CUTS C-CIER International Conference on Quality
of Regulation
New Delhi, 27th March 2010
QUALITY OF REGULATION
A CASE STUDY OF KENYA’S ENERGY
SECTOR
Presented
by
David Ong’olo
Outline of the Presentation
• The Energy Sector in Kenya
•Reforms in the Energy Sector
•Imperfect Market Conditions in the Energy
Sector
•Findings of the Study
• Quantitative Analysis
• Regulatory Impact Assessment
•Recommendations
The Energy Sector in Kenya
Energy Sources
Electric Power Sources
Wood fuel (68%)
Petroleum (22%)
Electricity (9%)
Coal/Solar (1%)
Wind (0.003%)
Hydro (50.6%)
Thermal oil (33.2%)
Geothermal (16.1%)
Cogeneration (0.061%)
•Effective power capacity - 1,480MW
•Electricity demand - 1,135 MW to >10,000MW in 20 years.
•About 4,000MW - geothermal sources
• “Talk” of nuclear energy
•Solar power has potential but not developed
•Advent of wind power
Reforms in the Energy Sector
•ERC – Is the Sectoral Regulator
•Early 1990s fundamental structural, institutional and regulatory reforms in
the energy sector
•ERB replaced by ERC through Electric Power Act, 1997
•Energy sector has central place in Kenya Vision 2030
Functions of the Energy Regulatory Commission
•The objects and functions of the ERC are set out in section 5 of the Energy
Act 2006. These are to inter alia:
– regulate the sector
– protect the interests of consumer, investor and other stakeholder interests
– formulate, enforce and review environmental, health, safety and quality
standards
– enforce and review regulations
Imperfect Market Conditions
Asymmetric Information
ERC has fairly reliable information – revenues and cost structures
Data on sale of electricity and distribution losses are less reliable
Petroleum companies provide manipulated information
Commission and energy sector players – asymmetry
Externalities
External costs - Diesel generators
There is need to improve the short-term security of energy supply
Natural Monopoly
Benefits of natural monopoly do not exist
– excessive prices at the consumer level
– high production inefficiencies – 20% distribution losses
– poor service quality
Generation of electricity has been opened up to competition
Anticompetitive Practices
Pricing of petroleum products, 2004 and 2009
ERC published proposals for price controls in the industry
Study Findings -Qualitative Analysis - 1
Regulatory Independence and Enforcement Capacity
Procedures for selection of the Members of the ERC and the Chairman
•Energy Act, 2006 and State Corporations Act
•Section 3 of the State Corporations Act - control and regulation of state
corporations
•Chairman and Commissioner's appointments
Professional backgrounds of the Commissioners
•Current crop of Commissioners adequately meet the requirements of the
law
The Use of Media
•Budget is about 10% of the total ERC annual recurrent expenditure
•ERC could be more visible
Study Findings -Qualitative Analysis - 2
Capacity for Service Delivery and Dispute Settlements
Petroleum
•
Frequent shortages/inadequate supply (34%)
•
High prices or fluctuations in prices (30%)
•
Poor quality of products (including adulterations) (20%)
Electricity
•
Most common complaints were black-outs, outages, accidents, low voltage supply.
Dispute settlement
•
45 consumer complaints received in 2006/7
•
51% were resolved, 38% awaiting utility response and 11% complainant’s responses.
•
A key monitorable Project Development Objective (PDO) is to “….increase the percentage of disputes
and complaints resolved annually by ERC from 85% in 2009 to 95%
Study Findings -Qualitative Analysis - 3
Setting of Performance Standards
•Adopted from those set up by ERB
•ERB has already set out a clear allocation of responsibilities for
monitoring compliance with EHS standards.
Co-ordination and Information Exchange
•The Energy Act of 2006 imposes an obligation on ERC to coordinate with
other statutory authorities
•Setting enforcing and reviewing Environment Health and Safety
standards – needs to improve
•Granting licenses for sustainable charcoal development - acceptable
•Competition regulation – needs to improve
•ERC and the REA – needs to improve
•Proposals for concurrent powers for competition regulation with the
competition regulators – new Competition Bill will facilitate this.
Study Findings -Qualitative Analysis - 4
Transparency, Advocacy and Awareness Creation
•Documentation for consultation is freely available.
•17.3% were of the opinion that the regulator was transparent
•46.2% of the respondents were not aware of the rules, principles and
guidelines
•38.5% were aware of the rules and principles pursued by ERC
•15.3% either didn’t know or were not sure of existing rules and
regulations.
Accountability
•28.8% of the respondents indicated that the regulator is accountable
•55.8% indicated that the regulator is not accountable to the public
Financial Performance of the Sector
•ERC collects 96% of the levy and is well funded.
•KPLC and Kengen make high profits
RIA – Prepaid Electricity Meters
•First phase - commenced in mid May 2009
•Existing 1,708 electricity postpaid electricity customers in the Kasarani
•Actaris Measurements & Systems from South Africa - 25,000 - 250,000 –
400,000
Key objective
•Consumers to manage their expenditure and spare them disconnection
or reconnection costs
•ERC had approved the system
•Sec. 44 of the Energy Act has specific provisions in relation to the forms
of contract for supply of electrical energy to consumers
•But no Energy Prepayment Meter System Code or Guideline exist
Findings of the Study - RIA - 1
Item
Average Annual cost/benefit
per Consumer (Ksh)
Net Present Value
(over 20 years)
(Ksh. Million)
-1509
-323
330
72
-1179
-251
Costs
-2183
-456
Benefits
3015
635
Sub-Total
832
179
-30
-0.065
Benefits
1,324
281
Sub Total
1,294
281
947
208
ELECTRICITY
CONSUMERS
Costs
Benefits
Sub-Total
KPLC
ERC and GoK
Costs
TOTAL
Findings of the Study - RIA - 2
Use of prepayment meters in Kenya is, in aggregate, in
the public interest.
•Discounted net cost for consumers is Ksh. 251 million
•Cost of prepaying electricity is the main element.
•For KPLC there is a net benefit of Ksh. 179 million
•Cost element is commission to card retailers
•Main benefit is reduction in reconnection costs.
There is, however, potential for some electricity
customers being significantly worse off
Avoiding this would require developing mechanisms to
ensure that customers on prepayment meters
•Are protected by ERC
•Have appropriate access credit terms - negotiated with
KPLC.
Recommendations
Challenges for better Energy Sector Regulation
Some of the most important regulatory issues in Kenya today:
•Introduction of prepayment meters for electricity
•Introduction of gasohol mix with petrol
•Proposed nuclear energy production
•Regulation of petroleum prices
Policy Recommendations
•Increase efforts to integrate a “whole-of-government” approach for
regulatory quality sector Improve co-ordination mechanisms with e.g.
NEMA and clarify responsibilities
•Internalise RIA in Kenya as an effective tool for regulatory quality
•Improve transparency and increase social participation in regulatory
processes.
•Increase cooperation between sectoral and competition authorities
Thank You
For
Your Attention