power sector reform and regulation - graduate school of business

Prof Anton EberhardManagement program in infrastructure reform and regulationUniversity of Cape Town

Power sector reform and regulation:responding to investment and poverty challenges in Africa

Parliamentary Forum on Energy Legislation and Sustainable Development: 5-7 October 2005, Cape Town

www.gsb.uct.ac.za/mir

University of Cape Town - Graduate School of BusinessGrowing leaders in emergent markets www.gsb.uct.ac.za/mir

University of Cape Town - Graduate School of BusinessGrowing leaders in emergent markets

Overview

• Reform experience in the 90s• Private participation in power sector• Impacts on poor people• Regulatory challenges• New regulatory models• Implications for legislators

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Drivers for utility reform in Africa

• Inefficiencies in investment and operations– soft budgets, poor governance, regulatory failure, no competition, few

incentives for cost reduction– deterioration or collapse of services

• Financing for capacity expansion– public resources insufficient -> private

• Part of overall economic restructuring– macro-economic constraints or crises– state re-defines relationship to SOE’s

• Technological innovation– Changing economies of scale and scope– New possibilities for competition

• Sector reform as a fad?– international role models


Power sector reform: the standard model

• Corporatisation• Unbundling for competition• Private sector participation

• Management contracts & leases• Concessions• Divestiture / privatisation• Greenfield investments (IPPs)

• Independent regulation


MODEL 1:NATURAL MONOPOLY

MODEL 4:RETAIL COMPETITION

MODEL 3:WHOLESALE COMPETITION

MODEL 2:SINGLE BUYER

Utilities are vertically integratedGeneration, transmission and distribution are not subject to competitionNo-one has choice of supplier

Single buyer chooses from various generators (IPPs)Access to transmission xxx not permitted for sales to final customersSingle buyer has monopoly over transmission networks and over sales to final customer

Distribution companies buy direct from generator (IPPs)Distribution companies have monopoly over final customersOpen access to transmission wiresGenerators compete to supply powerPower pool established to facilitate xΔ

All customers have choice of supplierOpen access to T & D wiresDistribution is separate from retail activityRetail industry is competitive

Generation (G)

Transmission (T)

Distribution (D)

Customer (C)

IPP IPP

Single buyer G & T

D D

C

G GG

TPower poolexchange

Franchisecustomers

(FC)

Largecustomers

(LC)

D

C

D

LC

D

C

G GG

TPower poolexchange


Private participation in power projects

.

IPPs

13 countries25 projects

Source: PPI database


Private management control of power sector

.


The 1990s: early promise and then collapse

Projects with private sector participation 1990-2001 (million US$, real)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

199019911992199319941995199619971998199920002001

acro

ss a

ll de

velo

ping

re

gion

s

$0$500$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500

SS

A

SSA

all regions


Experience of power sector reform in 1990s

• In most countries, reform process has slowed or stopped– nowhere in Africa are fully competitive electricity market to be found

• Nevertheless…….historical model of monopoly SOE is under pressure

• New wave of private investment?– Management contracts & leases– Concessions– New, greenfield investment: IPPs

• Impacts of reform on poor?


Utility reform and impacts on poor people

• Common assumption: competition and private participation have negative impacts on access and affordability for poor people

• However, international experience reveals much more complex picture

Need special policies and programs:• policy, legislation, regulation• planning, funds, implementation


Successful example of private sector participation

• Updated customer database

• Pre-payment methods

• Computerised billing system

• Local customer service centers

• 24-hour toll free hotline

In 5 years, Northern Electricity in Namibiamore than doubled access levels

while at the same time reducing tariffs


Power sector reform also affects the quality and reliability of supply

Many people are forced to maintain expensive, unhealthy or inconvenient

back-up power sources such as generators, kerosene, or wood

• Reduces need for back-up power• Reduces costs for business• Allows for improved productivity• Creates opportunity for new business


Electricity regulators* in Africa

*Regulators generally outside Ministry but may, or may not, have final tariff-setting authority


Multiple responsibilities of regulators

• Economic regulation of natural monopoly components

• Facilitation of new investment• Quality of supply• Dispute resolution• Market information• Policy advice• Advancing public benefits


Special role of regulatorsin advancing public benefit programmes

• Primary role is economic and technical• But can also ensure social delivery

– Policy advice to government– Connection targets in licences– Poverty tariffs– Manage a degree of cross-subsidisation,

transparently– Energy efficiency programmes– R & D– Monitoring


Regulatory worries for investors

Arbitrary or inconsistent decision-making• Limits to regulatory independence

– Some regulators only advise the Minister who makes final tariff decision– Tariff setting often highly politicized– Members of regulator boards are frequently replaced

Gap between “law” and “practice”• Institutional fragility

– Most regulators only a few years old• Lack of capacity• Regulatory contracts under stress

– Renegotiation of concession contracts– Pressure on IPP / PPAs– Confusion of authority between

regulators and contracts


African Forum of Utility Regulators

“AFUR recommends that the followingkey principles form part of an initialframework for utility regulation in Africa:

• Minimum regulation necessary to achieve policy and sector objectives;

• Adherence to transparent decision-makingand due process requirements;

• Independent or autonomous regulation where possible;• Accountability towards government, investors and end-users• Non-discrimination when not in conflict with policy prerogatives of government;• Protection of investors against physical and regulatory expropriation; and

• Promotion of competition by limiting anti-competitive behaviour.”

A Framework for Utility Regulation in Africa 2003

http://www.iisd.ca/2002/pc3/enbots/pix4/4nepad3.jpg


Rethinking the classic independent regulator model

THEN“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 SectorWorld Bank Policy Paper 1993

NOW“.. 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 servicesOperational Guidance for World Bank Group Staff 2004


A menu of regulatory options

• Regulation by agency / independent regulator

• Regulation by contract• Contracting-out of

regulatory functions• Strong advisory regulators• Regional regulators• Mandated periodic and public reviews of regulators• Building the demand-side for regulatory transparency• Partial risk guarantees for regulatory system

Select from menuto create transitional or hybrid model


Legislative implications

• Power sector reform- Corporatisation- Unbundling / competition- Private sector participation

• Regulation framework- Independent regulation- Regulation by contract- Expert panels- Mandatory reviews

• Pro-poor programmes- Electrification funds /agencies- Pro-poor tariffs

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Prof Anton EberhardResearch, training courses, consultancyUniversity of Cape Town

The Management Programme in Infrastructure Reform & Regulation (MIR) is an emerging centre of excellence and expertise in Africa. It is committed to enhancing knowledge and capacity to manage the reform and regulation of the electricity, gas, telecommunications, water and transport industries in support of sustainable development.

www.gsb.uct.ac.za/mir

power sector reform and regulation - graduate school of business

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