Regulatory Models For CuraçAo

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  • 1. Regulatory models for Curaçao: Costs and benefits of regulation Rudi Hakvoort Associate professor @ Delft University of Technology Partner @ D-Cision B.V.
  • 2. Overview 1. Energy & water regulation on small islands the ‘where’ of regulation – 2. The substance of regulation the ‘what’ of regulation – 3. Regulatory governance the ‘how’ of regulation – 4. Regulatory models for Curaçao the ‘why’ of regulation –
  • 3. 1. Energy & water regulation on small islands the ‘where’ of regulation
  • 4. Electricity and water supply in small (island) systems • Relatively small size • Not connected to other systems • Self supplying • In general, relatively high system costs Regulatory models from other countries cannot be easily copied for implementation on Curaçao.
  • 5. Applicable models DEZ-model GOVERNMENT UTILITY REGULATOR DEZ+ -model GOVERNMENT UTILITY REGULATOR Advisory model GOVERNMENT UTILITY REGULATOR Independent model UTILITY GOVERNMENT REGULATOR
  • 6. 2. The substance of energy regulation the ‘what’ of regulation
  • 7. A new task: regulation... ‘Wat?’, riep heer Bommel uit. ‘Mijn vermogen controleren? Dat doe ik zelf wel! Daar heeft niemand iets mee te maken!’ ‘Dat vreesde ik al!’, hernam de heer Dorknoper verdrietig. ‘De tijden dat iemand zo kon spreken zijn voorbij. Uw bezit gaat de gemeenschap aan, en die wordt door ons vertegenwoordigd.’ Maarten Toonder, De wens-werkster
  • 8. The four common regulatory objectives Interests Consumer Investor protection protection Efficiency Competition Economic advocacy efficiency System users Utilities
  • 9. The challenge to balance Political interests: · Good balance between price and quality · Continuity and viability of the industry Consumer interests: Utility interests: · High quality for an · Continuity of the utility acceptable price · Acceptable rate of · Transparent rate return system
  • 10. What is a ‘regulator’?
  • 11. Regulatory functions Consumers Regulated monopolies tariff setting licensing quality standards setting incentives to approve efficiency incentives for energy conservations investment approval complaint handling grid code Competitive markets Other policy areas promoting energy conservation promoting renewable energy management of environmental impact implementation of subsidies
  • 12. Regulatory instruments Legal instruments Financial instruments Issuing licenses Establishing the structure of tariffs Monitoring compliance Establishing the level of tariffs Enforcement by imposing penalties Establishing financial performance and administrative sanctions standards (incentives) Arbitrating disputes among Establishing a uniform (regulatory) stakeholders and the regulated firms accounting system Technical instruments Monitoring & reporting Setting technical performance Monitoring customer satisfaction standards (‘quality of supply’) Monitoring the performance of Setting commercial performance regulated firms, standards (‘quality of service’) ‘naming and shaming’ Approving the grid code Reporting to the appropriate Approving investments government authority
  • 13. 3. Regulatory governance the ‘how’ of regulation
  • 14. Regulatory governance Regulatory governance refers to the institutional and legal design of the regulatory system. It therefore represents the framework within which decisions are made. – Independence and accountability of the regulator. – The division of responsibilities among the regulator, policy maker and ministries. – The organizational autonomy of the regulator. – Processes for regulatory decision-making. – Transparency of decision making. – Predictability and speed of regulatory decision making. – Accessibility of regulatory decision making for stakeholders – Organizational structure and resources available to the regulator. – Judicial and nonjudicial mechanisms for appealing regulatory decisions.
  • 15. Regulatory governance The system of regulatory governance defines to a large extent the effectiveness and success of regulation. Therefore, careful attention must be paid to the governance aspects of regulation.
  • 16. Independence of the regulator Political independence • – reduces the influence of short-term political pressures on regulation – may reinforce the independence of the regulator from special interest groups – avoids conflicts of interest between the state as owner and as regulator Independence from stakeholders • – safeguards that the regulation is fair and does not favour one group of stakeholders over the others Organizational independence • – earmarked funding
  • 17. Political capture NO NO NO ! not that high...
  • 18. Regulatory versus corporate governance Regulatory governance Corporate governance Tariffs Investments Share Stake Utility Regulator holders holders Services Value A balance must be found between the public interests of high-quality services at an acceptable cost to the stakeholders and the private interests of the shareholders, i.e. the utility providing sufficient value. The two governance dimensions need to be mutually in balance, in order to safeguard the viability and continuity of the company and therefore the quality and affordability of the services provided on the long term.
  • 19. Regulator governance criteria Clarity of roles Transparency • • – There is a clear statement of the – Regulators should maintain an regulator's functions and his open operation. objectives in carrying out those functions. Accountability • – Regulators’ decisions, which are Autonomy • thought to be unreasonable, can – The regulator should stand aside be challenged in an effective from both political and way. commercial intervention. Predictability • Participation • – Companies need to be confident – All relevant parties must that the ‘rules of the game’ will contribute effectively to the not suddenly change. regulatory process.
  • 20. 4. Regulatory models for Curaçao the ‘why’ of regulation
  • 21. Applicable models DEZ-model GOVERNMENT UTILITY REGULATOR DEZ+ -model GOVERNMENT UTILITY REGULATOR Advisory model GOVERNMENT UTILITY REGULATOR Independent model UTILITY GOVERNMENT REGULATOR
  • 22. DEZ model DEZ+ -model Advisory model Independent model GOVERNMENT UTILITY REGULATOR GOVERNMENT UTILITY GOVERNMENT UTILITY UTILITY GOVERNMENT REGULATOR REGULATOR REGULATOR Description Current situation Legal mandate to Proposal for the Setting of tariffs fully DEZ to approve the tariffs prepared by independent from tariffs itself independent office. government. Role of the island Sets the tariffs. In the end, still Sets the tariffs. No formal role in the government responsible. tariff setting. Main issue Political capture of Island government How will the island Clear legal mandate tariff setting. needs to be government both on regulatory restrictive in evaluate the functions and overruling decisions proposal of the processes is of DEZ. independent office? required. Risk of political high medium high low capture Risk of regulatory high medium high low/medium hold-up Amount of none internal organisation formation of a significant changes institutional only separate entity, but changes required with limited powers Cost of regulatory low low medium high board
  • 23. A word of warning Although the independent regulator model clearly has major benefits, implementation in a system with institutional fragility and weak regulatory governance involves significant risks. These are related to: 1.the required time to adapt to institutional change 2.the required transfer (and growth) of legitimacy 3.the possible lack of stability of the regulatory approaches
  • 24. Model of Gradual Independence
  • 25. Starting with a regulatory contract In principle, a system of GOVERNMENT UTILITY REGULATOR regulatory contracts can be quickly implemented on Curaçao. This should contain the basic regulatory requirements for the utility with respect to quality of service and costs. Once such a regulatory contract is agreed on, it may be executed by a government GOVERNMENT UTILITY REGULATOR agency or some regulatory agency UTILITY GOVERNMENT REGULATOR provided that the contract itself is strictly adhered to.
  • 26. And now...? ‘Doe iets, Ollie jongen, zei mijn goede vader altijd. Anders laat je niets na dan een paar vuile sokken Dat zei hij en daar houd ik mij aan.’ Heer Olivier B. Bommel
  • 27. Thank you very much for your attention! Rudi Hakvoort D-Cision B.V.  +31 88 18 000 81  r.a.hakvoort@d-cision.com  www.d-cision.com