Regulation is a key element in the liberalization of downstream energy industries. The powers of a regulator under a given law (primary or secondary legislation) are major determinants of the rate of introduction of competition; the powers can contain the ability to adapt the liberalization scheme over time, and the regulator ensures that the remaining monopoly elements reflect the public interest in their conduct. Extensive powers will permit the regulator to ensure changes in the public interest are reflected. The time will always come when new plant needs to be built and paid for, which may change the usual approach that the public interest is best served by low prices.
Regulation is a rule usually made by a government or administrative agency or body, or by some other person empowered to do so under a primary legislation. It is a type of secondary legislation and is normally used to implement a primary piece of legislation to achieve government’s overall objective in enacting the primary legislation. The aim of regulation is simply to help achieve the aims of the liberalization program. It is to be noted that transition mechanisms are important because of market failures, which makes it difficult to achieve the desired goals all at once. The general aims of liberalization are not directly the realm of the independent regulator. However, where regulatory action leads to greater competition, and where stable regulation is part of encouraging greater investment, it may be seen that regulation contributes towards these other aims.
What is the aim of regulation in a liberalization program?
The aim of regulation is simply to help achieve the aims of the liberalization program. It is to be noted that transition mechanisms are important because of market failures, which makes it difficult to achieve the desired goals all at once. The general aims of liberalization are not directly the realm of the independent regulator. However, where regulatory action leads to greater competition, and where stable regulation is part of encouraging greater investment, it may be seen that regulation contributes towards these other aims. It can be difficult to establish whether regulation is a success or a failure. This is because success or failure can only be measured against pre-determined criteria. As it is, most liberalization models do not predict concrete outcomes.
They are usually limited to broad statements of seeking to improve competitiveness through the overall reduction of prices. Accordingly, it can be hard to see where success lies. Furthermore, if price is to be regarded as the only barometer of success, it must be borne in mind that price is affected by more than regulation. Most obviously, electricity price is affected by fuel prices. The gas price is loosely linked to crude oil in many long-term purchase contracts (usually via an escalator linked to a fuel oil index). If liberalization of generation permits substitution by a cheaper fuel, is the price reduction only caused by the act of liberalization?
There are perhaps two elements to regulatory failure, the first being a general inability to sustain a competitive environment over time. This is also clearly a failure of general competition law. The regulator’s inability to sustain competition over time may be evidenced by consolidation, or price rises, or reports into anti-competitive behavior which lead to no change in practices. Regulatory failure in any case is the inability of the regulated market place to achieve the policy goals which in any case may not be clear.
The second though arguable, is that regulatory failure may also be seen where there is judicial involvement in regulated activities, on the basis that if the regulators were effective then there would be no need for a court. This argument is somewhat tenuous given that the regulator may need to go to court to enforce a regulatory decision, or a participant may seek redress in the court against the regulator. On that same tenuous basis, regulatory failure might also be due to frequent legislative changes. Legislative change tends to be an indicator that the aims have changed or that the chosen program is inadequate.
It is not regulatory failure to fail to arrive at a fully competitive market if the original model did not envisage full competition. There are several problems associated with legislative changes to liberalized markets. It is considerably easier to change state monopolies than it is to change the ownership or behavior or expectations of private companies. This is because government exercises little or no control over private companies except by virtue of the general law under which the companies operate; and to alter the expectation of private companies in that circumstance may amount to a form of nationalization, normally referred to as regulatory taking. It attracts claims for compensation in a way which altering the state monopoly by definition does not. Owing to the problems of controlling private companies by general regulation, the energy regulators typically insert special conditions in operating consents – the license allowing participation is subject to a series of conditions.
In very simple terms ‘regulatory taking’ is when the government or its agents through the means of regulations, deprives a person of the use of his property in a way that such regulations have not affected the ownership of the property. Regulatory taking deprives the owner of the full use of his property in a manner acceptable to him even though he retains interest in the property. It is to be noted that it is not every legislative change that amounts to regulatory taking. It is however enough for our purpose to understand that it is only a legislative change that affects or limits the use of a person’s property that may amount to regulatory taking. There are despite the above, some examples where governments have been able to make changes to the basic law; effectively a second basic law.
