38328 E N E R G Y A N D M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R P A P E R N O . 1 8 J U L Y 2 0 0 6 Electrification and Regulation: Principles and a Model Law Kilian Reiche, Bernard Tenenbaum, and Clemencia Torres de Mästle THE WORLD BANK GROUP Energy and Mining Sector Board AUTHORS DISCLAIMERS Kilian Reiche (kreiche@worldbank.org) has worked for The findings, interpretations, and conclusions expressed in the World Bank's Latin America Region as Energy Specialist this paper are entirely those of the authors and should not be and Senior Energy Consultant since 1999. He is now Director attributed in any manner to the World Bank, to its affiliated of Development GmbH and lead transaction advisor for organizations, or to members of its Board of Executive output-based energy projects in Argentina, Bolivia, Ethiopia, Directors or the countries they represent. and Nicaragua. Before joining the World Bank, he was a renewable energy expert at the German Fraunhofer Institute CONTACT INFORMATION for Solar Energy. To order additional copies of this discussion paper please Bernard Tenenbaum (btenenbaum@worldbank.org) is a contact the Energy Help Desk: +1.202.473.0652 Lead Energy Specialist in the Energy and Water Department energyhelpdesk@worldbank.org at the World Bank. While at the Bank, he has served as an advisor on power sector reform and regulation projects in This paper is available online www.worldbank.org/energy/ Brazil, China, India, Mozambique, and Nigeria. Before joining the World Bank, he served as the Associate Director of the Office of Economic Policy at the U.S. Federal Energy Regulatory Commission. The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, Clemencia Torres de Mästle (ctorres@worldbank.org) without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permis- is a Senior Regulatory Economist in the Infrastructure, sion to photocopy or reprint, please send a request with complete information to Finance and Private Sector Development Department for the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, the Latin America and Caribbean Region of the World Bank. USA, fax 978-750-4470. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, While at the Bank, she has worked in the Development 1818 H Street N.W., Washington DC, 20433, fax 202-522-2422, e-mail: Economics Department and on telecommunications and pubrights@worldbank.org private sector development in the Middle East and North Africa. Prior to joining the Bank, she worked as a consultant on privatization and regulatory issues in Argentina, Chile, Egypt, and India. Ms. Torres de Mästle holds a Ph.D. in Economics and a master's degree in Economic Policy from Boston University. E N E R G Y A N D M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R P A P E R N O . 1 8 J U L Y 2 0 0 6 Electrification and Regulation: Principles and a Model Law Kilian Reiche, Bernard Tenenbaum, and Clemencia Torres de Mästle The World Bank, Washington, DC THE WORLD BANK GROUP The Energy and Mining Sector Board Copyright © 2006 The International Bank for Reconstruction and Development/The World Bank. All rights reserved CONTENTS FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 ACKNOWLEDGMENTS ABBREVIATIONS AND ACRONYMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 1 .REGULATING ELECTRIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Electrification Markets: A Matrix of Supply Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 The Basic Design Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Two Golden Rules of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Why Regulate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Important Dimensions of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Functions and Tasks: Regulation and Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Structure of the Paper: From Principles to Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 The Significance of Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Two Important Caveats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 2 .BASIC PRINCIPLES FOR REGULATING ELECTRIFICATION . . . . . . . . . . . . . . . .18 Principle 1: Light-Handed and Simplified Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Ex. 1: Isolated Minigrids: Flexible Filing Requirements and Lower Service Quality Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Ex. 2: Isolated Minigrids: Generic Tariff Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Principle 2: Delegate or Contract Out Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Benefits of Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Types of Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Ex. 3: Regulation by a Ministry: Solar Home Systems in Bolivia . . . . . . . . . . . . . . . . . . . . .25 . Ex. 4: Regulation by a Ministry: Grid-Connected Cooperative Resellers in Bangladesh . . . . .26 Ex. 5: Regulation by a Community: Isolated Minigrids in Cambodia . . . . . . . . . . . . . . . . . .27 Principle 3: Vary Regulation by Type of Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Ex. 6: Solar Home Systems: Fee-For-Service, Dealership, or Hybrids . . . . . . . . . . . . . . . . . . .30 Ex. 7: Minigrids: Private Operator or Community Owned . . . . . . . . . . . . . . . . . . . . . . . . . .32 Principle 4: Establish Realistic and Affordable Quality Standards . . . . . . . . . . . . . . . . . . . . . . .33 Quality of Service Standards for Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Ex. 8: Quality of Service for Solar Home Systems: The Case of Bolivia . . . . . . . . . . . . . . . .34 3 .A MODEL LAW TO PROMOTE ELECTRIFICATION . . . . . . . . . . . . . . . . . . . . . . . .37 Electrification­­the Forgotten Child of Power Sector Reform . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Going from Principles to Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Legal Standards for a Regulatory System That Will Promote Grid and Off-Grid Electrification . .38 4 .CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 5 .BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 LIST OF FIGURES Figure 1: How Business Regulation Varies across Countries . . . . . . . . . . . . . . . . . . . . . . . . . . .43 LIST OF TABLES Table 1: Matrix of Electricity Supply Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Table 2: Regulation and Policy for Grid and Off-Grid Electrification . . . . . . . . . . . . . . . . . . . . .16 Table 3: Examples of Lower Quality-of-Service Standards Proposed for Isolated Minigrids in Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Table 4: Quality-of-Service Standards for Solar Home Systems in Bolivia's IDTR Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 LIST OF BOXES Box 1: Form 55O The Heart of REB's Performance-Monitoring Process . . . . . . . . . . . . . . . . . . .27 Box 2: Power Supply Contract for the Private Operator of a Minigrid in Smau Khney, Cambodia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 i i FOREWORD An often-repeated statistic is that an estimated 1.6 billion This report had its genesis in a workshop of Latin people in the world do not have access to basic energy American electricity regulators and energy sector officials. services. At international conferences dealing with Although the initial work was prepared for Latin America, electrification, speakers have often pointed out that any the principles, accompanying examples, and the model attempts at "scaling up" electrification will not be law are equally relevant for Africa and Asia. Funding for sustainable unless they are supported by workable the Latin American workshop and follow-up work came economic regulatory systems. While there is widespread from the Energy Sector Management Assistance agreement on the need for regulatory systems that "help" Programme (ESMAP) and Energy and Water Department rather than "hinder" electrification, the reality is that very (EWD). This report should be viewed as a major "first little systematic work has been done on what such a installment" on how to operationalize regulation to system should look like. support electrification. I look forward to further follow-up efforts, both inside and outside the World Bank Group, This report by Kilian Reiche, Bernard Tenenbaum, and to extend this pioneering work. Clemencia Torres represents a major first step in defining such a system. The report presents four general principles that would need to be satisfied by such a system. The principles provide a compass that shows where one Jamal Saghir 1 needs to go, but the authors also recognize that little is Director, Energy and Water accomplished by enunciating general principles. Chairman, Energy and Mining Sector Board Government officials, regulators, and rural electrification specialists need more specific guidance on how to implement general principles in real world situations. Therefore, the report carefully illustrates each of these general principles with numerous detailed examples of emerging regulatory practices associated with different forms of electrification in five developing countries. In so doing, the authors show how general principles can be implemented through actual regulatory practices. Finally, the authors recognize that it will be impossible to implement the principles unless they are supported by a strong legal foundation. To provide this foundation, the report concludes with proposed elements of a model law based on the principles. 22 ABSTRACT The paper presents one of the first systemmatic attempts at defining workable regulatory systems that will "help" rather than "hinder" electrification with emphasis on off- grid electrification. It does this by first presenting four general principles that would need to be satisfied by such a regulatory system: Principle 1--Adopt light-handed and simplified regulation. Principle 2--Allow (or require) the regulator to "contract out" or delegate, either temporarily or permanently, regulatory tasks to other government or nongovernment entities. Principle 3--Allow the regulator to vary the nature of its regulation depending on the entity that is being regulated. 3 Principle 4--Establish quality-of-service standards that are realistic, affordable, monitorable, and enforceable. To make these principles more concrete, each one is illustrated with detailed descriptions of real world regulatory practices from five developing countries that support or do not support the principles. Since it would be impossible to implement the recommended principles and practices in the absence of a strong legal foundation, the report concludes with the proposed elements of a model law based on the four principles. ACKNOWLEDGEMENTS This paper could not have been written without the Rebecca Kary was an excellent editor who reminded us assistance of many friends and colleagues inside and that our goal was to communicate information and ideas outside the World Bank Group. These individuals helped to a wide audience and not just to write another report us to develop an understanding of the "ground-level for a small group of specialists. realities" of electrification and regulation in many developing countries. They gave freely of their time and Finally, we wish to acknowledge the financial assistance insights to make sure that we got the facts right and of the Energy Sector Management Assistance Programme understood what the facts really meant. They include (ESMAP) and the World Bank's Energy and Water Pedro Antmann, Carlos Arias, Douglas Barnes, Enrique Department. ESMAP provided funding that allowed us Birhuett, Dan Blanchard, Anil Cabraal, Walter Canedo, to organize the July 2004 Buenos Aires clinic, which M. Ananda Covindassamy, Philippe Durand, Johannes focused on the interaction between regulation and Exel, Christophe de Gouvello, Chandrasaker electrification. ESMAP also provided further assistance Govindarajalu, Ghislaine Kiefer, Dominique Lallement, through the DFID-funded Energy Small and Medium Ramiro Mendizabal, Ty Norin, Klaus Preiser, Badri Rekhani, Enterprise (SME) program. This allowed us to expand Pierre Rieszer, Juan Manuel Rojas, Dana Rysankova, the background research prepared for the clinic into a 4 Osvaldo Soliano, Witold Teplitz, Dan Waddle, Fiona full paper. And finally, we owe a special debt of gratitude Woolf, and Joseph Wright. Of course, none of them to Jamal Saghir, the Director of the Energy and Water should be held responsible for any errors of fact or Department. Jamal supported us throughout the process interpretation that remain despite their best efforts to and, as always, reminded us that the overarching goal educate us. was to develop insights and recommendations that will promote electrification. We hope this paper helps to achieve that goal. ABBREVIATIONS AND ACRONYMS IDTR Decentralized Infrastructure for Rural Transformation (Infraestructura AC Alternating current Descentralizada para la BPDB Bangladesh Power Development Board Transformación Rural) CGAP Consultative Group to Assist the Poor kV Kilovolt COELBA Concessionaire of the state of Bahia, kW Kilowatt Brazil (Companhia de Eletricidade do kWh Kilowatt-hour Estado da Bahia) MOU Memorandum of understanding DC Direct current MSME Micro, small, and medium-sized DESA Dhaka Electricity Supply Authority enterprise EAC Electricity Authority of Cambodia MW Megawatt EdM State-owned national utility in NERA National Economic Research Associates Mozambique PBS Palli Bidyut Samities EJEDSA The concessionaire responsible for all PV Photovoltaic dispersedusers in the province of Jujuy, REB Rural Electrification Board Argentina (Empresa Jujeña de Sistemas REE Rural electrification enterprise Energéticos Dispersos, Sociedad SHS Solar home system Anónima) TCU Technical Control Unit ESMAP Energy Sector Management Assistance USAID U.S. Agency for International Programme Development ICT Information and communication VMEEA Vice-Ministry of Electricity and technology Alternative Energy (Bolivia) WHS Wind home system EXECUTIVE SUMMARY Regulation is government control of a business. When Four Regulatory Principles a government regulates an enterprise, it imposes direct and indirect controls on the enterprise's decisions or This very general conclusion is based on four regulatory actions. Electrification is the supply of electricity to design principles implied by the two "golden rules". To households, public facilities, or businesses that have make these principles more relevant for practitioners, had limited or no access to electricity. The design of each is illustrated below with examples of emerging regulatory systems to support electrification is complicated regulatory practices in several countries. by the fact that electrification can be undertaken by different types of enterprises (for example, public, private, Principle 1--Adopt light handed and simplified or community-owned), each with different incentives. regulation. These enterprises may use very different technologies: grid electrification (the extension of existing transmission Complying with a regulatory rule costs time and money. and/or distribution grids) or off-grid electrification (the This is true regardless of whether the regulated enterprise installation of decentralized facilities that are not connected is privately, publicly or community owned. For off-grid to existing transmission and/or distribution grids). Off- operators, one should be especially conscious of the grid technologies are increasingly applied to electrify costs of regulation because most off-grid enterprises 5 remaining areas that are too remote or dispersed to be operate on the "razor's edge" of commercial viability. reached via grid extension. Decentralized technologies They have high costs because they often serve small often require decentralized supply solutions (usually isolated households and low revenues because these involving small and medium-sized enterprises) with households usually can afford to buy only small quantities specific requirements for regulation. This paper proposes of electricity (typically 50 kWh or less per month). some first, general principles for creating regulatory Unnecessary regulation can easily destroy the commercial systems that will "help" rather "hurt" electrification, viability of these enterprises. with emphasis on off-grid electrification. In designing a light-handed regulatory system to support In thinking about how to design such a "helpful" regulatory electrification, three questions need to be asked: system, the starting point should be the two "golden rules of regulation": 1. Is the information really needed? Rule 1--Regulation is a means to an end. What ultimately 2. Can the number of review and approval steps be matters are outcomes (such as sustainable electrification)-- reduced? not regulatory rules. 3. Can the regulator delegate some regulatory tasks to Rule 2--The benefits of regulation must exceed the costs other entities? of regulation. In Bolivia, prior to 2000, all operators of isolated The paper's focus is on how these two general rules can village minigrids above 300 kW installed generating be applied to regulatory systems that affect electrification. capacity were required to acquire concessions. This Our principal conclusion is that successful electrification created two problems. First, concessions could legally often requires that the traditional functions of regulation be granted only to entities that were shareholder (e.g., setting maximum tariff levels, establishing minimum companies. This conflicted with the fact that many quality of service standards and specifying entry and exit minigrids were operated by cooperatives. And second, conditions) must be performed in non-traditional ways. the reporting requirements and technical standards for concessionaires were impossible (that is, too costly) to satisfy for many of the smaller rural systems. A partial solution was introduced in 2000. The threshold of This paper is based on presentations made at the July 2004 ESMAP working clinic on Regulatory and Policy issues for Grid and Off-Grid Electrification in Buenos Aires. The clinic was supported by ESMAP and the World Bank's Energy and Water Departments­­see ESMAP 2005b. regulation was raised to 500 kW peak demand, and In Bangladesh, more than 60 rural electric cooperatives, cooperatives were allowed to maintain their legal status known as PBSs, have been created since 1978. The for an initial period of seven years. Discussions are now cooperatives are supervised and controlled by the Rural under way to lower reporting and technical requirements Electrification Board (REB), a semi-autonomous agency for all minigrids in villages with less than 2,000 users. located within a ministry. In addition to acting as a banker, technical advisor, procurement agent, construction In Cambodia, a novel, light-handed approach to tariff agent, manager supervisor, and trainer, the REB clearly setting has been proposed for several hundred isolated, also functions as a regulator by setting maximum prices privately owned minigrid operators. These suppliers, and minimum quality-of-service standards. To perform known as rural electrification enterprises (REEs), usually these functions, it has also created a uniform system of operate small, second-hand diesel generators that produce accounts. Since the REB "walks like a regulator and talks electricity for sale to retail customers in one or more like a regulator," it would be duplicative to add a new contiguous villages. It has been recommended that the separate regulator with regulatory jurisdiction over the maximum tariffs of these small operators be set through PBSs' retail service. published "Tariff Tables." The "Tariff Tables" would relieve the REEs of the obligation to make an initial tariff filing Principle 3--The regulator should be allowed to with the regulator or to return to the regulator with requests vary the nature of its regulation depending on the 6 for revisions in the tariffs. For each class of REEs, maximum entity that is being regulated. tariffs would be set on a generic rather than on an individual enterprise basis with automatic adjustments A regulator should be allowed to vary its methods keyed to a prespecified formula. (for example, how tariffs are set or what needs to be regulated) depending on the type of regulated entity. Principle 2--The national or regional regulator Many regulatory statutes do not encourage such flexibility. should be allowed (or required) to "contract out" They are either silent about regulatory methods or embody or delegate, either temporarily or permanently, the view that "one size fits all." This does not do justice regulatory tasks to other government or to the significant variation in electrification supply models nongovernment entities. (see figure ES-1). The better approach is to provide the regulator with explicit legal authority to vary its methods In many countries, a rural electrification agency or fund depending on the type of entity being regulated. functions as a de facto regulator. Typically, the agency or fund imposes certain requirements in return for giving For example, when a community-based organization grants or subsidized loans. For example, it may specify self-supplies electricity, the universal regulatory concern a maximum allowed tariff, a required technical quality that the operator may charge monopoly prices disappears. for new installations, or technical and commercial Owners of a cooperative do not have an incentive to quality for post-installation service. These are traditional charge monopoly prices because this would be equivalent regulatory functions--even if they are rarely described in to taking money from one pocket and putting it in another that way. pocket. Hence, "self-supply" offers the possibility of "self-regulation." Such an approach has been adopted Given this reality of de facto regulation, it makes sense in Sri Lanka for off-grid village hydro systems that are for the regulator to delegate or "contract out" some owned and operated by community based cooperative traditional regulatory functions to the rural electrification societies. While the government continues to fix technical agency or fund. This should lead to more efficient specifications and safety standards, the prices charged regulation for several reasons. The agency will almost for sales of electricity within the village are determined always be more knowledgeable than the regulator about by the cooperative's board of directors, not by a the specific technical operations of the electrification government ministry. In fact, since the community is provider; the agency will have a better appreciation self-supplying electricity, the charges are designated of the cost implications of imposing different regulatory as membership fees rather than tariffs. requirements; it will facilitate coordination between subsidy rules and tariff regulation; and it will reduce the risk of duplication and over-regulation. Principle 4--Quality-of-service standards must be prespecified quality-of-service standards of Bolivia's realistic, affordable, monitorable, and enforceable. IDTR project and it can impose penalties when operators fail to meet these standards. Two reporting forms were Regulators often ignore quality-of-service regulation. created for monitoring purposes--a complaint form and This happens because it is easier to specify and monitor an annual visit form. If a customer has a complaint about tariff levels than quality-of-service standards. Tariffs are the performance of the system, he or she must initially uni-dimensional. They can be readily observed in customer contact the operator. If communication problems exist, bills. In contrast, quality of service is multi-dimensional, the user can also make contact via the municipal and compliance is often difficult and costly to monitor, government authority. The operator is required to log in especially for dispersed off-grid systems. However, there the complaint and put it into a Management Information is a real danger in ignoring quality of service. Whatever System that can be audited for accuracy by the TCU or goodwill is created through electrification will quickly a contractor hired by the TCU. Audits will be contracted disappear if quality of service falls short of what customers out to a private contractor who "will witness what he were expecting. But there is also a danger in creating sees." To reduce costs, the contractor will perform the standards that are too strict; exaggerated service standards audit on a sample basis (20 out of 1,000 customers). create unnecessary costs. If the audit finds that the operator failed to meet the specified quality-of-service standards, then a larger sample A workable quality-of-service regulatory system should may be taken and penalties will apply to the full 1,000 7 have the following characteristics: customers in the sample. · The standards should be based on customers' A Model Law to Promote Electrification preferences and their willingness to pay for the costs of providing the specified level of quality. The standards Good intentions--increasing electricity access--do not need not be uniform across all customer categories or necessarily lead to good outcomes. If the four regulatory geographic areas. Offering a menu of service levels principles are to be implemented, they need to be allows customer choice ­ but it can also increase incorporated into legal instruments. To facilitate this transaction costs and decrease transparency if there outcome, the paper includes specific elements or standards are too many choices. of a model law. The recommended standards deal with the following eight topics: · Standards should be established for both technical and commercial dimensions of service. 