40914 noTE no. 22 ­ MaY 2007GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Relying on expert panels to help settle regulatory disputes Lessons from Chilean experience Alejandro Jadresic and Lorenzo Bertolini S tarting in the 1980s Chile initiated wide- adjustments.1 Existing legal institutions may prove ranging economic reforms, paving the inadequate for reaching technically complex deci- way for private sector involvement in major sions (such as in comprehensive tariff reviews) infrastructure sectors. With these reforms came because of such issues as the scarcity of special- new regulatory rules, institutions, and processes ized judges or the long and time-consuming to manage the interests and expectations of procedures typical of ordinary courts. The regula- such diverse stakeholders as the government, tory agency model requires adequate institutional consumers, and service providers. One innova- capacity as well as safeguards for autonomy in tive feature is the use of expert panels--special- decisionmaking, both of which are difficult to ized, independent, ad hoc entities affiliated with ensure in countries with fledgling institutions and neither the government nor the sector regulator-- scarce human and financial resources. to resolve disputes arising from regulatory deci- sions. The Chilean experience with these panels Another option is to create a specialized, indepen- offers useful lessons for policymakers. dent, ad hoc entity--affiliated with neither the Regulatory conflicts are common in infrastruc- government nor the regulator--that can be called ture sectors. Regulators and service providers may on to provide a decision or opinion on a dispute. take different views on how to set tariffs, enforce Known as an expert panel, this mechanism has obligations on the quality of service, or assess long been used to resolve disputes on the inter- compensation for past investment. Conflicts pretation of commercial contracts and conflicts may also arise between regulated companies or relating to foreign investment and international between service providers and users--for example, trade. But its use in economic regulation is less on interconnection charges, transmission fees, or well known.2 In principle, such panels can support service standards. regulatory institutions and legal processes-- whether well established or newly developed--or Different regulatory governance models have provide an alternative to them. been developed to resolve conflicts and reduce regulatory risks for private investors. Approaches typically range from enshrining detailed regula- How expert panels do their work tory mechanisms into legal instruments such as licenses and contracts (with possible appeals to Chile established expert panels as part of the the judiciary) to entrusting a specialized, auton- regulatory regimes it created in the past three omous agency with administering regulatory decades to promote private participation in decisions on the basis of preestablished rules and several regulated industries, including power, processes. Alejandro Jadresic is the dean of the Faculty of Science Implementing these governance models is chal- and Technology of the University Adolpho Inbaņez and lenging, especially in developing countries. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY president of the permanent Panel of Experts for the Chilean Contract provisions are often relatively general electricity sector. He was minister of energy of Chile in and require other institutions to help in reaching 1994­1997. Lorenzo Bertolini is PPIAF's regional program agreement on such key elements as periodic tariff leader for West and Central Africa. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY telecommunications, water and sanitation, and the panel so as to ensure transparency and due public works concessions (in such sectors as jails, process (a specified calendar, mandatory hearings, airports, irrigation, and toll roads). justification and publication of decisions). The panel's costs (approved annually by the National Expert panels in these sectors share some common Energy Commission) are paid by all power sector features: companies in proportion to their fixed assets. · Their functions are defined narrowly by law and Between 2004-2006 the permanent expert panel involve resolving regulatory disputes between has successfully resolved 33 disputes. Most government regulators and private companies were long-standing conflicts between genera- (in the electricity sector they can also settle tion companies about energy transfer payments. disputes between companies). Others related to tariffs for services provided by · The panels are not intended to replace sector distribution utilities or the terms of reference of regulators or the courts, but they may take over studies on transmission fees and the actual fees some of their traditional duties. charged by transmission companies. · Their aim is to resolve specific regulatory conflicts based on economic and technical Telecommunications sector criteria defined in laws, contracts, and other Ad hoc panels are used in the telecommunications instruments. sector, particularly during tariff reviews. Unlike in · And the panels coexist with other entities that the power sector, however, their input is not bind- also serve as appeal bodies, such as the courts. ing. Under the 1982 Telecommunications Law and the 1987 tariff regulations, regulated tariffs Power sector and access charges are reviewed every five years Chile's Electricity Law, enacted in 1982, sets on the basis of the "model company approach." out the sector's market structure and regulatory In this approach a tariff analysis is carried out framework, including mechanisms for determining based on estimates