The classic example is again the UK gas industry, which suffered serious problems in developing competition after the flawed liberalization program. Part of the solution, driven by the regulator, was a revision to the basic law creating a ban on vertical integration between transmission and supply. There were however very special circumstances which enabled the change to be made, in that it was also in the interests of the vertically integrated company to merge There were however very special circumstances which enabled the change to be made, in that it was also in the interests of the vertically integrated company to merge.
Regulatory Failure and Causes
There are perhaps two elements to regulatory failure, the first being a general inability to sustain a competitive environment over time. This is also clearly a failure of general competition law. The regulator’s inability to sustain competition over time may be evidenced by consolidation, or price rises, or reports into anticompetitive behavior which lead to no change in practices. Regulatory failure in any case is the inability of the regulated market place to achieve the policy goals which in any case may not be clear. The second though arguable, is that regulatory failure may also be seen where there is judicial involvement in regulated activities, on the basis that if the regulators were effective then there would be no need for a court.
This argument is somewhat tenuous given that the regulator may need to go to court to enforce a regulatory decision, or a participant may seek redress in the court against the regulator. On that same tenuous basis, regulatory failure might also be due to frequent legislative changes. Legislative change tends to be an indicator that the aims have changed or that the chosen program is inadequate. It is not regulatory failure to fail to arrive at a fully competitive market if the original model did not envisage full competition. There are several problems associated with legislative changes to liberalized markets. It is considerably easier to change state monopolies than it is to change the ownership or behavior or expectations of private companies.
This is because government exercises little or no control over private companies except by virtue of the general law under which the companies operate; and to alter the expectation of private companies in that circumstance may amount to a form of nationalization, normally referred to as regulatory taking. It attracts claims for compensation in a way which altering the state monopoly by definition does not. Owing to the problems of controlling private companies by general regulation, the energy regulators typically insert special conditions in operating consents the license allowing participation is subject to a series of conditions.
What is Vertical Integration?
Vertical integration is where a few or several chains (steps) in the production process or distribution, of a product or service are controlled by one company or an entity. E.g. from generation to distribution; or from generation to metering, in the case of electricity. The aim of vertical integration is usually to increase the company’s market power and reduce transaction costs. Regulating electricity and gas is seen as sufficiently different to general competition regulation that it justifies having a specialist regulator. Not all countries see matters in that light, and some are prepared to entrust the energy sector to the general competition authority. In most (but not all) countries where there has been a liberalization program, an independent specialist regulatory body has been established. The reason for this is that the energy sector tends to present specialist challenges for competition, perhaps through the nature of some participants requiring the making of huge investments; the traditional use of long-term contracts and the relatively small number of participants of diverse size.
There are however number of difficult issues surrounding the question of regulation of downstream energy industries. Regulation does not happen automatically. It must be imposed usually via primary legislation, but the precise method will depend on constitutional norms in the country. It can vary from law, secondary legislation, to administrative direction. It is however necessary to note that the regulation of the downstream energy industries must contend with the following issues: The first problem is to identify who the regulator will be. There is no doubt that the role can be played by government, but since liberalization of energy industries became more established a tradition of independent regulation is in evidence. See the diagram below for a typical structure of the regulatory process- policy making and implementation. It is to be noted that the diagram is for illustrative purposes only and may not be the same for all countries.
What are the merits of independent economic regulation?
There is however one overwhelming reason for the rise of independent regulation. An independent regulator makes decisions based on an evaluation of economic data or based against a list of objective criteria. In contrast, regulation directly by the government is open to manipulation for political reasons. There is a risk that investors are discouraged by political interference, which is countered by the predictability of independent regulation. In countries where the liberalization scheme envisages private investment, it is frequently worthwhile taking steps to minimize political risks for investors.