1. Flexibility to allow other Entities to Act on Behalf of the Regulator. · Required levels of service and associated penalties 2. Flexibility in Regulatory Methods. and rewards should be phased in over time and 3. Eligibility and Authorizations. synchronized with changes in tariff levels. 4. Tariff Setting. 5. Subsidies. · Where feasible and efficient, penalties should be paid 6. Quality of Service. to individual consumers. 7. Coordination with other Government Entities 8. Model Documents. · The regulatory entity should have the legal authority to delegate or contract out quality-of-service monitoring A Caveat and the imposition of penalties to a third party subject to appropriate oversight. While the full paper breaks new ground in dealing with issues that have previously only been alluded to This last element--contracting out--has been built into or touched on very lightly, its coverage is not complete. a new quality-of-service monitoring system for solar home The paper's focus is largely limited to off-grid systems in Bolivia. A Technical Control Unit (TCU) electrification, which is typically associated with rural consisting of three individuals within the Vice-Ministry electrification of a remote and/or dispersed population. of Electricity, Alternative Energy and Telecommunications More work is needed to develop workable regulatory is responsible for monitoring compliance with the approaches to promote electrification in periurban areas. In addition, several important regulatory issues, that relate both to rural and urban electrification, are not addressed in this paper. These include: setting tariff levels and structures (with and without metering); coordinating tariffs with subsidies; establishing regulatory approaches for different forms of bidding (e.g., for minimum subsidies, minimum customer connection charges or minimum tariffs); encouraging "regularization" of informal service providers; and designing "handoff" arrangements when the main grid connects to a previously isolated minigrid. We hope to address these issues in future research. 8 1. REGULATING ELECTRIFICATION regulation should always be performed in the same way. The "standard" regulatory approaches may not be Investors need confidence. Consumers need protection. workable for some of the newer forms of electrification. ­­Chinese government official (2001) Therefore, when designing regulatory systems for different forms of electrification, more attention should be paid ...people deserve a regulatory system that works for to the specific economic, institutional, and technical them, not against them.... We do not have such a characteristics of the enterprises that are being regulated. regulatory system today. For example, future electrification in rural areas will ­­U.S. government presidential order (1993) often be performed by small or medium-sized enterprises. In addition, many of these enterprises will not be Regulation means government control of a business. economically viable, unless they receive an initial direct When a government regulates an enterprise, it imposes or indirect capital cost subsidy.2 Even with such subsidies, direct and indirect controls on the decisions or actions the underlying economics of the enterprise will remain of that enterprise. The focus of this paper is on developing fragile. Finally, the technologies for producing and general principles for economic regulation of enterprises-- distributing electricity will vary widely. Given these whether publicly, privately, or community-owned--that characteristics, more attention should be paid to designing wish to supply electricity to households, public facilities, and operating regulatory systems that work for rather or businesses with limited or no access to electricity. than against sustainable, fast, and efficient electrification.3 9 Such electrification can be achieved through grid The principal question considered in this paper is electrification (the extension of existing transmission whether the regulatory approaches traditionally used or distribution grids, or both) or off-grid electrification in regulating one or more large central utilities need to (the installation of decentralized facilities that are not be modified when regulating a large number of small, connected to existing transmission and distribution grids). decentralized entities. In this paper, we pay special attention to regulation of Electrification Markets: off-grid electrification. There are two reasons for this A Matrix of Supply Models emphasis. First, off-grid electrification will become increasingly more important because many communities Historically, the dominant electrification model in and households that have yet to be electrified are relatively developing countries has been grid extension by large isolated, and off-grid electrification may be the only state owned utilities that was financed by cross-subsidies economically rational choice. This will be a growing from existing customers or by government grants. In phenomenon in Latin America. Second, the regulatory recent years, the "universe" of electrification models issues associated with off-grid electrification have received has become much more diverse. Today, supply models little attention in the general literature of power sector for electrification include the following: regulation.1 This literature has generally focused on regulation of large entities operating geographically · Grid extension by an existing distribution company integrated systems and not on regulation of small and (Brazil, Colombia, Ghana, Guatemala, and Nicaragua). medium-sized enterprises operating geographically isolated systems. · Grid extension by a local village, municipality, or private company (Colombia and Nicaragua). Certain regulatory functions, such as setting maximum tariffs and fixing minimum quality-of-service standards, · Bulk resale by a cooperative or private entrepreneur are universal. They need to be performed for monopoly of grid-supplied electricity to a new area or an area enterprises, whether large or small, integrated or isolated. that had previously been supplied by an isolated This observation, however, does not imply that the generator (Bangladesh, Cambodia, and Costa Rica). A good survey of the general literature on regulatory theory and practice can be found on the Website of the Public Utilities Research Center at 1 the University of Florida (http://bear.cba.ufl.edu/centers/purc/). The need for subsidies to promote rural electrification is not limited just to developing countries. For example, rural electrification in France was 2 supported by capital cost grants covering more than 70 percent of installation costs (Garnier 2005). Probably the single best analysis of the theory and practice of subsidies to promote electrification can be found in Komives and others 2005. Some forms of electrification (solar home systems and isolated hydro-based minigrids) use renewable energy. In these cases, if the regulatory 3 system is successful in promoting electrification, it will expand the use of renewable energy. In effect, a single regulatory system produces two societal benefits--rural electrification and renewable energy. · "Fill-in" or "densification" of service to new households unprofitable customers. Unless the reform package in a community that is connected to the main grid or includes both explicit incentives and obligations to that is served by an isolated minigrid (Bolivia, Cambodia, pursue electrification, most private companies will not India, and Mozambique). pursue grid or off-grid electrification. Without incentives and obligations, most private distribution companies · Sale of electricity to newly connected households or will focus on existing and more profitable core markets, those that have illegal connections in urban slums typically located in urban areas. This is a different (Brazil, India, the Philippines, and South Africa). situation from the traditional state-owned utilities that can be "ordered" to extend the grid. · Isolated village or municipal minigrid combined with stand-alone generation operated by a community · The completion of less costly electrification.5 It organization, a private entrepreneur, a state-owned should not be a surprise that most enterprises, utility, or a partnership of two or more of these entities whether public or private, will first pursue less costly (Bolivia, Cambodia, Ethiopia, Mozambique Nicaragua, and more profitable forms of electrification. They are Philippines, and Sri Lanka).4 not being "bad;" instead, they are being economically "rational." As a consequence, those who remain without · Connected minigrid with a distributed generator electricity are likely to be least desirable customers. 10 operated by a community organization, a private They will be poorer on average and live in isolated entrepreneur, or a partnership of the two (Cambodia, areas that are distant from existing electricity lines. Nicaragua, and Sri Lanka). Generally, they will have a low immediate potential for increasing their consumption,6 a limited capacity · Solar home systems (SHSs) installed under a dealership to pay, and limited access to credit and information or vendor delivery model (India, Indonesia, Kenya, about potential supply options.7 Therefore, it should and Sri Lanka), a fee-for-service delivery model not be surprising that traditional electricity suppliers (Argentina, Laos, Morocco, and South Africa), or a view them as high-risk customers because of their low mix of these (Bolivia). consumption and the high cost of supplying them. · SHSs installed through a legal obligation imposed on · The increasing expense of grid electrification. the existing holder of a concession for a grid-connected Using grid electrification to reach increasingly more distribution system (Argentina and Brazil). isolated rural households is very expensive. For example, the cost of connection in some rural · Private or community-owned and operated battery areas of Brazil has been estimated at several charging stations (Honduras, Nicaragua, and Nigeria). thousand dollars per connected household. In contrast, decentralized forms of electrification have What has led to the emergence of these many diverse the potential to provide basic service to remote, rural forms of electrification? And why does it matter for areas at lower costs (typical connection costs are in regulation? Several factors seem to be relevant: the range of US$300­1,000 per user). It makes little sense to spend scarce government resources on · The emergence of private distribution companies. expensive grid extensions when basic electricity service Power sector reform usually results in some combination could be provided through cheaper off-grid options. of restructuring and privatization. Private distribution companies are understandably reluctant to serve In some countries, they are referred to as "independent grids." They are independent because they are stand-alone grids that are not connected 4 to a larger national or regional grid. If a local grid is a stand-alone grid, it requires its own source of generation. If a local grid is connected to the national or regional grid, it may not have any generation of its own. Therefore, the term minigrid usually includes both independent and connected grids. The defining characteristic of both types of minigrids is that they are autonomously operated by some entity other than the operator of the national or regional grid. This is definitely the case in Latin America, where most of the closer-in communities (that is, the "low-hanging fruit") have now been connected. 5 See ESMAP 2005a,b,c. In countries such as Bolivia, Brazil, and Mexico, it is not uncommon to hear estimates of US$3,000­4,000 per new connected household. For many rural households, electricity consumption remains below 50 kWh per month long after they get access. As an example, about two 6 thirds of the rural households in Bolivia with grid-based electricity use less than 50 kWh per month (see IDTR 2003a). This is in contrast to the 400 kWh per month average electricity consumption of a typical European household and about 900 kWh per month in the United States. Barnes 1996; Cabraal, Schaeffer, and Cosgrove-Davies 1996. 4 · The emergence of new or improved, decentralized use different approaches for operation, maintenance, technologies. Off-grid technologies to serve isolated customer service, and billing. Therefore, off-grid systems rural users have improved and become more are often best owned and operated by micro, small, standardized. Off-grid technologies include (a) village and medium-sized enterprises (MSMEs) or user grids without connection to the national backbone associations. Decentralized business models will grid that are based on thermal generation, renewable often require decentralized regulation. energy (for example, micro-hydro, biomass, solar, or wind) or hybrid combinations of these; and (b) Policy makers and regulators are often uncertain as to stand-alone, single-user systems with diesel, pico-hydro, how to deal with this diverse universe of supply options. small wind, or photovoltaic (PV) generators. It is usually easier to go with what is "familiar" (that is, grid extensions and the standard regulatory approaches) · The requirement for decentralized technologies than to try to develop more particularized solutions. In to have decentralized business models. The deciding how to respond to this "new world," a simple defining characteristic of these off-grid technologies listing of electrification supply models, such as the one is that they are installed close to the users, but often given on the previous page, is not very helpful for thinking far away from the offices and facilities of existing about how to modify existing regulatory frameworks and utilities. Because of the remote locations of customers, electrification policies. If the goal is to try to create the business models (and regulatory solutions) that more rational regulatory policies, then there is a need 11 worked reasonably well for traditional grid extension to organize the universe of supply options in a way are often not suited for off-grid technologies. Off-grid that illuminates rather than obscures possible regulatory technologies require different business models that options. The matrix in table 1 is designed for this purpose.8 Table 1. Matrix of Electricity Supply Models GRID EXTENSION CONNECTED VILLAGE ISOLATED VILLAGE SINGLE-USER MINIGRID MINIGRID SYSTEM GRID <--------------------------------------------------------------------------------------> OFF-GRID Small, Small grid reseller (India) Hydro minigrids selling Diesel or hydro minigrid SHS (Honduras, Indonesia, decentralized to local customers and (Cambodia, Ethiopia) Kenya, Sri Lanka) to the main grid (China, Nicaragua) PV/wind/diesel water pumping (Brazil, Chile, Mexico) profit) Formerly isolated (for minigrid now connected WHS or pico hydro to grid, (Cambodia) (Argentina, Mongolia, Nepal) rivateP Large, Privatized concessionaire Off-grid concession (Argentina) centralized extends grid (Argentina, Chile, SHS (Bangladesh, Bolivia, Guatemala, Uganda) Technology neutral electrification concession (Senegal) Morocco, South Africa) Cooperative Cooperative finances grid Multi-service Coop with Agricultural Coop using extension (Bangladesh, diesel or hydro diesel genset (Bolivia) Costa Rica, United States) microgrid (Bangladesh, Bolivia, Philippines) OWNERSHIP OF Other Small "community Community microgrids Diesel genset or renewable community gateways" (Bolivia) (Brazil, Cambodia, energy to power a school, organizations Honduras, Indonesia, clinic, community center Nicaragua, Sri Lanka) (Argentina) FORM Nongovernmental PV Battery Charging Stations (Nicaragua) Small, Small state-owned Municipal diesel or decentralized utility extends grid hydro minigrid (Bolivia) owned)- (Brazil, Colombia) State utility extends grid Residual state-owned SHS (Mexico) (state and sells at retail isolated diesel-minigrids Large, (Botswana, Mozambique, with fuel subsidies Publiccentralized Thailand, Tunisia) (Cambodia Nicaragua) Table 1 presents the diverse universe of electrification What are some of the regulatory design issues that are options organized by two parameters: technology and suggested by the matrix? Some issues are common to form of ownership. Technologies are ordered along the all cells, whereas other issues are peculiar to specific horizontal axis. They range from centralized, grid- cells. For example, the two universal regulatory issues of connected options to decentralized, nonconnected, setting maximum tariffs and minimum quality-of-service single-user systems. Forms of ownership are ordered standards apply to all the cells. However, even though along the vertical axis. They range from state-owned the same tasks need to be accomplished, this does not utilities and community organizations (such as community imply that they need to be performed in the same way. councils and cooperatives) to private, for-profit firms. Consider the case of the community organizations shown The dominant historic model of grid extension by state- in the middle rows. When electrification is performed by owned power enterprise is in the lower left-hand corner. a community organization, the customers are the owners. The newer electrification options arise as one moves up Since there is no incentive for the owners to charge high and to the right within the matrix. prices to themselves, this suggests that a form of self- regulation may be possible for a community organization Although this matrix "orders" the universe along the two that is operating an isolated minigrid. If the same grid dimensions of technology and form of ownership, these were taken over by a private operator, the regulatory are only two parameters out of a much larger set of situation changes dramatically. Absent any regulatory 12 characteristics that distinguish one electrification option controls, the new private operator will have both the from another. These two "organizing" characteristics incentive and the ability to charge monopoly prices to were chosen because they are particularly useful in users in the community. Therefore, self-regulation is no focusing attention on important regulatory design issues.9 longer an option. However, the traditional option of This does not mean, however, that decisions about setting tariffs based on a detailed review of the supplier's regulatory design can be automatically answered by own costs, the regulatory norm for many large power simply locating the combination of technology and form enterprises, will not be workable because of the sheer of ownership in one the matrix cells. To do so would be number of such entities and the limited resources available dangerous and naïve. In particular, it would ignore the to most regulatory entities. importance of other parameters not shown in the matrix. These other parameters include, among others (a) the Regulatory issues also differ depending on whether a delivery model (for example, fee-for-service, dealers, supplier is connected to a larger regional or national or hybrids in the case of SHSs); (b) types of subsidies grid. The regulatory issues for a nonconnected minigrid (for example, connection versus consumption and operator are the traditional issues of price and quality of targeted versus untargeted) received; (c) the process service for retail customers. When this minigrid becomes for selecting operators and, in particular, whether there connected to the main grid, a whole new set of regulatory was any competition in selection (for example, competition issues arises. The new issues include the physical terms in the market, for the market, by project, by cluster, and conditions of connection; prices for wholesale sales or by yardstick); (d) where there was competition, the by the operator of the larger grid to the minigrid operator; parameters that were bid (tariff levels, connection prices for sales by the minigrid operator to the larger charges, minimum required subsidies, or number of grid or other noncontiguous grid-connected entities; new customers to be connected); (e) allocation of risks the right of the minigrid operator to buy from and sell between the suppliers, consumers, and government; (f) to other noncontiguous grid-connected entities; the price the stage of market development; and (g) the financing for transmission and ancillary services to reach these structure. Each of these parameters is relevant to the noncontiguous grid-connected entities; and how revenues design of a regulatory system. from wholesale sales are shared between the minigrid