ENERGYWorkingNotes ENERGY AND MINING SECTOR BOARD NO.1 MARCH 2004 Funding of Energy Regulatory Commissions Elizabeth Kelley and Bernard Tenenbaum INTRODUCTION In the last 10 years more than 200 infrastructure the regulator is created outside the government. regulators have been established around the world. Instead, it implies independent decision making. Generally, the new regulators were created to An independent regulator is a regulator that can encourage private investment in infrastructure sectors make tariff and other regulatory decisions under that previously were almost entirely state-owned. In specified legal standards without getting the prior almost every instance, the stated goal was to create approval of a minister or prime minister.2 If a new regulatory entity that was independent and independence is the desired output, then the usually accountable and which regulated in a way that was recommended inputs are: transparent both to the enterprises that were being regulated and to their customers.1 It was hoped that · A clear legal mandate excluding ministerial new regulatory entities with these characteristics discretion. would lead to a "depoliticized" regulatory system-- · Appointments to the regulatory body on the one that would give confidence to investors while basis of professional criteria with restrictions providing protection to consumers. With the benefit on conflicts of interest. of 20-20 hindsight, it has become clear that creating · Protections from arbitrary removal during new regulatory institutions with these institutional and fixed terms. political characteristics is easier said than done. · Staggered terms that do not coincide with the election cycle. Consider, for example, the concept of · Ability to hire staff at above civil service salaries. independence. Independence does not mean that · Earmarked and secure funding.3 1 Bakovic, Tenenbaum and Woolf (2003) argue that these "institutional characteristics" are necessary but not sufficient for getting good sector outcomes (encouraging good commercial performance by regulated enterprises while protecting consumers from monopoly abuses) in many developing and transition economies. In countries with new commissions and difficult starting conditions (high losses, tariffs that do not cover costs, a corrupt or inexperienced judiciary), they recommend that the new regulatory entity be backed up with a "regulatory contract" that specifies the tariff setting system and effectively limits the regulator and government's discretion during the early years following a privatization. 2 Regulatory commissions are not the only governmental entities that are given decision making independence. In many countries, election commissions and central banks are often granted some degree of independent decision making authority. See Stern (2004). 3 See Smith (1997). Energy and Mining Sector Board · Infrastructure Network · The World Bank Group www.worldbank.org/energy Elizabeth Kelley is a research analyst in the Energy and Water Department (EWDDR) of the World Bank. Bernard Tenenbaum (btenenbaum@worldbank.org) is a Lead Energy Specialist at the World Bank. Before joining the Bank, he served as the Deputy Associate Director of the Office of Economic Policy at the U.S. Federal Energy Regulatory Commission. 2 Funding of Energy Regulatory Commissions In these working notes, we take a closer look at the representative sample. These were commissions last element: the funding of the regulatory commission. where we happened to have one or more Several recent surveys have been published that contacts. We called the commissions and describe, among other things, how regulatory spoke at length to various staff members and commissions are financed in developed and other individuals to obtain detailed information developing countries. In general, the surveys focus on how the commission is funded both in law on whether the regulatory commission is funded and in practice. from the government's general budget or from earmarked fees or taxes. While these surveys are 2. Recommended Practices. Based on a review helpful in providing the "big picture," they often do of funding practices for these 8 commissions not go deep enough and therefore can lead to and our own experiences, we then developed faulty assessments. Even if a commission's funding a list of recommended practices. The list is comes from sources outside the government's inevitably subjective and we would welcome general budget, its funding cannot be viewed as comments on whether some practices should secure if the government also has the legal right to be eliminated or modified and whether others divert some or all of the outside funds for other should be added. government needs. One needs to take a close look at the budget approval and disbursement processes 3. Scoring. We assigned point values to each of in addition to the sources of funding to make an the recommended practices based on our accurate assessment of whether the commission's assessment of their relative importance. We financing supports independent decision making. used these point values to score the funding practices of the energy regulatory commissions In these notes, we have attempted to "drill down" in California and Bulgaria. deeper in analyzing the financing of regulatory commission. Specifically, we