection and fair

trading (incorporated in CB 2009)

Exemptions of the public sector from application of the Competition act (incorporated in CB 2009)

Weak provisions for sanctions, fines and penalties

7 MAIN CONSTRAINTS AND CHALLENGES

b Electricity sub-Sector

Limited enforcement powers for competition-related regulations

Uncoordinated enforcement of competition related regulations

Inadequate technical and professional staff.

Poor Infrastructure affecting data collection, information exchange, M&E etc

Weak governance of transmission network and pricing structures

7 MAIN CONSTRAINTS AND CHALLENGES

c Petroleum sub-Sector

Inadequate capacities for regulatory efficiency and effectiveness

External factors (international oil prices, global security etc)

Enforcement of standards and quality Weaknesses in existing laws and regulations

8 CONCLUSIONS

State owned public utilities dominant in generation, transmission and distribution of electric power despite increased participation of the private sector

An effective regulatory system in the energy sector is crucial for both investor confidence and consumer protection

9- RECOMMENDATIONS

Adoption of a HYBRID regulatory model i.e. Types II and III

Effective coordination of implementation and enforcement of competition-related regulations amongst various state agencies

Strengthening regulatory independence in management, dispute settlement and decision-making e.g. parliamentary vetting of Board members

Widening the scope for competitive power generation market which is currently dominated by KENGEN by deepening horizontal divestiture

Effective governance of transmission network and pricing structures.

7.0 RECOMMENDATIONS

Strengthening data reporting and M&E through increased allocations, and recruitment of additional staffs

Infrastructure development to improve efficiency in provision of petroleum products e.g. oil jetties, pipeline, storage facilities etc

Engagement and awareness of competition-related regulations among stakeholders

Improvement of Terms and Conditions of employment and retention mechanisms

THANK YOU