operator and its retail customers.Finally, suppliers in all cells of table 1 face the common issue of many The matrix was used to facilitate discussion in a 2004 ESMAP working clinic on policy and regulatory issues of electrification that was attended 8 by regulators and policy officials from six Latin American countries. It was also used for a parallel ESMAP study (ESMAP 2005c). The examples in the matrix cells are meant to be illustrative. Other recent studies with different purposes use somewhat different organizing principles. See, for example, the study on electrification 9 subsidies in Latin America (ESMAP 2005c) and the ongoing study of small service providers in the water and electricity sectors by Kariuki and Schwartz (2005). Alternative versions of table 1, with several different combinations of parameters, were used during the preparation of the Bolivia IDTR model in designing a new SHS business model (described more fully under principles 1 and 3 in chapter 2). customers having a low ability to pay. This implies that Two Golden Rules of Regulation none of the electrification models will be commercially viable unless external or cross subsidies are provided, at In addressing the four basic questions of regulatory least for initial capital costs. This, in turn, implies that the design, it is always important to remember two "golden regulatory system must be coordinated with a subsidy rules." They are meta-principles for the design of any system. This creates complications that do not exist for regulatory system: enterprises that are commercially viable without subsidies. It also raises the question of whether it might · Rule 1--Regulation is a means to an end. What be more efficient to delegate some traditional regulatory ultimately matters are outcomes (here, sustainable functions to the subsidy-granting body rather than trying to electrification), not regulatory rules. coordinate the provision of subsidies and the setting of tariffs between two separate government entities. · Rule 2--The benefits of regulation must exceed the costs of regulation. The Basic Design Questions Rule 1 should be displayed prominently on the desk of In designing any regulatory system, four basic questions every regulator. Much has been written about the theory must be answered: and practice of regulation, but regulators sometimes forget that the overriding goal of any regulatory system, 13 · What entities should be regulated? (Jurisdiction) both for consumers and investors, is "performance not processes." In the words of a Brazilian villager without · What activities or parameters should be regulated? access: "the most expensive electricity is when there is (Coverage) no electricity." The outcome that should be sought is sustainable and rapid electrification at the lowest possible · How should the regulation be performed? (Methods) cost while meeting minimum acceptable technical and commercial quality-of-service standards.10 If the regulatory · Who should perform the regulation? (Division of system does not help to achieve this goal, it is not Responsibility) "adding value." The principal conclusion of this paper is that the answers Rule 2 stands for the proposition that a regulator to these questions must vary by technology and form of can help to maximize the benefits of electrification by ownership if the electrification program is going to be minimizing the costs of regulation. As one small private successful. In the remainder of the paper, we discuss the investor in India observed: "Unfortunately, the single reasons for this general conclusion and the different most common mistake made by my country's electricity types of regulatory systems that will work best for the regulators, who live comfortably in the capital, is that different types of entities represented in the various cells they forget that their rules cost time and money." of table 1. Regulation creates both direct and indirect costs. The direct costs of regulation are the budget of the regulatory entity and the costs incurred by regulated entities to comply with the regulator's rules (for example, improved transformers or more extensive reporting requirements).11 In the case of electrification, the biggest regulatory costs are likely to be indirect. Given the fragile economics of many off-grid enterprises, too many regulatory requirements may stop an enterprise from In this paper, we do not discuss how to measure the societal benefits that result from electrification. Once a government has made a decision 10 to pursue a certain electrification target, this decision becomes a "given" for the regulator whose job should be to minimize the direct and indirect regulatory costs of achieving that goal. Two examples of careful studies that attempt to measure societal benefits are Meir 2003 and ESMAP 2002. Both publications attempt to estimate the increased consumer surplus (that is, the area under an estimated demand curve) that results from moving up the energy ladder from inferior to superior forms of energy. IThe indirect costs paid by a regulated entity may be formal or informal. A formal cost would be a license fee going to the regulatory agency, 11 whereas an informal cost would be a bribe paid to a regulatory official to process and approve the license application. initiating or completing an electrification initiative at Consumers are hurt whenever an electricity supplier all. And when regulation pushes the enterprise over exercises monopoly power. Monopoly power can be this "tipping point," the regulator will have failed in manifested through high prices, inferior service (for protecting consumers if they are forced to continue example, interruptions, safety problems, and inaccurate obtaining electricity from automobile batteries at US$2­3 billing), or a combination of the two. This, in turn, implies per kilowatt-hour when an off-grid supplier could have that the two principal functions of any economic regulatory provided more and better electrical service at system are price regulation and quality-of-service US$0.20­0.50 per kilowatt-hour.12 regulation. Even if both of these regulatory meta-principles are fully Regulation is also needed to protect investors. This is satisfied, this, by itself, does not guarantee the success true regardless of whether the investors are private of an electrification program. This is another way of investors or community-based organizations (for example, saying that appropriate regulation is a necessary, but a cooperative or a village electricity committee). If a not sufficient, condition for the success of electrification company or community is going to make an investment, programs. More important than regulation is the it needs to know beforehand what its rights and obligations fundamental commercial viability of the business model will be after the investment is made. To be more specific, that underlies the electrification effort. If the business it needs to know the prices that it will be allowed to 14 model is not viable (that is, costs are not covered by charge--so it can estimate expected revenues--and the revenues and subsidies), the electrification effort will service standards that it will be required to meet--so it inevitably fail. However, even if the business model is can estimate expected costs. In addition, investors need commercially viable, a poorly designed or implemented to know for how long they have permission (that is, regulatory system can destroy any electrification initiative, legal authority) to provide a service, whether that right most often by smothering it with too much regulation. is exclusive or nonexclusive, and whether there will be Our focus then is on how to create regulatory systems some compensation if the license is taken over by another that do not destroy what they should be trying to create. party.14 A good regulatory system will provide this information and ensure that whatever commitments Why Regulate? are written in licenses, concessions, and permits will actually be honored. The traditional justification for any kind of economic regulation is to protect consumers against monopoly Important Dimensions of Regulation abuse. A supplier of electricity services may have monopoly power because it is a natural monopoly, which means Any regulatory system has two important dimensions: simply that it is more efficient for one supplier to provide regulatory governance and regulatory substance. services rather than several suppliers. Alternative, it may Regulatory governance refers to the institutional and have monopoly power because a government has granted legal design of the regulatory system. It is the framework it a legal monopoly even if it is not a natural monopoly. within which regulatory decisions are made. Regulatory This happens whenever a government has concluded, governance is defined by the laws, processes, and correctly or incorrectly, that a single supplier should procedures that determine the enterprises, actions, provide the specified service rather than multiple competing and parameters that are regulated, the entities that suppliers.13 In other words, some natural monopolies make the regulatory decisions (the electricity regulator arise because of the underlying structure of costs, and or some other government entity), and the resources some "unnatural" monopolies arise because of a and information that are available to them. government decision or action. IThe same issue arises in deciding how to regulate microfinance institutions. If these small lending institutions are forced to comply with the 12 same reporting and fiduciary requirements as larger established banks, they will not survive, and the poor will either lose access to credit or be forced to pay extremely high interest rates for any credit they might obtain. See Christen, Lyman, and Rosenberg 2003. A government can create the functional equivalent of a legal monopoly by deciding to give connection subsidies to only one supplier. 13 This is usually described as entry regulation. In the case of an isolated minigrid operator, it would depend on regulatory decisions relating to the 14 duration of the license, conditions under which the license can be renewed or revoked and whether there is any compensation to the operator if the national or regional grid reaches the geographic area served by the minigrid operator. We use the term license as a generic term for any government-granted permission (for example, concession or permit) to supply a particular service. Regulatory governance is the "how" of regulation. Functions and Tasks: Regulation and Policy It involves decisions about: To perform these universal regulatory functions, certain · The accountability of the regulator. common tasks must be undertaken. Generally, a regulator or some other entity that has been assigned regulatory · The division of initial and ongoing responsibilities functions must perform four tasks: among the regulator, policy maker and any ministries, electrification funds, or subnational political entities. · Gather information and data. · Decision-making and organizational autonomy of the · Establish rules. regulator. · Monitor the implementation of the rules. · Transparency of decision making by the regulator or other entities that are making de facto regulatory · Enforce the rules.15 decisions. Regulatory functions and associated tasks are described · The predictability and speed of regulatory decision in more detail in the first two columns of table 2. The making. traditional regulatory functions of setting maximum tariffs 15 and minimum quality-of-service standards need to be · Judicial and nonjudicial mechanisms for appealing performed for all regulated enterprises in the power sector, regulatory decisions. regardless of whether they are traditional power enterprises operating on the central grid, new power enterprises that Regulatory substance refers to the content of regulation. are installing SHSs, or distributed generators providing It is defined by what is regulated and how it is regulated. electrical service on an isolated minigrid. For enterprises It is the actual decisions, whether explicit or implicit, that are operating on the central grid, the designated made by the specified regulatory entity or other entities regulatory agency will normally perform both tariff-setting within government that may make de facto regulatory and quality-of-service regulation and the four tasks decisions. Regulatory substance is the "what" of associated with these two functions. regulation. However, the traditional strategy of one national electricity The most important substantive regulatory functions regulator "doing it all" is usually not a sensible strategy involve: when regulating enterprises that provide off-grid electrical services. In other words, successful off-grid electrification · The setting of tariff levels and structures. requires that the traditional functions and tasks of regulation be performed in nontraditional ways. What · The setting of quality-of-service standards. this means is that successful electrification requires that the traditional regulatory functions and tasks are often · The setting of entry and exit requirements. best performed by entities other than the national electricity regulator.What this means is that successful Making decisions on these basic economic parameters electrification requires that the traditional regulatory is the traditional key function of any economic functions and tasks are often best performed by entities regulatory system. other than the national electricity regulator. The rest of the paper is devoted to exploring why nontraditional regulatory techniques need to be developed and how they can be implemented for different forms of electrification. In some Latin American countries, monitoring and enforcement are grouped together as a single activity and referred to as "supervision." 15 Regulation does not exist in isolation. Regulatory decisions which the regulator must operate. Although it is the must be consistent with policy decisions. In the case of government that normally makes these two policy grid and off-grid electrification, it is critical that these decisions, the regulator or some specialized electrification regulatory functions and tasks be coordinated with two entity will usually be tasked with implementing the key government policy decisions: mandated connection government's policy decisions. Since connection targets targets and levels of subsidies that are given to providers and subsidies levels are so critical for successful of electrification services or their customers.16 These two electrification, they are also listed in table 2, even policy decisions, typically made by a government ministry though they are typically "policy" rather than "regulatory" or rural electrification fund, are the policy platform on decisions. Table 2. Regulation and Policy for Grid and Off-Grid Electrification FUNCTIONS REGULATION POLICY Price regulation Service quality regulation New Connections Subsidies 16 Gather information and data · Get information on · Obtain information on current · Gather information on · Determine the magnitude of current and projected service levels. existing coverage. subsidy funds that will be tariff revenues and costs. available. · Carry out technical studies on · Define the meaning of new · Get information on the feasibility and cost of connections. · Decide which communities willingness-to-pay for different service standards and/or entities will have alternative service levels. (technical and commercial). priority to limited subsidy funds. Establish rules · Set tariff levels and · Define quality standards for · Establish connection · Decide on the levels of structures in the absence different types of technologies targets. capital and operating cost of competition, with and providers and for different subsidies for eligible entities. provisions to link some customer categories. · Specify the dates by which parameters to inflation. connection targets must be · Decide on how and when the · Specify the date by which achieved. subsidies will be disbursed. · Establish procedures for standards must be achieved. adjusting tariffs for · Determine how compliance · Decide on the actions (for unexpected events or at · Specify penalties for failure to will be measured and example, connections, the end of a specified achieve standards. monitored. maintenance visits) that will tariff period. trigger disbursement. ASKST · Determine how compliance · Specify events that excuse will be measured and compliance. monitored. · Specify events that excuse compliance. Monitor the implementation of existing rules · Audit financial accounts, · Monitor service to ensure that · Monitor connections to · Monitor performance to verify if necessary or feasible. mandated levels of service ensure that connection that recipient has performed quality are being achieved. targets are met. the actions that qualify for · Ensure that tariffs comply subsidies. with rules. Enforce decisions Enforce decisions Enforce decisions Enforce decisions Enforce decisions · Define tariff adjustments · Apply sanctions if the operator · Apply sanctions if the · Withhold subsidies for on basis of performance. has failed to achieve the operator fails to meet nonperformance, or apply standards. coverage targets. penalty or refund · Apply sanctions if tariff requirements. rules are violated. · Specify events that excuse · Specify events that excuse compliance. compliance. Source: Bank staff and Trémolet, Shukla, and Venton 2004. Structure of the Paper: very common talk about "best practices." These examples From Principles to Standards do not necessarily represent "best practices." The more accurate description would be "emerging practices" that The paper's structure is based on a hierarchy of guidance have the possibility of becoming "best practices." that goes from the general to the specific. It starts with the two previously described meta-principles, moves on Two Important Caveats to four general principles, and concludes with seven standards. The four principles are intended to provide The reader should be aware of two caveats when reading guidance on where the regulatory system needs to go. this paper. The first is that the principles and standards However, it is not very helpful to tell regulators and do not define a complete regulatory system. Instead, government officials that "this is where you should they represent a subset of a larger set of regulatory end up." In fact, such advice is often resented. One principles and standards required for successful government official in a developing country described electrification. In a future paper, we intend to present this approach as the "World Bank's propensity for making additional principles and standards covering other grand pronouncements." If any real progress is going important issues, such as tariff levels and structures; to be made, regulators and government officials need coordination of tariffs and subsidies (for connection specific advice on "next steps" rather than just general or consumption); regulation when there are different statements on "end points." Therefore, in the final section forms of bidding (for example, bidding for minimum 17 of the paper, we propose a list of seven standards designed subsidies, for minimum customer connection charges, to operationalize the four general principles. The standards or for minimum tariffs); "regularization" of informal are written so that they can be elements of an service providers; and "handoff" arrangements when electrification law or decree. They are designed to serve the main grid connects to a minigrid.17 as formal building blocks of a regulatory system that would work "for" rather than "against" electrification. The second caveat is that the paper's emphasis is on regulatory issues associated with off-grid electrification. The Significance of Examples Off-grid electrification is typically associated with rural electrification. Electrification is also needed in rapidly Principles and standards are easy to enunciate. What growing periurban areas. Usually, these are the informal is more difficult is to implement them in complicated, slums that surround major metropolitan areas. It is our real-world situations. To make the four principles more intent to explore regulatory design issues for periurban concrete and relevant, each principle is first discussed electrification in future work.18 and then illustrated with several real-world electrification examples from developing countries. However, the significance of these examples should not be misinterpreted. In the literature of development, it is We will use the term connections to describe the provision of electricity service to new customers. If the connection is to a grid (whether 16 national, regional, or isolated), the customer will receive alternating current (AC) service. If the service is provided by a single user system (for example, an SHS or wind home system), the customer will receive either direct current (DC) or alternating current, but will not be connected to a larger grid. For simplicity, both forms of electrification are called connections in this paper. For example, some of the questions that would need to be addressed for tariff setting would include the following: Should there be a review of 17 the operator's maximum and minimum tariffs? Should the review be one-time or periodic? What entity should perform the review--the regulator, the subsidy-providing entity, or a subnational level of government? If the operator is selected through some form of competitive procurement (for example, bidding a maximum tariff, bidding for a minimum subsidy per connected household, or bidding a connection charge), how should that competition affect the nature of the tariff review? Should there be different tariff structures depending on whether the generation technology is relatively standard (for example, a diesel generator) versus generation technologies whose costs vary considerably with site characteristics and resource availability (for example, hybrid renewable energy technologies)? If there is regulatory review of tariffs, should the review be based on the operator's own costs--benchmarked costs for similar providers or some other arrangement? Should connection payments be charged separately from usage charges? For customers who are metered, should the tariff be a one-part tariff (for example, a kilowatt-hour charge) or a multipart tariff (for example, a usage charge, a customer charge, and a connection charge)? For customers who are not metered, how should peak demand or total consumption be controlled to reduce inefficient consumption? How should tariff setting be coordinated with the provision of subsidies? A rich source of information on periurban electrification can be found in the presentations made at the ESMAP-hosted Slum Electrification 18 Workshop held in Salvador da Bahia, Brazil, in September 2005. The presentations are available at http://wbln0018.worldbank.org/esmap/site.nsf/pages/Slum+Electrification+Workshop. 