tried to assess how The recommended practices are intended to be funding, budget approval and disbursement practices "best practices" for the financing of regulatory might affect regulatory independence. Our goal was commissions. We think that it should be possible to to go beyond producing another cross-country develop similar lists of best practices for other comparison of regulatory practices. In particular, we regulatory practices such as appointments, hiring wanted to see whether it might be possible to produce and transparency. And then once these best a checklist of recommended funding practices to practices are defined, it should be feasible to achieve both independence and accountability and develop a system of overall rankings of the whether these practices could then be used to institutional design of regulatory commissions. produce ratings of commission funding procedures. These notes are a "status report" on our current We used a three step process: thinking. Therefore, they should be viewed as a "work in progress." We would welcome 1. A Mini-Survey. We picked a sample of comments and criticisms from colleagues within 8 energy regulatory commissions around the World Bank and from interested individuals the world. This was not meant to be a around the world. Energy Working Notes 3 How Do Energy Regulatory Commissions Get Funded? Funding Models in the U.S. and in Emerging Markets* U.S. STATES F U N D I N G S O U R C E S BUDGET APPROVAL CALIFORNIA The basic programs of the Commission and most of its staff are funded through a sur- The state legislature has the authority to approve the charge on electricity consumption. State law directs electric utility companies to gather a Commission's budget each year as part of the state budget California Public Utilities state energy surcharge of two-tenths of one mil ($0.0002) per kilowatt/hour (kWh) of process; the governor's approval is also required for the Commission (CPUC) / electricity consumed by all electrical customers. These funds are segregated in the state approved budget to become effective. Due to recent budget California Energy treasury as the Energy Resources Program Account (ERPA). For an average house- crises, some of the excess funds from the ERPA account (those Commission * hold that consumes 600 kWh of electricity per month, the contribution to ERPA is about funds in excess of the Commission's budget) have been rolled 12 cents per month or $1.44 per year. over to the state treasury for general government use. This Budget: extraordinary transfer of excess monies from state funds, all of $334 million The state Board of Equalization, the taxing authority, is responsible for collecting the which are deemed fungible, has occurred only in times of finan- ERPA funds and auditing utilities. The funds collected from ratepayers go into the ERPA cial crises. The most recent instance of such a transfer, in 2001, account, but the Commission is able to withdraw only the amount of funds approved by was attributed to the severe fiscal problems faced by the state, the legislature. Excess funds (beyond the amount approved for the Commission's budg- and is not a regular occurrence. Such a transfer of funds last et) remain in the ERPA account and earn interest; however, on average, only about 1% occurred in the early 1990s, during a similar fiscal crisis. of the total budget amount remains in the account from year to year (the rest being spent during the budget year), and this excess has no impact on the surcharge assessed on ratepayers. The Commission also manages another source of specific funding, a public goods charge comprised of funds collected by investor-owned utilities for renewable energy, research and development, and other federal and state funds for specific programs. In extraordinary circumstances, the state legislature can also provide emergency funds ­ such as for the energy crisis of 2001. However, any funds allocated to the Commission must be approved as part of the normal budget process or via extraordinary legislation, and must be signed by governor. * The California Public Utilities Commission regulates privately owned electric, telecommunications, natural gas, water and transportation companies, while the California Energy Commission is the state's primary energy policy and planning agency. The Energy Commission's responsibilities include forecasting future energy needs and keeping historical energy data, licensing thermal power plants 50 megawatts or larger, promoting energy efficiency through appliance and building standards, developing energy technologies and supporting renew- able energy, and planning for and directing state response to energy emergencies. 4 Funding of Energy Regulatory Commissions How Do Energy Regulatory Commissions Get Funded? Funding Models in the U.S. and in Emerging Markets* U.S. STATES F U N D I N G S O U R C E S BUDGET APPROVAL FERC (Federal) FERC regulates only interstate wholesale power sales and transmission service. It does Budgets are submitted first to the Office of Management and not regulate sales to end use customers. Budget (OMB is part of the executive branch), which has the Federal Energy authority to cut the budget. Congress then has the power to Regulatory Commission The Commission's regulations provide for payment of annual charges by public utilities; approve or reject the final budget as part of the overall govern- the amount of these annual charges is intended to cover the program costs for that fis- ment budget process. FERC has generally received full funding of Budget: cal year, with no remaining funds. These charges are adjusted accordingly each year to the amounts submitted to Congress in recent years. However, in FY03: $192 million reflect actual costs incurred. 