The Regulator is a key actor in the liberalised energy market. The aims of liberalisation are likely to be achieved with strong, independent regulation. The regulator needs to be independent of the industry and political office holders so that the regulator can perform the requisite umpire role without let or undue influence. But it is usual to have a Minister for Power. His role is linked to Government Policies for the industry. Must the Minister see himself as the supervisor of the Regulator? How free of the Minister should the Regulator be? This paper takes a close look at these issues and in the conclusion, it was suggested that the aim of attracting the private sector to the liberalised electricity sector is better served with strong and truly independent regulation.
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Introduction
Many countries over the past four decades have embraced energy market liberalisation. Some reasons can be found for this including the deteriorating service levels in many countries evidenced in frequent blackouts and the difficulty for governments to continue giving subsidies to inefficient state-owned energy corporations.[1] It could also be a need to create competition which not only increases efficiency but will enable the cheapest generator to meet the market demand. The government entities may be privatised and the private sector invited to invest in the sector to increase capacity.
A key feature of a liberalised energy market is the regulator or regulatory body whose functions include monitoring the progress of the liberalisation effort, addressing the complexities associated with the introduction of private sector participants, giving comfort to investors, ensuring that competition indeed takes place and that there is no price abuse on the part of remaining monopolies. The regulator in this case operates alongside generators, transmitters, distributors, suppliers, and other operators. To play the role effectively, the regulator needs to be independent of the other players in the industry. Typically, the regulator is linked to a ministry of government that is responsible for making policies for the energy sector. This then throws up the other side of regulatory independence which is the relationship between the regulator and the minister. What should be the relationship between the policy-making ministry and the regulator? What level of independence if any should the regulator have in relation to the relevant minister?
These questions are important because of the crucial role of the regulator towards the success of the liberalisation process and the need that this role is played without undue influence from the industry players or the government or elected officials. Investors particularly the new private sector participants who may be wary of country risks might like to see a truly independent regulator. The government on the other hand might consider the regulator as an arm of government that should report to the relevant minister. A balance needs to be struck as the choices made in this regard will have serious effects on the liberalisation process, and may determine how soon or late the country will begin to enjoy the gains of liberalisation.
This paper addresses the aforementioned questions by first considering two reasons for choosing liberalisation alongside the aims and the structure of a liberalised market. To achieve brevity, the paper will focus on the Electricity Supply Industry Chapter Three discusses the impact of independent regulation on the liberalisation effort. Chapter four which comes before the conclusions evaluates the need for regulatory independence vis-a-vis the role of the minister under the basic law. The implications of the considered options will also be considered. In its conclusion, the paper suggests that to open the electricity market to private-sector competition, there will be a need for a truly independent regulator.
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The Aims of a Liberalised Market
Before liberalisation, the normal practice is for governments to be involved in the energy business. The electricity industry is considered essential for communities with electricity prices normally government-controlled. A strategic industry for any nation’s economic wellbeing, they are usually capital-intensive monopolies that operate as vertically integrated entities handling generation, transmission, distribution, and supply.[2] However, from the late 1980s and early 1990s onwards, the trends changed and liberalisation became the vogue. But what are the aims of liberalisation?
2.1 The Aims and the Challenges Ahead
One aim of electricity market liberalisation is to create competition in as many parts of the value chain as possible from generation to consumption. This is done by withdrawing the monopoly rights of the state-owned entity and breaking it up into its constituent parts. New market entrants are encouraged and supported to compete with those sections of the erstwhile monopolist who can participate in the competition. Activities that are considered natural monopolies remain regulated by the introduction of measures that act as a surrogate to competition (an example is the publication of tariffs for transmission and distribution).[3]The challenge here is for government to show its strong political support in the unusual way of not intervening at difficult junctures in the development of competition but allowing the fledgling market to respond by itself within a robust framework which allows for the development of effective competition under the watch of the regulator.[4]
Another major aim of liberalisation is to attract private investment. This is particularly true of countries with limited capacity and funds. To attain this aim, dependable and stable regulation is sine qua non as it assures fair play that private investors would naturally require.[5]
The private investor is faced with country risks as the electric sector needs high levels of investments and the product is mostly for the local market. Although it can be argued that the existence of a well-functioning judiciary will safeguard the interests of the investors, it is submitted that independent regulation can at least give some measure of comfort to investors in countries with weak judiciaries.[6]
Therefore, regardless of the reasons for and the approach to liberalisation, the aims of liberalisation are attainable and the challenges ahead are surmountable with a strong government commitment evidenced by the establishment of independent regulation.[7]
2.2 The Regulatory Structure of a Liberalised Market
Government Policy and Legislation form the foundation on which the liberalised market will stand. The Power Sector legislation will typically dismantle existing legal monopolies, and obliterate statutory entry barriers.
The need for legislation and other support shows that the liberalisation process requires strong and committed government involvement but with the government this time acting the role of the provider of a level playing field for the various players and the soil on which effective markets may thrive. It is in the context of this framework that the independent regulator is empowered by law to play the crucial role of overseeing compliance with legislation and ensuring fair and efficient regulation. Government support must be sustained, however, to further the development of the market.[8]
In closing this chapter, it can be summarised that the aims of creating competition and attracting private investment can be attained through the establishment of a structure characterised by effective and independent regulation. All of these can translate to the emergence of competition, security of supply, improved efficiency which can bring down prices and more choices for consumers. The government role however changes from being a player to a facilitator of effective markets.
In Part 2 of this presentation, we will get into chapter 3 and we will then treat regulatory independence as a recipe for success.