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REGULATORY AND COMPETITION-RELATED REFORMS IN KENYA’S POWER AND PETROLEUM SECTORS

REGULATORY AND COMPETITION-RELATED REFORMS IN KENYA’S POWER AND PETROLEUM SECTORS. By C. Onyango, G. Njeru and B. Omori. 21 st October, 2009. PRESENTATION OUTLINE. Study Context Terms of References Methodology Literature Review Main Findings Constraints & Challenges Conclusions

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REGULATORY AND COMPETITION-RELATED REFORMS IN KENYA’S POWER AND PETROLEUM SECTORS

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  1. REGULATORY AND COMPETITION-RELATED REFORMS IN KENYA’S POWER AND PETROLEUM SECTORS By C. Onyango, G. Njeru and B. Omori 21st October, 2009

  2. PRESENTATION OUTLINE • Study Context • Terms of References • Methodology • Literature Review • Main Findings • Constraints & Challenges • Conclusions • Recommendations

  3. 1 CONTEXT OF THE STUDY MOTIVATION OF THE STUDY • Effective management and regulation of restructured energy sector • Need to support on-going utility reforms • Efficiency in service delivery and enhancement of consumer welfare • Promotion of synergies and cooperation amongst regulators

  4. 1 CONTEXT OF THE STUDY TERMS OF REFERENCE • To assess the institutional framework and structure of the national competition policy; • To review and evaluate the competition-related regulations and institutional framework in the energy sector; • To undertake a comparative analysis of competition and regulatory framework in energy sector in other countries.

  5. 1 CONTEXT OF THE STUDY Tasks • Evaluating the independence, transparency and clarity of existing regulations; • Assessing the market structure and performance of the electricity and petroleum sub-sectors; • Evaluating the institutional framework and capacity for enforcement of competition-related laws and regulations in the electricity and petroleum sub-sectors; • Establishing and assessing the existing administrative procedures for enforcement of competition laws in the electricity and petroleum sub-sectors; • Evaluating the relevance of existing laws and enforcement powers;

  6. 1 CONTEXT OF THE STUDY Tasks…..cntd • Assessing the quality, service delivery and dispute settlement mechanisms; • Evaluating the coordination and information exchange between the competition authority and the energy sector regulator; • Assessing the level of awareness about competition-related regulations among stakeholders; • Identifying implementation and enforcement challenges and constraints.

  7. 2 ENERGY SECTOR IN KENYA…cnt’d • Major regulatory statutes: RTPM&PC Act 1989; Energy Act 2006; • The case for regulatory reforms • Incentives to regulated firms • Cost Reduction • Efficiency and service delivery • Realization of Vision 2030

  8. 2 ENERGY SECTOR IN KENYA…cnt’d Domestic Consumption/Sales A: Electricity • Large/medium commercial users (56.2%) • Domestic and small commercial (37.4%) • Rural electrification (4.5%) B: Petroleum • Retail pump & road transport (51.4%) • Aviation (18.1%) • Industrial, Commercial (15.4%) • Power generation (11.5%) • Agriculture (1.2%)

  9. 3. METHODOLOGY a. Scope of study • Electricity and Petroleum sub-sectors: b. Sample Design • Study Population: (i) key institutions and organizations; and (ii) key informants and users of energy (i) Key institutions and organizations: Regulators and regulated firms (ii) Key informants: The private sector players and associations, consumer organizations, professional associations and selected Civil Society Organizations (CSOs)

  10. 3 METHODOLOGY c. Data Sources & Analysis • Questionnaires: Interviews with Key institutions and informants: Regulatory institutions, Industry players, private sector, CSO & consumers • A total of 70 (out of 100 targeted) interviews across 4 regions (Nairobi, Mount Kenya, Western and Coast) • Review of various reports, policy documents and internet sources. Documents were obtained from the MOE, ERC, Ministry of Trade, MOF & other government agencies • Qualitative & statistical methods

  11. 3. METHODOLOGY Study Limitations • Weak databases of regulatory institutions • The Triton scandal at the time of the survey • Financial constraints

  12. 4 ANALYTICAL FRAMEWORKFigure 1: Regulatory Framework Design Source: Adapted from Levy & Spillar (1994)

  13. 4 ANALYTICAL FRAMEWORK……CNTD • Governance structures:Regulatory discretion , contractual obligations • Incentive structure:Rules governing utility pricing, subsidies, entry, interconnections • Institutional endowments:Institutions (Legislative, executive & judicial institutions); customs and norms; social interests, ideologies and administrative capabilities

  14. 5 BEST-PRACTICES AND EXPERIENCES a. Best practice features of CAs (UNCTAD, 2005) • Independence • Transparent, well-designed administrative mechanisms, regulations and procedures • Separate investigation, prosecution and adjudication functions • Checks and balances with rights of appeal, reviews of decisions and access to information on legal and economic interpretations • Expeditious and transparent proceedings with safeguard sensitive business information • Provisions for imposing significant penalties

  15. 5 BEST-PRACTICES AND EXPERIENCES b CA and Sector Regulators Models (UNCTAD, 2006) • Technical and Economic regulation: Enforcement of competition exclusively done by CA • Technical and Economic regulation: Regulator has some or all competition law enforcement functions • Technical and Economic regulation: Coordination btw CA with Regulator to enforce competition law • Technical regulation done by sector regulator, while economic regulation within the CA • Reliance on competition law enforced by the CA