1999, the budget was cut by approximately $2.5 million, or 1.4%. For the electricity industry, the total related program costs are assessed proportionally Political issues and funding among public utilities that provide transmission service. Annual charges are calculated Although FERC is a program revenue agency that does not rely based on the proportion of the MWH of electricity transmitted in interstate commerce by on tax dollars, its budget remains subject to approval by both each public utility to the sum of MWH of electricity transmitted in interstate commerce the executive and legislative branches ­ OMB and Congress. by all public utilities being assessed annual charges. Similar formulas are used to The Congressional approval process renders FERC susceptible to determine the annual charges assessed to regulated entities in the hydropower, gas, political considerations, as policy prescriptions can be added to and oil sectors. the budget bill, or approval of FERC's funding can be used as a bargaining chip to achieve political objectives. One example of The annual charges are collected directly by FERC, which then turns over the funds to this is the issue of Standard Market Design for wholesale elec- the U.S. Treasury Department. The Treasury in turn allots the total budgeted funds tricity markets, a policy strongly opposed by some states. The (equal, in theory, to the amount of funds collected from annual charges) to FERC. Any 2003 energy bill would prohibit FERC from implementing its excess funds beyond the budgeted amount are rolled over to the FERC budget for the proposed Standard Market Design until 2007. following year. The converse of this political influence is the fact that, due to its Regulated entities are permitted by FERC to recoup the costs of the annual charges small size and technical subject matter, FERC is rarely the object through the rates charged to distribution companies and electric utilities that they serve. of Congressional scrutiny or concern. Further, because FERC is a The formula for calculating this rate increase must be approved by FERC to ensure that program revenue agency, Congress has no incentive to reduce the increase covers only the cost of the annual charge. its budget. Previously, FERC was funded through user fees, charged for filings submitted by regu- lated companies ­ e.g. an application for a rate increase incurred a fee of $55,000. Under this funding scheme, hundreds of types of user fees were levied on regulated entities. There are now only six types of users fees, which together represent less than 5% of FERC's total budget. The previous funding mechanism also included a charge on wholesale power sales. Original sales as well as resale sales were subject to these charges, so double charging of wholesalers was an issue. Energy Working Notes 5 How Do Energy Regulatory Commissions Get Funded? Funding Models in the U.S. and in Emerging Markets* (continued) U.S. STATES F U N D I N G S O U R C E S BUDGET APPROVAL WISCONSIN Like FERC and the California Energy Commission, WPSC is a program revenue agency The total state budget, which includes WPSC's budget, is as opposed to a tax-revenue agency; the Commission assesses fees on regulated enti- approved biannually by the state legislature. The remainder Wisconsin Public Services ties, and uses no tax dollars. The WPSC is funded through direct billing of regulated assessment is automatically set at 10% higher than the previ- Commission (WPSC) entities plus a remainder assessment (to cover unbilled costs) based on the previ- ous year's level, as mandated by the state legislature. ous year's gross revenues of the regulated entities. The relative percentages of the Budget: direct charges and the remainder assessment in the total budget are approximately 40- Due to state funding deficits, the budget has been reduced in $22.4 million (FY03) 60. Any excess funds in the remainder assessment at the close of the fiscal year are recent years, by a total of about by 5-10% over this period. The rolled over to the next year's year's account. state has used a "cash lapse" mechanism for reducing the budget of program revenue agencies. This involves transferring Staff time is billed directly to the case ­ and utility ­ in question. The hourly billing a given sum from the Commission's cash reserves to the state rate is calculated for each staff person based on salary, plus a current fringe rate of budget; the Commission then reduces its budget to compensate 35%, plus a weighted overhead rate of 75% of the salary (for an average hourly for this loss, and utilities (ratepayers) are not billed for this billing rate of $80 salary, $28 fringe, and $60 overhead, or $168 total.) . Staff time is "lapsed" amount. billed on every case including construction cases, investigations and litigation of cases after commission decisions. The remainder assessment comprises the portion of the