Creating an independent regulator is a relatively straightforward way to reduce political risks, although it does mean that the government is at least partially surrendering an economic lever which it formerly held. Where the regulator has been identified, (in this case an independent regulator), the next thing would be to look at the mechanisms for setting up independent regulation, and how it is controlled. The powers of the regulator, including the objective criteria under which decisions will be made are set out in legislation promoted by government. Licensing criteria are established under the legislation.
- Government (Rule Making)
- Regulator (Referee) – implements the rules
- Energy Providers
- Energy Consumers
Who to appoint as regulator
Few countries follow the early models and appoint individuals as regulators. Appointing an individual has the advantage of easily identifying the regulator, and the advantage of easy accountability. It has the disadvantage of potentially personalizing regulation and the responsibility in the hands of an individual may lead to allegations of corrupt practices. Later models typically appoint a committee, with members retiring at different times in an effort to improve continuity. The committee members may also be chosen to represent a wider selection of expertise and interests. It is possible to appoint members to reflect specific interests e.g. those of consumers. It is also more difficult or at least more expensive to ‘corrupt’ a committee rather than an individual. Regulation is a balancing act between the needs of the various participants. The interests of consumers need not be identical with the interests of the license holders; the interests of some license holders may conflict with the interests of others. The regulator is given responsibility to balance the competing interests. A committee may be better positioned to do so than an individual.
Scope of regulated business
As the regulator must regulate within the parameters of the framework set up by the government, it is important that the scope of the regulated business be defined. This is fundamentally dealt with under the statute creating the regulator, which may be the primary legislation enacted by parliament (see diagram). This may also be combined with the privatization/liberalization decision or policy. The scope of the regulated business is primarily speaking, entwined with the proposed degree of liberalization. If, for example, it is only the generation sector which is to be liberalized (the equivalent for gas is the right to put product in at the terminal / import point), the scope of regulation will be different from that needed where there will be full liberalization. The most obvious difference is that regulation will be needed where monopoly elements remain, in this case meaning that supply activities will be part of the regulator’s remit. Regulation will deal with the negative effects of the remaining monopoly elements which the market on its own cannot deal with. Refer to Unit one- government and energy policy
Economic regulation is concerned with creating an environment where the incentives are similar to those experienced in a competitive market. Where there is monopoly, prices will be regulated either directly or by means of controlling the rate of increase (or regulating the rate of decrease). In addition to being in control of the price in monopoly segments, the regulator will usually be charged with promoting greater competition as the market becomes more liberalized. This is simple recognition that liberalization is a process rather than a single event. It is to be expected that a small degree of liberalization will be introduced at first, followed by greater liberalization. The task of the regulator is to ensure that there are no competitive abuses amongst the growing ranks of participants. An incumbent former monopolist may be tempted to use its dominant position to restrict the decline in its market share as liberalization develops. This problem can be addressed both through the specialist regulator and through competition law.
Specialist regulator or general competition regulator?
As said earlier on, the specialist challenges presented by the energy sector generally makes using a specialist regulator for the sector worthwhile. Despite this, it remains a debatable point as to whether a specialist regulator is necessary, or whether a general competition regulator can perform the task. Various countries take different approaches. Germany relies on its competition authority, although the other members of the European Union prefer specialist regulators. Some have a single energy regulator for both electricity and gas, whilst others have separate electricity and gas regulators. With the increase in gas fired power generation, and the obvious similarities between the delivery systems, coupled with the trend towards multi-utility suppliers, it would seem likely that regulators of the future will have responsibility for both industries.
Where gas from other fields can be injected during periods of lower demand, and produced again when demand rises. Northern Europe in particular has a “gas swing” a sizeable difference between low demand in the summer and high demand in the winter caused mainly by the use of gas for space heating, although that swing has been considerably reduced in recent years by the use of gas for power generation. Gas production (or import) facilities are built to deal with the largest expected demand, meaning that with constant production levels (or constant import levels) there is a role for storage (also known as gas banking).
