The energy industry of Bangladesh is undergoing an exciting and challenging process of sector reform and market structure formulation. It is a complex task which involves a number of steps, but the principle ones are unbundling of integrated functional organizations (generation/supply, transmission, and distribution), regulatory oversight, introducing commercialization, private sector participation and investment where possible, and promoting competition in those parts of the energy industries that are not natural monopolies. The ultimate goal of the reform is to have more efficient gas and electricity sectors. One of the key measures that will allow achieving this goal is the development and effective implementation of a new regulatory regime in the energy sector.


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The new era in regulatory environment of the Bangladesh energy sector has been marked by creation of the Bangladesh Energy Regulatory Commission (BERC) by Act No. 13 of 2003 entitled “An Act to make provisions for the establishment of an independent and impartial regulatory commission for the energy sector”. The BERC Commissioners and the Chairman are soon to be nominated and, in turn, they will select qualified technical staff to perform regulatory duties provided for in the Act.
What are the main objectives and benefits of the energy regulation? What are some of the most important characteristics of an effective regulator? Are there any positive experiences of regulatory commissions in other countries that could be useful in the context of Bangladesh? The following sections of this article provide some insights that could help in answering these questions and a summary of good/effective regulation principles.


Objectives of Regulation

Benefits of Regulation

The benefits of effective energy regulation, if implemented properly, have proven to be the following:

Enforcement of Fiscal Discipline: The regulatory regime will help enforcing payments and fiscal discipline between various players of the gas, electricity and petroleum products markets, and alleviate a problem of delayed payments or lack of payments for electricity/gas supply between various participants of the energy sector of Bangladesh.

Introduction of Performance Targets & Incentive-based Regulation: The term “performance-based regulation” is used to describe regulatory approaches that rely on financial incentives and disincentives to induce desired behavior by a regulated firm. The encouraged behaviors, or outcomes, are generally lower costs and improved service (e.g. development of new and creative service offerings).

Introduction of Uniform Operational Standards & Quality of Supply: Good examples of such standards are Transmission (Grid) Codes, Distribution Code; Petroleum Products Quality Standards; and Customer Service Code that may include the extent and duration of outages, service restoration time, frequency of planned outages, performance of worst circuits, and voltage variations;

Transparency in Tariff Determination & Economic Efficiency: Achieved through rate of return or price cap regulation. Some of the best examples of revenue based regulation come from approaches used in countries like UK, Australia and Norway to regulate regional or national transmission companies.

Increased Opportunities for Development of Competitive Markets: A good example could be a petroleum products market in Bangladesh. At the moment, all tariffs are being set by the government and they neither reflect the cost of service nor provide for a opportunity for fair return on investments for the private companies. Once a new cost-based tariff methodology that will allow for a greater profit margin is introduced by the Commission, more companies will be willing to enter the market and compete for customers. As a result, these companies will be forced to be more efficient in order to offer a better service, higher quality product or lower price. All of this will benefit the consumers.

Increased Opportunities for Efficiency & Economic Growth: As mentioned before, the ultimate goal of the reform is a more efficient sector. Natural gas of Bangladesh is the major source of commercial energy, providing a high percentage electric generation. Increased efficiency (both economic and operational) will result in increased and uninterrupted electric generation and power supply and reduced burden of import of petroleum fuels. Ultimately, an efficient gas sector (and the power sector, for that matter) contributes into the economic growth of the country.
The last, but not the least is Public involvement into the energy sector. The general public and all stakeholders affected by developments in the energy sector should have the right of access to the information and a possibility to voice their concerns or provide feedback to the industry and the regulator with respect to a specific project or actions undertaken by energy companies.
Let's examine now the most important features of an effective regulator. Several countries that are considered by energy analysts to have established successful and effective regulators are Canada, UK, USA, Argentina, Colombia and Hungary. Two examples of Hungary and Argentina are provided in the last section of this article.
These key characteristics of an effective regulator are not given in an order of priority, as they are all very important for successful implementation of the new regulatory regime in the energy sector of Bangladesh or any other country. However, I would like to emphasize the most critical and inter-related issues pertaining to independence and autonomy, and accountability.

Independence & Autonomy: Ideally, regulators should operate independently from political pressures. To ensure that, the commissioners should be selected on the basis of professional, rather than political criteria and should have formal protection from arbitrary removal during their term. In addition to that, rather than relying on budgetary transfers from the government, the regulatory commission should have their own funding sources. The most common method is through fees and levies on regulated companies and entities. Ability of the commissioners to select and nominate their own technical staff and use independent outside consultants, when necessary, will also further contribute into independent and autonomous decision-making process.