Comment from the Budget and Intervenor Office: "On the budget not collected on direct basis, but spent by the commission on other regulatory whole, the PSC, prior to the recent budget problems of the last actions. These are expenses are not covered in any discernable way ­ i.e. not directly two fiscal years, has been fairly insulated from budget reduc- billable to a specific case. tions. In Wisconsin all agencies are subject to "chapter 20" under which the legislature and governor establish the total Cost recovery for utilities: The utilities are allowed to recover the costs of the PSC allocation for each state agency regardless of funding source. charges in rates. The recovery is monitored for the majority of large utilities as part of These base budgets can only be modified by requesting emer- the annual rate case process, which all major electric and gas utilities (covering 75-80% gency relief from the legislature's Joint Finance Committee of the market) must submit. (Smaller utilities, such as municipal utilities, are required between biennial budget periods. In some states the PSC or to submit rate cases only when requesting changes in their rates.) PUC is not constrained by any set limit imposed by the legisla- ture. These are, in effect, sum-sufficient operations that collect Additional Funding: Some additional programs, such as research and programs to funds based on what the agency itself determines as the manage stray voltage (a major issue for farms, as it can have a significant affect on amount needed to operate each year. This type of model would milk production) are funded by the five largest electric utilities. This arrangement was not be acceptable in Wisconsin because the legislature would mandated by the state legislature, as most farms are based in the service areas of the never relinquish oversight of operating budget limits." [Note: five largest electric utilities. Federal matching funds, for initiatives such as the gas We have not yet been able to track down examples of such pipeline safety program, also contribute to the total budget. states.] 6 Funding of Energy Regulatory Commissions How Do Energy Regulatory Commissions Get Funded? Funding Models in the U.S. and in Emerging Markets* (continued) COUNTRY F U N D I N G S O U R C E S BUDGET APPROVAL TURKEY EMRA is financially and administratively independent. It has its own revenues and its The budget is currently not subject to government approval. own budget. Sources of funding include: However, a new law under consideration would affect adminis- Turkish Energy Market a) Fees collected for license applications, renewals, modifications, license copies and trative and budget issues for all regulatory agencies, and could Regulatory Authority annual license fees. require government approval of budgets. This draft law is cur- (EMRA) b) Publications and other revenues. rently being amended. .] c) Grants extended by international organizations and institutions to finance studies Budget: and projects relating to development of market, provided the details of such grants are $4.7 million (2002) made public. d) 25% of the administrative fines imposed by the Board. e) Transmission surcharges equal to one percent of the transmission tariff at most. EMRA was established in 2001, and market opening (the beginning of the licensing process) was in September 2002. The review and evaluation process will take some time, and until it is completed, applicants only pay 1% of the license fees. A provision in the law stipulates that resources for EMRA's budget should be transferred from the general budget, and hence Treasury, until EMRA is able to support itself through rev- enues. For this reason, Treasury support currently accounts for 56% of the total budget. This picture is expected to change when the 2003 budget figures are published, as regu- lated entities began paying full licensing fees in 2003. All existing state-owned and pri- vate generation facilities applied for licenses in 2003. Several fees in relation to licenses also came into effect, namely, licensing fees (first-time licenses, based on installed capacity), annual license fees (based on kWh of electricity generated per annum), license renewal fees, license modification fees and license duplication fees; plus several license types (transmission, distribution, retail and wholesale). Licensing fees are approved by the Energy Market Regulatory Board, as is the overall EMRA budget. Board members are selected and appointed by the Council of Ministers, and are responsible for oversight and enforcement of the EMRA law. Energy Working Notes 7 How Do Energy Regulatory Commissions Get Funded? Funding Models in the U.S. and in Emerging Markets* (continued) COUNTRY F U N D I N G S O U R C E S BUDGET APPROVAL BULGARIA Although it collects licensing fees from regulated entities, SERC is officially funded The national Parliament has powers of approval over the state through the state budget. That is, while its funding source is licensing fees, SERC's budget (including SERC's budget) as proposed by the Ministry Bulgarian State Energy budget is still considered part of the state budget, and it must be approved by both the of Finance. Parliamentary approval of the budget has not, in Regulatory Commission Ministry of Finance and the Parliament. recent years, been