Main title Main title Main title

Report
Importance of Effective Independent Economic Regulation
Presenter:
Cornel van Basten
Date:
October 2008
Introduction
 Network utilities – essential input, crucial importance to economic growth
and international competitiveness
 Naturally monopoly elements create need for economic regulation
 Why then the need for independent economic regulation?
 Protection of customers from potential market power abuse
 Implementation of government policies
 Facilitation of investment – creation of a level playing field especially
where SOEs are operating – need transparent process to attract
private capital
 Important in the SA context - need to attract private capital for
infrastructure investment (investors need to be satisfied that incumbent
will not receive any special treatment)
Questions & Purpose

Evidence suggests that “success” of independent economic regulation in
developing countries – debatable, because of half finished reforms,
conflicts of interest, uncertainty wrt political commitment & capacity issues

So, in SA context – wrt network utilities:
 Are there clarity about and completion of industry reforms?
 Are there any conflicts of interest? (Conflict between policy
statements & legislation?)
 Are there uncertainty wrt political commitment?
 Capacity issues?

Purpose of presentation: In this context what is important for a
regulator to be effective & efficient?
Regulatory failure – a real threat
 Regulatory failure is not a concept that is often raised, however it is a real threat
 Concepts that affect the ‘success’ of economic regulation:
o Institutional context – regulatory framework
o Information asymmetries
o Investment subject to a threat of delays/cancellations
o Regulatory capture
o Effectiveness (doing what it is supposed to do) and efficiency (least cost)
o Competition where possible and regulation where necessary
Economic regulation – how? (1)
 Controlling market forces – this is invariably unsuccessful in
the long-term
 Facilitating market forces in the public interests. It follows
that:
o Where market forces operate freely regulation is not required e.g.
wellhead pricing in USA
o Where market forces cannot operate freely regulation is required e.g.
networks
Dimensions associated with the facilitation of market forces:
Access to the market and transparency
Economic Regulation – how? (2)
 Results of facilitation of market forces:
o Investment is facilitated
o Abuse of dominance is mitigated
o Customer choice (competition) with lower prices and better service
o Optimal use of resources e.g. small gas fields, small power stations can be
exploited
What is good regulation?
 IEA regulatory principles – good guideline:
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Rule of law
Transparency
Neutrality
Predictability and consistency
Independence (industry/consumer/political)
Accountability (performance & funding)
[Resources in terms of human skills, expertise and financial resources]
 How are SA regulators faring against these principles?
Breadth of economic regulation (1)
 Industry/sector/multi-sector regulators
 Important to consider regulation in a co-ordinated and coherent
fashion, e.g. resources, costs, characteristics and synergies
across industries and sectors:
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Human resource limitations?
Costs of number of regulators vs. single multi-sector regulator?
Decisions affecting one industry also affect others?
Importance of consistency in regulatory approaches?
Compliance, resource and time related costs involved for regulated
entities
Consumer participation in regulatory processes
Possible improvement in effectiveness and efficiency if multi-sector
entity?
Concern that smaller industries might not receive sufficient focus in
a multi-sector entity?
More/less potential for regulatory capture?
Power to resist political interference?
Breadth of economic regulation (2)
 Conclusion re. breadth of economic regulation
o SA Regulators established in silos → difference in organisational structure,
conduct and legislation
o What was the main reason for creation of independent economic regulators in
SA – promotion of investment and competition
o Should there be a rethink as to the design of regulators?
The South African situation (1)
 Various ‘independent economic regulators currently exist – similar objectives but divergent in
nature
 Difference ito clarity & application of regulatory principles
 Legislation generally focuses on necessity of competition and private sector involvement. Is this
still the thinking?
 1980s: Security of supply because of sanctions - controlled by gov officials
 1990s: Followed world trends into liberalisation & private participation
 2000s: Security of supply because of global issues - controlled by gov officials (will not attract
private investment)
The South African situation (2)
Some general occurring themes regarding SA regulators’ performance:
o Policy clarity and coherence – clearly defined roles & responsibilities essential as is
demarcation between policy and implementation
 Unusual for regulators not to write regulations
 IEA on role of SOEs – SOEs should not be involved in policy except as a general stakeholder
The South African situation (3)
o Regulatory independence (political/consumer/industry)
 What does it mean? Definitely not that the regulator can do what it wants. It must be able to
make binding decisions within legal framework of limitations and requirements without
fear/favour
 Currently – different levels of independence, e.g. NERSA, Ports and Telecommunications.
 What is the advantage of having an independent sector regulator? Minister sets the framework
and the regulator administers the framework – any court cases to be dealt with by the regulator
The South African situation (4)
o Regulatory certainty
 Important role for independent regulators are to create a climate of investor comfort through
explained regulatory decisions
 SOEs will continue to be a considerable force in the development of infrastructure – important to
create an investor-friendly climate for all potential investors while still protecting captive customers
o Competition where possible and regulation where necessary – role for RIAs
o Regulatory capacity
The South African situation (5)
o Regulatory transparency – overall improvement – especially energy:
 Consultation, Public meetings, comment phase, decisions with reasons
 Important especially because of SOEs dominance – perceptions can be created that regulator will
decide in favour of the SOE if no transparency
 Disappointing participation by stakeholders
o Regulatory governance
 Vary across network industries – part-time/full-time/combination
 Distinct differences in regulatory governance approaches
Regulatory constraints/pitfalls
 Importance of policy clarity, demarcation of policy
and implementation
 Lack of “trust” in regulators
 Piecemeal sector-by-sector development of
regulators
 “Strong” incumbent monopolies vs. “weaker”
regulators
Conclusion
 Regulation is complex and is a balancing act – affordable and
accessible services vs. economic growth and investment
 Have to deal with: industry structure, conflicts of interest, uncertainty wrt
political commitment & capacity issues
 Multi-sector regulator makes sense, BUT other models can also work.
What is essential – compliance with basic regulatory principles should
be non-negotiable, e.g. transparency, explained decisions and rule of
law.
 Regulatory framework should fit the local circumstances (e.g. where lack
of capacity) – therefore learn from international experiences but keep
local circumstances in mind (adopt, adapt and reject according to local
circumstances). IEA regulatory principles – good guidance
 SA in need of improved service delivery, competitive prices and
investment in network industries – SOEs will not be able to do it alone –
important to ensure a conducive investment climate while protecting
captive customers

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