INTOSAI Working Group for the audit of Privatisation, Economic Regulation and Public Private Partnerships

INTOSAI Working Group for the audit of Privatisation, Economic Regulation and Public Private Partnerships Tuesday 17-Thursday 19 March 2009

Regulatory Structure in Oman ABDULRAHMAN ALHARTHY Moscow March 2009 2

Presentation Schedule • Introduction to Regulatory Structure in Oman • Structure of Electricity Market in Oman and its Regulation • Application of INTOSAI Guidelines in audit of Electricity Regulation • Findings of audit of Electricity Regulation in Oman

Regulatory Structure in Oman Economic regulation Exercise of control by the Government over suppliers of services to consumers. Off-shoot of privatization process - Need to check monopolistic power of vital utilities now in private ownership Need for Arbitrator - Need to balance legitimate interests of the consumer against those of the supplier: how to secure a fair service for a fair price. 4

Mandate of State Audit Institution for audit of Regulatory Bodies Audit of Financial services regulation -Financial Services regulation through Capital Market Authority regulates issue and trading of securities as well as regulation of the insurance sector and Central Bank of Oman which regulates the Banking Institutions - SAI audits only Capital Market Authority 5

Mandate of State Audit Institution in audit of regulation of Telecommunications Telecom Regulatory Authority established in 2002 to liberalize and promote telecommunications services Objectives of TRA regulating telecom services promoting interest of telecommunications services providers and beneficiaries ensuring that consumers receive international standards of services with reasonable choices at affordable prices. Audited by State Audit Institution 6

Mandate of State Audit Institution in audit of Electricity Regulation All electricity related activities used to be run as government departments by Ministry of Electricity. Government notified a legal framework in 2005 and created Authority for Electricity Regulation. Authority for Electricity Regulation established as an independent entity responsible for public interest regulation of electricity sector under state law Audited by State Audit Institution 7

Functions of Authority for Electricity Regulation The Authority shall: Secure provision of electricity and related Water services in all parts of the Sultanate and protect interests of Customers Encourage promotion of competition in public interest in electricity and related Water sector Secure and develop safe, effective and economic operation of electricity and related Water sector and to enhance safety of the public Secure Security of Supply in the country 8

Structure of Electricity Sector Activities were unbundled into separate companies Generation, Transmission Distribution. Companies operate under licence issued by the Regulator and also under the Economic Regulation put in place by the Regulator Regulator is responsible for safeguarding interest of customer and investors. 10

Ownership of Firms in Electricity Sector As of now 6 out of 8 generation companies are in private sector Government owned Transmission Company is in process of being privatized Government owned Distribution & Supply Companies (three in number covering three geographical regions) are planned to be privatized in near future State Audit Institution audits the Government Owned Companies separately 12

Application of INTOSAI Guidelines in Audit of Electricity Regulation 13

Audit of Authority for Electricity Regulatory (AER) Audit of AER in Oman conducted in 2008 Audit conducted keeping in view INTOSAI Guidelines and the criteria developed 14

Findings of Audit of Electricity regulation Regulatory framework - AER found to be independent and autonomous Objectives, functions and power - Objectives clearly laid down in the Law Impartiality - Found to be functioning and perceived as impartial Information needs - Information systems exist and there is a system of validation Accountability - Accountable to Council of Ministers and the sector law provides for independent Audit by SAI, Oman 15

Supply of service Consumer access - Customer complaint handling mechanism exists. No instances of discrimination by any licensee till date. Supply to vulnerable consumers - Being safeguarded in the form of deferring disconnection, and waiver of arrears, if justified Dealing with customer complaints - Well publicized procedures exist and complaints are satisfactorily handled and documented 16

Price of service Controlling prices - Pricing regime is transparent and well devised with incentives to licencees. Linking price to quality - Standards found to exist Encouraging supplier efficiency - Improved dispatch procedures resulted in reduction in subsidy per unit. There is further scope for improvement in dispatch. 17

Developing Competition Reducing monopoly and market domination - Only Generation market is liberalized. Conditions are conducive to new entrants Promoting consumer choice - AER is working to introduce competition in Supply in the near future Combating anti-competitive practices - Systems exist to enforce market share and economic interest restrictions to prevent monopoly 18

Thank You

Modernization Project for External Control of Regulation

Modernization Project for External Control of Regulation From 2004 to 2008, the Brazilian Court of Audit (TCU) developed the “Modernization Project for External Control of Regulation”, financed by the Inter-American Development Bank (IDB) and technically supported by the Getulio Vargas Foundation. • Why? • The need for a specific project in the area of regulation control arose after identifying opportunities for advancing the work that was being carried out, not only in areas already under TCU’s oversight but also regarding new objects of external control of state regulatory activities in the field of infrastructure.