controversial. The president, who in this (SERC) Parliamentary republic has little power, does not have authority The Commission collects licensing fees and renders all excess income beyond the level of to approve the budget. The Ministry of Finance can and does, Budget: its budget to the state treasury, where it is used for general purposes. SERC's budget is however, amend the budget proposed by SERC, often resulting LV1.7 million, or calculated based on salaries (from a fixed scale for civil servants), equipment, and over- in a lower final budget. $0.93 million (2003) head, with no provisions for international travel. According to one source, the SERC is considered a state entity, In previous years, SERC has collected more than twice the amount of its budget in as noted by both its title and its funding mechanism. It is thus licensing fees, and the remainder was returned to the state treasury. Current law stipu- not a independent body, according to the source. Other sources lates that in instances like these, when the difference in income and budget allocation is disagree and maintain that SERC does enjoy quasi- independ- above a certain percentage, the Commission must propose changes to the licensing fees ence, despite its funding arrangements. to reduce the difference. The state Council of Ministers serves as the approving body for all licensing fee proposals from the Commission. Licensing fees (initial and annual fees) are collected biannually from all regulated enti- ties, and the fee amount is calculated according to installed capacity of the utility. Utilities recover the costs of these fees through the tariffs charged to consumers, and approved by SERC. While SERC's funding is currently under consideration in the pending Energy Act, the draft law maintains the central features of the current funding mechanism. Licensing fees would remain the principal source of funding, and fees in excess of the budget would be rolled into the state budget, as under the current law. 8 Funding of Energy Regulatory Commissions How Do Energy Regulatory Commissions Get Funded? Funding Models in the U.S. and in Emerging Markets* (continued) COUNTRY F U N D I N G S O U R C E S BUDGET APPROVAL GHANA Currently, virtually the entire Commission budget is financed through the central The Commission's annual budget is submitted to Ministry of government budget with some donor assistance. Additional sources of funding include Finance through the Office of the Chief of Staff which Public Utilities consultancy fees, fees for Commission publications e.g. rate setting guidelines, penalties approves/recommends it to Ministry of Finance. After Ministry Regulatory Commission for failure to meet operational benchmarks. of Finance approval, the Minister must obtain Parliamentary (PURC) approval for his total budget of which the PURC budget forms Fines imposed as a result of prosecution of crimes by utilities are paid through the law a part. Thereafter, disbursement of the final figure approved courts into the consolidated fund and are not available to the Commission. by Parliament is effected through the central treasury. Although PURC is operationally independent, it is administratively under the Office of the Once approved, the budget is generally secure and not usually Chief of Staff within the Presidency. cut. On rare occasions, the amount actually disbursed falls short of the approved amount. After the approvals, the Commission The Ministry of Finance usually sets a budget ceiling with respect to the Commission's must apply to the Ministry of Finance periodically for disburse- budget request. Parliament does not impose a budget ceiling, although it may debate ment of a range of budget items; some specific budget items the budget and request charges. must be approved on a case-by-case basis. There are currently no charges imposed on regulated entities. It has been widely The differential between approved and actual may be acknowledged that the introduction of a regulatory charge would help to guarantee attributed to the overall Government budget/financial outlook an independent and sustainable source of funding. The proposal was submitted to the rather than targeting of the Commission. government some time ago, but the necessary approval is yet to be granted for the implementation of the concept. Occasional increases in the budget have been allocated through Ministerial interventions as a supplementary vote. BRAZIL ANEEL is authorized to collect a fee of 0.5% of electricity revenues from regulated enti- ties. In the past year, however, the government has siphoned off up to 50% of these Brazilian Electricity funds for general use. This transfer of funds has been well-documented. Regulatory Agency [Additional information forthcoming.] (ANEEL) INDIA The expenses of CERC including all salaries and allowances payable to, or in respect of, CERC is subject to periodic financial audits by the Auditor- the Chairperson and the Member of the Central Commission are charged to the General. It also prepares an annual report detailing its activi- Central Electricity Consolidated Fund of India. ties, and submits this report to the government. Regulatory Commission (CERC) CERC prepares its budget for the each fiscal year, showing the estimated receipts and expenditure of the Commission, and submits it to the