2. BASIC PRINCIPLES FOR It is worth highlighting the report's principal conclusion: REGULATING ELECTRIFICATION Businesses in poor countries face much larger Principle 1: Light-Handed and Simplified regulatory burdens than those in richer Regulation countries. They face 3 times the administrative costs, and nearly twice as many bureaucratic Principle 1 is a corollary of a general and widely accepted procedures and delays associated with them.20 principle of regulation. The general principle applies to all forms of power sector regulation, not just the regulation Since many of these poor countries are also the same of grid and off-grid electrification. In the United Kingdom, countries that desperately need electrification, it is critical the general principle is referred to as "proportionality." to try consciously to avoid overregulation in designing In the United States, it is described as "smart regulation" the regulatory systems to promote electrification. and "cost effective" regulation. And in Australia, it is Overregulation also goes hand-in-hand with corruption. known as "minimum necessary regulation." Although As one Asian energy minister observed, "the more pieces the specific terms used to describe the concept vary of paper that are required, the more opportunities for from country to country, the concept is the same: bribes." a well-functioning regulatory system is one that 18 minimizes the costs of regulation. Achieving light-handed regulation requires that those who are designing or implementing a regulatory system The rationale for this principle is straightforward. It does for grid and off-grid electrification must ask the following not make sense to regulate more than is absolutely questions: necessary because regulation imposes costs on those who are regulated and on the economy in general. · Is the information really needed? Any regulation will cost time and money to comply with. This is true regardless of whether the enterprise is privately, · Can the number of review and approval steps be publicly, or community owned. Most off-grid providers reduced? of electricity do not have "deep pockets." They are enterprises that are often just barely commercially viable EXAMPLE 1: Isolated Minigrids: Flexible Filing so that any unnecessary regulation can destroy their Requirements and Lower Service Quality Standards viability. Overregulation is a major issue for small, isolated Overregulation is not a problem that is peculiar to the village minigrid operators, which are often "spontaneous" power sector. It is, in fact, a central issue for the overall rather than "nurtured" enterprises.21 In other words, economy of any country. In recent years, there has been they did not come into existence because of some growing empirical evidence that "heavy-handed" regulation formal government program. For example, in many or overregulation clearly hurts economic development. Asian countries it is not uncommon for a small private This evidence was recently presented in a 2004 World entrepreneur to buy a second-hand diesel generator, Bank study that examined the levels of regulation for run wires to 100 or more households in a village, the same five common business processes and actions and supply them with electricity for several hours each in more than 145 countries. As shown in figure 1, evening, with monthly charges usually keyed to the number the pattern is clear: poorer countries have much more of lightbulbs or small appliances that are connected complicated and extensive business regulation than rather than to kilowatt-hour consumption as measured developed countries. For example, it takes two days to by a meter. Such mini-enterprises are operated by private start a business in Australia, but 203 days in Haiti and entrepreneurs (most commonly in Asia), cooperatives, 215 days in the Democratic Republic of the Congo.19 or local government units (typically in Latin America). World Bank 2004, p. xxxi. 19 World Bank 2004, p. 3. 20 In this context, the term isolated means that the system is not connected to the national or provincial high-voltage (typically 220 or 115 kV) or 21 medium-voltage (usually 33 or 22 kV) power grid. FIGURE 1. How Business Regulation Varies across Countries Poor Countries Regulate Business the Most More regulation Court-powers-in 30 12 bankruptcy index Entry procedures 66 11 63 27 27 Contract procedures Employment-laws index 56 10 55 53 53 43 7 18 43 Less regulation Low-income Lower-middle- Upper-middle- High-income 19 income income Note: The indicators for high-income countries are used as benchmarks. The average value of the indicator is shown above each column. Source: World Bank, Doing Business in 2004, pg. xii About 150 such enterprises operate in Bolivia,22 at least concessionaire requires that the new concessionaire 200 in Cambodia,23 and several hundred in Ethiopia. It become incorporated by creating a "shareholder is hard to get accurate information on the number of company" (known as sociedad anónima in Latin American such enterprises because they mostly operate in the countries). Since more than two-thirds of the smaller "informal" economy and therefore rarely appear in rural suppliers are cooperatives (while some of the government statistics.24 Historically, they have not been medium-sized systems are co-owned by municipalities or regulated, either because no regulatory entity existed or, prefectures), the legal requirement that they convert if a regulatory entity did exist, its rules and regulations themselves into private companies directly conflicts with were usually ignored. In other words, the norm is de their current status as cooperatives, a legal status that facto deregulation (which, of course, is the ultimate they wish to maintain. Moreover, the reporting requirements form of light-handed regulation) though it clearly was and technical standards for concessionaires would be not planned that way. impossible to satisfy for many of the smaller rural systems. Faced with this conflict between what the law requires In Bolivia, about 50 operators of the existing isolated and what is economically feasible, Bolivia found itself village minigrids were surveyed in 2002 as part of the with a de facto system of bimodal regulation: full project preparation for the Decentralized Infrastructure regulation for the largest distribution concessions and for Rural Transformation (IDTR) program.25 Even though nonexistent regulation for the bulk of the isolated the Bolivian energy law requires that these enterprises minigrid operators. obtain a formal concession from the national electricity regulator if their installed generation exceeds a maximum To address the conflict between "cooperative" and local generation capacity of (originally) 300 kW, the "concession" status, a new type of transitional contract rule was not enforced in most cases. Becoming a known as contrato de adecuación was introduced as Mendizabal 2003. This report was prepared in 2003 as a background study during preparation for a World Bank loan to the Bolivian 22 government. Enterprise Development Cambodia 2001. 23 When regulators are given the responsibility to regulate these informal enterprises, the regulators will often have an incentive to underestimate 24 the number of such enterprises to avoid the appearance that they are failing to perform their required regulatory functions. IDTR 2003b. 25 a partial, interim solution in 2000. This new regulatory A second proposal would create an even simpler structure arrangement allowed the cooperatives to continue with only two categories of rural system sizes. These providing electricity service to their members without categories would be based on the population served having to acquire concession status. The transitional instead of load or generation levels. As an example, all contracts have an initial four-year term with the possibility systems for towns and villages with a population fewer of an extension of four more years. To ease the regulatory than 20,000 would fall under a new "rural electrification" burden on minigrid operators who have old diesel category and enjoy lighter regulatory obligations than generators larger than 300 MW, but who are serving a the systems serving communities with populations greater relatively small customer base, the 300 kW generation than 20,000. threshold was changed to 500 kW system peak demand. However, this was only a partial solution, since the Both proposals share the same common idea. Where cooperatives above 500 kW are legally required to satisfy possible, standards for reporting and quality of service all the reporting and technical standards of concessions, in the smaller rural off-grid systems would be lower than even if they are not formally concessions. for the main power grid, so that costs can be reduced and tariffs can be lower and electricity services more There have been lengthy discussions of the more general affordable for (future) rural users. problem of overregulation of small off-grid suppliers. 20 Several independent consultants have proposed systems Table 3. Examples of Lower Quality- of graduated regulation for rural off-grid systems.26 One of-Service Standards Proposed for proposal is to create three categories of rural off-grid Isolated Minigrids in Bolivia suppliers, based on system load size, and define less 1. Technical Current Possible future norm burdensome forms of regulation for the two smaller sizes. product quality regulation for isolated minigrid Systems with a demand above 1 MW would continue to systems be regulated as before. Operators of systems between a. Voltage level +/- 7.5% Between ±10% and 300 kW and 1 MW demand would have fewer reporting ±12% have been requirements and less stringent service standards (see proposed for the new threshold (TBD) table 3). A third regulatory category would be established b. Phase shift < 3% < 5% under this specific proposal for minigrid operators with c. Disturbance of None None a peak demand below 300 kW. Operators in this lowest communication appliances (cell size category would have no obligation other than to phone, radio, TV) register themselves once and provide a yearly update of basic information.27 2. Technical service quality If they meet this minimal requirement, they would be e. Frequency of < 7 times Between <20 and <25 eligible to receive much needed technical assistance.28 service per year times per year Technical assistance is an important concern for the small interruption f. Duration of < 12 hours Between < 36 hours rural village grid providers, because technical and service and <48 hours administrative capacity is often low. A 2002 survey of interruption Bolivian off-grid providers confirmed that many of them 3. Commercial recognized this lack of capacity and asked for training. service quality SHSs would either be regulated by the government entity that provides installation subsidies funding their installation g. Consumer < 6% < 10% complaints or by the national electricity regulator under a new h. Billing < 0.15% < 0.35% separate category. i. Average < 24 hours < 80 hours response time TBD, To be determined. Source: Unpublished consultant's report prepared as preparation for a World Bank loan. Mendizabal 2003. Similar proposals have been made in Senegal for what might be described as a "concession lite." Our discussion of 26 developments in Bolivia is based on information that was available as of January 2006. The new government of President Evo Morales is now conducting a fundamental review of existing and proposed electrification programs. This is explicitly provided for under the new Nigerian Electric Power Sector Reform Law 2005. The law states that "...the Commission may 27 establish simplified procedures for undertakings and businesses that are limited in size and scope so as to expedite the application and licensing process." Section 63 (8). Presentation of Enrique Birhuett Garcia during ESMAP working clinic in ESMAP 2005b. 28 EXAMPLE 2: Isolated Minigrids: Generic Tariff The essence of this proposal is that maximum tariffs Setting would be set on a generic rather than on an individual enterprise basis.31 In other words, tariffs would be based A novel, light-handed approach to tariff setting has been on general benchmarks rather than on each enterprise's proposed for the several hundred isolated, privately owned own cost of service.32 Such an approach raises three minigrid operators in Cambodia.29 These suppliers, implementation questions. known as rural electrification enterprises (REEs), usually operate small, second-hand diesel generators that First, on what basis are the tariff categories established? produce electricity for sale to retail customers in one Since there is some evidence of economies of scale (that or more contiguous villages. At present, it appears that is, unit costs tend to be lower as the number of customers the regulator has accepted the prices that are currently increases and volume of sales increases), it has been being charged. A phased-in, alternative tariff-setting suggested that the tariff categories be keyed to some approach has been suggested by an outside consultant. measure of enterprise size. Others have argued that this The consultant's proposal is that the maximum tariffs of is too simplistic. They contend that any tariff categories these small operators would be limited through would also have to be keyed to geographic location.33 published Tariff Tables. Second, will the benchmark costs be keyed to an estimate The Tariff Tables would specify a maximum allowed retail of average or best practice efficiency? The advantage of 21 price (that is, a tariff ceiling) for minigrid operators "under using a benchmark is that it creates an incentive for an different circumstances." An operator would have the enterprise to be more efficient. It is, in effect, a simple flexibility to charge any price up to the specified maximum. form of performance-based regulation. However, whenever The Tariff Tables would relieve the REEs (also referred to regulators use benchmarks for setting tariffs, there is as small licensees) of the obligation to make an initial always the possibility that some enterprises will always be tariff filing with the regulator or to return to the regulator "on the wrong side of the benchmark" because their with requests for revisions in the tariffs. Another element costs are higher for reasons that have nothing to do with of the proposal is that the maximum ceiling tariffs would their own internal efficiency.34 For example, two REEs of be automatically adjusted on some periodic basis for the same size could have widely different production changes in diesel oil fuel prices.30 This would be similar costs simply because one of them may be located in a to the automatic fuel or purchase power adjustment more isolated location. If number of customers is the clauses that are commonly used by larger, grid-connected one and only characteristic that defines tariff categories, distribution enterprises in many countries. the more isolated REE will be penalized because of its See NERA 2004. A similar approach is being pursued by the national water regulator of Paraguay. Faced with the daunting task of being 29 required to regulate the tariffs of more than 1,300 small water systems, the Paraguayan regulator has stated that it will try to group them according to similar technical, economic, and geographic characteristics. The costs of providing service for a "typical system" will be calculated and used to set tariffs for all systems in that group. Rather than revising existing tariff agreements, this will be done on a prospective basis. This is an important element of the proposal because fuel costs constitute about 70 percent of the average cost (including depreciation) for a 30 typical REE (Chanthan and Mahé 2005, p. 13). A significant increase in diesel fuel prices without any parallel adjustment in tariffs could easily bankrupt an REE. For example, the average price paid by REEs for a barrel of diesel oil jumped from about US$20 in 2003 to more than US$30 in 2005. An important decision will be how frequently to adjust the tariff for fuel price changes. The adjustment could easily become too complicated for both the operator and its customer if the tariffs are adjusted too frequently. This is in contrast to the Philippines where the national electricity regulator currently requires that each of the 119 rural electricity cooperatives 31 make a separate tariff filing based on the cooperative's own cost of service. Essentially the same approach was used by the U.S. Federal Power Commission in regulating the prices of hundreds of natural gas producers 32 in the late 1960s and early 1970s. Initially, the commission tried to regulate prices "with `cost based' limit on prices in each contract of every individual producer." This approach was a total failure, however, because "there are too many producers, too many contracts and too many cost elements to determine the regulated price on each sale." In 1960, the commission decided to set maximum tariffs of the producers using the concept of "area rates." The area rates were based on the commission's estimates of the average costs of exploration and production for existing gas production in certain specified geologic basins. The assumption was that the costs of production would be roughly comparable for all producers in the same basin. Unfortunately, it took the commission eight years to reach a decision on the first area rate. The general consensus now is that the area rates were set too low and that the area rates were the principal cause of major shortages of natural gas in the United States in the late 1970s. In 1989, the U.S. Congress passed a law that eventually led to total deregulation of natural gas producer prices. See MacAvoy 2000. Technology is a constant. Almost all REEs currently generate electricity from small diesel generators. 33 For example, some electricity distributors in Colombia have argued that their costs are higher because they are providing electricity in areas 34 where there is active fighting between the government and rebels. On the general problem of establishing benchmarks in regulation, see Shuttleworth 1999. location. It appears that this problem has been anticipated. Principle 2: Delegate or Contract Out The proposal provides that any REE has the right to Regulation make an application to the regulator for a different tariff if it "believes that it is in special circumstances and The national or regional regulator should be allowed therefore cannot charge the relevant tariff in the Tariff (or required) to temporarily or permanently delegate Table without damaging its financial viability."35 or "contract out" regulatory tasks to other government and nongovernmental entities. Third, will political authorities require uniform tariffs for main grid and minigrid customers? The retail customers Although it may be legally necessary for the national or of some REEs currently pay about US$0.50­0.80 per regional regulatory to have final formal responsibility kilowatt-hour. This is two to three times higher than the over all entities within a country that provide electrical price paid by the grid-connected retail customers in services to consumers, it does not logically follow that some of Cambodia's provincial towns.36 Presumably, this the regulator should be required to perform all the reflects some combination of small size, the inherent regulatory functions and tasks shown in figure 1. In our costliness of generating electricity at isolated locations view, it is often more efficient for the regulator to "delegate" using diesel fuel that has to be trucked in, and the risk or "contract out" traditional regulatory functions for of operating in these areas--but probably also the entities that are providing off-grid electrical service--or 22 exercise of some monopoly power. It is not easy for the not to regulate at all.38 regulator to set tariffs that reflect the first three factors, yet also prevent the exercise of monopoly power. If, in Benefits of Delegation the future, the government decides, as a matter of policy, that the customers of the REEs should pay prices that Delegation is especially desirable if there is a functioning are comparable to the lower prices paid by grid-connected rural electrification agency or rural electrification fund. customers, the government would be forced to provide In most countries, such an agency or fund will provide large subsidies to these enterprises or face the possibility capital (and sometimes operating cost) subsidies to entities that the REEs will simply go out of business.37 And if this that provide electrification services. The rationale for the happens, it is not obvious that consumers have been subsidies is to close the gap between relatively high "protected" if they are forced to going back to batteries costs and the generally low capacity to pay in remote that cost the equivalent of US$2­3 per kilowatt-hour. rural markets. Not surprisingly, electrification agencies will require one or more quid pro quos from entities that receive these subsidies. For example, the electrification agency may specify a maximum price that the operator can charge its customers. In addition, it may impose certain output requirements: number of new connections, NERA 2004, p. 23. 