Modernization Project for External Control of Regulation Schematic diagram Diagnosis Development Sustainability Mapping of Sefid work methods and techniques Mapping of SEFID work processes Mapping of macro processes and computer systems of Regulating Agencies Diagnosis of target audiences Role of control Consolidation of Methods, Techniques, and processes (SEFID) Regulation Control Study Center Planning and mobilization – understanding and analysis of current situation Role of agencies Evaluation of organizational structure Development of new Methods and Techniques

Modernization Project for External Control of RegulationDiagnosis Products The diagnosis products have the objective of registering the work processes as well as the methods and techniques currently used by TCU. By comparing this information and identifying the objects of control mapped in the regulating agencies, one can propose improvements or new approaches for TCU’s performance in control of regulation of public services. Internal diagnosis • Mapping of Sefid organizational processes • Mapping of Sefid methods and techniques External diagnosis • Mapping of the macro processes of regulating agencies • Mapping of computer systems of regulating agencies

Modernization Project for External Control of RegulationExternalDiagnosis Products • Mapping of processes and risk in regulating agencies • 159 processes and 2025 negative events were mapped in 8 regulating agencies (National Oil, Natural Gas, and Biofuels Agency - ANP, National Ground Transportation Agency - ANTT, National Water Transportation Agency - Antaq, National Telecommunications Agency - Anatel, National Electricity Agency - Aneel, Electronic Communication Secretariat of the Ministry of Communication - SCE/MC, Undersecretariat of Postal Services of the Ministry of Communication - SSPO/MC and Brazilian Postal Service - ECT); • Risk evaluation of regulating agencies • Based on the process mapping of the agencies, on the identification of the risks associated with such processes and on a risk matrix, it was possible to create new models of control designed to improve the oversight carried out by TCU in order to reduce the greater risks that exist in the end activities (atividades finalísticas) of the regulating agencies under TCU’s jurisdiction.

Modernization Project for External Control of RegulationExternalDiagnosis Products – Main Results low medium high not assessed The results showed that the economic-financial regulation and of concession (outorga) processes are more significant from the external control perspective. Importance of the processes of the agencies to External Control Technical Audit Economic-Financial Audit Technical Regulation Economic-Financial Regulation Concession Relation to Society

Modernization Project for External Control of RegulationDevelopment Products • Development Products • Based on the diagnosis reached, we created models that will be used to enable a more comprehensive and effective performance on the part of TCU regarding regulation control. • The choice of new methods and techniques for regulation control was based on the confrontation between the knowledge that already exists in TCU and the challenges that were identified after knowing the areas that are most exposed to risk. • Example: National Electricity Agency – Aneel / economic financial regulation / impact of information asymmetry

Modernization Project for External Control of RegulationDevelopment Products • Development of New Method and Techniques for Sefid • Control Models Developed

Modernization Project for External Control of RegulationDevelopment Products With the implementation of the “Modernization Project for External Control of Regulation” we propose to create, within the scope of TCU/Sefid, the professional skills, technical infrastructure and the organizational structure needed to adopt a a comprehensive control system for processes of delegation of public services focused on the external control of the regulator. • Evaluation of the organizational structure of Sefid • Evaluation of the organizational structure; • Creation of alternatives for organization aiming at optimally quantifying the resources necessary to meet the demand for control objects.

Modernization Project for External Control of RegulationSustainability Products . • Diagnosis of target audiences • Survey of target audiences of the Court when it comes to regulation; • Proposal of a mechanism for sustained interaction; • Proposal of a tool to disseminate the actions of the Court and the benefits resulting from these actions involving each target audience identified. • Center for Studies on Regulation and Control - Cerc • Assemble and systematize the knowledge acquired during the Project; • Collect, systematize, and disseminate information on infrastructure regulation and its control (legislation, technical documents, academic production, events, news, etc.); • By using a website, it intends to stimulate dialogue and cooperation among all agents interested and involve in the Brazilian regulatory framework; • Offer room for contributions by users which is a way of improving discussions and intensifying the generation of knowledge in the area; • It is expected that Cerc will offer means for carrying out a direct and critical analysis of the performance of the delegated economic agents on aspects related to the quality of the services delivered, to the PPPs, to the economic-financial balance of the contracts and to other factors that will enable a more comprehensive understanding of the political, economic, and operational model adopted to provide the public services that are the object of the state delegation.