Balancing supply and demand
Having had a look at the nature of the industry, it is instructive to observe that in the monopoly era, obviously the monopolist was responsible for balancing supply and demand. Where it controlled generation (electricity) and also was the supplier, balancing supply and demand is not particularly difficult, although there remains a question over payment for unused capacity. It is the same for gas as well, although the monopolist’s control will usually be over gas entering the network (import or landing point) rather than over production.
The structural issue concerns where to fit the regulator into the industry. Following the early models, legislation to create liberalized markets is typically quite limited. It is essentially a framework legislation designed only to outline some of the following:
- How the participants in the market will be controlled
- How the extent of liberalization will be determined
- Creation of a regulatory body with various basic powers
- The detail of how the regulator will work
- The methodology for calculating economic incentives
- The detail of the criteria under which the regulator will make decisions
The structure will also recognize the continuing existence of the natural monopoly element, and provide for a different way of regulating the network from the regulatory approach to other monopoly sectors in the chain which will disappear as competition develops (e.g. supply).
Regulatory structures and liberalization
The precise extent of liberalization is not determined by guesswork but by regulation. Let us examine the above statement in the light of the electricity industry. Liberalization of electricity can be carried out in a number of different ways. The different sectors – generation, transmission, distribution, supply (and metering) offer almost infinite possibilities for different degrees of liberalization. The wires businesses are natural monopolies (remember the meaning of natural monopoly) but the other sectors can be opened to varying degrees. Generation is perhaps the classic example, where the full spectrum of liberalization includes everything from simply allowing new entrants to build plant (which then sells to a monopoly supplier) to full competition between all plants.
There are numerous steps in between where segments of the market can be protected for particular generators – a tactic regularly favored by governments seeking to protect higher cost generators (eg renewables or nuclear) from the advent of competition. Similarly the supply market can be divided into a competitive sector where consumers have a choice of supplier; and a non-competitive sector where consumers must purchase from a (regional) monopolist. There are different ways to enforce a division of the market into competitive and noncompetitive segments. It can be carried out through primary legislation, but given that the extent of competition is likely to be changed (increased) over time, it is more likely that the division will be brought about by secondary legislation. Structuring the model in that way is also part of the reason why framework legislation is typically short whilst the regulatory detail is vast.
Introduction of competition
The role of the regulator, one may think will be to ensure full competition to the extent that it is possible. This will nevertheless depend on whether full competition is the aim of the energy policy/strategy. Despite this, it should be noted that the natural monopoly element inherent in the downstream sector, makes it impossible to have full competition in all sectors, and regulation of the price (or more accurately the price structure) of the natural monopoly service. Literally speaking therefore, the role of the regulator will be to ensure that the objectives set out in the regulation are achieved through the introduction of competition in the downstream energy sector. This he can do by implementing the rules enforcement of market rules. Continuity of service will in this instance also be of the essence to the regulator, especially for services that are regarded as essential like electricity distribution. Continuity of service can in this instance only be achieved by regulatory compulsion because the energy provider cannot be forced otherwise. But wherever there is regulatory compulsion to provide service, it is derogation from a fully liberalized market.
Network use arrangement
The regulator will have to deal with the issue of regulating the process by which network capacity is allocated as part of the network use arrangement between the network operator, the regulator and the users. Whatever is done, it is essential that the regulator ensures non-discriminatory access to the network. In doing this the regulator will deal with issues such as:
Third party access regime
It is to be noted that surrogate competition in the networks is possible via a third party access regime. Where a system is not vertically integrated (remember the meaning of vertical integration), the network only earns income by providing a service. It is debatable whether the vertical integration needs to be established by account unbundling, or through complete ownership separation. The second option is a logical extension of the first. Account unbundling aims to make any attempt to cross subsidize between sectors transparent, and therefore open to being attacked by regulation. Ownership separation removes any incentive to attempt to cross subsidize. If account unbundling works in practice, the result should be the same as ownership separation.
What is account unbundling?