Central Government. [Additional information forthcoming.] * The material presented here was collected from interviews with commission staff, commission websites, and laws pertaining to the structure of the particular commissions. The opinions expressed in this table are those of individuals within or associated with the commissions. Energy Working Notes 9 RECOMMENDED PRACTICES FOR regulatory staff per million served customers was 59 FUNDING ENERGY REGULATORY in developing countries and 15 in developed COMMISSIONS countries (Domar, Pollitt and Stern, 2002). Levels of Funding Sources of Funding 1. The level of funding should be adequate to allow 1. The commission should receive its funding from the Commission to perform its assigned tasks. fees, charges and utility specific taxes rather than There are no hard and fast rules for determining from general government budget allocations. what constitutes an adequate level of funding. a. If there is a utility specific tax, it should be a. In general, the funding needed by a imposed on some measure of utility revenues commission will depend on: the number of rather than on profits. A utility specific tax is tasks it performs, the number of enterprises defined as a tax imposed by the government that it regulates, the number of customers that and with the collected revenues earmarked to they serve, the frequency of tariff proceedings, support the regulatory commission. the extent to which the details of the b. The commission may also fund its activities regulatory system have been pre-specified through fees and charges that it imposes on and the complexity of the sector structure. regulated enterprises. The commission should b. For example, most states in India currently have the discretion to choose the mix of charges establish retail tariffs on an annual basis. In and fees that it will use to fund its budget. The contrast, the Chilean regulator resets retail charges can be for specific regulatory actions: tariffs every 5 years. As a consequence, the the issuance and maintenance of licenses, the Chilean regulator will need a smaller staff processing of tariff filing applications, etc. The than his Indian counterpart. Similarly, a fees can also be on some measure of enterprise regulator that is regulating a centralized size and energy sales measured on a total market and an open access transmission revenue or kWh sales basis. regime will need more resources than a c. It may be necessary for a new regulatory regulator that is responsible for setting the commission to receive a portion of its budget tariffs of a single vertically integrated company. from the national treasury during the first few years of existence. The law establishing the 2. There are economies of scale in regulation. The commission should limit the number of years regulatory issues that must be examined (e.g., during which national budget funding will be allowed rate of return, tariff structure, establishment accepted, so that a transition to self-funding of performance targets) are largely the same (from the sources listed above) will be achieved. regardless of whether the resulting tariff is for 100,000 or 1,000,000 customers. Therefore, small 2. The fees, charges and utility specific taxes should countries are at a regulatory cost disadvantage be paid by the regulated energy enterprises or because the fixed costs of regulation must be their customers. spread across a fewer number of customers. One a. If the fees, charges and utility specific taxes recent survey found that the average number of are paid by the regulated energy enterprise, 10 Funding of Energy Regulatory Commissions then the enterprise should have the legal right date, then the commission's budget allocation to recover these regulatory costs in its tariffs. should automatically be set equal to the previous year's budget or to another pre- 3. The fees, charges and utility specific taxes should specified minimum level. go directly to the commission or to a designated trust fund account rather than to a general 3. Neither the executive nor the legislative branches government account with re-allocation to the of government should have the right to transfer commission. funds earmarked for the commission to other government functions. 4. If there is a surplus of funds resulting from the different funding sources, some portion of the Penalties surplus should be retained in a reserve account that can provide funding for the commission in 1. The commission should have the legal right to future years. If the fund grows too large (e.g., impose penalties on regulated power enterprises. equals more than 10% of the commission's annual budget), then the surplus should be 2. The commission should not be allowed to use returned to the regulated enterprises or their penalties to augment its own budget. customers. The surplus funds should not be transferred to the government's general budget. 3. If a utility fails to meet a pre-specified performance standard relative to an individual Approval of Budgets and Fees customer, any associated penalty should go directly to the affected customer. If this is not 1. The executive and legislative branches of the feasible or the penalty is not associated with the government must have the right to review the utility's performance relative to a specific commission's funding levels. However, the customer, then the penalties should go into a commission must be protected from budget cuts fund that reduces tariffs for all customers, motivated by a political reaction to unpopular subsidizes the tariffs of poor customers or provides commission decisions. for other energy-related public benefits (e.g., subsidizing electrification or renewable energy). 