Modernization Project for External Control of RegulationImpact for the SAI • Impact of the Project on the SAI • Promotion and consolidation of the ability of the Brazilian Court of Audit to oversee the Brazilian regulatory system in a more efficient and effective way; • Easier access to sources of information on doctrines, best practices in regulation, news, regulatory reform, and state regulation; • Consolidation and systematization of the methods and techniques already used by TCU when performing regulation control; • Better possibilities for capacity building and specialization of the technical staff; • Definition of new regulation control methods and techniques; • Greater knowledge regarding access and contents of the data bases of the regulating agencies; • Improvement of the model for planning, organization and management of external control of regulation; • Definition of a communication and dissemination strategy for control of regulatory activities that will meet the needs of the different audiences to whom the information, determinations, and recommendations on control are destined; • A better understanding of the essential activities of the regulating agencies that are under Sefid’s jurisdiction, taking into consideration the criteria of materiality, risk, relevance, and other criteria needed for regulation control, aiming at improving it.

Thanks for the attention ! • WWW.TCU.GOV.BR • International Relation Unit : arint@tcu.gov.br – 00 55 61 7626 • Denationalization Audit Secretariat: sefid@tcu.gov.br – 00 55 61 33167381

TCU’s Action Strategy and Main Results in Overseeing Power Sector Regulation

TCU’s external government auditing and its work with regulatory bodiesStrategy Map of the Brazilian Court of Audit (TCU) The Court’s mission is to ensure the effective and legitimate management of public resources for the benefit of society. MISSION: ensure the effective and legitimate management of public resources for the benefit of society Improving public management Fighting corruption, embezzlement, and fraud Target actions to areas of high risk and relevance

TCU’s external government auditing and its work with regulatory bodies Strategy Map of the Brazilian Court of Audit (TCU) The Court’s mission is to ensure the effective and legitimate management of public resources for the benefit of society. effective MISSION: ensure the effective and legitimate management of public resources for the benefit of society Assesses the performance of government.

TCU’s external government auditing and its work with regulatory bodies Strategy Map of the Brazilian Court of Audit (TCU) The Court’s mission is to ensure the effective and legitimate management of public resources for the benefit of society. legitimate MISSION: ensure the effective and legitimate management of public resources for the benefit of society Ensures the legal compliance of resource management.

TCU’s external government auditing and its work with regulatory bodies Strategy Map of the Brazilian Court of Audit (TCU) The Court’s mission is to ensure the effective and legitimate management of public resources for the benefit of society. MISSION: ensure the effective and legitimate management of public resources for the benefit of society benefit Generates a positive impact for society.

TCU’s external government auditing and its work with regulatory bodies TCU’s work TCU’s work stems from an ambitious constitutional and legal mandate that provides a series of functions to be performed and instruments to be utilized within the wide world of the Federal Government. Mandate Functions Instruments • Audits and inspections • Administrative acts subject to approval and registry Audit/Inspection Constitution • Preliminary opinion • Consultations Advisory • Power to issue rulings on the accounts of those responsible for managing public money and goods Judicial • Application of sanctions (fines, prohibition on bidding, etc.) Punitive Laws • Issuance of mandatory regulatory acts in its areas of competence Rulemaking • Tips and formal complaints about illegal activity Ombudsman

TCU’s external government auditing and its work with regulatory bodies TCU’s Role in Overseeing Regulation TCU acts during different phases of the regulatory process... • Concessions • Contract performance • Performance of regulatory body ... with a focus on various aspects ... • Compliance • Transparency • Improvement ... seeking external oversight that adds value to agencies’ results. • Continuous and systemic • Technical • Independent • Effective In this context, the Court is responsible for exercising external oversight of regulatory agency activities. Oversight of concession contracts is the responsibility of regulatory agencies. TCU is responsible for overseeing the work of regulatory agencies, not for regulating the market.

Successes and challenges of Brazilian regulationRegulation in Brazil Regulatory reform in Brazil took place beginning in the mid-1990s as a result of privatization and the outsourcing of public infrastructure services. Main Expected Benefits: • Separation of roles and inter-institutional coordination • Lower rates • Improved quality of service • Universal access and expansion of coverage • Accountability, Transparency, and Public Oversight • Increased competition • Continuity of service • Fair rate of return • Environmental sustainability Regulatory bodies were created to ensure a stable and economically attractive environment that safeguards the public interest.

Successes and challenges of Brazilian regulation Separation of Roles and Inter-Institutional Coordination Successes Challenges • Creation of regulatory agencies responsible for implementing public policy • Power sector: formulation of public policy by the Ministry of Mines and Energy, project design by the Energy Research Corporation and the National Electricity Agency (ANEEL) • Guarantee of increased inter-institutional coordination among formulators of public policy and regulatory agencies • There still is no integrated environmental policy in the regulation of the various infrastructure sectors Examples of TCU’s participation • Audit of the National Council for Energy Policy (CNPE) in 2001: ineffectiveness of agencies responsible for formulating energy policy and recommendation of reformulation of sector planning. • Environmental and energy audit conducted with government institution responsible for policy making and implementation (2008): deficiencies in the implementation of sector planning (ten-year plan).

Successes and challenges of Brazilian regulationLower Rates Successes Challenges • Creation of mechanisms to harness productivity gains for consumers' benefit • Rate adjustments in power distribution and transmission • Strengthening of agencies’ economic regulation • Capacity building for technical staff • Adequate handling of information asymmetry Examples of TCU’s participation • Concomitant control of concessions for new electricity projects: improvement of feasibility studies. • Monitoring of main power utility rate review processes: analysis of legality and technical consistency of the process, thus contributing to the legitimacy of the regulatory agency’s actions.

Successes and challenges of Brazilian regulation Quality Successes Challenges • Independent agency to regulate quality of service • Indicators • Inspection • Sanctions • Communication channel for end-user issues • Improved efficiency in utility operations • Reduction in power loss • Improvement in quality inspection • Adherence to end-user perceptions about the quality of services rendered • Review of agency work processes • Effectiveness of agencies’ punitive power Examples of TCU’s participation • Monitoring of main power utility rate review processes: incorporation of high levels of power loss into rates and absence of regulatory incentives to reduce them.

Successes and challenges of Brazilian regulation Universal Access and Expansion of Supply Successes Challenges • Universal access to certain services • “Luz para todos” (Universal service: Light for all) • “Tarifa social” (subsidized rates for low-income consumers) • Integration of isolated power generation systems (specially in the North Region – Amazon) • Improved oversight of attainment of universal access goals • Correct distortions in subsidized power rates (“tarifa social”) Examples of TCU’s participation • Audit of “Tarifa Social”: ineffectiveness of criteria used to apply the subsidized rate. • Audit of the Fuel Consumption Account (“ContaConsumo de Combustível”): confirmation of the need for the Account for the economic sustainability of the benefited regions and its growth due to losses in the isolated system.

Successes and challenges of Brazilian regulation Increased Competition Successes Challenges • Increased competition in certain sectors • Competitive energy contracts • Regulatory mechanisms for efficiency of natural monopolies • Power distribution sector regulatory system based on rate-of-return incentives • Improvement of rate setting process and information asymmetry Examples of TCU’s participation • Monitoring of main power utility rate setting processes: recommendations for improving methodology (ex.: rate of return and capital costs)

Successes and challenges of Brazilian regulationContinuity of Service Successes Challenges • Guarantee of greater legal security of signed agreements • Reduced risk of undue state interference in prices and rates • Monitoring of financial health of concession • Investment planning • Security of supply (cost, sustainability) • Studies and Projects • Improved governance between energy and the environment Examples of TCU’s participation • Topics of great import currently underway: Security of Supply

Successes and challenges of Brazilian regulationFair Rate of Return Successes Challenges • Creation of rate setting mechanisms during performance of contract • Rate adjustments for power distribution and transmission • Improvement of economic feasibility studies in concession processes • Power transmission and generation • Strengthening of agencies’ technical capacity in economic regulation • Technical capacity building, budget, and contingency planning • Reduction of information asymmetry among agencies and utilities Examples of TCU’s participation • Monitoring of concession processes: recommendations and orders for improving economic feasibility studies in various sectors (e.g. hydroelectric plants on the Madeira River and transmission lines).

Successes and challenges of Brazilian regulationEnvironmental Sustainability Successes Challenges • Development of mechanisms to manage environmental impacts in infrastructure sectors • Requirement of prior licensing as a requisite for competitive contracting in the power sector. • Coordination and integration of environmental policy among the various formulators and implementers of public policy Examples of TCU’s participation • Environmental and energy audit conducted with government bodies: finding, among other things, that there are no government contact persons for social and environmental issues at the National Council for Energy Policy (CNPE).

Conclusion • With the assistance of TCU’s external government auditing, regulatory bodies in Brazil have made significant progress toward the healthy functioning of infrastructure sectors, including: • capacity to promote investments • incentives for productive efficiency – appropriate costs • control of market power abuse – “just and reasonable” rates • management of negative externalities (e.g. environmental impact) • promotion of positive externalities (e.g. coordination and optimization of network utilization, universal or expanded access) • protection of consumer rights (quality, information, health consequences, individuals with special needs, etc.)

INTOSAI Working Group for the audit of Privatisation, Economic Regulation and Public Private Partnerships