This is the splitting of the company’s value chain into separate accounts usually done in accordance with the liberalization policy or legislation. Legal unbundling is quite a different concept as it connotes the spinning off of the individual elements of the value chain into legally independent firms/enterprises- as separate legal entities. The results of legal and account unbundling may in practice be the same especially with regards to the difficulty of crossing of subsidies between the different value chains.
What is third party access?
Third party access is a straightforward concept under which the ownership of the network is separate from the ownership of the commodity travelling in the network (it allows say A, access to use a network belonging to B to transmit electricity or distribute gas). It can be negotiated or regulated. The network owner is paid for the service of transmission or distribution, and is not involved in supply. Furthermore where there is also a competitive supply market, it is common to find that there is a separate licensed category of shippers. The shipper is the participant who deals with the network operator and ensures that the technical side of delivery (volumes; location; timing etc.) is carried out. In contrast, the supplier deals with the customer. It is clear that some suppliers will be capable of carrying out the shipper’s role, but the reverse is not necessarily true. The characteristics of what makes a successful supplier are primarily related to ability to deal with consumers, and arrange billing, rather than understanding the technical side of the energy business.
Sale of network capacity
Third party access is facilitated by arranging for sales of network capacity. There are a number of ways to sell capacity, ranging from long term sales (for which one assumes there will also be a separate but related long term supply contract) to one-off sales of capacity through auctions. There is a finite amount of capacity in a network. Where it is constrained, that is where demand for capacity exceeds supply, the access arrangements will need to specify the consequences. Note that ‘constraint’ in the network may be defined in the access arrangement, to occur before the network is actually ‘full’. This will permit the putting in place of contingency plans which will permit the control of shortages and the ability to dictate where the shortage occurs. If the shortage is extremely severe, there are normally emergency provisions which allow direction of the available supply by either the Minister or the regulator, similar to a situation where there is a severe shortfall in generation or input volumes. Emergency provisions tend to allow the Minister (or regulator) extensive authority effectively to order supply to be directed to particular persons, and others to be cut off.
The regulator may also have to deal with the issue of price regulation but this will not be necessary in competitive parts of the industry. However, writing a law concerned with liberalization does not automatically create competition, and accordingly a period of regulatory oversight of prices may be required until competition becomes sufficiently established. The issue of price/rate of return regulation is elaborated upon below in the section dealing with ‘price regulation or rate of return regulation’. Defining the point of sufficiency will clearly depend on the market position of the participants and will probably vary from country to country.
Problems of specialist regulation
Under this we shall look at the following problems:
A. Regulatory capture. The problem of regulatory capture affects the essence of regulation, because it makes it difficult to embrace regulation based on evaluation of economic data or based against a list of objective criteria.
B. Price regulation or rate of return regulation. This may create problems in regulation where the regulator is not properly informed in his choice (as between the two) of regulatory instruments or bases such choice on extraneous factors. It is to be noted however that whichever of the instruments of regulation that is adopted, the results in practice are not too different.
A. Regulatory capture
One of the problems of specialist regulation is the potential for regulatory capture. Regulatory capture occurs where a regulator makes decisions which are not truly his own, but instead are unduly influenced by another party. That influence may come from the government, or from the industry, or any other source eg consumer groups. The key element is that the decision is influenced by someone other than the regulator. It can also be seen from the angle of the regulator being captured by the interest he is supposed to regulate.
B. Price regulation or rate of return regulation
Price regulation is generally considered to be different from rate of return regulation. Rate of return regulation is well established, particularly in the United States, where private companies formerly submitted to regulation in return for the grant of a (regional) monopoly right. The regulator, in the US case the Federal Energy Regulatory Commission (FERC) (backed up in each state by a Public Utility Commission), based its pricing decisions on the total return to the company. The FERC made a decision as to what the allowable profit rate (the return) should be. There is a separate decision as to the value of the regulated company’s assets. That rate multiplied by the asset value, and then adding in allowable costs, gives the total amount of money the regulator will allow the company to earn. It is obvious that there are several different areas where the company and the regulator can disagree – and probably the least important is the headline rate of return. The asset value, together with the allowable costs, provides fertile ground for disagreement and legal challenge.
