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Prof Anton EberhardManagement program in infrastructure reform and regulation
Bernard Tenenbaum
Electricity regulation in Africa:exploring hybrid governance models
www.gsb.uct.ac.za/mir
www.gsb.uct.ac.za/mir
Overview
• Context: status of power sector reform in Africa • Regulation of SOE, IPPs, Concessions in Africa• Challenges/problems with “independent regulation”• A menu of regulatory options
– Independent regulators– Regulatory contracts– Contracting-out regulatory functions– Advisory regulators– Regional Regulators– Mandated periodic and public reviews of regulators– Partial risk guarantees for regulatory failure
• Hybrid regulatory models
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• Power sector reform process has slowed or stopped in many Africa countries. Absence of competitive electricity markets.
• While SOEs often still dominant, and private participation is now curtailed, original drivers for reform remain
• A number of PPI projects have either failed (Guinea, Senegal) or are under stress (Cameroon, Cap Verde, Mali, Togo)
• There have also been some relative successes (e.g.? Cote d’Ivoire, Gabon, Northern Namibia, Tanzania MC, Uganda)
• Most widespread feature of reform is creation of “independent” regulators
The context for electricity regulation in Africa
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Private participation in power projects
.
IPPs ManagementContracts
Concessions
13 countries25 projects
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Private investment in the power sector in Africa
0500
10001500200025003000350040004500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year of financial closure
US
D m
illio
ns
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The growth of independent electricity regulators
.
Independent regulators(19 )*
Regulator planned (15)
No regulator (14)
) Regulators generally outside Ministry but may, or may not, have final tariff-setting authority
• Half of regulatorsoversee mainly SOEs
• Most countries withsignificant PPIhave regulators
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African Forum of Utility Regulators
“AFUR recommends that the following key principles form part of an initial framework for utility regulation in Africa:
• Minimum regulation necessary to achieve policy and sector objectives;
• Adherence to transparent decision-making and due process requirements;
• Independent or autonomous regulation where possible;• Accountability towards government, investors and end-users• Non-discrimination when not in conflict with policy prerogatives of
government;• Protection of investors against physical and regulatory expropriation;
and• Promotion of competition by limiting anti-competitive behaviour. “
A Framework for Utility Regulation in Africa2003
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Regulation of SOEs important but difficult
Example: NER and Eskom in South Africa• Appropriate separation of government’s shareholding
and regulatory functions has been achieved• Recent NER determinations well below Eskom
application:– 2.5% versus 8.5% requested by Eskom for 2004– 4% versus 17% requested by Eskom for 2005
• One of Africa’s more capacitated regulators still does not provide consistent, robust and transparent regulatory determinations– WACC calculated at 13.3%, 14.5% and 11.14% in 2003-2005– Claw-back applied – but not in published methodology
• Most African regulators face more challenging situations in terms of governance of SOEs and capacity building
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Regulators have minor role in relation to IPPs
• Initial IPP bids, negotiations and contracts generally managed by government with assistance of international advisors
• Regulators frequently presented with fait accompli and little input into key contracts such as PPAs or cost pass-through provisions – i.e. after IPP has reached agreement with off-taker
• Some interesting exceptions: Kenyan regulator has forced lower tariffs in second period of PPAs as well as for new IPP
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Concessions limit regulator discretion
• Example: MaliConcession agreement had tariff formula with annual increases. Nevertheless, government requests reduction in tariffs. Tariff compensation paid by government to concessionaire for lost revenue. Move to cost-reflective pricing negated. Social tariff for small users.
• Example: LesothoProposed private concession agreement has built-in, automatic tariff increases for first 3 years and then specifies in detail multi-year tariff regime. Regulator discretion limited. Considering PRG for regulatory failure
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Institutional fragility
Example NER South Africa• 4 different regulator boards and 4 sets of senior managers in 10 yrs!• 3 serious instances of corruption / mismanagement allegations.
Resolved satisfactorily by Board (with assistance of Minister) but at considerable cost to institutional stability, morale
• High turn-over of staff. Most qualified leave for investment banks, consultancies, etc
• Regulator meetings taken up not primarily with core regulatory decision-making, but corporate governance issues and strategic challenges related to policy developments in the industry.
• Absence of public-hearings for most regulatory decisionsExample Kenya • 5 chairpersons in 6 years (Act stipulates 4 year term)
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Regulatory commitment vs capacity
.
Institutional and human resource capacityLow
High
High
Reg
ulat
ory
com
mitm
ent
Weak commitmentCompetent institutions
Weak commitmentLimited capacity
Strong commitmentLimited capacity
Strong commitmentCompetent institutions
Country X
Independent Regulator possibleAfrican
reality
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Significant regulatory problems are emerging
• Absence of independence– Some regulators only advise the Minister who makes the final price decision– Despite legislative provisions, members of regulator boards are frequently
replaced: Gap between “law” and “practice”– Tariff setting is still highly politicized– Government officials often seek to undermine regulator. Regulator frequently
staffed by previous ambitious Ministry officials - leaving behind even poorer capacity in government
• Lack of transparency and legitimacy– Regulators seldom provide public explanations for the reasons for their
decisions• Lack of capacity/competence – probably the biggest challenge!
– Arbitrary or inconsistent decision-making• Institutional fragility
– we underestimate the challenges in establishing new institutions with robust governance – most regulators a few years old
• Exclusion or lack of clarity in relation to many IPP and concession contracts
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Rethinking the classic independent regulator model
THEN“A requirement of all power lending will be explicit movement toward the establishment of a legal framework and regulatory processes satisfactory to the Bank…………this requires countries to set up transparent regulatory processes that are clearly independent …..”
