Publication: Regulation by Contract : A New Way to Privatize Electricity Distribution?
In with the performance of recently privatized electricity distribution companies. Governments complain that tariffs have increased without visible improvements in service. Investors contend that they have not earned reasonable returns on their investments. Both sides often express dissatisfaction with the new independent regulatory commissions established at the time of privatization. In particular, investors argue that the commissions have not lived up to their commitments and almost always side with consumer interests. Some investors claim that the design of the new regulatory system in many developing and transition economies is fundamentally flawed. They often recommend that independent regulatory commissions be supplemented or replaced by more explicit "regulation by contract." This paper examines whether regulation by contract or a combination of regulation by contract and regulatory independence would provide a better regulatory system for developing countries that wish to privatize some or all of their distribution systems. The paper: Describes the key characteristics of regulation by contract as it has been implemented in several developing countries Focuses on how regulatory contracts in several countries handle certain key issues (pass-through of power-purchase costs, foreign exchange fluctuations, loss reduction and the obligation to serve) Describes the strengths and weaknesses of different approaches for dealing with disputes that inevitably arise in the application of regulatory contracts Compares and contrasts some recent experiences of distribution entities in Latin America and India. Examines some of Brazil's recent problems that may have arisen because Brazil adopted a flawed variant of regulation by contract. The paper concludes with a discussion of some lessons that can be learned from the experience of several countries.
“Bakovic, Tonci; Tenenbaum, Bernard; Woolf, Fiona. 2003. Regulation by Contract : A New Way to Privatize Electricity Distribution?. World Bank Working Paper;No. 14. © Washington, DC: World Bank. http://openknowledge.worldbank.org/entities/publication/80f5eb94-0330-5f32-8fd8-6084b8abc45a License: CC BY 3.0 IGO.”
Other publications in this report series
PublicationBank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries(Washington, DC: World Bank, 2003)This report reviews loan classification and provisioning practices in a broad sample of countries that differ in size, location and level of financial development. The survey conducted for the report compares the regulatory approaches adopted by industrial and emerging economies, and is intended to complement other sources of information that focus exclusively on either industrial or developing countries. It covers classification of individual and multiple loans, treatment of guarantees, collateral and restructured loans, bank loans review processes, loan loss provisioning, tax treatment of loan loss provisions, disclosure standards, and external auditors' role. Differences in provisioning and classification approaches have often made difficult a comparison of bank and banking system weaknesses across regulatory regimes. Poor classification and provisioning practices have led to solvency ratios that gave a false sense of security, as occurred when seemingly adequately capitalized financial systems failed in the 1990s. Successful regulatory harmonization therefore requires a set of minimum standards for loan classification that is grounded in sound risk management practices, but that is also sufficiently general to recognize differences in national economic and legal environment. The evidence this report provides is intended to contribute to this difficult task.
PublicationPrivate Participation in Infrastructure in China : Issues and Recommendations for the Road, Water, and Power Sectors(Washington, DC: World Bank, 2003)Infrastructure has played a major role in China's rapid development. Over the past decade the road network expanded by more than 40 percent, water production grew by more than 50 percent, and China has become the world's second largest energy producer. However, foreign direct investment in infrastructure accounts for a small share of foreign direct investment flows and for only 10 percent of total investment in infrastructure. Meeting the demand for cheaper, more reliable, and more efficient infrastructure services will require more than US$75 billion a year over the next decade. Increasing the participation of the private sector, domestic and foreign is an obvious policy option. Public-private partnerships can reduce the fiscal subsidies on public agencies and improve the targeting of subsidies to poor people, students, the elderly and other disadvantaged groups. This report reviews China's current framework for private participation in infrastructure. It also compares China's experiences with those of other countries, providing legal, regulatory, and financial framework recommendations as well as sector-specific suggestions.
PublicationAgriculture Non-Point Source Pollution Control(Washington, DC: World Bank, 2003-06)The Chesapeake Bay is the largest and historically most productive estuary in the United States. It is approximately 200 miles long and 35 mile wide at it broadest point. The Bay's watershed includes parts of six states (Delaware, Maryland, New York, Pennsylvania, Virginia, West Virginia, and the entire District of Columbia. This area encompasses 64,000 square-miles, 150 major rivers and streams and has a population of 15.1 million people. It receives half of its water from the Atlantic Ocean; the rest from rivers, streams and groundwater sources. Fifty percent of the freshwater coming into the Bay comes from the Susquehanna River, which starts in New York State and flows through Pennsylvania and Maryland. The Chesapeake Bay supports 3,600 species of plants, fish and animals. It is home to 29 species of waterfowl, a major resting ground along the Atlantic Migratory Bird Flyway, and provides winter nesting for over one million waterfowl. After years of decline, the Bay still supports number of commercial and recreational fisheries, producing about 500 million pounds of seafood per annum. Over the years as its population the watershed grew, use of agricultural chemicals became widespread and livestock numbers increased, the water quality in the Bay declined. Nutrients, sediments and toxic chemicals flowing into the Bay were decreasing dissolved oxygen, increasing turbidity, killing-off sea grasses and producing diseases in fish and shellfish. Research undertaken in the late 1970s and early 1980s determined that the major culprits responsible for the decline of the Chesapeake Bay's health were the excess nutrient loads from municipal wastewater plants and from agriculture and residential lands, the sediment runoff from agricultural and residential construction, and the high level of toxic chemicals coming from industry and agriculture.
PublicationPublic Money for Private Infrastructure : Deciding When to Offer Guarantees, Output-based Subsidies, and Other Fiscal Support(Washington, DC: World Bank, 2003-08)When governments seek private investment in infrastructure projects, they usually find themselves asked to provide grants, guarantees, or other forms of fiscal support. Often they prefer to provide support in ways that limit immediate cash expenditure but sometimes generate large costs later. Seeking to provide support without any immediate spending of cash, for example, governments often agree to shoulder project risks and sometimes encounter fiscal problems later. For example, in the 1970s and 1980s in Spain, the government was obliged to pay $2.7 billion when the exchange-rate guarantees it had given private toll roads were called (Gomez-Ibanez 1993). More recently, the Indonesian government agreed to pay $260 million as a result of its agreements, through the electricity company it owns, to bear demand and foreign-exchange risks in private power projects. Yet even when governments have chosen to provide cash subsidies they have not always achieved their apparent goals: for example, over 80 percent of the Honduran government's "lifeline" electricity subsidies go to customers who aren't poor (Wodon et al. 2003). In still other cases, governments' decisions not to provide support may have caused problems.
PublicationPrivate Sector Participation in the Power Sector in Europe and Central Asia : Lessons from the Last Decade(Washington, DC: World Bank, 2003-06)The Californian power crisis appears to have greatly rekindled the latent doubts on moving to more competitive market structures for such an essential service as electricity. The recent collapse of Enron and several other industrial giants, as well as doubts about the reliability of external audits (resulting, in particular, in the collapse of Arthur Anderson) and the slide in the stock values of AES and other companies has eroded the confidence in the institutional pillars of the market, such as corporate disclosure, external audit, and oversight by regulators and Security Exchange Commissions. Major energy investors, at least in North America, seem to be anxious to clean up their balance sheets to eliminate from their portfolio unprofitable and risky investments. Against this backdrop, the objective of this study is to review the experiences in the ECA regio