2. The commission can be protected from politically motivated budget cuts in two ways: 4. In general, penalties should stay within the a. The law should specify that the commission's energy sector (though not for funding the budget must guarantee a minimum funding commission's budget) rather than going into a level. This funding floor could be based a general government budget. specified charge per connected customer or per kWh sold. It would provide partial protection to the commission if it makes a politically unpopular decision. b. If the government or the legislature does not act on the requested budget by a specified Energy Working Notes 11 Review of Expenditures and Performance c. The report of the panel should be made public when it is submitted to the legislature. To ensure 1. In return for receiving more funding that the assessment is genuinely impartial (i.e., independence than a normal government is not biased in favor of the regulator or those agency, the commission must be held who are opposed to the regulator), the panel accountable for its expenditures and should also include international regulatory performance. experts from outside the country. 2. Expenditures--Like any government entity, the commission's expenditures should be reviewed for prudence and efficiency. However, the commission must have the clear legal right to pay salaries above normal government salaries and to hire outside consultants to assist it in performing its regulatory functions. The audit should be performed by an independent and professional audit entity. 3. Performance--The performance of the commission should be reviewed every three to four years by a committee of the legislature. There should be a legal requirement to perform this assessment so that the regulator and ministers know that the design and implementation of the regulatory system will be assessed on a regular basis. a. The starting point for this assessment should be a written report of a panel of outside, independent experts. b. The mandate of the panel should be to review the functions and authorities of the commission in light of legislative and government energy policy goals, the division of responsibility with other government entities, transparency of the commission's processes, adequacy of legal and other protections to ensure the commission's independence, adequacy of measures to minimize corruption, clarity and specificity of the tariff setting system and predictability of commission decisions. 12 Funding of Energy Regulatory Commissions Energy Regulatory Commission Funding: A Scorecard CALIFORNIA: California Public Utilities Commission C H A R AC T E R I S T I C S C O M M E N T S SCORING Funding source: Fees or charges imposed on the regulated entities or State law directs electric utility companies to gather a state energy sur- 5 consumers constitute at least 50% (in developing countries) or 75% (in charge of two-tenths of one mil ($0.0002) per kilowatt/hour (kWh) of developed countries) of the commission's funding. (+5) electricity consumed by all electrical customers. The commission has the discretion to choose the best mix of charges and This is determined by state law. 0 fees to fund its budget. (+1) The fees or charges are paid directly to the commission or into a desig- The state taxing authority collects and disburses the funds. 0 nated trust fund. (+2) If the fees or charges are paid by regulated energy enterprises, these N/A (Fees are charged directly to consumers.) 0 enterprises have the legal right to recover these costs in its tariffs. (+1) Transfer of funds: Neither the executive nor the legislative branches of No. The legislature can, at its discretion, transfer excess funds from the 0 government have the right to transfer funds earmarked for the commis- ERPA account (those funds that are in excess of the budgeted amount) sion to other government functions. (+3) to the state budget. In recent years, this has happened only during budget crises. Budget approval: The legislature and/or executive have the authority Yes. The state legislature is has the authority to approve the Commission's 2 to approve the commission's operating budget. (+2) budget each year as part of the state budget process; the governor's approval is also required for the approved budget to become effective. Budget delay: If either the government or legislature do not act on the No. 0 requested budget by a specified date, then the commission's budget allo- cation is automatically set at least equal to the previous year's budget, or to another pre-specified amount before the beginning of the fiscal year. (+2) Funding floor: The law governing the commission's funding establishes Yes. The surcharge on consumer electricity bills is written in state law. 2 a specified charge per connected customer, KWH sold, or gross revenues from activities regulated by the commission. This floor provides partial protection for the commission's budget should the commission