A Handbook For Evaluating A Handbook For Evaluating Infrastructure Regulatory Infrastructure Regulatory

SystemsSystems

A Handbook For Evaluating A Handbook For Evaluating Infrastructure Regulatory Infrastructure Regulatory

SystemsSystems

Ashley Brown, Ashley Brown, Jon Stern, Jon Stern, Bernard Tenenbaum and Bernard Tenenbaum and Defne GencerDefne Gencer

Ashley Brown, Ashley Brown, Jon Stern, Jon Stern, Bernard Tenenbaum and Bernard Tenenbaum and Defne GencerDefne Gencer

INFOSHOP, World Bank INFOSHOP, World Bank October 2, 2006October 2, 2006

INFOSHOP, World Bank INFOSHOP, World Bank October 2, 2006October 2, 2006

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How WB Thinking Has How WB Thinking Has EvolvedEvolvedHow WB Thinking Has How WB Thinking Has EvolvedEvolved “ “A requirement of all A requirement of all

power lending will be power lending will be explicit movement toward explicit movement toward the establishment of a the establishment of a legal framework and legal framework and regulatory processes regulatory processes satisfactory to the satisfactory to the Bank…………this requires Bank…………this requires countries to set up countries to set up transparent regulatory transparent regulatory processes that are clearly processes that are clearly independent …..”independent …..”

““The WB’s Role in the Electric Power The WB’s Role in the Electric Power Sector”Sector”

World Bank Policy Paper 1993World Bank Policy Paper 1993

““.. a credible regulatory .. a credible regulatory system requires more than system requires more than a formally independent a formally independent regulatory entity……other regulatory entity……other transitional arrangements transitional arrangements may need to be may need to be established…. including established…. including limiting the amount of limiting the amount of discretion that regulatory discretion that regulatory bodies have in setting bodies have in setting prices and key prices and key parameters..”parameters..”

“ “ Public and Private Sector Roles in the Public and Private Sector Roles in the Supply of Electricity Services”Supply of Electricity Services”

Operational Guidance for World Bank Operational Guidance for World Bank Group Staff 2004Group Staff 2004

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Why New Regulatory Why New Regulatory Systems?Systems?Why New Regulatory Why New Regulatory Systems?Systems? Desperate need for new capital investment and better Desperate need for new capital investment and better

operating efficiencyoperating efficiency

Governments do not have enough moneyGovernments do not have enough money

Private investment will come if there is a credible Private investment will come if there is a credible commitment on the “rules of the game”commitment on the “rules of the game”

An independent regulator with transparent process can An independent regulator with transparent process can provide such commitmentprovide such commitment– ““Depoliticize” the two principal regulatory tasksDepoliticize” the two principal regulatory tasks

Setting maximum pricesSetting maximum prices Setting minimum quality of service standardsSetting minimum quality of service standards

– Presumption: technocratic and apolitical regulators (“philosopher Presumption: technocratic and apolitical regulators (“philosopher kings”)kings”)

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Why Haven’t The New Reg Why Haven’t The New Reg Systems Always Worked Systems Always Worked (as hoped for)?(as hoped for)?

Why Haven’t The New Reg Why Haven’t The New Reg Systems Always Worked Systems Always Worked (as hoped for)?(as hoped for)?

Never got independent regulatorsNever got independent regulators

– Law wasn’t adequate (Gap #1)Law wasn’t adequate (Gap #1)

– Disconnect between formal law and actual implementation (Gap #2)Disconnect between formal law and actual implementation (Gap #2)

– Naïve expectation about depoliticizationNaïve expectation about depoliticization

Lack of capacity & commitmentLack of capacity & commitment

– Capacity building = the supply side of regulation (traditional World Bank TA emphasis)Capacity building = the supply side of regulation (traditional World Bank TA emphasis)

– But is there a demand for independent regulation by the Minister or general public? (demand side)But is there a demand for independent regulation by the Minister or general public? (demand side)

Applied to the wrong entityApplied to the wrong entity

– Private investors did not show up so regulators ended up regulating SOEsPrivate investors did not show up so regulators ended up regulating SOEs

– Indian electricity regulator—”My orders are just pretty poetry.”Indian electricity regulator—”My orders are just pretty poetry.”