35 This is shown in the annual report of Cambodia's national electricity regulator (available on the Internet at www.eac.gov.kh/report.php). In 36 contrast, customers of the Northern Imhabane minigrid concession in Mozambique, the country's first minigrid concession, have protested strongly that the US$0.14­0.15 per kWh that they are paying is unfair when comparable grid- and non­grid-connected customers of the state- owned national utility (EdM) are paying about US$0.08 per kilowatt-hour. Both enterprises--EdM and the Northern Imhabane concessionaire-- have received major capital cost subsidies from the Mozambican government. However, EdM has an additional advantage, which is not available to the stand-alone private operator, of being able to continue to subsidize its ongoing operating costs with cross-subsidies from urban customers in the capital. The World Bank is proposing to lower the commercial costs of some REEs through access to grants from a newly created Rural Electrification 37 Fund. The grants would be used to subsidize connection and generation capital costs of selected REEs. The proposed grants are US$45 for each new connected rural household. The proposed grant for generating facilities is US$400 per installed kilowatt of mini- and microhydro facilities and US$100 for a 40 watts-peak SHS. A major problem with the current design of the REF is that it can provide grants, but not loans or credit supports to lower financing costs, which are currently in the range of 18­28 percent for most Cambodian REEs. If an REF is to be successful, it has to be able to provide access to lower-cost loans, as well as grants. At present, subsidized loans are available only to EDC, the state-owned utility. For any of its World Bank­supported electrification activities, EDC is eligible to receive 2 percent loans with a 25-year term and 7-year grace period. In the literature of regulation, this is known as "regulatory forbearance." It means that the regulator is given the legal discretion to decide when 38 and how it will regulate. This, in turn, requires that the relevant law be enabling rather than highly prescriptive. For example, when new long- distance telephone companies entered the U.S. telephone market in the 1980s, the U.S. regulator decided to "forebear" from regulating these entities as a way of encouraging competition. A similar approach is suggested in the Nigerian Electric Power Sector Reform Act 2005. The new regulatory commission is given explicit legal authority to exempt power generators or distributors from the requirement of having a license as the commission "may determine from time to time." Section 54(2). The law also provides that "different standards may be determined for different licenses...". Section 73(3). technical quality of the installations, and the technical Types of Delegation and commercial quality of the post-installation service. These various requirements constitute the traditional All of this suggests that delegation of regulatory tasks-- dimensions of price and quality-of-service regulation, whether formal or informal, temporary or permanent--is even if they are given another name. So the rural a rational strategy for regulation of off-grid electrification. electrification agency or fund is, in effect, a de facto If a country decides to pursue this strategy, three general regulator.39 types of delegation are possible. The first is full and permanent delegation. Under this arrangement, the If the rural electrification agency or fund is already the legislature or national regulator has decided that the de facto regulator (because of the conditions and rural electrification agency or fund should be granted requirements imposed on the operator as a quid pro full and final legal authority to decide on tariffs and quo for receiving subsidies, either in bilateral subsidy quality-of-service requirements. This would be in addition agreements or in general subsidy fund guidelines), to its regular functions--establishing rules for connection it probably makes sense to convert the de facto regulator requirements and associated subsidies.42 If this option is into a de jure regulator--for several reasons: adopted, there would be no further formal review of the agency or fund's decision by the regulator. However, · The agency or fund is almost always more it seems unlikely that a regulator would want to permanently knowledgeable than the regulator about the specific and irrevocably delegate its decision-making authority 23 technical operations of the electrification provider, to some other entity with no possibility of taking back especially in the case of off-grid service provision.40 that authority. For example, there is always a danger that the other entity may go out of existence or may be · The agency or fund will have a better appreciation of unable to perform the delegated regulatory functions for the cost implications of imposing different regulatory budgetary reasons, and the regulator would be blamed. requirements. Most rural electrification agencies or funds are not set up to be long-term regulators. · If the regulator decides to undertake traditional regulatory tasks, it will simply be repeating many of A second type of delegation is partial and temporary the determinations already made by the rural agency delegation. Under this arrangement, the national electrification agency. or provincial regulator designates the rural electrification agency or fund as its temporary agent. The essence of · There is an obvious need for coordination between this approach is that one of these entities has been the electrification agency and the regulator, although authorized to act on behalf of the regulator for certain mandated coordination between different government functions for a specified period or until a specified event entities is usually slow and tends to produce conflicts. occurs (for example, until an isolated minigrid becomes connected to the main grid). It is not complete and · The two sources of income for typical off-grid operators irrevocable delegation because the regulator reserves are subsidies and tariffs. Therefore, subsidy rules and the right to take back any decision-making authority that tariff regulation need to be coordinated closely.41 it delegates to another entity if the regulator disagrees with the actions or decisions of its designated agent. In · It would avoid confusion and create greater clarity other words, the regulator retains the legal authority to that, in turn, would reduce regulatory risk. reverse or modify the decision made by its agent. At a practical level, this does not imply that the regulator · It would minimize the risk of duplication and must formally review each and every decision of its agent. overregulation. Instead, it can simply require that certain key actions or This was essentially the regulatory approach taken by the United States when it electrified millions of rural households in the 1930s. Regulation 39 was not performed by a national or state electricity regulator. Instead, it was performed by the Rural Electrification Agency that gave subsidized loans to rural electrification cooperatives. For a full description of U.S. electrification programs, see Barnes 2005. In addition, the electrification agency or fund will sometimes employ field personnel that will have direct knowledge of the installation. 40 This is not easy to do when there are two separate entities. It creates what has been described as the "chicken and egg" problem in one Asian 41 country. The Rural Electrification Fund will not give subsidized loans and grants, unless the minigrid operator has a license issued by the regulator. However, the regulator will not issue license unless it has assurance that the minigrid operator has access to subsidized loans and grants to ensure its financial viability. One solution is to create a memorandum of understanding between the regulator and Rural Electrification Board that describes what entity performs which activities and how their activities will be coordinated to minimize delay and duplication. See ESMAP (2005c) for an overview on issues involved in subsidy design for electrification in Latin America. 42 decisions be filed with it on an informational basis. The that is acting on his behalf fails to perform well. One action or decision will be deemed to be approved if the option for overcoming this reluctance to share authority regulator takes no action within a specified period. For would be to specify in the law how regulatory functions other actions or decisions, the regulator might not even should be shared. The problem, however, with this require that the operator make an informational filing. approach is that the law may "get it wrong," and then Instead, it would simply allow affected parties to file a it will be difficult to make corrections because the complaint with it if they felt aggrieved by the agent's requirements are written into law (and laws are not easy action. This is usually described as "regulation by to change). Another option is to include a provision in exception." the law that requires the regulator to make a specific proposal at periodic intervals to a minister (or some As a general proposition, this second form of delegation other identified individual or body within the executive is probably the preferred approach. It can be implemented branch) on how regulatory functions that affect if the national electricity law is written such that the national electrification should (or should not) be shared with or provincial regulator has final legal authority over the other governmental and nongovernmental entities. provision of all forms of electrical service within its The minister would have the authority to accept, reject, jurisdiction, but the law also allows (or requires) the or modify the proposal in a decree that has the force regulator to delegate regulatory tasks to other entities. of law. This second approach recognizes that the most 24 To avoid jurisdictional confusion or the reluctance of a efficient solution for sharing regulatory authority may regulator to give up any of its responsibilities, it is usually change over time and therefore the law requires periodic best if the law includes an explicit statement to this effect reevaluations. rather than leaving it as an unstated possibility.43 A third type of delegation is "contracting out." Contracting This last point is important. It is important that a regulator's out has been defined as: authority to delegate some or all of its regulatory authorities, whether done permanently or temporarily, "[T]he use by a regulator of an external be made explicit because the presumption in many legal contractor, instead of its own employees to systems is that a government entity, which has been perform certain function(s). Such external assigned a responsibility, normally does not have the contractors can be consultants, individuals, legal right to reassign this responsibility to any other entity. other government entities (in country or outside, In common law systems, this legal doctrine is referred including at a regional level) or NGOs."44 to as delegatus non potest delegare (that is, what is delegated by the legislature cannot be redelegated Contracting out by regulatory entities is more widespread to another entity unless the law specifically allows for than is generally realized. Trémolet and her colleagues redelegation). Therefore, if one accepts the general found that 75 percent of regulatory agencies contract principle that it is more efficient and effective for entities out functions. The most common forms of contracting other than the national regulator to regulate small, are for performing tariff reviews, monitoring compliance, off-grid providers, it is critical that the law be written drafting legal opinions, and conducting dispute resolution. so that redelegation, whether temporary or permanent, Most contracting out is advisory (as opposed to binding) be explicitly allowed under the law. in nature. Stated differently, even though the regulator has contracted out a certain function, the regulator still Even if the regulator is given explicit legal permission to retains full legal responsibility for all final decisions related "delegate" or "transfer" some regulatory functions, the to that function. The outside individual or entity is simply regulator may still be unwilling to do so because of assisting the regulator because the regulator may not bureaucratic inertia, a desire to protect his "regulatory have the in-house capability to perform the task, or it turf," or simply fear that he will be blamed if the entity can be performed more efficiently and effectively by an This is especially important in civil law countries because government entities in these countries normally do not have the right to perform a 43 function unless they are explicitly authorized by law. In contrast, government entities in common law countries are often allowed to perform functions if the functions are generally consistent with their assigned responsibilities, even if the particular function is not explicitly mentioned in law. Trémolet, Shukla, and Venton. 2004, p. i. 44 outside entity. Even for this limited form of delegation, and determines in detail the quality-of-service standards however, it is best for the law to be explicit that the that operators must satisfy, as well as the method for regulator has the authority to contract out functions. monitoring compliance with these standards. These are the traditional functions of a regulator (see figure 1). Up to this point, our discussion of delegation or contracting out has focused on rural electrification agencies or funds. The ministry has established these important regulatory However, these are not the only entities that can receive parameters and obligations, so that potential operators tasks from the regulator. The regulator should also have will have full knowledge of the regulatory "rules of the the authority to delegate regulatory tasks to community- game" before they bid on a proposed number of based organizations or lower levels of government, such connections (the bidding variable) for a fixed total level as municipalities or provincial governments.45 The rationale of subsidies per area.48 Is it efficient for the ministry to is that, all other things being equal, regulation of act as the de facto regulator in this case? The answer decentralized electricity suppliers should be performed is "yes"--at least during the early years. The ministry, by an entity that is close to the customer and operator. through its specialized vice ministry, has much greater Whenever possible, the promotion of decentralized knowledge of the economics and operational requirements energy service providers should be accompanied by of SHSs than the regulator. Moreover, the ministry, like a decentralized regulation. regulator, knows that it has to balance the interests of consumers and investors if the program is to be successful. 25 EXAMPLE 3: Regulation by a Ministry: Solar Home Consumers have to be convinced that they are getting Systems in Bolivia "good value" for their money (that is, not being charged monopoly prices) and investors have to see the genuine In 2005 the Government of Bolivia successfully bid out possibility that they will be able to earn a profit on their performance-based subsidies to encourage private operators investment. Unless the ministry can satisfy these two to install about 15,000 individual SHSs over a period of constituencies, the program will be unsustainable and three years in four provinces of the country.46 The IDTR will probably be viewed as a political failure. As a program, like most government-supported national SHS consequence, the ministry is likely to have even stronger programs, is run by a ministry that "wears several hats." incentives than a regulator to balance the interests of In this case, the Vice-Ministry of Electricity and Alternative consumers and investors. Energy (VMEEA) is the promoter, subsidizer, and de facto regulator (at least initially).47 In Bolivia, as in most other countries, the national electricity regulator has little or no interest in getting involved in How is the ministry the de facto regulator? It is the regulator regulating individual SHSs. If offered the possibility of because in the subsidy agreement with each operator regulating individual SHSs, most electricity regulators (all of whom were chosen in 2005 through an international would probably say: competitive bidding for 14 service areas), the ministry specifies the nature and duration of the service obligation, I regulate 220 volt AC electricity systems not establishes a maximum price for the SHSs to be installed, 12 DC volt electricity systems. I have more than For example, the 1994 Colombian water law explicitly authorizes the national water regulator to delegate tariff setting to municipal and provincial 45 governmental entities if their regulatory actions are consistent with general principles enunciated by the regulator. Presumably, this was necessitated by the fact that it would be impossible for a single national regulator to review the tariffs of more than 1,700 separate water and sanitation entities. In theory, the Colombian national water regulator is supposed to review the actions of the municipal and provincial governments to ensure compliance with its principles. In practice, this does not seem to happen. A colleague, Eric Groom, has suggested the alternative of "contracting out" the monitoring of compliance with the national regulator's tariff principles. His specific proposal is that this monitoring function be contracted out to one of several prequalified, private auditing firms. The auditors would, in turn, have their audit reports spot-checked by a review panel. If an auditor were found to have provided inaccurate information, it would be removed from the panel of prequalified auditors. The workability of such an arrangement would depend on the specificity of the tariff principles whose implementation is being audited. IDTR 2003b. 46 A more detailed description of this innovative Bolivian project--which bids out decentralized energy and information and communication 47 technology (ICT) services under medium-term service contracts against performance-based subsidies--can be found in IDTR 2004b. At the time of this writing, all 14 areas have successfully been awarded. The winning bids all exceeded the minimum user number defined by 48 the Bolivian government as conditio sine qua non. In the best areas, the gain from bidding these medium-term service contracts out was up to 35 percent, and the average gain was 25 percent (or about US$2.5 million at a total subsidy amount of about US$10 million). This is the result of a very intensive transaction marketing and a best-practice, performance-based bidding document for a whole package of decentralized services, reaching from installation and maintenance to training and monitoring tasks. enough work just trying to regulate the AC system. years. On average, these cooperatives have systemwide I don't have the budget and staff to try to regulate total losses of 17 percent, a relatively low level of losses what is essentially a renewable electricity among South Asian distribution utilities. Equally impressive generating appliance located in someone's is that their collection rates average well above 95 percent, home. I am more than happy to let the ministry a very high number by international standards. run this program. The PBSs are supervised, controlled, and regulated by In fact, the norm in many countries is that the national the Rural Electrification Board (REB), which is a semi- electricity regulator has no legal jurisdiction over individual autonomous agency located within the Ministry of Energy SHSs.49 Therefore, it would be inaccurate to say that the and Hydrocarbons. The REB performs a wide range of electricity regulator in Bolivia has delegated this authority functions. Since its creation in 1978, it has managed to a government ministry. The reality is that the regulator more than US$900 million in loans and grants from never had the authority in the first place. international aid agencies. These external grants and loans have allowed the REB to provide subsidized loans This is not true in all countries. In other countries, to individual PBSs. The REB also provides extensive such as Argentina and Brazil, the government has technical assistance to the managers, board members, decided that the best strategy for "universalization" is engineers, and linemen of the PBSs. The REB conducts 26 to establish a regulatory quid pro quo. The essence central procurement and actual construction of most of this quid pro quo is that the distribution company, new facilities for the PBSs. In addition, the REB maintains which is currently serving grid-connected retail customers, close control over the operations and finances of the is also required to provide some form of electrical service, individual PBSs. This is accomplished through an whether it is an SHS or a stand-alone minigrid, to "Instructional Series", a comprehensive set of operational households that are beyond the economic reach of the guidelines that covers engineering, financial functions, grid.50 In such situations, the regulator will be forced to administration, accounting, and training.53 get involved in setting the terms and conditions of solar home service or other forms of off-grid electrification, The REB's control over individual PBSs is tight. As one unless it has the legal authority to delegate this knowledgeable observer commented, "Although PBSs responsibility to some entity. are autonomous in theory, REB retains much financial and managerial control over them, including the power EXAMPLE 4: Regulation by a Ministry: Grid- to set performance goals and allocate annual bonuses." Connected Cooperative Resellers in Bangladesh The heart of the control and monitoring system is found in Form 550, which provides monthly summaries on all The rural electricity cooperatives of Bangladesh represent operational and financial characteristics of individual a rural electrification success story.51 Since 1978, more PBSs. (See box 1 for a summary of the principal elements than 60 rural cooperatives have been created. These of Form 550.) Form 550 allows the REB to monitor the cooperatives--known as PBSs52--have succeeded in commercial viability and internal management of individual providing electricity connections to more than 2.5 million PBSs. In addition, the REB usually provides one of its rural households with new connections growing at more own staff members to serve as the general manager of than 500,000 new customers per year in several recent new PBSs for an initial period of time. The extent of REB SHSs are a relatively new technology. From the regulatory point of view, they can be thought of as something between a consumer good (like a 49 refrigerator or a computer) and a very small, decentralized power plant with generation and distribution at the very same place. See ESMAP 2005a. The same approach has been used in the Argentine province of Jujuy (Covarrubias and Reiche 2000). One utility executive 50 described this as the "hostage" approach to electrification. He elaborated that the unspoken understanding is that the regulator's willingness to give favorable tariff determinations for customers on the main grid depends, in part, on how well the company's rural electrification subsidiary does in providing service to poor rural customers. He said that even though his rural electrification subsidiary does not make a lot of money, it does buy the parent company considerable "goodwill." This discussion of Bangladesh is based on "Rural Poverty and Electricity Challenges in Bangladesh," which is chapter 4 of Barnes 2005. 51 The cooperatives are called Palli Bidyut Samities (PBS). In recent years, many of the new customers have been customers who were previously 52 served by DESA and BPDP, two state-owned utility systems. The Instructional Series is closely modeled on the Rural Electrification Bulletin series developed for U.S. rural electricity cooperatives. This 53 reflects the fact that the REB elected to model Bangladesh's rural electrification program after the U.S. rural cooperative system. The Philippines made the same choice, but has had much less success in applying the U.S. coop model than Bangladesh. See Barnes 2005. control and monitoring is so extensive that the PBSs could Is there a need for regulation by a separate regulatory almost be thought of semi-autonomous franchises of a entity in this case? We think not. In addition to being a large corporation. Micro-management by a regulator is banker, technical advisor, procurement agent, construction normally a sign of regulatory failure, but when there is agent, management supervisor, and trainer, the REB is already micro-management by some government entity, clearly also functioning as a regulator. It performs the which seems to be the case in Bangladesh, it would traditional functions of a regulator: setting maximum becounterproductive and inefficient to create additional prices and minimum quality-of-service standards.54 oversight by a separate regulatory entity. Like a traditional regulator, it has also specified a "uniform system of accounts." Moreover, it has established a sophisticated and effective system of incentive regulation. This system, known as the Performance Target Agreement, Box 1: Form 550--The Heart of REB's Performance- is an annually negotiated agreement between the REB Monitoring Process and PBS managers. It includes 21 performance targets for reducing system losses, increasing sales, meeting A: Revenue and Expense Statement. Summarizes customer expansion levels for various categories, and PBS operating revenues and expenses. maintaining and improving collection rates. It is probably B: Aging of Accounts Receivable. Provides data fair to say that the REB "walks like a regulator and talks on receivables from PBS members for the current like a regulator," even if it is not formally called a regulator. 