Regulatory Models for Caribbean Utilities – Do’s and Don’ts from Europe given local challenges

1. Regulatory Models for Caribbean Utilities – Do’s and Don’ts from Europe given local challenges Rudi Hakvoort Associate Professor @ Delft University of Technology Partner @ D-Cision B.V. Formerly, head of unit @ Dutch Office for Energy Regulation Steven Martina CEO @ Fatum Caribbean Formerly, CEO @ Aqualectra

3. Myth #1In Europe, the starting point was the same

4. A risk forCaribbeanutilities The vicious spiral of performance decline of utilities Tariffs don’t cover cost Low collection No correct price signal,Inefficient usage Investment and maintenance are postponed High usage and system losses drive up cost Services deteriorates Customers are ever less willing to pay Subsidies are introduced Managers lose autonomy and incentives Efficiency keeps dropping Subsidies fail to sustain Utility cannot pay wages, recurrent costs or extend system Motivation and service deteriorates further System assets go down the drain CRISIS (with huge rehabilitation costs)

5. Myth #2In Europe, competition is heaven • For electricity and gas, there is competition, butit does notworkperfectly • Onwholesalemarkets, there is lack of competitiondue to: • Market power of big companies, present in manycountries (E.On, EdF, RWE, Enel) • Insufficientunbundlingfromgeneration • UK seems to be the exception • Onretailmarkets, competition is limiteddue to: • Lack of demand response • Switchingrate of householdconsumers is low

6. Myth #3In Europe, the independent regulator exists • Manycountries have ‘independent regulators’ but • Theirpowers are sometimeslimited • (althoughgraduallyincreasingbypushing of the EuropeanCommission) • Sometimesgovernmentsdesire to keep a decisive rol in makingdecisions • There is a differencebetweenformalindependence and practical independence • Clashesbetween regulators and policy makers

7. The challengeHow to solve the conflicts? COGNITIVE CONFLICTS Based on (technical) disagreement on interpretation of data Policy Development and Implementation INTEREST CONFLICTS Asymmetric allocation of benefits and costs between stakeholders under alternative policies VALUES CONFLICTS Involving ideology or personal preferences regarding outcomes AUTHORITY CONFLICTS Jurisdictional disagreements originating in unclear legal context 7

8. Myth #4A regulatory model canbeimplementedinstantaneously Liberalization and regulationstartedearly in the 1990s, butmanycountries are stillstrugglingwith the following issues: Networkregulation • What are the optimalcostsfor a utility? • Which are the specificities of eachcompanythatneed to becorrectedfor? • What are the relevant ‘peers’ whenbenchmarkingnetworkcompanies? • How to integratequalityeffectivelyintoregulation? Market design • How to increasedemandsideparticipation? • How to integraterenewableenergyinto the electricitymarket? • Whatmarket model to implementfor smart grids?

9. Myth #5Regulation has onlyadvantages • Regulation is more complex thaninitiallythought • Size of regulatoryinstitutions is growing • Legislation is changingalmosteachyear • Big books of regulatory codes • Hugeamount of data needed • (onEuropean level) Resistanceagainstattempts of the EuropeanCommission to establishincreasingly independent regulators • Manylegal cases againstregulatorydecisions • Example: economic (price cap) regulation • Highly complex models (understoodbyonly a very few people) • Many design flawswhichcannotbecorrectedany more • Regulators need to look gradually more intocosts, which is cumbersome and costly

10. ExampleSupport schemesfor wind energy in somecountries

11. ExampleEffectiveness of renewableenergy support mechanisms Some countries favour a Tradeable Green Certificate (TGC) system simply because it is trade-based, but TGC has (not yet?) any success stories. • On the contrary, most European successes with promoting renewable energy systems were achieved with feed-in-tariffs, implemented in a technology-specific manner. • However, the costs of feed-in tariffs are increasing (fast), especially for solar PV and wind energy. Presently, TGC markets are characterized by short term trading, which (so far) do not provide the long-term investment incentives in renewable energy welcomed by their policy makers.

12. Main message Don’tcopyregulatory models toohastilyfromEurope (or the US). Develop (market and) regulatory models which are specificallydesignedforyour system.

13. AnopportunityforCaribbeanutilities The vicious spiral of performance increase for utilities OPTIMAL SERVICE Better performance at overall lower system costs Overall energy policy framework Incentives for energy efficiency Refocusing of energy subsidies Stable investment climate Regulatory governance principles adhered to Cost-based tariffs with performance incentives Independent regulator Sound basis for infrastructure development Regulatory framework in place Clear rules on cost pass-through in tariffs Regulatory contracts Clear focus of the future system requirements Policy decision to implement change

14. Thanksforyourattention! Complimentarycopy of ‘Reflectionson a utility regulator forelectricity and water on Curaçao’ Rudi Hakvoort D-Cision B.V.  +31 88 18 000 81  r.a.hakvoort@d-cision.nl www.d-cision.com