– African regulator—”I have never seen the government’s performance contract with our state owned African regulator—”I have never seen the government’s performance contract with our state owned utility. How am I supposed to regulate it?”utility. How am I supposed to regulate it?”

Good regulation can’t overcome bad economics and bad sector structuresGood regulation can’t overcome bad economics and bad sector structures– Minister to regulator—”I don’t want you to raise tariffs.”Minister to regulator—”I don’t want you to raise tariffs.”– Bulk power competition in small countries?Bulk power competition in small countries?– Regulator can’t perform miracles if the economics and sector structure don’t workRegulator can’t perform miracles if the economics and sector structure don’t work

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So What Can Be Done?So What Can Be Done?So What Can Be Done?So What Can Be Done? Handbook = A toolkit for conducting Handbook = A toolkit for conducting independent and publicindependent and public evaluations of evaluations of

regulatory systemsregulatory systems– A guide to performing single country, structured case studiesA guide to performing single country, structured case studies– Supplemented by benchmarking if available.Supplemented by benchmarking if available.– Ideally, the evaluation is:Ideally, the evaluation is:

Sponsored by the governmentSponsored by the government Periodic and pre-scheduled (like an annual physical)Periodic and pre-scheduled (like an annual physical)

– Evaluation team: international/regional & local expertsEvaluation team: international/regional & local experts– How you perform the evaluation is as important as what you recommend. How you perform the evaluation is as important as what you recommend.

“Not buried in a World Bank report”“Not buried in a World Bank report”– Handbook quick readHandbook quick read

The handbook’s focus:The handbook’s focus:– after the fact evaluations of economic regulationafter the fact evaluations of economic regulation– real world electricity sector examples but applicable to telecomm and real world electricity sector examples but applicable to telecomm and

water and??water and??– regulation of commercialized entities (usually private)regulation of commercialized entities (usually private)– regulatory systems, not just the official regulatory entityregulatory systems, not just the official regulatory entity

=/

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What Are The Handbook’s What Are The Handbook’s Underlying Assumptions?Underlying Assumptions?What Are The Handbook’s What Are The Handbook’s Underlying Assumptions?Underlying Assumptions?

Must look at regulatory governance (the “how) Must look at regulatory governance (the “how) and and regulatory substance regulatory substance (the “what”) (p.19-21)(the “what”) (p.19-21)– Governance = regulatory laws, institutions and processesGovernance = regulatory laws, institutions and processes– Substance = regulatory decisions and actionsSubstance = regulatory decisions and actions– Economic regulation = Governance + SubstanceEconomic regulation = Governance + Substance

Need to look at the gap between what is written in law and what happens in Need to look at the gap between what is written in law and what happens in practice (the implementation gap).practice (the implementation gap).

The “bottom line”: the effect on sector outcomesThe “bottom line”: the effect on sector outcomes

– Regulation is a means to an end. The end is better sector performance.Regulation is a means to an end. The end is better sector performance.– Does the regulatory system (governance and substance) move you Does the regulatory system (governance and substance) move you

closer to or further from targeted sector outcomes? (p. 160-164)closer to or further from targeted sector outcomes? (p. 160-164)

Target audience for the evaluation: Prime Minister and Energy MinisterTarget audience for the evaluation: Prime Minister and Energy Minister

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Specific guidance on how to perform quick (5 days), mid-level (up to 4 Specific guidance on how to perform quick (5 days), mid-level (up to 4 weeks) and in-depth evaluations (up to 3-4 months)weeks) and in-depth evaluations (up to 3-4 months)

Two questionnaires (quick vs mid-level/in-depth) and specific interview Two questionnaires (quick vs mid-level/in-depth) and specific interview questions on regulatory components of reform actions questions on regulatory components of reform actions (electrification, (electrification, grid-based renewables, distribution regulation, effect on poor, open grid-based renewables, distribution regulation, effect on poor, open access and customer choice, competitive bulk power markets)access and customer choice, competitive bulk power markets)

List of needed background documents and TORs for hiring consultantsList of needed background documents and TORs for hiring consultants

Detailed summaries of earlier electricity reg evaluations (Brazil, Chile, Detailed summaries of earlier electricity reg evaluations (Brazil, Chile, India, Russia, South Africa and the Ukraine) Telecomm – NERA Africa India, Russia, South Africa and the Ukraine) Telecomm – NERA Africa report (2004). Water-Castalia evaluations (in process)report (2004). Water-Castalia evaluations (in process)

