The Purpose of Economic Regulation and
Role of NERSA in the Energy Sector Regulation
Presentation to: South Africa Economic Regulators Conference (SAERC)
By: Phindile Nzimande, CEO, NERSA
21 August 2012
1
OUTLINE
1. Purpose of Economic Regulation
•
Public Interest Theory vs Capture Theory
2. Enablers of Credible Regulation
•
Policy; Legislation; Regulator Independence
3. Regulatory Institutional Arrangements in SA
•
Juristic Person; Departmental; Self Regulation
4. Role of NERSA in the Regulation of Energy Sector
5. Outlook of Regulation in South Africa
6. Conclusion
2
Introduction
• In our current South Africa infrastructure investment
mode, one challenge is that of establishing credible
regulatory regime (commitment) necessary for
attracting sufficient funds to make the required
infrastructure investments
• A credible regulatory commitment provides a
regulated entity with assurance that, after having
made the investments, it will be allowed to provide
services at prices that fully recover efficient
investment costs and makes a profit commensurate
with risk
3
Introduction
• A second challenge is that of ensuring the
regulated services are accessible, available
(service reliability), and affordable to the South
Africans
• This presentation explores the purpose of
regulation and the role of NERSA in the Energy
Sector regulation in that context
4
Purpose of Economic Regulation=Public Interest
• Commonly held view is that Regulation is for the
public good (the public interest theory)
• Regulatory intervention is necessitated by market
failure
• Market failure manifests itself in the form of market
monopoly power
• Intent of regulation is to create an imitative
substitute of competition to exact efficiencies from
these monopolistic market structure
5
Purpose of Economic Regulation=Public Interest
• Regulation for the public good aims to strike a
balance between the interests of society by treating
both the regulated entity’s customers and the
regulated entity’s investors fairly
• Regulation of monopolies for the public good
therefore furthers public objectives and maximises
social welfare
6
Criticism of Public Interest view=Capture Theory
• Public interest theory, that regulation is for the
public good, is criticised by the Capture Theory for
its:– underestimation of the lobbying power of organised
interests/regulated entity
– inability to take into account that there is no universal
agreement on what is ‘public good’ or public interest
7
Criticism of Public Interest view=Capture Theory
• Capture theory view contends that:– the real purpose of natural monopoly regulation is to
serve economic interests of the monopolies themselves
– consumers rarely have an incentive to take action
against the regulator, so long as the costs imposed on
the rest of the society are small enough, even though it
reduces economic welfare
• Regulation is driven not by efficiency but by politics
– politicians establish commissions to take shelter from
hard decisions dealing with politically sensitive economic
issues
8
Regulation of Natural Monopolies Still Remains
• Despite these criticisms of the public interest view,
the regulation of natural monopolies still remains
• Arguments to counter the Capture Theory include:– no single economic interest group captures the regulatory
body
– natural monopoly regulation is not evidently in the interest of
regulated firms, as it seems to place an upper limit, rather
than a floor, on the prices the regulated firm can charge
– Governments delegate decision-making powers to these
bodies, in part, to preserve public confidence in the fairness
of the decision-making process
9
Lessons learned from the Capture Theory
• Response to the criticisms against public interest:– a roll-back in economic regulation, and
– establishment of new mechanisms (such as
requirements for all new regulation to pass an economic
cost-benefit test) to prevent inefficient regulations being
implemented in future
10
Lessons learned from the Capture Theory
• To prevent regulatory capture, the policy makers
can make changes in the design or the regulatory
institutions such as:– changes in the length of the regulator’s tenure
– changes in the design of the regulatory tasks
– ex-parte communication rules
• However in making these changes, policy makers
should also guard against their tendency to reduce
regulatory discretion to the extent of making dayto-day regulatory operations a routine chore. 11
Enabler of credible regulation: Policy
• Policy signals the intent of government with
respect to regulation
• Policy clarifies the roles and responsibilities of the
regulator in implementing policy
•
The South African White Paper on Energy Policy (1998),
Policy Objective No. 2 provided for the creation for Energy
Regulator:“Improving energy governance: - The focus will be the clarification of roles and responsibilities of the
various governance institutions, such as the Energy Regulator, Government departments and other
spheres of government, as well as consultation with stakeholders on the formulation and
implementation of energy policies”
12
Enabler of credible regulation: Policy
• Policy should give economic regulators discretion
in executing their mandate, but that role should be
restricted to implementing public policy, rather than
making it.
• E.g., In the case of NERSA, the enabling
legislation requires NERSA to make decisions that
are not at variance with published government
policy
13
Enabler of credible regulation: Policy
• Thin line between policy making and regulation
since it is also possible to confuse a ‘regulatory
decision’ for ‘policy-making’. Encapsulated in the
comment:‘…this is not to say that regulators are not tempted to make
policy, but regulators have traditionally walked and must
continue to walk, the fine line between pandering to public
opinion and recognizing that decisions that lack broad
public support (at least of the process by which those
decisions were reached) are ultimately not sustainable…’
(Senator Pat Moynihan 1998).