of the costs that an efficient distribution and transmission fees. The law was company would incur in providing the services. amended in 2004 partly to modernize the mecha- nisms for resolving regulatory disputes. For that To guide this tariff study, the regulator sets specific purpose the law established a permanent expert criteria and assumptions based on a proposal Expert panels panel to resolve the wide range of disputes that filed by the regulated company. If the company arise in the power sector between the regulator and disagrees with these terms of reference--or with can support the regulated companies (for example, in calculat- the tariffs that the Ministry of Telecommunica- regulatory ing the asset base for distribution companies to tions later sets on the basis of the tariff study--it determine transmission fees and investments; box can request the opinion of an expert panel. In institutions-- 1). The expert panel can also consider disputes setting the final tariffs the ministry is supposed to or provide an arising between companies (such as on transfer follow the panel's proposal, but it need not do so payments due to power and capacity exchanges if it considers the proposal inconsistent with the alternative between generation companies). law or government policy. The permanent expert panel consists of seven Each panel is formed of three acknowledged members with six-year staggered terms nominated experts--one nominated by the regulated company, by the Competition Tribunal through a competi- another chosen by the undersecretary of telecom- tive public process. Establishing a permanent munications, and the third selected by agreement. panel, rather than an ad hoc one for each dispute, Rulings in 1998 and 2003 set requirements aimed was aimed at fostering greater independence, at promoting equity and transparency, including consistency, and specialization over time. consultation, publication of documents, and writ- ten justification of decisions. Costs related to the Decisions by the panel are binding, strengthening panels are shared equally by the parties. its powers of conflict resolution, though the panel is required to pick the proposal of one of the parties Of 18 tariff reviews completed in 2004 and 2005, to the dispute. The obligation to choose among 10 involved an expert panel. These included the positions of the parties is aimed at prevent- reviews of the consumer tariffs and access charges ing excessive demands. It also makes the panel's of the three fixed line telephone companies defined work easier: the panel does not need to identify as dominant by the competition authority and the the optimal solution, only the least worst solution. access charges of the four mobile phone compa- The law sets out detailed rules and procedures for nies operating in Chile. Though the opinion of Relying on expert panels to help settle regulatory disputes box 1 Calculating the asset base of distribution companies The Chilean electricity law calls for adjusting consumer tariffs every four years for all distribution companies. The new tariffs are calculated on the basis of the replacement value of "model companies"--models that are constructed assuming that services are provided efficiently by companies that earn a 10 percent rate of return. Expert panels both the National Energy Commission (CNE)--with data provided by the Superintendency of Electricity and can step in Fuels--and the distribution companies hire consultants to prepare cost studies, and their results are averaged to resolve (with two-thirds weight to the CNE study) to calculate the tariffs. A consistency check is then done to ensure conflicts that the actual rate of return that the companies would earn with these tariffs is within the 6­14 percent range. If not, the final tariffs are adjusted to bring the rate within that range. on complex and delicate A key variable in the consistency check is the replacement value, or asset base, for each distribution company. The asset base is calculated every four years by each distribution company and presented for review to the issues Superintendency of Electricity and Fuels which sets its value. If the company disagrees, it can ask the expert panel to determine the final value of the asset base. During the last asset base review, for 35 distribution companies in 2003, the Superintendence discounted the asset bases proposed by the companies by an average 39 percent, while the ad hoc expert panels reduced them by an average 16 percent. Transparency and due process were ensured: the assumptions made by the expert panels to determine the final values, and the position of the panel members on each dispute, were explained in a written report signed by all members and presented to the participants. The final report was accepted by both the regulator and the companies, none of which filed any appeal or complaint with the courts. The expert panel reached its decisions in about a month. a panel is not binding, in most cases there was a The panel must choose either the values of the significant revision in the tariff after the opinion parameters used in the company's tariff study or was issued. Indeed, while the regulator initially those used in the superintendency's study. The reduced the annual long-run total cost (a proxy final tariffs are then calculated by the regulator, for the tariff) proposed by the companies by an using the values chosen by the panel, and set in a average 25 percent, the final average reduction decree by the minister of the economy. was just 17 percent.4 Each panel consists of three experts, one named Water supply and sanitation sector by the superintendency, another by the regulated Chile reformed its water supply and sanitation company, and the third selected by the