Checklist for “operationalizing” the independent regulator model Checklist for “operationalizing” the independent regulator model (Appendix A) and a “crib sheet” of arguments to use with the Prime (Appendix A) and a “crib sheet” of arguments to use with the Prime MinisterMinister

Hybrid and transitional regulatory systems (Chapter 4)Hybrid and transitional regulatory systems (Chapter 4)

What is in the What is in the Handbook?Handbook?What is in the What is in the Handbook?Handbook?

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Reviewing Decisions and Reviewing Decisions and Actions (Regulatory Actions (Regulatory Substance)Substance)

Reviewing Decisions and Reviewing Decisions and Actions (Regulatory Actions (Regulatory Substance)Substance)

Praise the good and shine a light on the badPraise the good and shine a light on the bad

Bad regulatory decisionsBad regulatory decisions Sins of omission (p. 154-155)Sins of omission (p. 154-155) Sins of commission (p. 157-158)Sins of commission (p. 157-158)

Energy Minister: “Evaluations are fine but what do I do next week?”Energy Minister: “Evaluations are fine but what do I do next week?”

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Strong advisory regulator Strong advisory regulator (Mozambique)(Mozambique)

Detailed regulatory contracts and concession Detailed regulatory contracts and concession agreements in distribution agreements in distribution (Romania, Uganda and (Romania, Uganda and Chile)Chile)

Partial risk guarantees for initial tariff setting Partial risk guarantees for initial tariff setting system system (Uganda and Romania)(Uganda and Romania)

Contracting out—advisory (worldwide) and binding Contracting out—advisory (worldwide) and binding (Chile and Romania)(Chile and Romania)

Specialized appeals tribunal Specialized appeals tribunal (India)(India)

Hybrid or Transitional Hybrid or Transitional Regulatory SystemsRegulatory SystemsHybrid or Transitional Hybrid or Transitional Regulatory SystemsRegulatory Systems

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Institutional and human capacity Low High

High

Re

gul

ato

ry c

om

mitm

en

t

Weak commitmentCompetent institutions

Weak commitmentLimited capacity

Strong commitmentLimited capacity

Strong commitmentCompetent institutions

Independent regulator with discretion -

Eastern Europe?

Hybrid Systems -

Africa?

?

What Reg. System Is Possible?What Reg. System Is Possible?

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Best Practices Vs Next Best Practices Vs Next StepsStepsBest Practices Vs Next Best Practices Vs Next StepsSteps

Two viewsTwo views– Minister—”Please no sermons about best practices. I just Minister—”Please no sermons about best practices. I just

want advice on what I can do tomorrow.”want advice on what I can do tomorrow.”

– Advisor—”But if you don’t know where you want to go, Advisor—”But if you don’t know where you want to go, you will end up some place where you don’t want to be.”you will end up some place where you don’t want to be.”

Both are rightBoth are right– Best Practices-Checklist for “operationalizing” the Best Practices-Checklist for “operationalizing” the

Independent Regulator (Ch 3 and Appendix A)Independent Regulator (Ch 3 and Appendix A)

– Transitional Regulatory Systems (Ch 4)Transitional Regulatory Systems (Ch 4)

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ConclusionsConclusionsConclusionsConclusions

The “independent regulator” model may not always be The “independent regulator” model may not always be feasible or the best way to startfeasible or the best way to start

What is the sector problem that you are trying to fix? Will What is the sector problem that you are trying to fix? Will a separate regulatory entity help in solving the problem?a separate regulatory entity help in solving the problem?

What is the best combination of legal instruments and What is the best combination of legal instruments and allocation of regulatory authority among different allocation of regulatory authority among different government organizations?government organizations?

Self-evaluation of WB regulatory adviceSelf-evaluation of WB regulatory advice– Too much emphasis on the supply side (i.e. capacity Too much emphasis on the supply side (i.e. capacity

building), not enough on the demand sidebuilding), not enough on the demand side– More emphasis needed on quality of serviceMore emphasis needed on quality of service– More focus on “next steps” not just “best practices”More focus on “next steps” not just “best practices”