|
|
|
C. The Importance of the Proper Power Sector Framework |
2. Legal and Regulatory Framework
Preceding a privatization with the creation of the appropriate legal and energy regulatory environment is a practical requirement and an economic one as well. As noted above, a key guiding principle that all countries should keep in mind in making any privatization decision is risk reduction. Every investment involves a risk premium. The lower the risk of an investment, the higher the price that a purchaser will pay, and the more bidders the privatization will attract. Endowing the regulatory agency with appropriate authority and an adequate degree of autonomy reduces the level of political interference in the regulatory decision making process, thereby increasing the level of predictability for the investor and reducing potential risk.
Safeguards of regulatory autonomy that will interest investors include:
 A separate legal mandate creating the regulatory agency and defining its functions vis-à-vis various government ministries;
Freedom from ministerial control;
Professional appointment criteria for energy regulatory commissioners;
Fixed-term appointments and protection from arbitrary removal from office; - Staggered terms for commissioners; and
Reliable funding sources for the agency such as licensing or franchise fees that reduce the dependence of the agency on the budget authority of the central government.
To mitigate risk, the participants agreed that the power sector privatization must be preceded by the creation of a strong regulatory agency endowed with independence and characterized by openness and transparency in its decision-making process. For example, in Moldova, where Union Fenosa purchased three of the five national distribution companies in February 2000, a national regulatory agency was created in 1997, followed by an energy framework law in 1998, which provided the legal basis for the regulator. The regulatory agency was charged with a set of clearly defined tasks including licensing, tariff setting, and promotion of competition and consumer protection. The jurisdiction of the agency was reinforced by the Law on Electricity promulgated the following year, which detailed the jurisdiction of the relevant ministries, utilities and the regulator a full two years prior to privatization.
A strong and competent regulatory authority provides investors with a level of comfort regarding the rules of the market place, the procedures for amending tariffs, and the performance criteria for obtaining and retaining license authority, which are significant regulatory risks of concern to strategic investors in the post-privatization period. Together with a well-understood process for conducting the privatization, a competent regulatory authority is one of the most important factors in reducing the level of risk perceived by qualified strategic investors.
Predictability is a key to investor confidence. If the investor understands the rules; has confidence that they will not change and knows that it will be treated equally under these rules; recognizes that the rules will be applied by an independent regulator, with no vested political interests, the investor will perceive a reduction in risk and should adjust its purchase price accordingly.
Importantly, the investor knows that after the sale, the government will withdraw, leaving only the regulator to deal with on a day-to-day basis. At that point, the investment has become immobile and the investor is committed. Hence; it is crucial that the regulator inspire confidence in the investor, and have the authority to make decisions in principle areas of interest: setting or enforcing tariff methodology and pricing; licensing and monitoring new owners; and consumer protection.
|
|
Source: |
|
|
|
Table
of contents |
|
|
|
I. Power Sector Privatization |
|
|
|
II. Privatization Process |
|
|
|
Conclusion |
|
|
