Session 24 Elements of Effective Regulatory Agencies







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Session 24

Elements of Effective Regulatory Agencies

Legitimacy, Credibility, and Transparency

PURC/ARSESP Training Sao Paulo, S.P., Brazil October 22-26, 2012

Ashley Brown

Executive Director, Harvard Electricity Policy Group John F. Kennedy School of Government

Harvard University


META Principles

 Credibility:

 Regulatory commitments to Investors honored

 Legitimacy:

 Consumers convinced they will be protected against commercial and monopoly abuse

 Transparency:


Introduction: Two Contexts for Legitimacy, Credibility, and Transparency

 Consistent with Accepted Practice in Country

 Consistent with Reasonable Expectations of Fairness from International Investors


Ten Key Principles

1. Independence 2. Accountability

3. Transparency and Public Participation 4. Predictability

5. Clarity of Roles

6. Completeness and Clarity in Rules 7. Proportionality

8. Requisite Powers

9. Appropriate Institutional Characteristics 10. Integrity


Critical Standards for Effective Infrastructure Regulation

Legal Framework

Legal Powers

Property and Contract Rights

Clarity of Roles in Regulation and Policy

Clarity and Comprehension of Regulatory Decisions

Predictability and Flexibility

Consumer Rights


Financing of Regulatory Agencies

Regulatory Independence

Regulatory Accountability

Regulatory Processes and Transparency

Public Participation

Appellate Review of Regulatory Decisions


Legal Framework

 The regulatory agency should be created in a law

 Jurisdictional authority

 Powers, duties and responsibilities

 Basic regulatory principles, practices, procedures and policies articulated in law

 All laws enacted on regulatory matters should be

prospective in nature and none should have retrospective application


Legal Powers of Agency

 Authority to make final decisions within its statutory domain without having to obtain approval of any other agency of government

 Approve tariffs at reasonable levels both for consumers and regulated entities

 Set binding standards in such appropriate areas as technical and commercial service quality

 Make rules and subsidiary policy

 Perform routine administrative functions

 Fully enforce its decisions and rules

 Range of remedies appropriate to the severity of violations that it is likely to meet


Legal Powers of Agency con’t

 Adopt appropriate accounting standards

 Adopt appropriate procedures for carrying out its duties

 Adjudicate jurisdictional disputes

 Prevent the abuse of monopoly/market power

 Promote competition where appropriate and feasible

 Adequately protect consumers

 Prevent undue discrimination

 Monitor the performance of regulated entities, the functioning of the market and reliability of supply

 The property and contract rights should be respected


Clarity of Roles in Regulation and Policy-making

 The law should also provide for clear and comprehensive allocation of powers and duties between the regulatory agency and the government

 Basic policy set out in law and prospectively binding on the regulatory agency

 Ministers and government agencies seeking to influence regulatory decisions should be able to do so only in a fully transparent and open manner

 The key principles and methodologies on which major regulatory decisions will be made should be clearly articulated in advance


Predictability and Flexibility

 Regulatory decisions should, to the extent reasonable and feasible, be consistent with previous decisions

 When deviation from previous practice is necessary, it should be undertaken by regulators only after first

providing public notice and providing all interested parties with a meaningful opportunity to be heard on the matter

 Any fundamental change in regulatory practice or policy should, to the extent feasible, be undertaken on a


Consumer Rights

 Adopt a consumer statement of rights, that at a minimum, should include:

Quality of service standards to which customer is entitled to


 Process for handing complaints

 Remedies to which customer is entitled in case of breach



 Regulation should always be kept to the minimum

necessary to assure efficiency and fairness. Examples:

Demonstrable market failure that cannot be removed by other


Where the economic and social benefits of intervention can

reasonably be expected to exceed the likely economic and social costs

 Where significant market power exists  Where consumer protection requires it

 Where clearly specified, government-mandated social policy is


Proportionality, con’t

 Where regulatory actions are necessary, they should be:

Well targeted

Proportionate to the problem being addressed  Measured against the alternatives


Financing of Regulatory Agencies

 The level of funding of the agency should be adequate to allow it to meet all of its responsibilities competently,

professionally and in a timely manner

 A minimum level of funding, expressed in terms of a

percent of regulated revenues (not profits) should be set out in law

 Agency funding should be obtained from a levy assessed on regulated entities

 Regulated entities should be able to pass through funds collected for the levy to their customers in their tariffs


Financing of Regulatory Agencies, con’t

 Funds collected from the levy should be held in a special account and earmarked for the exclusive use of the

regulatory agency, and any other use should be expressly prohibited

 The ordinary fiscal and audit controls should apply to the regulatory agency

 The overall spending authority of the agency should be subject to government approval