  16. 5 BEST-PRACTICES AND EXPERIENCES… c. Country Experiences Brazil: Type I - Competition law fully applicable to regulated sectors and CA in charge of enforcement in cooperation with sector regulators Mauritius: Type II - Some sector regulators have competition competencies. South Africa: Type III - Sector regulators have concurrent jurisdiction. However, the competition act neither explicitly claims precedence over it. CA negotiates agreements with sector regulators South Korea: Types I, II, III-Moving towards III

  17. 5 BEST-PRACTICES AND EXPERIENCES… d. Energy Sector Models • Unbundling of Generation from Transmission and Distribution (ISOs model): Latin America – Chile 1978-1988; Argentina -1992; In Africa – Senegal, Uganda and Nigeria. • Asian IPP Model: Incumbent owns transmission & Distribution and purchase from IPPs • EU Reform Model: Independent incentive-based regulation; no requirement for ownership of unbundled transmission; • The SE Europe: Wholesale competition, legal unbundling of networks, a fully independent regulator, price or revenue cap with a 3-5 year incentive period

  18. 5 BEST-PRACTICES AND EXPERIENCES… Major lessons Learnt • Adequate legal backing in statutory law • Good leadership • Adequate staffing resources in terms of staff numbers and skills • Political and economic independence • Institutional Collaboration: Domestic & external • informal exchanges of information and pooling of resources between national regulators

  19. 6 Main Findings of the Study • Weak enforcements of competition-related laws i.e. no proven cases for anti-competitive practices • Inadequate technical regulatory capacities e.g. MPC had 32 employees of which 21 are Economists; ERC has 36 employees against an establishment of 56; • Poor delivery of services: At importation, refinery and storage; Suspect quality of petroleum products despite surveillance and quality inspections; Shortages, price fluctuations, blackouts, accidents & settlement of disputes etc • Poor co-ordination and information exchange btwn ERC, MPC & other govt agencies. No clear legal provisions for co-ordination;

  20. 6 Main Findings of the Study • Limited awareness about competition policy and laws by stakeholders. ERC has been engaging the public in the recent past particularly on formulation of wholesale and retail pricing. However, room to improve transparency in providing information & documents. • Performance and Market structure 1. Electricity • KenGen accounts for 76.6% of effective production capacity; EPPs (11.5%) and IPPs(11.3%); • A near zero reserve margin i.e. in 2008 max output was 1,267 MW against Total Systems Demand of 1,044 MW • High vulnerability i.e. Hydro accounts for 54.6%; thermal & Geothermal (45.4%) • Fuel costs account for largest component of purchase costs (Table 7)

  21. 6 Main Findings of the Study • Positive financial performance i.e. generation and supply subject to rate-of-return regulations and prices negotiated through PPAs • Low consumption per capita i.e. 121 per capita and national access rate of 15% compared to 32% for SSA • Large commercial and industrial users (41.8%); Domestic users (24.9%) • Increasing unit costs i.e. 37.3% increases btwn 2003/04 and 2007/08 i.e. from ksh 5.92 per kw to ksh 8.13 per kw

  22. 6 Main Findings of the Study

  23. 6 Main Findings of the Study 2. Petroleum sub-sector • Oligopolistic mkt structure i.e. • HHI was 1649.16 (see table 12); • Market concentration Ratio was 76.7% i.e. Kenol (24.8%); Shell (20.9%); Total (19.5%) and Chevron(11.1%)

  24. 7 MAIN CONSTRAINTS AND CHALLENGES a Competition-Related Regulations • Limited regulatory independence of MPC and ERC i.e. both subject to State Corporations Act; MPC funded by exchequer; Ministerial involvement in decision-making etc • Limited funding thus affecting staff recruitment, M&E and enforcement for the MPC • Existing laws do not provide for consumer protection and fair trading (incorporated in CB 2009) • Exemptions of the public sector from application of the Competition act (incorporated in CB 2009) • Weak provisions for sanctions, fines and penalties

  25. 7 MAIN CONSTRAINTS AND CHALLENGES b Electricity sub-Sector • Limited enforcement powers for competition-related regulations • Uncoordinated enforcement of competition related regulations • Inadequate technical and professional staff. • Poor Infrastructure affecting data collection, information exchange, M&E etc • Weak governance of transmission network and pricing structures

  26. 7 MAIN CONSTRAINTS AND CHALLENGES c Petroleum sub-Sector • Inadequate capacities for regulatory efficiency and effectiveness • External factors (international oil prices, global security etc) • Enforcement of standards and quality • Weaknesses in existing laws and regulations

  27. 8 CONCLUSIONS • State owned public utilities dominant in generation, transmission and distribution of electric power despite increased participation of the private sector • An effective regulatory system in the energy sector is crucial for both investor confidence and consumer protection

  28. 9- RECOMMENDATIONS • Adoption of a HYBRID regulatory model i.e. Types II and III • Effective coordination of implementation and enforcement of competition-related regulations amongst various state agencies • Strengthening regulatory independence in management, dispute settlement and decision-making e.g. parliamentary vetting of Board members • Widening the scope for competitive power generation market which is currently dominated by KENGEN by deepening horizontal divestiture • Effective governance of transmission network and pricing structures.

  29. 7.0 RECOMMENDATIONS • Strengthening data reporting and M&E through increased allocations, and recruitment of additional staffs • Infrastructure development to improve efficiency in provision of petroleum products e.g. oil jetties, pipeline, storage facilities etc • Engagement and awareness of competition-related regulations among stakeholders • Improvement of Terms and Conditions of employment and retention mechanisms

  30. THANK YOU

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