The WB’s Role in the Electric Power SectorWorld Bank Policy Paper 1993
NOW“.. a credible regulatory system
requires more than a formally independent regulatory entity……other transitional arrangements may need to be established…. including limiting the amount of discretion that regulatory bodies have in setting prices and key parameters..”
Public and private sector roles in the supply of electricity servicesOperational Guidance for World Bank Group Staff 2004
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A menu of regulatory options
• Independent regulators• Regulatory contracts• Contracting-out regulatory functions• Advisory regulators• Regional regulators• Mandated periodic and public reviews of
regulators• Partial risk guarantees for regulatory failure
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Exploring hybrid regulatory models
• “Regulatory independence” is desirable but is not enough• An effective regulatory system needs regulatory substance
as well as regulatory governance • Regulatory governance structures and processes should
constrain arbitrary administrative action• Enhancing regulatory substance implies improving the
quality and sustainability of decisions• Success of a regulatory system depends on compatibility
with country’s regulatory commitment and institutional and human resource endowment
• Can select a menu of regulatory options to create hybrid model
• Nature of hybrid model can change over time as regulatory independence and capacity is built – a transitional model
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Prof Anton EberhardTraining courses, research, consultancy
The Management Programme in Infrastructure Reform & Regulation (MIR) is an emerging centre of excellence and expertise in Africa. It is committed to making a major contribution to enhancing understanding and capacity to manage the reform and regulation of the electricity, gas, telecommunications, water and transport industries in support of sustainable development.
www.gsb.uct.ac.za/mir
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Regulatory contracts
• A pre-specified and relatively detailed multi-year tariff setting regime contained in one or more legal instruments or contracts
• Does not eliminate regulator– Periodic adjustments for inflation or “true-ups”– Extraordinary adjustments– Resetting tariffs at end of multi-year period
• Key issues are base-line data; efficiency targets; cost pass-through formulae; new investment; foreign exchange; triggering events; dispute resolution
• Examples: Uganda, Lesotho, Mali, Gabon, etc..Bakovic, Tenenbaum and Woolf 2003
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Contracting-out regulation (1)
• The use by a regulator of an external contractor, instead of its own employees, to perform certain functions such as tariff reviews, bench-marking, monitoring compliance or dispute settlement.
• Considered when challenges or problems regarding regulator’s independence, competence/capacity, or legitimacy. Also for cost reasons.
• Strategic decisions needed around core competency and cost-benefits of contracting out, extent of contracting-out and when
Tremolet, Shukla & Venton 2004Bertolini 2004
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Contracting-out regulation (2)
• Institutional models– Technical support; information; compliance monitoring– Advisory: no obligation to accept advice– Binding: tariff determination or recommendations must be applied
– Ex-ante in the contract or embedded in primary or secondary legislation
• Paradoxically, those regulators who would most benefit from contracting out are the ones that have the most difficulties in entering into such agreements or to monitor contract performance and ensure adequate transparency and accountability
• Politically sensitive
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Advisory regulators
• Expert panel (typically domestic plus international)• Role specified in primary or secondary legislation• Weak advisory regulator
– No separate earmarked budget– Advice is confidential– Little or no public consultation– No obligation on Minister to explain rejection or modification of recommendations
• Strong advisory regulator– Separate, earmarked funding – Regulator’s advice must be public– Ministerial policy directives to regulator must be public– Regulator has public consultations– If Minister fails to respond within specified time, recommendations adopted– Minister must explain publicly rejection or modification of recommendations– Pre-scheduled, periodic regulatory assessments
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Regional regulators
• In principle, certain decisions on pricing and access on regional grids could be contracted-out to a regional regulator
• In practice, Governments and regulators unwilling to cede “sovereignty”;AFUR has avoided/postponed this debate
• In practice utilities reach bilateral agreements –facilitated by regional pools (e.g. SAPP or WAPP)
• Regional institutions still face huge challenges in terms of political commitment, institution building and adequate resources
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Mandated periodic assessments of regulators
• Mandated in primary or secondary legislation• Pre-scheduled, periodic – in public domain• Ex post evaluation, includes recommendations• Should cover both regulatory governance and
regulatory substance• Should include impact of regulator’s actions and
decisions on sector outcomes • Performed by a panel of independent national
and international experts• Hasn’t been mandated anywhere. But examples
of ad-hoc assessments (Brazil, Russia, India, Uganda, South Africa……)
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Partial risk guarantees for regulatory failure
• First WB regulation PRG for Uganda Electricity Distribution concession
• Provides support for loss of regulated revenues from a guaranteed event– Non-compliance by regulator of pre-agreed tariff framework– If bulk electricity price for UETCL is not fully passed-through– If tariff adjustment not timely (45 days)– If GOU electricity bills not paid (60 days)– If termination payments not made
• Complemented by MIGA shareholder equity insurance• Regulation PRG for Lesotho LEC concession being
consideredFarida Mazhar 2005
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Private management control of power sector
.
>80% of sector underprivate management
Some (>10%) privatesector management
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Regulation and private participation
• Of 19 Sub Saharan African (SSA) power sector regulators – about half oversee mainly SOEs,the other half deal with significant private participation
• Most countries with significant private participation in power sector in SSA also have regulators
• Of countries with significant IPP experience – Kenya, Cote-d’Ivoire, Ghana, Senegal have regulators; Congo, Nigeria &Tanzania do not but are planning regulators
• All countries with large concessions (Cameroon, Cap Verde, Cote d’Ivoire, Gabon, Mali, Uganda, Togo) have regulators
• Of countries with management contracts, Lesotho and Rwanda have regulators; Chad does not and Tanzania is planning a regulator.
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