Ashley Brown, Jon Stern, Bernard Tenenbaum and Defne Gencer

1. A Handbook For Evaluating Infrastructure Regulatory Systems Ashley Brown, Jon Stern, Bernard Tenenbaum and Defne Gencer INFOSHOP, World Bank October 2, 2006

2. “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 Sector” World Bank Policy Paper 1993 “.. 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 Services” Operational Guidance for World Bank Group Staff 2004 How WB Thinking Has Evolved

3. Why New Regulatory Systems? • Desperate need for new capital investment and better operating efficiency • Governments do not have enough money • Private investment will come if there is a credible commitment on the “rules of the game” • An independent regulator with transparent process can provide such commitment • “Depoliticize” the two principal regulatory tasks • Setting maximum prices • Setting minimum quality of service standards • Presumption: technocratic and apolitical regulators (“philosopher kings”)

4. Why Haven’t The New Reg Systems Always Worked (as hoped for)? • Never got independent regulators • Law wasn’t adequate (Gap #1) • Disconnect between formal law and actual implementation (Gap #2) • Naïve expectation about depoliticization • Lack of capacity & commitment • 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) • Applied to the wrong entity • Private investors did not show up so regulators ended up regulating SOEs • Indian electricity regulator—”My orders are just pretty poetry.” • African regulator—”I have never seen the government’s performance contract with our state owned utility. How am I supposed to regulate it?” • Good regulation can’t overcome bad economics and bad sector structures • Minister to regulator—”I don’t want you to raise tariffs.” • Bulk power competition in small countries? • Regulator can’t perform miracles if the economics and sector structure don’t work

5. = / So What Can Be Done? • Handbook = A toolkit for conducting independent and public evaluations of regulatory systems • A guide to performing single country, structured case studies • Supplemented by benchmarking if available. • Ideally, the evaluation is: • Sponsored by the government • Periodic and pre-scheduled (like an annual physical) • Evaluation team: international/regional & local experts • How you perform the evaluation is as important as what you recommend. “Not buried in a World Bank report” • Handbook quick read • The handbook’s focus: • after the fact evaluations of economic regulation • real world electricity sector examples but applicable to telecomm and water and?? • regulation of commercialized entities (usually private) • regulatory systems, not just the official regulatory entity

6. What Are The Handbook’s Underlying Assumptions? • Must look at regulatory governance (the “how) and regulatory substance (the “what”) (p.19-21) • Governance = regulatory laws, institutions and processes • Substance = regulatory decisions and actions • Economic regulation = Governance + Substance • Need to look at the gap between what is written in law and what happens in practice (the implementation gap). • The “bottom line”: the effect on sector outcomes • Regulation is a means to an end. The end is better sector performance. • Does the regulatory system (governance and substance) move you closer to or further from targeted sector outcomes? (p. 160-164) • Target audience for the evaluation: Prime Minister and Energy Minister

7. What is in the Handbook? • Specific guidance on how to perform quick (5 days), mid-level (up to 4 weeks) and in-depth evaluations (up to 3-4 months) • Two questionnaires (quick vs mid-level/in-depth) and specific interview questions on regulatory components of reform actions (electrification, grid-based renewables, distribution regulation, effect on poor, open access and customer choice, competitive bulk power markets) • List of needed background documents and TORs for hiring consultants • Detailed summaries of earlier electricity reg evaluations (Brazil, Chile, India, Russia, South Africa and the Ukraine) Telecomm – NERA Africa report (2004). Water-Castalia evaluations (in process) • Checklist for “operationalizing” the independent regulator model (Appendix A) and a “crib sheet” of arguments to use with the Prime Minister • Hybrid and transitional regulatory systems (Chapter 4)

8. Reviewing Decisions and Actions (Regulatory Substance) • Praise the good and shine a light on the bad • Bad regulatory decisions • Sins of omission (p. 154-155) • Sins of commission (p. 157-158) Energy Minister: “Evaluations are fine but what do I do next week?”

9. Hybrid or Transitional Regulatory Systems • Strong advisory regulator (Mozambique) • Detailed regulatory contracts and concession agreements in distribution (Romania, Uganda and Chile) • Partial risk guarantees for initial tariff setting system (Uganda and Romania) • Contracting out—advisory (worldwide) and binding (Chile and Romania) • Specialized appeals tribunal (India)

10. High Strong commitment Limited capacity Strong commitment Competent institutions Independent regulator with discretion - Eastern Europe? ? Regulatory commitment Hybrid Systems - Africa? Weak commitment Limited capacity Weak commitment Competent institutions Institutional and human capacity Low High What Reg. System Is Possible?

11. Best Practices Vs Next Steps • Two views • Minister—”Please no sermons about best practices. I just want advice on what I can do tomorrow.” • 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.” • Both are right • Best Practices-Checklist for “operationalizing” the Independent Regulator (Ch 3 and Appendix A) • Transitional Regulatory Systems (Ch 4)

12. Conclusions • The “independent regulator” model may not always be feasible or the best way to start • What is the sector problem that you are trying to fix? Will a separate regulatory entity help in solving the problem? • What is the best combination of legal instruments and allocation of regulatory authority among different government organizations? • Self-evaluation of WB regulatory advice • Too much emphasis on the supply side (i.e. capacity building), not enough on the demand side • More emphasis needed on quality of service • More focus on “next steps” not just “best practices”