What is the difference between rate of return regulation and price regulation?
In rate of return regulation, the regulator is allowed to control the profit of the company. The perceived weakness is that the mechanism does not provide for an incentive to the company. If performance improves, there is no extra profit. If Performance is poorer; there is no direct link to a financial loss. While in price regulation an attempt is made to address the incentive element. Instead of attempting to regulate profit, it seeks to provide a mechanism by which a regulated company can improve its performance and earn more profit. It also attempts to penalize a company which does not deliver an improved performance. It is an attempt to mimic one of the effects of a market, rewarding improved performance and penalizing poor performance.
Regulation and barriers to entry
The essence of this sub theme is to consider what may constitute barriers to entry into the downstream energy industry and how regulation can help to address these. To begin with however, we must understand what is meant by ‘barriers to entry’. Barriers to entry are obstacles in the path of a firm or person which wants to enter or participate in a given market. The obstacles can be in the form of regulation (licensing for instance), high investment costs or through predatory pricing. Barriers to entry in our context are therefore those obstacles in the path of firms that want to enter into any or all the chains that make up the downstream energy industry.
Energy markets are characterized by reliance on the natural monopoly transmission and distribution elements, differentiating them from other commodity markets. The behavior of participants in the other segments of the downstream energy industry is however controlled by the threat of competition in those segments. The threat however
has to be credible for it to actually influence their behavior. In the natural monopoly segments, the threat is obviously not credible due to the various barriers to entry, and accordingly regulation is essential. Other segments are different. In the supply segment for instance, all that is needed to enter or take part is: procure a license from the licensing agency or regulator (it is assumed here that the conditions for obtaining a license are not very stringent) establish contracts with consumers have a billing system, and purchase product from producers/generators put the product through the pipe/wire to deliver it to consumers (an activity which may be delegated to the shipper as described above)
No infrastructure is needed to be a supplier, and the existence of the shipper role ensures that the ability to market/sell is moreover, more important than an understanding of the technical requirements of the industry. The cost of investment here is low also compared to the natural monopoly segment. New entry is therefore a credible threat that can impact on the behavior of participants in the supply segment. To compete in the generation segment requires a power plant which makes it a less credible threat.
Regulation and the basic law
It is important first to understand what is meant by basic law as this will enable us to appreciate how it affects regulation of the downstream energy industry. Generally speaking, the basic law is usually a framework to support later detailed regulation. Given that it has to match local legislative requirements, the specifics and wording of basic laws differ wildly from jurisdiction to jurisdiction even though the principles are similar. The greater problem comes where a new detailed law or regulation on liberalization is passed in a jurisdiction which lacks certain other (basic) laws, such as general competition law, property rights, or company law. What is the relationship between regulation of the downstream energy industry in terms of liberalization and the basic law? In other words, how does the basic law affect regulation of the downstream?
A. The basic law determines the scope of the liberalization.
For example, in China there is no intent to open the supply market to competition, and serious attempts to control the extent of opening of the generation market (unsurprising given the investment needs). In other markets it is clear that the law permits full competition. It is however important to note that simply writing a law is no guarantee of change. Ukraine for example has a law on electricity liberalization, and an independent regulator, but financial and pricing problems mean that the sector is incapable of privatization and shows few signs of liberalization.
B. The basic law underwrites the authority of the regulator, his identity and his powers.
It gives permission to restructure the sector. It controls the pace of change. It controls the ultimate degree of liberalization. It shows how to identify the participants. Where there is privatization, it is extremely diff cult to change any part of the basic law relating to new participants. There is a powerful incentive to avoid known problems. The basic law also provides for the independence of the regulator, firstly through appointment, then through ability to interpret his role outside judicial intervention, and also through the regulator’s ability to investigate and enforce breaches of the rules set out by the basic law. Appointment of independent regulators is akin to the appointment of judges, and indeed some countries use exactly the same procedures for appointing both. It is possible however that independence whilst in office can be achieved through appropriate powers in the basic law even where there is an element of political choice in the appointment (e.g. it is made by the Minister).