27 month, 30 days, and over 90 days. Therefore, it would seem counterproductive and inefficient to add a new separate regulator with regulatory jurisdiction C1: Balance Sheet. Summarizes PBS assets and liabilities, over the PBSs' retail service.55 including a summary statement of long-term debt obligations. EXAMPLE 5: Regulation by a Community: Isolated C2: Changes in Utility Plant. Summarizes the value Minigrids in Cambodia of all PBS assets, any assets retired for the current month, and changes for the year to date. In Cambodia, many small private enterprises operate isolated minigrids that typically provide electricity service D: Consumer Sales and Revenue. Summarizes sales by customer category for the current month and to a few hundred households and small businesses in a year to date. single village.56 These informal, spontaneous "bottom up" enterprises, known as REEs, are not the result of any E: Energy and Demand Data. Summarizes energy formal government programs. They exist for the simple and demand data at each substation metering reason that there are willing buyers and willing sellers.57 point within the PBS. F: Plant and Consumer Data Sheet. Summarizes the The Cambodian REEs all face similar challenges: total number of in-service, disconnected, and idle increasing connections to new households, expanding connections. Also summarizes the kilometers of line hours of service, and improving the quality of the constructed by the PBS and length of lines taken over distribution facilities (for example, eliminating uninsulated from the Dhaka Electricity Supply Authority (DESA) or wires, constructing medium-voltage wires, and introducing the Bangladesh Power Development Board (BPDB. adequate grounding).58 Achieving these outcomes requires G: Accounts Payable Statement. Summarizes investment capital that many of the REEs do not have. payments due to the BPDB for power and to REB When financing is available, it often comes at high interest (two government-owned utilities) for outstanding rates (20 percent or more) through loans of short duration loans. (1­2 years) and high collateral requirements (2­3 times Elements of its regulation of tariffs could be improved. Issues relating to tariff regulation (level and structure) and its interaction with subsidies will 54 be discussed in a future report. Separate regulation of the retail service provided by U.S. rural electricity cooperatives is also the exception rather than the rule. As in Bangladesh, 55 the de facto regulator is the Rural Electrification Agency of the U.S. Department of Agriculture. However, the prices paid by the U.S. cooperatives for bulk power purchases are under the jurisdiction of the national electricity regulator, the U.S. Federal Energy Regulatory Commission. It is estimated that as many as 600 such enterprises may be selling electricity to 60,000­120,000 households in more than 700 villages. 56 A recent worldwide survey found evidence of about 7,000 small private sector providers of electricity in 32 countries that serve an estimated 57 10­50 million customers. The numbers are even higher if one includes community and public systems. The 7,000 operators include minigrid operators, as well as providers of SHSs and other forms of household electricity-generating equipment. See Kariuki and Schwartz 2005, p.19. During weekdays, the REEs typically provide electricity just during evening hours (for example, 5­11:00 PM). Consequently, the current 58 electricity service provides little or no value for businesses that operate during daylight hours. the size of the loans). Given these difficulties in financing and the ongoing need for capital cost subsidies, the Box 2: Power Supply Contract for the Private Cambodian government recently created a Rural Operator of a Minigrid in Smau Khney, Cambodia Electrification Fund (REF) to provide capital cost subsidies · Technical engineering requirements (for example, and technical assistance to REEs.59 grounding, types of poles, and distance between poles and cables). One such REE is located in the village of Smau Khney about 40 kilometers south of the capital. Like most · Location of meters. Cambodian REEs, it operates a diesel-fired minigrid · Responsibility for meters that are intentionally broken system. In 2004, GRET, a French NGO, developed a or tampered with. form of decentralized regulation for the Smau Khney REE. The regulatory arrangement is based on a 15-year · Number of new customers to be connected "contract of power supply" between the Commune (for example, 280 households). Electrification Committee (a local government unit) · Limit on time to connect new customers (1 year). and a local private developer living in the village.60 The power supply contract is supported by a second · Amount of the capital cost subsidy (US$45 per contract between GRET and the Commune Electrification household). 28 Committee that provides a US$45 grant for each new household that is connected as either a metered or · Connection and reconnection rules for customers. unmetered customer. The program has been successful · Duration of service on weekdays (6 hours) and in that 220 new households have been connected in weekends (11 hours). slightly more than a year, average monthly consumption is reported to have increased from 8 to 16 kWh, and · Subsidized tariff for poor households (US$1.20 per the developer will soon be installing a second 50 KW 10 watt lamp per month). generator to increase the hours of available service on · Duration of the contract (15 years). weekdays. · A local system for handling complaints. This arrangement has effectively led to a sharing of regulatory responsibilities between the Electricity Authority · Funding of subsidies for poor customers and of Cambodia (EAC), the national electricity regulator, the administrative expenses of the Commune and the commune government. This can be seen in Electrification Committee through an annual US$5 fee per household. box 2, which summarizes the principal obligations and requirements in the power supply contract. households. However, the contract does not completely The contract is as an example of "regulation by contract," replace the regulator. For example, the contract includes since it includes engineering requirements that affect two very specific disclaimers that state that both tariffs technical quality of service (quality of the conductors, and general conditions of service will simply reflect the distance between poles, and minimum voltage levels at decisions of EAC. Therefore, the contract can be viewed different locations on the distribution grid) and economic as an example of a partial, downward delegation of requirements that affect commercial quality of service regulatory responsibilities to the community organization (hours of service and tariffs for poor households). In that represents the interest of final consumers.61 It clearly addition, it specifies the actual tariffs to be paid by poor does not eliminate regulation by the EAC, since the REE Initially, the REF's financial assistance will be limited to providing capital cost subsidies for connections and renewable generation. At a later 59 stage, the REF may also provide guarantees to lower financing costs to REEs. A detailed discussion of the arrangement can be found in Chanthan and Mahé 2005. 60 A very similar approach has been used in Paraguay. Small private operators of separate water and sanitation systems enter into contracts with 61 local communities that must be approved by the national government ministry that is responsible for rural water and sanitation systems and the national water regulator. These private operators, known as aguateros, operate under model contracts that are particularized for the needs of specific communities. As in Cambodia, the private operator receives a capital cost subsidy from a fund administered by the national government. See Drees, Schwartz, and Bakalian 2005. One major difference is that in Paraguay, there is a formal competition (run by the rural water ministry) for the right to serve particular communities and to receive the associate subsidies. One consultant in Cambodia has referred to the absence of competition as the "missing link." is still required to get a license from the EAC. However, around the country. However, if the village government the power supply and incentive contracts complement and is going to perform the monitoring function, it will need particularize the EAC's more general regulatory rules. resources. In Smau Khney, the power supply contract requires that the private operator provide the Commune This sharing of regulation for an isolated minigrid appears Electrification Committee with an annual budget of to produce four major benefits. about US$200.65 · First, the village government feels more ownership · Third, it reduces the likelihood of corruption. The because it directly negotiated the contract with the Cambodian electricity regulator has a high reputation for local developer. Consequently, the village government integrity and honesty. The regulator places considerable views itself as responsible for ensuring that the developer emphasis on transparency of process.66 Unfortunately, complies with the terms and conditions of the supply such honesty and transparency are often not the norm contract. This is quite different from relying on a regulator in poor countries. All too often there is the "official fee" in the far-away capital to administer a piece of paper and the "unofficial fee" for government services and called a "license" whose terms and conditions may be approvals. Such corruption is less likely to occur when unknown to the village and largely beyond its control. regulation is shared with a village governmental body. The fact that the village negotiated the contract gives The overriding incentive for the village is to get results: it a greater stake in the success of the enterprise.62 reliable electricity for new and existing customers. If there 29 This is not just a passing theoretical observation. The are delays or requests for bribes, this will raise the cost of sense of ownership has been manifested in concrete electricity to the village. Therefore, the village committee and specific ways. For example, the developer has reported has a strong incentive to take timely action in a way that that the village committee has given active assistance a national regulator would not. in collections, locating poles in optimal locations, and explaining the need for tariff increases when fuel · Fourth, it allows communities to act as "monitors" costs doubled.63 Where local ownership increases so rather than "operators." Collective decision making significantly, user satisfaction is likely to increase, too. is always slower than individual decision making. Moreover, committees and boards are susceptible · Second, the village government can assist in to personality and political conflicts. This is not to monitoring compliance with quality-of-service standards. say that it is impossible for a community to own and It is easy for a national regulator to issue quality-of- operate a minigrid system or buy in bulk from the service standards for decentralized energy service main grid. There are successful examples in Bangladesh, providers. However, it is difficult and expensive for a Costa Rica, and the Philippines, among others. But if national regulator to actually monitor whether the a community-based organization, whether a cooperative providers in distant and isolated villages are actually or village electrification committee, is to be successful, complying with the standards. If a village government is it often requires considerable time and nurturing. actively involved, it can act as the regulator's "eyes and Therefore, in many countries, it may be more efficient ears" at the local level.64 This is likely to be more effective to limit the role of the community to that of a regulatory and less costly than if the regulator were to try to monitor rather than a system operator. maintain a large compliance staff in the capital that would need to make numerous field trips to villages Interestingly, such decentralization of ownership fits not only the decentralized character of off-grid technologies well, but also the increased 62 decentralization of government (authority and funds) that is taking place throughout Asia. Interview with the developer, Mr. Srey Sokhom, in Smau Khney on October 22, 2005. 63 However, it may be the case that a village or small municipality simply may not have the technical capacity to conduct such monitoring. In this 64 situation, it may be more efficient for a provincial or regional government to provide such services (often by hiring specialized private consultants) for the benefit of villages and municipalities. This is explicitly allowed for in the Colombian water sector. A combination of assigning local communities a control function for service quality regulation, contracting out basic monitoring and reporting tasks to the providers themselves and checking both through regular performance audits is envisioned in the Bolivia IDTR program, a subsidized SHS program described elsewhere in this paper. In the Paraguayan rural water and sanitation sector, the small private water operators are required to pay 5 percent of their annual billings for 65 connections and annual charges to the local users' association and 2 percent of their annual billings to the national regulator. For example, public hearings are held on the issuance or extension of licenses for individual REEs. 66 Although the sharing of regulation between the national good approach because it will lead to unnecessary and regional regulator can produce these benefits, disputes about what the regulator is legally allowed it may also produce costs. The biggest danger is that to do under the existing statute. In our view, the better there will be overregulation. The combination of national approach would be for the electricity or regulatory law and local regulation could lead to too many requirements, to be written (or amended) to provide the regulator with which may conflict, and too many approvals, which may explicit authority to vary its regulatory rules and procedures cause delays. In general, this does not appear to have (concessions vs. licenses vs. permits) depending on the been the case in Smau Khney. The national regulator nature of the entity that is being regulated (small vs. large, reviewed the "supply contract" to ensure that it did not grid vs. off-grid, private vs. community based).68 This conflict with the license that he had issued.67 general principle can be illustrated with two examples. One technique for minimizing possible conflicts is to EXAMPLE 6: Solar Home Systems: Fee-For- create model agreements between the village and the Service, Dealership, or Hybrids developer that the regulator has preapproved. This avoids the need to "reinvent the wheel" every time a village wants SHSs can be provided under a variety of different business to enter into a contract with a private developer. Such models.69 Two of the most common business models model agreements have been used in developed and are the fee-for-service model (Argentina, Morocco, 30 developing countries as well. For example, most French and South Africa) and the "dealership" or "vendor model" municipalities use a model document, developed by the (China, India, Indonesia, Kenya, and Sri Lanka).70 association of municipalities, when granting a concession for the private provision of water and sanitation services. Under the fee-for-service model, key components of the Similarly, a model 14-page concession agreement is solar equipment (the PV module, charge controller, and used in Paraguay whenever a community allows a private battery--and in some cases even the internal installation) operator to build and operate a water and sanitation are owned by the operator. Fee-for-service operators system. often receive capital cost subsidies from the government to lower their connection charges to customers (and in Principle 3: Vary Regulation by Type of Entity some cases ongoing operating and maintenance expenses). Under the fee-for-service model, the SHS The regulator should be allowed to vary the nature operators often operate under a concession or license of its regulation depending on the entity that is being that grants an exclusive right and obligation to provide regulated. service within specified geographic region for a specified period (usually 15­20 years).71 It is useful to think of A regulator should be allowed to vary its methods of such concessions as involving a quid pro quo. Specifically, regulation depending on the type of entity that is being the concessionaire is granted a legal monopoly (and a regulated. Unfortunately, many regulatory or reform capital subsidy) in return for a specified obligation to statutes do not allow for this flexibility. They are either serve. The subsidy grant is often bid out, so that there is silent about regulation of grid versus off-grid electrification competition "for the market." This model resembles the or embody the view that "one size fits all." This is not a traditional utility model for grid-connected customers. The only apparent conflict was that the license issued by the regulator was for 7 years, and the power supply contract between the community 67 and the developer was for 15 years. The staff of the regulator said that when the first seven-year term ends, it is likely that the license will be automatically renewed for an additional seven or more years if the private developer performs well (that is, makes continued investments and improves operating efficiency). However, some have argued that the regulatory system could be improved if the regulator were willing to give longer licenses and specify more clearly the criteria used in deciding the duration of licenses. The Cambodian Council of Ministers took this approach in a 2005 sub-decree, which stated that the regulator "[m]ay apply different principles 68 to different licensees, to the extent that these are necessary to take account of their different sizes, locations, and other objective circumstances." Royal Government of Cambodia 2005. See Barnes 1996; Reiche, Martinot, and Covarrubias 2000; Martinot, Cabraal, and Mathur 2000. When we use the term business model, we 69 are referring to the business arrangement by which the services are delivered. A third hybrid model is the medium-term service contract that has been proposed in Bolivia. Under this approach, the SHS provider is granted 70 an exclusive franchise for four years (starting from the date of the installation of the last SHS in the specified area) in return for commitments on installation, post-installation servicing, and local market development. Once the three-year period ends, so does the exclusive franchise. Therefore, the terms fee-for-service model and concession model are often used synonymously, which is not strictly correct. Both modalities 71 can be implemented without the other : operators who have been granted exclusivity can decide to transfer SHS ownership at a certain point-- for example, Bolivia and Brazil--just as companies without a formal concession contract by a government entity or regulator can opt for an operate leasing contract with some or all of their customers--which is the same as fee-for-service). In contrast, a SHS provider who is a dealer operates in ensuring that the government is getting "good value" under a very different business model. The dealer may for the subsidies it has granted. In other words, both the receive a nonexclusive franchise from the government regulatory and the subsidy-granting entity will want the under the expectation is that the dealer will be one of same outcome, although for different reasons. There is several dealers, all of whom are (hopefully) competing room for delegation--and a necessity for cooperation-- "in the market" to provide SHS to potential customers, in such cases. usually at fixed subsidies. Typically, the dealer-provider will sell the equipment and ideally installation (with or Less regulation is required for the SHS provider that is without financing) to a customer. It will have no ongoing operating as dealer. Specifically, there is a presumption obligation to that customer, unless the dealer is willing that price regulation is not needed because competition to offer an extended warranty or ongoing service among dealers will protect consumers from monopoly agreement. Once the equipment is purchased, it is pricing. However, this assumes that the markets will be owned by the customer. workably competitive, which is likely to occur only in relatively mature markets where customers can choose The Bolivia IDTR project is implementing a new SHS from more than one supplier. In addition, it is sometimes business model that tries to combine the strengths of also argued that the regulator (or its agent) does not need the fee-for-service and dealer models. Under this hybrid to regulate quality of service under the dealer model approach, known as Medium Term Service Contracts, Those who take this position contend that any licensing of 31 subsidies are provided in return for five- to seven-year dealerships should simply be limited to minimum financial year obligations to develop and serve small local markets. requirements, technical competencies, and perhaps a The winners of the medium-term service contracts will commitment to some specified form of dispute resolution, have the obligation to install a minimum number of but with no need for quality-of-service regulation. Under SHSs over a period of less than three years, to service this "minimalist" regulatory approach, the presumption is systems during an additional four years (starting from that dealers will compete on both price and quality, and the date of installation), to develop the local SHS markets therefore potential purchasers of SHS do not need on the demand and supply side by educating users about protection from a regulator or a ministry over maximum SHSs and training future local spare parts suppliers), prices and minimum quality of service. Those who argue to report on their own performance, and to conduct for this approach view the