REGULATORY IMPACT ANALYSIS: A PRAGMATIC APPROACH

1. REGULATORY IMPACT ANALYSIS: A PRAGMATIC APPROACH Jorge Vasconcelos NEWES, New Energy Solutions Istanbul October 2, 2009

2. REGULATORY IMPACT ANALYSIS: A PRAGMATIC APPROACH • INTRODUCTION • REGULATION • REGULATORY IMPACTS • REGULATORY IMPACT ANALYSIS • CONCLUSIONS

3. INTRODUCTION • “The term “regulation” (...) is generally used to cover any instrument by which governments set requirements on citizens and enterprises. It therefore includes all laws (primary and secondary), formal and informal orders, subordinate rules, administrative formalities and rules issued by non-governmental or self-regulatory bodies to whom governments have delegated regulatory powers.” • OECD • http://www.oecd.org/dataoecd/16/45/43325693.pdf

4. INTRODUCTION

5. INTRODUCTION

6. INTRODUCTION OECD Building an Institutional Framework for Regulatory Impact Analysis (RIA): Guidance for Policy Makers 2008

7. INTRODUCTION • A PRAGMATIC APPROACH : • FIRST CHAIRMAN (10 YEARS) OF THE PORTUGUESE ENERGY REGULATORY AUTHORITY • CO-FOUNDER AND FIRST CHAIRMAN (6 YEARS) OF THE COUNCIL OF EUROPEAN ENERGY REGULATORS • FOUNDER OF THE FLORENCE SCHOOL OF REGULATION • ...

8. REGULATION “(…) The first consideration to be kept in mind is that the power should be affirmative and should be given to some administrative body created by the Congress. (…) I do not believe in the government interfering with private business more than is necessary. I do not believe in the government undertaking any work which can with propriety be left in private hands. But neither do I believe in the government flinching from overseeing any work when it becomes evident that abuses are sure to obtain therein unless there is government supervision. (…) I regard this power to establish a maximum rate as being essential to any scheme of real reform in the matter of railway regulation. “ President Theodore Roosevelt to Congress, December 5, 1905

9. “The opponents of government regulation dwell upon the difficulties to be encountered and the intricate and involved nature of the problem. Their contention is true. It is a complicated and delicate problem, and all kinds of difficulties are sure to arise in connection with any plan of solution, while no plan will bring all the benefits hoped for by its more optimistic adherents. (...) But while I fully admit the difficulties in the way, I do not for a moment admit that these difficulties warrant us in stopping in our effort to secure a wise and just system.(…)” President Theodore Roosevelt to Congress, December 5, 1905

10. REGULATION

11. REGULATION COSTS PROFIT SHAREHOLDERS Economic Efficiency PRICE CUSTOMERS REGULATOR RULES COMPANY QUALITY (Regulatory Contract) PUBLIC INTEREST • Price stability • Price equity • Security of supply • Reliability • Universal service • Sustainability • etc.

12. THE TRADITIONAL ROLE OF REGULATION REGULATOR REGULATED UNDERTAKING OUTPUT . . . INPUTS “fair and reasonable” price (tariff)

13. CONSUMERS tariffs INVESTORS

14. REGULATION PRICE REGULATION REGULATED UNDERTAKING PRICE INPUTS QUALITY QUALITY REGULATION

15. REGULATION PRICE & QUALITY REGULATION REGULATED UNDERTAKING PRICE INPUTS QUALITY

16. INCREASING REGULATORY COMPLEXITY EU REGIONAL SINGLE COUNTRY SINGLE VARIABLE TWO VARIABLES MULTI- VARIABLE

18. REGULATION • CHALLENGES FACED TODAY BY TRADITIONAL REGULATION OF NETWORK INDUSTRIES : • FROM COST-BASED TO PERFORMANCE-BASED • LIBERALIZATION (UNBUNDLING, COMPETITION) • REGIONAL, SUPRA-REGIONAL MARKETS • SUSTAINABILITY POLICIES • INNOVATION

19. “OLD” ENERGY SYSTEMS MONOPOLY SUPPLIER NO COMPETITION NO CHOICE CONSUMER

20. “NEW” ENERGY SYSTEMS monopolies

21. Unbundling of accounts...

22. WHOLESALE MARKET – DESIGN IS CRUCIAL

23. Source: EUROGAS Annual Report 2007/2008 http://www.eurogas.org/uploaded/Final%20version%20Annual%20Report%20as%20of%20231208.pdf