Effective regulation, points to note
Regulation is all about balancing interests of the various parties. The interests frequently simply contradict each other. A high price may be in the interests of suppliers but not consumers. Balancing these interests attempts to be as objective as possible, relying on economic tests and data rather than on a political decision. The regulator in this sense is an economic regulator. There will also be technical regulation (quality standards; safety etc.) which this module will simply assume happens automatically. It is common to find that technical regulation remains with the Ministry after liberalization. The following are also essential for an effective regulation:
- Regulation needs to be flexible, avoiding and able to change over time as competition develops. The role for the regulator in the first year may be much greater than the role after ten years, even if regulation of the natural monopoly will always be necessary. There has to be a way for the regulator to cede price setting power to the market. This is usually a test that the regulator is satisfied with the level of competition and that the participants have appropriate bargaining power.
- The regulator needs sufficient authority to carry out his functions. He needs the power to retrieve data. He needs to have decision making power for himself rather than consistently appealing to courts. He needs to be able to gather political support without prejudicing independence. He needs to interact with other regulators (eg general competition regulator). He needs to recognize that there are constraints on regulatory action as competition develops. At this stage he may simply need to leave matters to the market. A regulator cannot always stop a participant from going bust, and a market gives participants the right to fail. Energy market participants’ behavior has undoubtedly changed. These factors when integrated into the regulatory framework will enhance the efficiency of regulation in the downstream energy sector. It will also enhance the efficiency of the regulator.
By allowing the regulator an adequate measure of discretion to interpret his role, the regulator is merely ticking boxes from a government formulated sheet, then clearly however independent he may be there is considerable government influence. The independence of the regulator is also affected by the appointment process. Independence whilst in office can be protected through stringent provisions against removal. Most systems only allow for removal by a court where a regulator has demonstrably breached statutory duties. In most cases, individual regulators or members of the regulatory panel can be removed in the case of bankruptcy, insanity, or conviction under criminal law.
One of the most controversial aspects of regulatory capture is the link with Ministerial influence over the sector. There is no doubt that in order to gain leverage and influence over private companies’ decisions, which will in turn be reflected in diversity and security of supply, the Minister requires a mechanism to influence decisions. The absence of a mechanism would leave future decisions on security of supply, diversity of supply, and capacity building, exclusively to the market. The ability to influence the regulator is unlikely to give the Minister sufficient power to control the participants, but it is perhaps helpful in the development of an energy strategy. There are two parts to the debate, firstly asking whether there should be any power to influence the regulator, and secondly asking in the event of there being such a power, how extensive it should be.
It is to be noted that it may not be necessary to give the Minister the right to issue guidance under the regulation as he undoubtedly could do that without a specific power in the energy legislation. The issue is a however a complex balancing act. Looking at the United Kingdom example; change to the basic laws governing electricity and gas regulation saw two different alterations. First, under Minister was granted the power to give binding general directions to the regulator which
however did not authorize the Minister to order an investigation into a particular company etc; and secondly the two regulators were merged to form a single energy regulator. The important thing however is that there is no universal solution, particularly as it is intimately related to investor confidence. Each country must find its own solution, and should not rule out having zero influence as an option. It is possible to change the basic law and grant government influence after the model is up and running. To change the law in this way runs the risk of being seen by investors as taking a backwards step. It also runs the risk of undermining the original intent of liberalization. However, changing the basic law with respect to the regulator (or the powers / regulatory approach/government influence, etc.) does not immediately alter the position of the regulated companies, and accordingly is much less likely to attract claims for compensation. It is of course possible that regulatory changes will adversely affect the companies, but it is somewhat difficult to argue that granting the Minister a power to give general directions to the regulator is sufficiently closely linked to any reduction in share value of the regulated companies.