purchase of an SHS as being user interviews for project evaluation.72 Since the operators no different from the purchase of a TV or a radio. are free to choose between cash sales, microcredit, and a finance or operate lease, they have considerable In our view, this approach is based on a somewhat freedom to find the best business plan for their geographic idealized view of consumer competencies. It assumes areas.73 a level of knowledge and sophistication on the part of poor and sometimes illiterate consumers that is not Should fee-for-service operators and dealers be regulated realistic, especially since the purchase of an SHS is often in the same way? We think not. Under the fee-for-service likely to be a "once in a lifetime" purchase. Therefore, we model, one would expect that the regulator, or some see merit in the argument that it is more efficient for the other entity that is acting as its agent, would need to government to establish minimum quality-of-service regulate both price and quality of service. The rationale standards for SHS equipment. This conclusion has even is that the SHS operator has been granted a legal greater justification if the government is also providing monopoly and therefore consumers need to be protected subsidies to the SHS dealers or their purchasers. A from possible monopoly abuses in the form of high prices government clearly does not want allegations that it or inferior service. The regulator, however, will not be provided subsidies to dealers of SHSs without ensuring that the only government entity with an interest in the SHS the dealers' customers get value for the government's operator's price and quality of service. If some other subsidies. entity within the government has provided the subsidies, this government entity will clearly also have an interest The delegation of basic monitoring tasks to the providers will save money because fewer visits will be needed to remote households. but it will 72 need to be complemented with independent evaluation and auditing to check on the operators' reporting. ESMAP 2005a. 73 EXAMPLE 7: Minigrids: Private Operator or provider of subsidies, the prices charged for the electricity Community Owned are determined by each cooperative's board of directors and not by any government ministry. In fact, the charges The nature of regulation should also be allowed to vary are not even called tariffs, but instead are referred to as depending on the type of entity that owns the facilities membership fees. that are being regulated. Consider, for example, the case of an isolated minigrid combined with some form of Our general recommendation is that there should be generation (say, diesel or hydro). Such a system could be a presumption of "self-regulation" for cooperative and owned and operated by a private company, a cooperative, other community-based organizations. However, this or some other community-based organization.74 In both does not mean that the regulator should take a completely instances, the technology is the same and the legal "hands-off" approach. It would be naïve to believe that document issued by the regulator (for example, a license community-based organizations will always have good or concession) may be the same, but should the process governance. Like any other local organization, they are of regulatory review, especially with respect to price, be susceptible to corruption and capture by local politicians the same? for political purposes. This has been a major issue for the rural electric cooperatives in the Philippines.75 We think that the answer is "probably not." The private A recent in-depth analysis of the Philippine cooperative 32 minigrid operator, like all private monopolists, will be movement concluded that Philippine "cooperative trying to maximize profits by charging the highest prices managements tend to be relatively fragile and isolated, that it believes that its customers can pay. Therefore, making them susceptible to local corrupting influences."76 if it has been given a license, concession, or contract This is a polite way of saying that the Philippine that provides a de facto or de jure monopoly, there is cooperatives have been vulnerable to takeover by a need for the regulator or the subsidy granting entity local politicians. Once local politicians gained control, to be concerned about monopoly pricing. The situation many of the cooperatives were "run into the ground" is different for a cooperative. In a cooperative, the owners through economically unjustified grid extensions, are also the consumers. In addition, under the Seven padding of cooperative payrolls with supporters of Principles of Rochdale, the universal principles that govern the politicians, a general reluctance to raise tariffs, most cooperatives around the world, each owner-consumer an unwillingness to pursue collections, and sometimes has one vote in all matters. Therefore, if the member even outright theft of funds.77 A 1989 World Bank owners of the cooperative decide to raise prices, they report found that only 22 of 117 Philippine electricity themselves will pay the higher prices because they are cooperatives were commercially viable. One consequence also the customers. In effect, they would be taking money of the prevailing financial weakness of most Philippine from one pocket and putting it into another pocket. Since cooperatives is that they are often unable to extend there is no obvious incentive to do this, when a community- service to new users. based organization is self-supplying electricity, it is reasonable for the regulator to accept considerable Even if there is a presumption of self-regulation by degrees of "self-regulation." cooperatives or other community-based organizations, the regulator (or its designate) must have the ability, This has been the regulatory approach taken for the incentive, and obligation to "step in" when there is Energy Services Delivery (ESD) project's off-grid village evidence that "self regulation" is no longer working. hydro systems that operate in Sri Lanka. The systems are But even if the regulator has the legal authority and owned and operated by community-based cooperative obligation, the regulator can do very little when there societies. Although the government exerts some control is pervasive corruption. Corruption in community-based over technical specifications and safety in its role as a rural electrification organizations can only be overcome In most countries, a cooperative is a nonstock, nonprofit membership that operates under the Seven Principles of Rochdale. Perhaps, the most 74 important principle is that each member has one vote. See http://www.coop.org/coop/principles.html for a full description of the Rochdale principles. Barnes 2005. 75 Barnes 2005, p. 9. 76 The problems of politicization appear to have been largely avoided in Bangladesh where the statute prohibited any officer in a political party 77 from serving on the board of directors of electricity cooperatives. if the central government is able to support a strong central A good regulatory framework for quality-of-service entity--whether it is a government ministry or umbrella regulation should be based on the following operational organization of the community organizations--that is standards: willing to impose serious economic and governance standards on the community organizations in return · Quality-of-service standards can be established on for subsidies. an input basis, output basis, or a combination of the two. Quality-of-service standards should be established Finally, it is important to recognize that the nature of tariff for those dimensions of service that are important to regulation is likely to be quite different for privately owned consumers, controllable by the operator, and capable operators and community-owned operators. For a privately of being measured on a reasonably objective basis. owned operator, the regulator will almost always be trying to reduce tariffs. In contrast, the situation will usually be · Quality-of-service standards need not be uniform across the opposite for community-based organizations and all customer categories or geographic areas. Instead, government-run enterprises. In these cases, the regulator standards should be based on customers' preferences will often find itself trying to increase tariffs. Therefore, and their willingness to pay for the costs of providing in the former case, the regulator will be establishing the specified level of quality. All other things being equal, price ceilings, whereas in the latter case, the regulator customers prefer higher quality to lower quality. will be establishing price floors. However, all other things are not equal--higher quality 33 almost always costs more money. Principle 4: Establish Realistic and Affordable Quality Standards · In the absence of subsidies, the regulator or government ministry, which is acting as an agent for customers, Quality-of-service standards must be realistic, affordable, should not impose quality-of-service standards on monitorable, and enforceable. an operator unless customers would be willing and able to pay for the costs associated with meeting the It is counterproductive to try to impose quality-of-service standards. This is especially important in remote standards that cannot be met.78 However, this does off-grid markets, where users' requirements can vary not imply that quality of service should be ignored. greatly and many households will be satisfied with Unfortunately, although everyone talks about improving a lower service level (for example, frequency of short quality of service, in practice quality of service often gets system failures) for less money--as long as that lower very little attention. This probably happens because it service level is clearly defined in advance. In general, is easier to specify (and to monitor) tariff levels than quality- consumers should be given no more than two or three of-service standards. Tariffs are uni-dimensional and can choices. With too many choices, the process of making be readily observed in customer bills. In contrast, quality a selection may become confusing to consumers and of service is multi-dimensional, and compliance is often expensive to administer.79 difficult and costly to monitor, especially for off-grid systems. Moreover, when quality falls short of expectations, · Quality-of-service standards should be established for disputes often arise, particularly in SHSs, about what both technical and commercial dimensions of service happened and who was responsible. Because it is harder (see the next section). The quality-of-service standards to regulate, quality of service usually receives less attention may be (a) guaranteed standards where the standard from regulators. The danger in ignoring quality of service must be achieved for every specified customer and (b) is that whatever goodwill may have been generated by overall standards where the standard must be achieved an electrification program can quickly disappear if quality on average over a stated period across a specified of service falls short of what customers were expecting. customer category, but need not be satisfied for all From a customer's perspective, electricity that is of poor customers at all times in the category. The operator quality (or never arrives) has little value. must publicize the standards to its customers. The discussion in this chapter draws from IDTR transaction advice (IDTR 2004b), as well as from Bakovic, Tenenbaum, and Woolf 2003, pp. 78 46­47 and appendix C. See also Foster 2002. Although it is fashionable (especially among economists) to emphasize the desirablity of maximizing customer choice, this ignores the fact that 79 there are genuine costs associated with the time and effort to make choices. For a discussion of the transaction costs involved in making choices, see Schwartz 2004. · Quality-of-service and associated penalties and rewards · Commercial quality should be phased in over a reasonable period. Any · Connection time for new customers penalties should be proportionate to the extent of · Accuracy in meter reading noncompliance and the costs likely to be incurred · Accuracy in billing by the operator in meeting the standards. · Response time to customer complaints · Where it is feasible and efficient, penalties should be EXAMPLE 8: Quality of Service for Solar Home paid to individual consumers. Otherwise, penalties Systems: The Case of Bolivia should be used to provide subsidies to poor customers. Penalties should not be used to support the budget Standards of the regulator or any other government entity. In general, penalties and rewards should be capped The quality-of-service standards for SHSs installed under so that they do not exceed more than 2­4 percent Bolivia's IDTR program are summarized in table 4.80 of the operator's overall revenues. The standards were specified in the bidding documents for the simultaneous bidding of 14 areas that were · Any changes in quality-of-service standards should be awarded in 2005. In addition to the quality-of-service synchronized with a regulatory proceeding to update parameters, maximum prices for each SHS size were also 34 tariffs for a new tariff-setting period. specified in the bidding documents. Therefore, when the 11 prequalified potential operators in the Bolivia SHS bid · The regulatory entity should have the legal authority competed for the right to provide service with an exclusive to delegate or contract out quality-of-service monitoring right to subsidies for four years in one or more of the and imposition of penalties to a third party subject to 14 areas, they had complete information on two key appropriate oversight and a dispute resolution process. regulatory parameters: maximum prices and minimum quality-of-service standards.81 In addition, bidders were · The regulatory entity should establish a reliable, informed of the maximum aggregate subsidy that would be objective, and publicly available monitoring system provided for the each of the 14 areas, if the performance that compares the quality of service provided by targets were met. Bidders competed against each other different operators. based on the number of SHSs that they would commit to install in the specified area. Quality of Service Standards for Electricity The basic regulatory parameters were fixed by the VMEEA, Quality-of-service standards for electricity service, which established the program and will provide output- whether grid or off-grid, fall into three general categories: based subsidies to the successful bidders. The national electricity regulator (Superintendent of Electricity) will · Product quality have no direct involvement in specifying either maximum · Stability of voltage relative to targeted levels prices or quality-of-service standards during the 3-phase, · Stability of frequency relative to targeted levels 10-year IDTR program.82 However, the regulator was invited to evaluate the monitoring process of the program's · Service quality first phase--with the option of assuming regulatory · Targeted hours of service oversight in Phase Two of the program. · Number of interruptions, both planned and unplanned This is one of the first SHS programs that set performance · Duration of interruptions, both planned and targets for quality-of-service standards. The quality-of- unplanned service standards are mostly output-based, although · The safety of the system some standards in the bidding documents are based Two of the standards are less stringent than the standards for EJEDSA, the SHS concessionaire that is a fee-for-service operator in the 80 Argentine province of Jujuy. EJEDSA must respond to complaints in five workdays if the user is reachable by motorized vehicle and nine days if the user can be reached only by foot or donkey. The corresponding numbers in Bolivia are 10 and 15 days, respectively. Winning bidders have the flexibility of providing the service on a traditional fee-for-service basis as a concessionaire for three years or on a sale 81 basis (cash or credit) where the customer will own outright all of the SHS facilities right from the beginning. The SHS bid is the core component of the ongoing Bolivia IDTR project, which runs until 2008 and is part of a three-phase adaptable program 82 credit designed by the World Bank. The programmatic approach allows for long-term market development: if Phase One targets are met, funding for Phase Two will be triggered. See IDTR 2003b. Table 4. Quality-of-Service Standards for Solar Home Systems in Bolivia's IDTR Program STANDARD PENALTY OR INCENTIVE · Components and system must meet Operator needs to fix or exchange all technical input specifications. For systems that do not meet minimum instance, PV module output must be requirements, and pay a penalty to the PRODUCT at least 90% of name plate. user. QUALITY · Standards are measured (a) for the prototype of each system size and (b) in random in situ samples. · Minimum energy (defined as Ah at 17% of total subsidies will be paid (a) given voltage level) provided by the upon completion of each of the 4 visits system must meet minimum specified (3% per visit) and (b) in a final payment SERVICE for each system size. This translates upon satisfactory service up to year 4 QUALITY into minimum hours of appliance use. (5%). · Must make the mandated annual visit to customers during years 1­4, including user training. Must respond within 30 days to a request Will be fined US$2 for each day of 35 for new service. delay. Must respond to customer complaints Will be fined the number of days without COMMERCIAL within 10 days if reachable by road and service times the equivalent daily tariff QUALITY 15 days if not reachable by road. times a penalty factor (about one US$1 per day). No penalty if it was the customer's fault; customer pays visit. Must employ one local technician Payment of subsidies will require with spare parts for every 300 users. the establishment and training of independent and certified local technicians with spare part shops. Source: IDTR 2004. on input specifications. The rationale for input Monitoring specifications was that it was necessary to protect winning operators and customers from costly mistakes. The monitoring of quality-of-service performance will Because off-grid markets are new phenomena in most use a hybrid form of contracting out arrangements. developing countries, it was concluded that there was A Technical Control Unit (TCU) within the VMEEA, considerable risk that the winner of a minimum subsidy will be responsible for monitoring compliance with the bidding might be underinformed and might bid too prespecified quality-of-service standards and imposing small a required subsidy. The problem in such cases penalties when operators fail to meet the standards. is that these bidders would win, but then be unable to Two draft reporting forms have been created for monitoring perform as required (sometimes referred to as winner's purposes--a complaint form and an annual visit form. curse). If this happens, the winners would probably fail When a customer has a complaint about the performance financially, but consumers would also get hurt in the of the system, he or she must initially contact the operator. process, and SHSs would get a bad reputation in Bolivia. If communication problems exist, the user can also make To avoid such an outcome, all bidders were required contact through the municipal government authority. to offer SHSs that met certain minimum equipment The operator will then be required to log in the complaint specifications based on several national and international and put it in a Management Information System that can standards for PV systems.83 be audited for accuracy by the VMEEA or a contractor Norma Boliviana NB1056; IEC61215+60811; IEEE1262; PV-GAP PVRS5-8; EC-DGXVII THERMIE-B SUP 995-96.funding for Phase Two will be 83 triggered. See IDTR 2003b. hired by the VMEEA. These audits can be contracted out The three most common problems in operating an SHS to a private contractor who "will witness what he sees."84 are discharged or aged batteries, missing battery water To reduce costs, the contractor will perform the audit on a (except for sealed batteries), and blown fuses. All three sample basis (20 out of 1,000 customers). If the audit problems are frequently caused by user behavior. One finds that the operator failed to meet the specified solution is to put the PV module, the charge controller, quality-of-service standards, a larger sample may be and the battery completely outside the user's direct taken, and penalties would apply to the full 1,000 control.85 This solution, however, raises installation costs. customers in that sample. Prepaid meters are sometimes installed in combination with such tamper-proof systems.86 A second alternative Who Is Responsible? is to transfer ownership of the battery completely to the user, so that the user bears the consequences of poor The feasibility of implementing quality-of-service standards maintenance.87 A third option is to create a bonus system for SHSs depends critically on determining who was for users with long-lasting batteries. Such a bonus responsible for a given failure of the system. If the customer system creates financial incentives for the user to take is responsible, the operator does not pay any penalty. good care of the battery (for example, fill it with water at In off-grid systems, however, it is not always easy to make regular intervals and not discharge it completely by this determination. Unlike other electrification technologies, shunting the charge controller). The Bolivian IDTR 36 the components of the system that produce electricity project has chosen a variant of option three (for all are located within the customer's premises. In contrast, systems) with operators being allowed to decide about for most other forms of electricity production, the electricity options one and two. In the future, the battery charge is produced at facilities that are far from the customer's controllers may include a memory device to record user house, and the facilities are solely under the operator's behavior. This should help to resolve disputes over who physical control. was responsible for battery failures. The use of private contractors to monitor compliance with quality-of-service standards is not uncommon for connected and isolated utility 84 systems. See Trémolet, Shukla, and Venton 2004. Applied, for instance, in Morocco by a fee-for-service operator. 85 Although prepayment meters and "energy dispensers" for SHS and village PV systems have recently been applied in several pilot projects, 86 documentation of early lessons and costs is scarce. In the case of prepayment meters, the cost of establishing and maintaining the infrastructure for charging can be substantial. Quoted costs range from about US$30 to US$60 per prepayment meter, depending on sophistication and production size. See Fraunhofer Institute 2004 and Vallve 2000. This is obviously the case in all dealer models, but also in some fee-for-service models. 