1. Energy regulation and quality of service Eric Groom FEU, World Bank 4 th Poverty Reduction Strategy Forum Athens, June 26-27 2007

2. 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

3. Scope and role of economic regulation Core Definition “ the rules and institutions which set, monitor, enforce and change maximum allowed tariffs and minimum allowed services standards for providers Policy Fiscal Monopoly Safety Social Objectives Consumer Protection Environmental e.g. Effluent Discharge Standards e.g. Drinking Water Standards e.g. Consumer Complaints e.g. Service Coverage Monopoly Safety Social Objectives Consumer Protection Environmental e.g. Emission Discharge Standards e.g. Electrical Safety Standards e.g. Consumer Complaints e.g. Service Coverage Economic: Prices to reflect resource costs– may be higher or lower Ownership Regulation Legal Control on Firm Behavior

4. 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

5. 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

6. 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

7. Service standards and setting prices: the ‘standard’ regulatory process

8. Poor quality: the rule, not the exception - examples from Africa 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.

9. Impact of reliability on power costs – examples from Africa Source: WB draft – not for quotation or citation

10. 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?

11. 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

12. 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

13. 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?

14. 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

15. 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

16. Thank you. Eric Groom + 1 202 458-8558 egroom@worldbank.org www.worldbank.org