make a politically unpopular decision. (+2) Penalties: The commission may not use penalties to augment its own No. 0 budget. (+1) Penalties are directed to affected consumers or to public goods programs Unclear. for the energy sector. (+1) Performance Review: There is a legal requirement that the perform- No and yes. Although there are performance reviews of individual pro- 1 ance of the commission be reviewed every three to four years by a com- grams run by the Commission, there is no provision for a comprehen- mittee of the legislature. This review is based on a report by an inde- sive review of the Commission's performance. pendent panel, including international regulatory experts from outside the country. The final report is made public. (+3) Audits: The commission's expenditures are subject to regular audits Yes. 2 (either scheduled or unscheduled) by external, independent experts from within or outside the government. (+2) The audit report is made public when it is submitted to the legislature. (+1) Yes. 1 Total Score 13 of 29 Energy Working Notes 13 Energy Regulatory Commission Funding: A Scorecard BULGARIA: Bulgarian State Energy Regulatory Commission (SERC) C H A R AC T E R I S T I C S C O M M E N T S SCORING Funding source: Fees or charges imposed on the regulated entities or SERC is funded 100% from the state budget. 0 consumers constitute at least 50% (in developing countries) or 75% (in developed countries) of the commission's funding. (+5) 0 The commission has the discretion to choose the best mix of charges and No. fees to fund its budget. (+1) The fees or charges are paid directly to the commission or into a desig- Licensing fees are paid directly to SERC, but excess funds are transferred 2 nated trust fund. (+2) to the government thereafter. If the fees or charges are paid by regulated energy enterprises, these Yes. 1 enterprises have the legal right to recover these costs in its tariffs. (+1) Transfer of funds: Neither the executive nor the legislative branches of No. All excess funds (beyond the level of the commission's budget) col- 0 government have the right to transfer funds earmarked for the commis- lected by SERC are transferred to the general budget. sion to other government functions. (+3) Budget approval: The legislature and/or executive have the authority Yes. The national parliament has the authority to approve the Commission's 2 to approve the commission's operating budget. (+2) budget each year as part of the budget process; the president's approval is not required for the approved budget to become effective. Budget delay: If either the government or legislature do not act on the No. 0 requested budget by a specified date, then the commission's budget allo- cation is automatically set at least equal to the previous year's budget, or to another pre-specified amount before the beginning of the fiscal year. (+2) Funding floor: The law governing the commission's funding establishes No. While SERC collects licensing fees directly, it can only use the budget 0 a specified charge per connected customer, KWH sold, or gross revenues amount allocated to it. The budgeted amount could thus be significantly from activities regulated by the commission. This floor provides partial lower than the collected fees. protection for the commission's budget should the commission make a politically unpopular decision. (+2) Penalties: The commission may not use penalties to augment its own False. 20% of fees from penalties go to SERC's budget (the remaining 0 budget. (+1) 80% go to the government budget). Penalties are directed to affected consumers or to public goods programs No. The fees are not allocated to specific purposes or programs in the 0 for the energy sector. (+1) SERC or government budget. Performance Review: There is a legal requirement that the perform- No. The Commission submits an annual report, prepared by staff and 0 ance of the commission be reviewed every three to four years by a com- Commission, to Parliament. However, the report is not prepared by mittee of the legislature. This review is based on a report by an inde- independent experts. pendent panel, including international regulatory experts from outside the country. The final report is made public. (+3) Audits: The commission's expenditures are subject to regular audits No audit of financial performance is required. 0 (either scheduled or unscheduled) by external, independent experts from within or outside the government. (+2) The audit report is made public when it is submitted to the legislature. (+1) N/A. 0 Total Score 5 of 29 14 Funding of Energy Regulatory Commissions SELECTED BIBLIOGRAPHY Backovic, Tonci, Bernard Tenenbaum, and Fiona Prayas, Energy Group. "A Good Beginning But Woolf. "Regulation by Contract: A New Way to Challenges Galore: A Survey Based Study of Privatize Electricity Distribution?" World Bank Energy Resources, Transparency, and Public Participation in and Mining Board Discussion Paper Number 7, Electricity Regulatory Commissions in India." May 2003. February 2003. Brown, Ashley C., and Ericson De Paula, "Strengthening of the Institutional and Regulatory Smith, Warrick, "Utility Regulators: The Structure of the Brazilian Power Sector." 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Disclaimer The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent.