Energy regulation and
quality of service
Eric Groom
FEU, World Bank
4th Poverty Reduction Strategy Forum
Athens, June 26-27 2007
Outline
• The role of the regulator
• Price regulation and quality of service
– Why does quality of service matter?
• Issues in setting quality of service targets
–
–
–
–
Choosing the measures
Setting the target
Monitoring and benchmarking
Creating incentives
• Incentives and government-owned utilities
Scope and role of economic
regulation
Economic:
Prices to reflect
resource costs –
may be higher or
lower
Consumer
Protection
Policy
Fiscal
Safety
Ownership
Regulation
Monopoly
Social Objectives
Legal Control on
Firm Behavior
Environmental
“
Core Definition
the rules and institutions which set, monitor, enforce and change maximum allowed
tariffs and minimum allowed services standards for provide rs
Functions of economic regulators – in
practice
•
•
Wide range of functions of ‘economic regulators’
in practice: some, for example, are
– extensively involved in sector policy and reform
– Setting social policy through tariff design
– Technical regulators as well (eg safety)
– Consumer advocates and/or resolve disputes
– Environmental regulators
Good reason to be wary of broadly defined functions
– Can confuse accountabilities, roles, and relationships
with Government and stakeholders
Prices and quality of service
• Price and quality go ‘hand-in-hand’
– Cost of service for user depends on quality as well as
price
• Poor quality => higher cost to users through loss of supply
and production, spending on backup equipment and
alternative sources, damage to equipment
– Quality of service affect costs – higher quality =>
higher costs
• Eg network planning criteria, level of generation reserves
– And customers do not want to pay for unreliable ad
poor quality power
Quality regulation is becoming more
important
• Recent review of Bank’s support for regulation
highlighted that quality of service was given too
little attention
• ‘Old-style’ rate-of-return promoted excessive
quality – in principle – through excess investment
• Price cap => stronger efficiency incentives
– But cutting costs may mean cutting quality
– And incentive to game capex forecasts
Service standards and setting prices:
the ‘standard’ regulatory process
Existing Assets
+
CAPEX
Efficiency
Adjustment
Regulated
Asset Base
x
Reasonable =
Target Return +
Rate of Return
on Assets
(WACC)
Service Standards
New Capital
Expenditure
Depreciation/
Capital Asset
Maintenance
Actual
Operating and
Maintenance
Expenses
OPEX
Efficiency
Adjustment
Allowed
Operating and
Maintenance
Expenses
Customer
Contract
+
Form of Control
• Indexation
• Price or Revenue
Cap
• Regulatory Lag
Maximum Allowed
Revenue
Tariff Structure
Poor quality: the rule, not the
exception - examples from Africa
% of businesses that rely on back-up generation
Antonio Estache & Sergio Perelman & Lourdes Trujillo, 2005. "Infrastructure Performance and Reform in
Developing and Transition Economies," Policy Research Working Paper Series 3514, The World Bank.
Impact of reliability on power costs –
examples from Africa
Average
total cost of
own
generated
power
0.70
0.60
0.50
0.40
Average
price of
power
purchased
from utility
0.30
0.20
0.10
Benin
Niger
Cape Verde
Mauritius
Burkina Faso
Mali
Senegal
Cameroon
Uganda
Kenya
Tanzania
Eritrea
Malawi
Zambia
0.00
South Africa
Average cost of power (US$/kWh)
0.80
Source: WB draft – not for quotation or citation
Weighted
average
cost of
power used
Setting Quality – what matters for
customers
• Customers want
– Reliable supply – so that they know it will be available when they want it
– Stable voltage and frequency – so that their equipment works and is not
damaged
– Good customer service – e.g. queries answered, timely connection,
information, fair resolution of disputes
• But what quality customers want varies between customers and is
difficult to assess
– Most likely wealthier customers and sophisticated businesses want
higher quality
• In the extreme – eg lengthy blackouts at any time on most days – all
customers want better service
• But what if power is available most of the time and interruptions are
short – who benefits from further improvements and how much
should we pay?
Measuring reliability and quality
• Most focus is on reliability
– Easier to measure and important
• Most common measures
–
–
–
–
SAIFI – Frequency of interruptions per customer
SAIDI – Average time that customers are interrupted
CAIDI – Average duration per outage
ENS – Energy not supplied
• But measures are not standard e.g.
–
–
–
–
Minimum outage times and momentary interruptions
Planned or unplanned
Adjustment for storms
Estimation of customers affected
Regulatory Instruments
• Public reporting of performance
• Minimum standards
– Overall standards for average performance
• Penalties levied paid to government
– Guaranteed standards for individual customer
performance
• Penalties paid to customer
• Incentive schemes
– Revenue cap or prices linked to reliability and service
quality
What reliability level
•
•
•
Strong benefits if reliability is very poor
But beyond that little ‘hard data’ on benefits in
developed or developing countries
Guides could come from
–
–
–
–
•
Historical performance – small incremental steps
Benchmarking performance
Observed costs
Consumer survey
Key problems in setting price-quality trade-off:
1. Customers in an area (mostly) all get the same quality
2. But customers value quality/reliability differently
3. And cost for a given level of reliability vary by region
– Higher cost of quality in poor areas?
Incentives and Government-owned
utilities
• What incentives (if any?) work best for
government owned utilities
– key issue is what drives managers
– and how effective are the governance regimes
• Financial penalties are often problematic
– Are managers driven by financial outcomes?
– Who pays anyway? Penalties ultimately fall on the
government budget … and taxpayers and users of
government services
Incentives and Government-owned
utilities
• Reputational – publication of poor performance –
incentives may be effective
– Managers do value their reputation and their
organization’s reputation
• Hence transparent reporting may be effective,
but…
• May raise political sensitivities – especially if
there is not strong accountability of managers
Thank you.
Eric Groom
+ 1 202 458-8558
[email protected]
www.worldbank.org