Accountability: It cannot be achieved without transparency in decision-making process and without setting clear and simple procedural rules. The regulator should have clear procedures/rules for decision deadlines, hearing procedures that ensure that all relevant parties will have a fair opportunity to express their views in public hearings and appeal decisions; and rules to permit the removal of regulators in case of misconduct/violation of their duties.


Successful Regulators: Are there Lessons to be Learned?

Argentina Case: Gas & Power

In Argentina responsibility for infrastructure services is divided between the national and the provincial governments. The national government initiated a privatization program in 1989 for all utilities under its purview—mainly gas, electricity generation and transmission, and water and electricity distribution in the Buenos Aires metropolitan area. Like the United Kingdom, the national government created industry-specific agencies for the four main utilities: electricity (ENRE), gas (ENARGAS), telecommunications (CNT), and water and sanitation (ETOSS). But unlike the United Kingdom, Argentina has opted for regulatory commissions for each agency rather than a single regulator.
Most successful have been the two agencies covering the power sector, ENRE (Ente Nacional Regulador de la Electricidad) and ENARGAS (Ente Nacional Regulador del Gas). There are some issues that still need to be further addressed by these agencies, such as an increased transparency of their decision making process and administrative procedures, as well as the need to develop a set of accounting procedures and standards. Consistent regulatory accounts across all firms, with detailed cost information for each type of service, are essential for effective economic regulation, particularly for revising prices and monitoring whether regulated firms are using cross-subsidies.
However, despite above challenges both regulatory agencies have generally been extremely effective in carrying out most of their responsibilities. Both are reasonably independent, autonomous, and accountable. They have their own sources of funding and sufficient funding to perform all their tasks— though some would argue too much funding. Both have a small, technically competent, well-paid staff (less than 100, including regional offices), and the regulators on their commissions are accountable to both the legislative and the executive branches of government.


Hungary: Privatization & Investment Rather than Competition

The restructuring of the power sector in Hungary is an intriguing case of a deliberate decision against competition, and in favor of a rapid modernization of the sector, largely financed by foreign investment. The Electricity Act of 1994, the first of its kind in Eastern Europe, left the choice of the reform model open, so that the subsequent governments were free to install a single-buyer model. A state Energy Office was established, which was responsible for issuing licenses for respective business activity in the power sector, for construction of power plants, safety issues and for negotiating electricity tariffs. Once the formal regulatory structure was set up, the government proceeded quickly with the privatization of generation and distribution. Investors were offered a generous rate-of-return regulation (on average: 8%), they had to commit to significant investments in the modernization of capacities in generation, transmission lines, and distribution.
This approach was perhaps a second-best solution to attract investment to the sector and quickly approach European technical standards. Contrary to Poland, the Hungarian electricity industry has been able to participate in European competition on a level playing field.
The second aspect of the Hungarian story is the stabilization of the regulatory environment in the second half of the 1990s, leading to a reduction of regulatory risk by creating the Hungarian Energy Office (HEO). The HEO was established in 1994 and has a fairly small staff of 90 employees. The Office regulates and supervises energy activities of gas and electricity companies, heat production of electric power stations and protects consumer interests. Regulation has proven to be reliable in Hungary: the HEO has taken a strong stand on the rate-of-return regulation, withstanding pressure of foreign investors to increase generation capacity and to overcapitalize. The HEO has established itself as an independent and competent regulator. It is important to note that the Office has a separate and independent financial management mechanism: it is self-financing through license and other regulatory fees payable by the energy companies.


Conclusion

There is a river of knowledge and experience gained in the last 15-20 years by the countries in very advanced stages of energy sector and markets development and with mature regulatory institutions. A number of countries in Asia, Latin America, CIS and Eastern Europe are still in a process of reforming their power and gas industries to improve efficiency and attract investment. These countries, including Bangladesh, could benefit from the lessons learned from the reform countries. Also PA Consulting's experience of creating regulatory agencies in more than 18 countries shows that the biggest challenges for effective regulatory regime are achieving political independence and ensuring accountability. Political independence requires a resolve and commitment of the government in early stages of the regulatory regime design. Accountability requires development of sound rules and procedures that will govern activities of the regulatory commission.
Lastly, a Regulatory Commission exists in an autonomous fashion primarily to serve the public interest by: ensuring energy prices reflect true cost of service, energy companies have incentives to provide quality service at affordable cost, and that the energy sector functions in a safe and reliable manner. Effective regulation will benefit all consumers and participants and help to ensure affordable energy supply is available for the economic development of Bangladesh.

Tatyana Yamova: Regulatory Consultant of PA Consulting Group, working in Bangladesh under the USAID's Improved Performance of the Bangladesh Energy Sector Project.