Clarity and certainty

National energy regulators from eleven regions and 80 countries issued a “World Energy Regulators’ Statement on Climate Change” on 20 October 2009 during the World Forum on Regulation IV (WFER IV)  held in Athens.  Reading an initial review of the eight “concrete actions” presented, one is tempted to ask, “Why bother?”. And yet, anyone who has spent any time reviewing the capabilities and competencies of many of the signatory agencies, will see glimmers of light and hope as well as understand the rationale for the statement. 

“One of the oldest puzzles of politics is who is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom.”
John Kenneth Galbraith
It should be noted first of all that energy regulation, in the sense of governmental regulation of investor-owned, privately financed or quasi-governmental energy companies, is relatively new in most of the signatory countries. In Europe the privatization and restructuring of many electric and natural gas systems in the 1990s led to the creation of new regulatory agencies, many of which were based on the US independent regulatory commission model or its more modern variant, the United Kingdom’s “RPI-X” scheme of price-cap regulation (= Retail Price Index minus X). Thus, all of the member states of the European Union and many of the former member states of the USSR, have only recently established regulatory agencies with a limited history or experience. Similar agencies have now also been established in Asia and Latin America with even China creating a State Electricity Commission.

These new regulatory agencies have not only had to struggle with the new challenge of regulating the price and quality of energy services, they have also had to coordinate with ministries which still have authority over certain aspects of regulation. The United States, the country with the longest record of regulatory success, as well as one or two notable failures (the California electricity market of the early 2000s is one example), finds its state and federal regulatory agencies struggling too in some respects. For example, they have difficulties trying to include climate change considerations in proceedings aimed at finding solutions to the traditional regulatory problem of matching energy supply and demand at reasonable cost. Nonetheless, the 100 year history of US regulation and the successful recent decades of UK regulatory practice do provide lessons, examples and benchmarks for newer energy regulatory agencies.

This was recognized by the regulators at the WFER IV and thus the eight action items include a number which look to education and knowledge transfer among regulators. The following are the action steps agreed to by the participants in Athens.

  1. Creating a new International Confederation of Energy Regulators (ICER) to take forward our international cooperation and dialogue on global issues such as climate change.
  2. Supporting the delivery of energy to all in developing markets within the context of rising energy costs and environmental constraints.
  3. Promoting energy efficiency.
  4. Conducting a review of renewable energy and distributed generation.
  5. Sharing best practices for use worldwide (where appropriate) and developing new approaches on regulatory issues which are central to meeting greenhouse gas emissions targets.
  6. Working in close cooperation with our nearest neighbours and within the ambit of our responsibilities, we will foster stronger network interconnection and facilitate compatibility of our regulatory frameworks in order to create more efficient energy systems and provide clarity and certainty to the market.
  7. We will further reinforce our engagement in the international climate change process, nwith energy regulatory associations participating as observers to the sessions of the United Nations Framework Convention on Climate Change (UNFCCC).
  8. Promoting reliable energy supply and reasonable energy costs to all consumers which lies at the heart of regulators’ work.

Branko Terzic is the Global and US Regulatory Policy Leader for Energy and Resources at Deloitte Services LP. He is also Chairman of UN ECE Ad Hoc Group of Experts on Cleaner Electricity Production from Coal and Other Fossil Fuels and the former commissioner of the US Federal Energy Regulatory Commission.
The themes of “best practices”, cross-border “close cooperation” and promotion of “energy efficiency” are all amenable to information and technology exchange at the highest levels among regulators. These are also components of any regulatory plan which will provide certainty to financial investors and their markets which must, in most cases, provide the funding for the massive energy infrastructure investment ahead, even without consideration of the additional investment necessary to support climate change mitigation programs.  This is explicit in the Regulator’s Statement and bears repeating here:

‘Investors need clarity and certainty in the energy sector in the long-term not least because of the long lead-times for investments. Major investments will be required to deliver new resources and energy efficiency measures and to implement the necessary structural changes, including smart grids, which are crucial in energy markets and energy infrastructure.’

This statement bears remembering. It should be widely distributed and frequently cited as it is possible that it will be overlooked by some zealous politicians and climate change action advocates.  Implicit in this last statement, and something that should have been made explicit, is that investors will also need the opportunity for “rate of return adequacy”, as well as “clarity and certainty” emerging from regulation. That is also a key lesson from the past one hundred plus years of US energy regulation.