Slide 1

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Quality of Regulation: AComparative Study - CaseAnalysis of the Energy, Petroleumand Gas Industries

CUTS International Conference

Delhi, India

Dr. Cezley Sampson

CPCS Transcom Limited

March 27 2010

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

•Need to agree on length – 50 pagesor x words

•Spacing and Font -1 ½” spacing and11 font on Times Roman or Ariel

• References - End notes or Foot notes

Format of Reports

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Objective of Quality Regulation

•The research seeks to provide answers to what is qualityregulation

•There is the need to improve the legal and regulatoryenvironment in developing countries

•The objective is to increase investments, widen accessand improve consumer welfare for infrastructure services

•The Research assesses the relationship between thequality of regulation and performances in the regulatedindustries

•Does quality regulation leads to increased access toinfrastructure services and improved consumer welfare?

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

The Field of Study

•The research seeks to understand what is qualityregulation

•Empirical evidence is drawn from the regulatoryenvironment from three case countries, Brazil, India andKenya representing the Asian, Latin American and Sub-Saharan regions.

•Regulation is considered to be necessary where marketsfail – market failure rationale: existence of naturalmonopoly, information asymmetry, externalities,incomplete market or market with significant anti-competitive practices

•Industries selected: electricity ,petroleum and gas

www.cpcstrans.com

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Political Structure

•Federal government and state governmentin India and Brazil and NationalGovernment in Kenya

•Multi-tier structure of regulation Brazil andIndia - federal and state and Kenya singlenational

•Independence of the judicial system

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

The Macro Economic Background

Comparative data on the three countries:

•Gross Domestic Product (US$)

•Population and population growth

•GDP growth over the last 15 years

•Per capita income (US$)

•Percentage contribution of Industry, AgricultureElectricity and Gas and Petroleum

•Access to electricity

•Energy intensity

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Macro Economic Reform Agenda

Evolution of economic reform over the last

15 years –

•Structural adjustment, privatization,liberalization and introduction ofcompetitive markets

•Forces shaping the reform

•Year when reform commenced

•Key features of the reform

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Development of the Regulatory Framework

•The overall regulatory institutionalframework in the country

•The regulatory mandate and specificregulatory institutional framework forelectricity

•The regulatory mandate and specificregulatory institutional framework for oiland natural gas

•The role of the Competition Authority

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Quality Regulation

•Regulation is addressed as an institutional phenomenon

•Proxies are taken with the assumption that qualityregulation will follow

•Quality regulatory environment is said to exist wherethere is:

1.Good governance structure

2.Operation and financial independence of the regulatoryinstitution

3.Accountability

4.Transparency/consistency -clear and consistent rules

5.Existence of an appropriate coordinating mechanism

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Theoretical Assumption

Normative Consideration

•What an agency providing quality regulationshould look like

•Problem of theoretical institutional analysis isthat it is rarely measured on quantitativemeasures

•Theory focuses on the ideal type

•Empirical analysis determines the extent towhich the ideal exist

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Comparison Between the TwoIndustries

Proxies Electricity Oil and Gas

Independence

Financial Indep

Accountability

Consistency

Coordination

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Governance and Personnel

•Whether a dedicated agency within a ministry or anindependent legal entity outside a ministry

•Involving the executive and legislature branches in theappointment process

•Appointing regulators for fixed teems

•Protecting them from arbitrary removal by politicalbureaucracy -removal from office by cause stated in law orgross misconduct

•Staggering terms so that they do not coincide withelection cycle

•Prescribing professional criteria for appointment ofregulators and technical staff

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Operational and Financial Independence

Operational Independence

•Insulation from improper influence , conflict of interest

•Arms Length relationship from political bureaucracy, regulatedindustry and powerful consumer groups

•Regulator has discretionary decision making power over substantivematters: tariff, technical standards and dispute resolution

•Exemption from restrictive civil service salary scale and rules thatmake it difficult to attract well qualified staff

Financial Independence

•Earmarked funding independent of central budget –levy onconsumers or industry

•Security of the budget - not subject to ministerial approval process

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Accountability

•Effective appeals process from agency decision-existence of Appeals Tribunal and Judicial Reviewby the Courts

•Providing for scrutiny of the Agency's budget bythe Auditor General and Parliament

•Subjecting the regulators conduct and efficiencyto scrutiny by external auditors or a publicwatchdog

•Involving the stakeholder in the decision –consultation on matters affecting the stakeholder

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Transparency

•Mandating rigorous transparency, includingwritten, published decisions, giving reasons fordecision

•Prohibiting conflicts of interest – full and timelydisclosure

•Avoiding revolving door - movement of staff betweenregulated company and the regulator

•Ensuring procedures are produced and widelydistributed.

•Consistency in the application of rules

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Coordination and Interface

•Relationship with Anti-trust, and Environmentalregulators

•Roles of each regulator should be clear if morethan one agency is involved and roles over lap

•Preferable one agency – one agency law shouldhave primacy

•Provide for cooperative agreements

•Representation on respective boards

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Inputs and Outputs

•Assessment of investment levels

•Assessment of service quality and choicewithin the respective industries

•Assessment of real prices

•Distribution of efficiency gains: betweenprofits: producers surplus and economicrent and lower prices and improvedservices: consumer surplus

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Quantitative Assessment

RIA Analysis

INFRASTRUCTURE DEVELOPMENT CONSULTANTS

Lesson learnt and Main Conclusions

•Any indication that quality regulationleads to a more efficient industry,increased investment in infrastructure,wider choice for consumers andimprovements to service quality

•Has the reforms led to increasedcompetition

•How has real prices performed