87 3. A MODEL LAW TO PROMOTE Going from Principles to Practices ELECTRIFICATION The lesson to be learned from past power sector Most electricity laws are not opposed to the principles reforms is that good intentions (increasing electricity presented in this paper. However, early electricity access) do not necessarily lead to good outcomes. reform laws are usually silent about electrification or, Regulatory principles need to be embedded in legal if electrification is mentioned at all, the law might include instruments. Therefore, a fundamental premise of this a general statement that increased electrification is a paper is that more explicit legal guidance needs to be worthwhile goal. Some recent electricity laws have gone given to national regulators and energy ministers on somewhat further. These "second generation" electricity how to promote electrification, whether it is grid or off- reform laws often create new rural electrification agencies grid, or rural or urban. Ideally, such guidance should that are tasked with giving technical assistance and be given ex ante in the new electricity reform law. If is administering a "rural electrification fund" to subsidize too late, however, because the law already exists and connection costs.88 However, even these second-generation would be difficult to amend, the next best solution is for laws usually pay little or no attention to how the rural the government to issue a decree that provides guidance electrification agency should interact with the electricity to the regulator on how to promote electrification. regulator to avoid duplication and delays. Nor is there Such guidance is necessary because most regulators will any guidance on whether the core regulatory tasks of be reluctant to pursue nontraditional regulatory approaches 37 setting maximum prices and minimum quality-of-service to promote electrification, unless they receive clear signals standard should be performed differently or by entities that such approaches are consistent with the government's other than the designated regulator. Quite often even electrification policies and are permissible under law. basic rules for financing these funds and disbursing the subsidies are not defined. As a consequence, Given the many forms of electrification, it would be implementation of the law is often slow and confused. dangerous to be overly specific, either in law or in decree, because too much specificity can easily lead to unintended Electrification--the Forgotten Child of Power consequences. But if guidance is to be of any practical Sector Reform value, it needs to go at least one level down from the general principles discussed so far in this paper. Therefore, Electrification is the "forgotten child of power sector we propose a set of seven "regulatory standards" designed reform" because most power sector reform laws focus to provide more detailed guidance to the regulator on improving the performance of existing state-owned and other government officials on what they should and utilities through restructuring, privatization, or a should not do in implementing the general principles.89 combination of the two, and the regulatory system The standards are intended to serve as a starting point needed to accomplish these outcomes. This emphasis for developing specific language that could be used in on reforming existing or new "main power grid" enterprises a primary law, a secondary law, or a degree. is neither surprising nor inappropriate. When existing state-owned enterprises are inefficient and poorly run, The approach embodied in the standards is enabling there is little that they can do to promote electrification, rather than prescriptive. Although the standards, which especially if the electrification strategy assumes that deal with issues of both regulatory governance and these enterprises will provide a major source of cross- regulatory substance, are more specific than the four subsidies for connecting new customers. principles discussed in this paper, the standards are still sufficiently general to apply across all forms of electrification. The standards are designed so that a regulator can "particularize" them for the different forms of electrification shown in table 1. Federal Republic of Nigeria, Energy Power Sector Reform Law, 2005, Part IX. 88 The standards presented in this chapter are incomplete in three ways. First, as noted earlier (footnote 16), a number of regulatory design issues 89 still need to be addressed in future research. Second, a model law would also need to cover the functions of any rural electrification agency and fund. Third, the standards would need to be converted to formal, legal language by a lawyer who is familiar with the legal system of a particular country. It is dangerous to assume that the legal language that works in a civil law country would work equally well in a common law country. Legal Standards for a Regulatory System That g. There should be specified procedures for appealing Will Promote Grid and Off-Grid Electrification the regulator's decisions. These procedures should identify the entity or entities that can receive appeals 1. Flexibility to allow other entities to act on its and the grounds for reviewing the regulator's decisions. behalf 2. Flexibility in regulatory methods a. In the interest of maximizing the use of limited government and regulatory resources to promote a. The regulator has the authority to vary its methods electrification, the regulator is explicitly authorized of regulation depending on the form of electrification to allow other entities, both governmental and and the type of entity that is providing the electrical nongovernmental, to act on its behalf in performing service, as long as the categories and methods are various regulatory tasks, such as (but not limited to) transparent. setting maximum tariffs and minimum quality-of- b. The regulator can allow for some degree of self- service standards. regulation where a community or cooperative b. The regulator has the authority to contract out (fully organization is providing the electrical service. or partly) regulatory functions if it believes that this c. The regulator should encourage associations of will lead to more efficient and timely electrification. electricity providers to develop technical and commercial 38 If the regulator chooses to designate other entities to standards of performance. act on its behalf, the regulator still has the ultimate d. The regulator should encourage suppliers and individual legal responsibility to ensure that these entities are or groups of consumers to negotiate direct agreements performing regulatory functions in a manner that is that cover the term and conditions of electrical service consistent with the law. with the presumption that the regulator will give c. The regulator is authorized to use other government considerable deference to these negotiated agreements entities (including, but not limited to, ministries, if the agreements are consistent with the regulator's electrification funds, subnational governmental bodies) general principles and standards. and other nongovernmental organizations (including, e. The regulator should adopt the minimum necessary but not limited to, community and cooperative amount of regulation to protect both consumers and organizations and associations of suppliers) to perform investors. Light-handed and simplified regulatory its regulatory functions. requirements should be employed in deciding the d. The regulator can enter into agreements with other nature and number of approvals that are required governmental and nongovernmental entities to perform and the type and amount of information that must be functions, such as gathering information and data, supplied. establishing rules, monitoring implementation of existing f. As a general rule, smaller entities should have fewer rules, and enforcing decisions. and simpler regulatory requirements. e. To ensure that efficient sharing options are considered, g. The regulator has the authority to grant temporary or the regulator is required to make a specific proposal permanent exemptions or waivers from regulatory for sharing of regulatory responsibilities that affect requirements if the regulator concludes that the costs electrification to the [energy] minister [or some other of regulation (both direct and indirect) would exceed specified official or entity within the executive branch] its benefits. no later than 18 months after the issuance of this law. The minister must accept, reject, or modify the proposal 3. Eligibility and authorizations within 90 days after it has been received. If the minister takes no action within 90 days, the proposal is deemed a. An electricity supplier can be a company, a partnership, to be accepted. Every two years the regulator is required an individual, a cooperative, or a subnational to make a new proposal to modify or retain the existing government body. sharing arrangements. b. In granting authorization to provide electrical service, f. The regulator, or any entity acting on behalf of the the regulatory authority should provide authorizations regulator, must render a decision to any petition within of sufficient duration and exclusivity to provide incentives a specified period. If the regulator, or the entity acting to the supplier to make investments that will lead to on its behalf, fails to render a decision within the specified improvements in the number and quality of connections. time, the petition is deemed to be accepted. c. The authorization should specify conditions that must government must publicly notify the regulator as to be satisfied so that some or all of the rights to supply how cost shortfalls are to be funded (for example, service can be transferred to other entities. cross-subsidies or government-provided subsidies). d. If there is an involuntary takeover of service (for example, replacing one supplier with another), 5. Providing subsidies the regulator should specify the principles that will be used in deciding whether the current supplier is a. The government, rather than the regulator, has primary entitled to compensation and at what level. responsibility for deciding the level of subsidies, the form of subsidies (subsidies to the enterprise, 4. Tariff setting subsidies to some or all consumers, or both) and the mechanism for funding subsidies (external budget a. The regulator has the authority to use different tariff- transfers, grants or loans, or cross-subsidies). The setting methods for different types of entities. For regulator has primary responsibility for periodically example, tariffs can be set using cost-of-service studies, informing the government as to how much the electricity price or revenue caps, tariff tables for groups of similarly service would cost with and without subsidies. situated electricity providers, and negotiated agreements b. The regulator should coordinate efficiently and between suppliers and individual consumers or groups transparently with any entity providing subsidies of consumers (such as a village, a municipality, or a (for example, an electrification agency or electrification 39 province). In addition, the regulator has the authority fund) to reduce subsidy delivery and regulatory to accept tariffs or tariff formulas that result from a compliance costs and to ensure that the subsidies bidding process where there has been adequate reach their intended beneficiaries. competition. The regulator also has the authority to c. If the government fails to deliver its promised subsidies, use benchmarks in setting tariffs. the regulator is authorized to raise the price of electricity b. In setting tariffs, the regulator should take account to reflect the shortfall after it attempts to resolve conflicts of grants or contributions received from government between the provider, users, and government. ministries, national or subnational electrification funds, d. One-time connection subsidies that reduce connection international donor organizations, or monetary or costs for the poor should be favored over ongoing in-kind contributions from customers. As a general consumption subsidies. rule, the level of tariffs should be reduced to take e. Targeted subsidies for particular classes of customers account of grants or contributions of labor while (for example, poor customers) are generally preferable recognizing that tariffs must recover the cost of untargeted subsidies that benefit all customers. future replacements of any capital equipment that f. The regulator should publicize the level, sources, is acquired, either partially or completely, through and beneficiaries of subsidies. grants or contributions. g. Where tariffs for electricity consumption are significantly c. The regulator should encourage technologies or subsidized (directly or indirectly through cross-subsidies billing arrangements that will allow consumers to or external subsidies), the regulator should try to control the amount and timing of their expenditures encourage actions (for example, subsidizing energy on electricity. conservation or placing physical limits on users' peak d. Whenever possible, the regulator should encourage loads or energy consumption) to minimize the efficiency the use of meters for consumption. If a meter is not losses that result from charging prices that do not technically or economically feasible, the regulator reflect the costs of supply. should take steps to ensure that the absence of metering h. The electrification agency should favor subsidies does not lead to wasteful consumption or operating that are given in return for performance (for example, problems on the supply system (for example, too much new connections by the supplier and payment of bills consumption during periods of constrained supply). by consumers). The regulator and the electrification e. Where there are variations in the costs of supply, the agency should coordinate the definition of appropriate regulator is not obligated to impose uniform tariffs performance indicators and align regulatory reporting unless publicly instructed to do so by the government. requirements and auditing procedures with the If the government concludes, as a matter of policy, corresponding rules for subsidy disbursement. that uniform tariffs are necessary and desirable, the i. Even when consumption is subsidized, consumers should h. Any penalties should be proportionate to the extent of always pay more for higher levels of electricity service, noncompliance and the costs likely to be incurred by such as more kilowatt-hours received and better quality the operator in meeting the standards. of service. If consumption subsidies are given, they i. Required improvements in quality of service should be should be limited to the amounts needed for basic synchronized, whenever possible, with proceedings to human needs. change tariffs. j. If quality-of-service standards are established and 6. Quality of service monitored by another entity within the government, the regulator should have the right to make a. The regulator should establish quality-of-service recommendations on these matters to this other entity. standards for product quality, service quality, and k. Given the dispersed and often isolated location of commercial quality. Product quality includes stability electrification projects, the regulator is encouraged to of voltage relative to targeted levels and stability of use other government and nongovernment entities to frequency relative to targeted levels. Service quality monitor a supplier's performance relative to these includes targeted hours of service, number of standards. interruptions (planned and unplanned) and duration of interruptions (planned and unplanned), and safety 6. Coordination with other government entities 40 of the system. Commercial quality includes connection time for new customers, accuracy in meter reading a. The regulator should enter into memorandums of (for customers whose service requires meter reading), understanding (MOUs) with other entities that are accuracy in billing, and response time to resolve promoting electrification, such as ministries and customer complaints. electrification funds. Such MOUs should clarify respective b. The regulator has the discretion to establish quality- roles and responsibilities and the sequence of needed of-service standards on an input and/or output approvals. The overall goal should be to streamline (that is, performance) basis. Whatever standards the regulatory process by minimizing unnecessary are established should be important to consumers, duplication and delays. controllable by the operator, and capable of being b. Any MOUs should be publicly available documents measured on a reasonably objective basis. so that consumers and potential suppliers of electrical c. The regulator has the discretion to phase in quality- service will have clear understanding of the of-supply standards over time, with reasonable grace responsibilities and processes of the regulator and periods. other entities that are promoting electrification. d. Quality-of-service standards need not be uniform across c. Two to three years after these standards are adopted, all customer categories, geographic areas, or forms the government should require an independent and of electrification. Whenever possible, the regulator publicly available evaluation of its electrification should encourage lower costs of construction. program, which should include an assessment of However, the regulator should recognize that lower the regulatory system as it affects electrification. costs of construction may lead to lower quality of service. e. In establishing quality-of-service standards, the regulator 7. Model documents must recognize that it is acting as an agent for consumers. In general, the regulator should not impose a. The regulator should encourage and assist in the input or output quality-of-service standards on a supplier creation and use of model documents by communities unless customers are willing and able to pay for at or organizations that seek to initiate or expand least some portion of the costs associated with meeting electrification. Such documents could include, for the standards and unless the standards are capable of example, model power supply agreements, model being monitored. subsidy contracts, and model bidding documents. f. Fewer standards that can be effectively monitored are b. Such documents should be used to particularize preferable to many standards that are poorly monitored. national regulatory policies for the circumstances and g. Whenever possible, consumers should be presented needs of individual communities. Whenever feasible, with a menu of service options ranging from the less the regulator should encourage and assist in the costly to the more costly. creation of model documents that will allow other entities to perform one or more regulatory functions 4. CONCLUSION on its behalf. This will have the benefit of economizing on the use of the government's limited resources. Our goal in writing this paper was to consider how c. The regulator should also employ such model economic regulatory systems could be designed to help documents to streamline the regulatory process. rather than hurt government and nongovernment initiatives to promote electrification. Electrification can be achieved with a variety of technologies and forms of ownership. Within the many possible forms of electrification, our focus has been on electrification by small, decentralized entities. Given this emphasis (and the fact that it has received little attention in the literature of regulation), much of the paper is devoted to addressing a single question: Are the regulatory approaches that are traditionally used in regulating large central utilities equally appropriate in regulating small, decentralized electricity providers? The answer is that some regulatory approaches are 41 common to large and small enterprises, whereas other regulatory approaches clearly need to be modified to accommodate the characteristics of small enterprises. For example, the principle that "quality-of-service standards must be realistic, affordable, monitorable and enforceable" is equally relevant for large centralized utilities and small decentralized providers (even if the principle leads to different regulatory answers when applied to these different suppliers). Similarly, the principle that a "regulator should be allowed to vary the nature of its regulation depending on the entity that is being regulated" is a sensible principle whether the entity that is being regulated is large or small, or connected or not connected to the main grid. However, the two other principles--the need for "light-handed regulation" and the ability to "delegate or contract out regulatory functions to other governmental or nongovernmental entities"--are clearly more relevant for small, decentralized providers than for large centralized providers. General regulatory principles are important because they provide direction for where one should be going. Principles are of little or no use, however, unless they can be operationalized. Translating principles into action requires that the principles be both legally and politically feasible. Legal feasibility requires supportive laws and decrees. The elements of the proposed model law represent an attempt to translate the general principles into more detailed regulatory standards. These standards would need to be modified for the specific requirements of a country's legal system. We did not attempt to create specific standards to achieve political feasibility, even though political feasibility is clearly important. Nothing will happen if a proposal is politically infeasible. However, the requirements for political feasibility are country specific, so they are much less amenable to general principles and standards. This paper does not pretend to provide all the answers on designing a complete regulatory system to promote electrification. For instance, our focus has been largely limited to off-grid electrification, which is typically associated with rural electrification of a remote or dispersed population. Further work needs to be undertaken on workable regulatory approaches to support electrification in periurban areas. In addition, a number of other general regulatory questions are not addressed in this paper. They include tariff levels and structures, coordination of tariffs with subsidies, regulation when 42 there are different forms of bidding (for example, for minimum subsidies, minimum customer connection charges or minimum tariffs), "regularization" of informal service providers, and "handoff" arrangements when the main grid connects to a minigrid. We hope to address these questions in future research. We conclude with one final word of caution. Even if all the principles and standards are satisfied, this in itself will not guarantee the success of an electrification program. Regulation is not a "magic bullet." As we noted earlier, regulation is a necessary condition, but not a sufficient one for the success of electrification initiatives. An electrification initiative will be sustainable in the long term only if costs are covered by a transparent combination of revenues and subsidies. 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