Regulatory Independence

 Regulatory agencies should be created by law (or constitution), rather than by decree or other subsidiary legislation

 Under the law, regulatory agencies should have the following powers and characteristics:

 Regulatory decisions should, if possible, be taken by a board of 3, 5 or 7 commissioners

 Stable and reliable source of revenue for its operations

 Offer staff competitive compensation packages and viable career opportunities, as well as appropriate training and education

 Establish the table of organization within the agency and make all relevant personnel decisions

 To set such rules and policies as it may need to carry out its responsibilities

 To promulgate a code of ethics applicable to agency personnel and to those who conduct business at the agency

 To contract for needed outside services

 Should be encouraged to join/participate in relevant professional, research and educational groupings as well as in regional/international co-operative regulatory organizations


Regulatory Independence, con’t

 Regulatory agency directors or commissioners should:

Be appointed to fixed, staggered terms of office not coincident

with the terms of governments or legislatures

Be appointed by the head of government or head of state, with

possible legislative approval

Only be removed for proven good cause

 Terms and conditions of employment of any regulatory

commissioner/director should not be altered during the course of a term

Directors/commissioners should come from diverse


Regulatory Accountability/Legitimacy

 Legislative committees and/or relevant ministries and executive task forces should periodically conduct hearings reviewing the

performance of regulatory agencies. Issues that should be covered include:

 The functions of the agency and continued appropriateness of the

division of authority between it and other relevant agencies

 Transparency, effectiveness and timeliness of regulatory procedures

 Clarity, coherence, consistency and timeliness of agency decisions  Proportionality and effectiveness of targeting in agency decisions

 Quality of decisions and their sustainability on appeals and in practice

 Efficient use of the agency’s resources


Regulatory Accountability/Legitimacy, con’t

 The government or legislative authorities should

periodically engage the services of a panel of financially disinterested outside experts to evaluate the overall

performance of the agency, or on specific areas of interest

 Regulatory agencies should be subject to periodic

management audits and to other types of effectiveness review (e.g., policy audits)

 Regulatory agencies should be required to issue annual reports on their activities


Regulatory Processes and Transparency/Legitimacy

 Except for defined emergency circumstances, no decision should be taken by a regulatory agency until the following have occurred:

 Proper legal notice is given

 All parties who wish to do so have been afforded a meaningful opportunity to provide input to the agency

 Clear guidelines for emergency decisions

 All decisions by a regulatory agency should be written in a public way, including:

 A clear statement of the decision

 A description and analysis of all evidence taken into consideration

 A summary of the views offered by participants to the proceeding  A full discussion of the underlying rationale for the decision


Regulatory Processes and

Transparency/Legitimacy, con’t

 Multi-member regulatory agencies normally make decisions by:

 Majority vote, or

 Credible, consensual, non-voting methods

 If a multi-member regulatory agency uses a formal voting process, there should be opportunity for:

 Members voting “no” may file formal opinions expressing the

rationale for their votes

 Members who concur in the result but do so for different reasons

set forth in the decision, may file concurring opinions expressing the rationale for their decisions


Regulatory Processes and

Transparency/Legitimacy, con’t

 If the regulatory agency decides to use a consensus approach, the agency should proceed as follows:

 A record of the discussion should be made, reflecting the range of

opinions expressed (supporting and dissenting)

 A summary of the discussion should be made publicly available,

along with or soon after the publication of the regulatory decision and its justification

 Members should have the right to state their views concerning the

decision publicly and on an attributable basis

 All regulatory agencies should have clearly defined, published

procedures under which they take decisions


Regulatory Processes and

Transparency/Legitimacy, con’t

 Opportunity for meaningful participation in regulatory proceedings

 Regulatory agencies should facilitate and encourage public participation


Appellate Review of Regulatory Decisions/Legitimacy

 All appeals from a regulatory agency decision should be directed to a single, independent appellate forum, the decision of which would be final

 The appellate forum should either be:

 A specifically designated court, or

 A specialized appellate tribunal with the authority to review the decisions of one

or more infrastructure regulatory agency/agencies

 In either case, the appellate forum should possess relevant expertise in regulatory matters

 Any party believing that it is adversely affected by an

agency decision should have the right to take an appeal from that decision within a reasonable period of time after


Appellate Review of Regulatory Decisions/Legitimacy, con’t

 Regulatory agency decisions should be affirmed on appeal unless the agency:

 Acted unlawfully or exceeded its lawful authority

 Failed to follow the required process/processes in making its decision, or

 Made decisions that were clearly contrary to the evidence

 The decision of the regulatory agency should remain in effect for the duration of the appeal, unless the agency or the appeals tribunal decides otherwise





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