24. SINCE THE 1st OF JULY 2007 ALL ELECTRICITY AND GAS CONSUMERS ARE FREE TO CHOSE SUPPLIER FROM ANY MEMBER STATE

25. “[g]iven that energy production and use are the main sources for greenhouse gas emissions, an integrated approach to climate and energy policy is needed to realise this objective” [of limiting the global average temperature increase to not more than 2°C above pre-industrial levels] European Council March 2007

27. http://www.theclimategroup.org/assets/resources/publications/Smart2020Report.pdfhttp://www.theclimategroup.org/assets/resources/publications/Smart2020Report.pdf

28. “In total, ICTs could deliver approximately 7.8 GtCO2e of emissions savings in 2020. This represents 15% of emissions in 2020 based on a BAU estimation. In economic terms, the ICT-enabled energy efficiency translates into approximately € 600 billion ($946.5 billion) of cost savings : € 553 billion ($872.3 billion) in energy and fuel saved and an additional € 91 billion ($143.5 billion) in carbon saved assuming a cost of carbon of € 20/tonne.” http://www.smart2020.org/

30. REGULATION Regulation is more than a succession of unrelated technical decisions: to be predictable and successful, regulation needs a coherent strategy, i.e., a clear “regulatory policy”. Any “regulatory policy” reflects the way regulators apply their knowledge and expertise taking into account not only the general “politics of regulation” but also relevant sector specific policies – for instance, energy policy. Therefore, the performance of regulators depends not only on the quality of their “specialized knowledge”, but also on their ability to conveniently and timely interpret public policies, translating them into an appropriate and transparent “regulatory policy”.

31. REGULATORY IMPACTS OTHER INDUSTRIES NATIONAL ECONOMY AGENTS IN OTHER COUNTRIES REGULATED INDUSTRY

32. REGULATORY IMPACT ANALYSIS • WHAT ? • BENEFITS AND COSTS OF PROPOSED INDIVIDUAL REGULATORY ACTION(S) • BENEFITS AND COSTS OF REGULATION FOR THE REGULATED SECTOR • BENEFITS AND COSTS OF REGULATION FOR THIRD PARTIES • REGULATORY ACTION vs. NO REGULATORY ACTION • COST OF NOT ENABLING POLICY • ...

33. REGULATORY IMPACT ANALYSIS • HOW ? • MEASUREMENT • ANALYTICAL CALCULATION • COMPUTER SIMULATION • INQUIRIES • BENCHMARKING • ...

34. REGULATORY IMPACT ANALYSIS • SOME “EASY” EXAMPLES • REDISTRIBUTIVE EFFECT OF CHANGING TARIFF STRUCTURE • REDISTRIBUTIVE EFFECT OF ROR, COC, CAP, etc. • REDUCING FREQUENCY AND / OR DURATION OF SERVICE INTERRUPTIONS

35. REGULATORY IMPACT ANALYSIS • SOME “HARD” CASES • LONG-TERM INFRASTRUCTURE INVESTMENT • IMPACT OF RENEWABLE PENETRATION / CARBON PRICE ON ELECTRICITY MARKETS • SMART GRIDS • ELECTRIC VEHICLES

36. GERMANY Source: http://www.erneuerbare-energien.de/files/pdfs/allgemein/application/pdf/eusew_slides_langniss.pdf

37. THE CONSEQUENCES OF A REGULATORY FAILURE TO DELIVER 2020 WOULD BE DEVASTATING

38. SMART SYSTEMS SMART SYSTEM CURRENT SYSTEM • WHY IS IT NECESSARY TO REDESIGN THE POWER SYSTEM ? • TO COPE WITH STRUCTURAL CHANGES • TO MAXIMIZE THE BENEFITS OF INTRODUCING NEW TECHNOLOGIES, IN PARTICULAR ICT

39. SMART CONSUMERS

40. WHOLESALE MARKET PRICE price without demand response different prices corresponding to different generation technologies price with demand response demand response inelastic demand peak demand MW DEMAND PARTICIPATION IMPROVES MARKET EFFICIENCY

41. CONCLUSIONS THE QUALITY OF THE REGULATORY PROCESS AND EVEN THE POSSIBILITY OF PERFORMING MEANINGFUL RIA DEPENDS ON THE EXISTENCE OF A CLEAR REGULATORY POLICY

42. CONCLUSIONS REGULATORY POLICY

43. CONCLUSIONS Designing and implementing a consistent “regulatory policy” requires a broad, multi-disciplinary, long-term approach and not just a “quick fix” ...

44. CONCLUSIONS RIA IN REGULATED NETWORK INDUSTRIES IS NOT SIMPLE AND IT IS NOT TRIVIAL