regula- sector through four laws enacted in the late tor from a list agreed on by both parties at the 1980s. These established rules and regulations on beginning of the review process. Decisions by tariffs, the concession regime, subsidies for poor expert panels are final and mandatory for both customers, and the role of the Superintendency of parties. The law does not specify procedures for Sanitation Services. Under the Law of Tariffs of the panels (beyond requiring that their costs be 1988 and its amendment of 1997, tariffs for water shared equally by the parties), though it does give supply and sanitation services are reviewed every some guidance on the calendar for reaching deci- five years using the model company approach, sions and require publication of proceedings. with expert panels involved as needed to resolve disputes. Expert panels have been used often to resolve tariff disputes in the water supply and sanitation Once the superintendency has prepared a tariff sector, especially since the state-owned utili- study, the regulated company may state its objec- ties were privatized. Six of the 21 tariff reviews tions to it. If the two parties are unable to agree between 2000 and 2004 relied on expert panels. on the new tariffs after 45 days, the regulator has Only two of these involved state-owned compa- to set up an expert panel to resolve the dispute. nies, suggesting that agreement with the regulator was more frequent when companies were owned though it may also diminish independence and by the state. But even though most of the compa- eventually make the decision dependent on the nies have now been privatized, just a few recent view of just part of the panel (such as the presi- tariff reviews have ended in expert panels, prob- dent). Clear rules regarding ineligibility help ably because the use of criteria set by past panels promote independence and legitimacy of the has tended to narrow the differences. panel. · Expert panels can help establish the credibil- ity of the regulatory process among operators, Emerging lessons particularly where the capacity or objectivity of the regulator is not yet established and regula- Expert panels in Chile appear to have been effec- tory risks for investors are high. tive overall in resolving regulatory conflicts both between the regulators and private companies and References between companies--including conflicts on such complex and delicate issues as tariff reviews or Jadresic, Alejandro. 1997. "Regulating Private Involvement in energy transfer payments. This experience might Infrastructure: The Chilean Experience." In Harinder Kohli, Ashoka be useful for developing countries with weak or Mody, and Michael Walton, eds., Choices for Efficient Private Provision fledgling institutions. of Infrastructure in East Asia. Washington, D.C.: World Bank. ------. 2006. "Expert Panels in Regulation of Infrastructure in The structure and performance of these panels Chile." Paper presented at the Third Annual Conference of the have evolved over time and differed across sectors. African Forum of Utility Regulators, Windhoek, Namibia, March Even so, a few lessons can be drawn from this 11­19. experience: Shugart, Chris, and Tony Ballance. 2005. "Expert Panels: Regulating · A panel's functions, composition, and relation- Water Companies in Developing Countries." Draft for discussion. ships with other authorities should be defined Available at rru.worldbank.org. very precisely, ideally in the law. · When setting up panels, tradeoffs between costs and benefits need to be analyzed carefully. Notes Permanent panels may allow greater specializa- This note is based on a paper "Expert Panels in Regulation of tion, consistency, and independence than ad Infrastructure in Chile," Available at www.ppiaf.org under Working hoc panels, but they may also prove too costly Papers by Alejandro Jadresic (2006). in some sectors or countries. · Clear rules, realistic deadlines, and well-defined 1. Regulation by contract has been successful in water in Senegal, but procedures are essential. Public hearings and with the support of a range of institutions--the government-owned other means of public participation should be asset-holding company in supervising the contracts, committees in considered if a decision affects third parties. facilitating the tariff review process, and outside experts and donors Requiring panels to justify all decisions and in resolving disputes. publish all materials used in the process 2. For a more detailed review of the regulatory governance debate strengthens the legitimacy and quality of their and some experiences with expert panels in infrastructure regulation, decisions. see Shugart and Ballance. (2005) · Panel members must be highly qualified and independent from the parties to a dispute. 3. For an overview of the reforms, see Jadresic (1997). Different schemes can be used to identify 4. These figures are greatly affected by the review process for GRIDLINES members. Allowing the parties to nomi- Telefonica CTC, where the parties' initial proposals differed the nate some or all of them may promote most. Excluding this case, the average initial reduction is 21 percent, and the final one 13 percent. Gridlines share emerging knowledge confidence and aid conciliation, on public-private partnership and give an overview of a wide selection of projects from various regions of the world. Past notes can be found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA views are those of the authors and do not necessarily PHoNE (+1) 202 458 5588 FAx(+1) 202 522 7466 reflect the views or the policy of PPIAF, the World Bank, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY gENErAl EMAIl ppiaf@ppiaf.org WEb www.ppiaf.org or any other affiliated organization.