14
Enabler of credible regulation: Legislation
• The mandate of the regulator is spelt out in
enabling legislation
• For credible regulation, legislation should compel
the economic regulator to act :– according to the constitution and the laws of the country
– transparently, follow administrative justice procedures
and provide the public with access to the information
15
Enabler of credible regulation: Legislation
• Legislation must specify how the regulator raises
its budget and accountability framework to the
executive, legislature, judiciary and on the
management of its financial affairs
• Regulator should be allowed to raise its budget
from a fee (levy) imposed on licensees to create
financial autonomy. Without this financial
autonomy, the regulator’s ability to execute its
mandate will vary from budget cycle to budget
cycle.
16
Enabler of credible regulation: Independence
•
•
Regulatory independence is a necessary element in
providing stakeholders with confidence in the regulatory
system
But what is regulatory independence?
“…the degree of independence from government varies
with the type of organization…” (Caron 2012)
‘…no agency head can ever achieve complete autonomy
for his or her organization; politics require accountability,
and democratic politics implies a particularly complex and
all-encompassing pattern of accountability’ (Wilson 1989)
17
Enabler of credible regulation: Independence
•
•
•
Regulatory independence is a durable balance between
authority and accountability
Authority requires that a regulator have the authority to
make independent decisions consistent with its designated
mandate
Accountability to the executive, legislature, judiciary for
oversight of the regulator to ensure that the regulator
performs its assigned tasks in the public good. A regulatory
body is accountable for their decision in a court of law if
taken for review, and accountability on the management of
its financial affairs
18
Enabler of credible regulation: Independence
• But, ultimately regulatory independence comes
down to societal and policy makers’ attitudes to
regulation
19
South Africa Regulatory Institutional Arrangements
• In South Africa, we observe three institutional
arrangements of how economic regulators are
organised. These are:
– a juristic persons e.g., NERSA, ICASA
– ‘in-house’ regulators within a government department.,
e.g. Transport Regulator, Water Regulator
– industry “self-regulation
20
Role of NERSA: Legal Basis and Mandate
• NERSA is a regulatory authority established as a
juristic person in terms of Section 3 of the National
Energy Regulator Act, 2004 (Act No. 40 of 2004)
• NERSA regulates the:– Electricity industry in terms of the Electricity Regulation
Act, 2006 (Act No. 4 of 2006)
– Piped-Gas industry in terms of Gas Act, 2001 (Act No.
48 of 2001); and the
– Petroleum Pipeline industry in terms of the Petroleum
Pipelines Act, 2003 (Act No. 60 of 2003)
21
Role of NERSA: Legal Basis and Mandate
•
•
•
•
NERSA decision-making and public participatory processes
are conducted under the Promotion of Administrative
Justice Act, 2000 (Act No. 3 of 2000) (PAJA)
NERSA determines how to treat access to information
under the Promotion of Access to Information Act, 2000
(Act No. 2 of 2000) (PAIA)
NERSA’s funding is through levies paid by the regulated
entities under the three industries’ respective Levies Acts.
NERSA conducts its financial affairs in accordance with the
Public Finance Management Act, 1999 (Act No. 1 of 1999)
(PFMA)
22
Role of NERSA: Functions
•
•
•
•
•
Licensing and Registrations
Pricing and tariffs
Promoting competition
Compliance monitoring and dispute resolution
Gathering information
23
Role of NERSA: How NERSA exercises its mandate
• NERSA has published rules and procedures for
conduct of its meeting and public participation
processes;
– All of the Energy Regulator’s meetings are open to the
public;
– All of the Energy Regulator’ meetings are advertised;
24
Role of NERSA: How NERSA exercises its mandate
• NERSA has published methodologies for
tariffs/price setting/approvals;
– Methodologies aim to enable an efficient licensees make
a profit commensurate with risk
– Ensure that products and service are accessible,
available and affordable to the public
25
Role of NERSA: How NERSA exercises its mandate
• NERSA’s decision-making processes follow the
required administrative justice procedures and
abide by :– Follow due process with transparent public consultations
in making its decisions
– Make decisions based on facts and evidence and must
be in writing
– Make decisions that are not at variance with published
government policy
26
Role of NERSA: How NERSA exercises its mandate
• Any of the Energy Regulator’s decisions can be
taken for review at the High Court
27
Looking ahead: Economic Regulation in South Africa
•
•
•
As regulatory agencies are established, the first cohort of
regulators will have a crucial role in establishing
administratively just regulatory procedures
The public is will be more reliant on technology to obtain
information/communicate with each other and with
regulators. Global perspectives quickly become National
perspectives and vice versa…e.g. Green peace on coal.
Regulators must be cognisant of these evolving societal
norms with implications on what becomes “public interest”
Regulating for Innovation. Regulators need to balance
between encouraging innovation by utilities and allowing
28
consumers to pay for commercialised innovation
Conclusion
• In our country’s current infrastructure investment mode, the primary
regulatory challenge is attracting sufficient funds to achieve
adequate infrastructure investment
• A central concern to investment is to establish credible regulatory
regime (commitment) that provides assurance to the regulated entity
that, after having made the investments, it will be allowed to provide
services at prices that fully recover efficient investment costs and
make a profit commensurate with risk
• Building trust and a reputation for a regulator are important pillars to
establishing a credible regulatory regime
• This requires the regulatory body to act fairly to both the customers
and regulated entity’s investors, as well as in the larger public
interest, in order to effectively achieve regulatory outcomes intended
by policy makers at the outset
29