Garantías en procesos de contratación

This section provides a high-level assessment of the performance of the electricity regulation system in TCI, and outlines some options for what an alternative system might look like. Section 5.1 starts by illustrating principles that can be used to design an effective system of electricity regulation. Section 5.2 then assesses the performance of the existing system of electricity regulation in TCI against these principles.

Having found that the existing system ‘falls short’ on some of these principles, section 5.3 introduces some potential options for regulatory reform of the TCI electricity sector, which appear to be more consistent with the principles. While some of these options are possible within the existing regime, and could be pursued in the shorter term, others would require more extensive reforms and/or may be longer-term in nature. How these sorts of reforms, if taken forward, could be introduced in practice is discussed in more detail in section 6.

5.1

Principles of economic regulation

A clear specification of regulatory principles is central to assessing the performance of the current regime. It is also important to developing a new overall approach to regulation going forward. Some important principles, which any regulatory regime should seek to balance, are set out below. While some of these are complementary, others may conflict to some extent. Therefore, there is no perfect system, and in practice any regulatory system must make trade-offs and be sensitive to the local conditions.

1) Government policy objectives should be clearly set out and should be taken into

account in the regulatory regime—for example, government policy should be clear on

social considerations (including the treatment of different types of customers in the setting of tariffs), strategic issues, and the role and funding of renewable energy sources. The regulatory regime should then ideally be designed to be consistent with these objectives.

2) Regulation should promote the consumer interest and protect consumers from

monopoly power—electricity companies undertake ‘naturally monopolistic’ activities (or

at least may inherit a position of market power); hence, regulation may be required to protect consumers’ interests. Regulation should seek to limit the potential for excessive monopoly profits to be earned—prices should ensure that the companies cover their costs, including a return on investments equal to the cost of capital. Regulation should also ensure that an adequate level of service is provided. Furthermore, regulators may be concerned to ensure that there is fair treatment of different types of customer in the setting of tariffs, which may in turn need to take account of the government policy objectives—see 1) above.

3) Utility businesses should have incentives to improve their efficiency now and in

the future—in the absence of effective regulation, monopolies may have insufficient

incentive to reduce their costs or improve their service offerings. Regulation can be used to encourage electricity companies to improve their day-to-day OPEX efficiency, and to invest in the right activities at the right time and at the right unit cost (CAPEX efficiency). The regulatory system can be designed to provide electricity companies with a profit incentive to seek cost efficiencies in the shorter term, enabling them to earn some degree of monopoly profits in the shorter term, with the benefits of these efficiencies passed on to customers in the longer term. Similarly, the regulatory system can be designed to provide the companies with incentives to improve quality of service.

4) Utility businesses need to be able to finance their functions by recovering their

costs—utilities differ to firms operating in ‘normal’ markets in two important respects:

the service supplied is a basic necessity (eg, consumers have little choice but to use electricity and water); and, as stated, the often naturally monopolistic nature of networks means that if a utility stops producing, there can be widespread social disruption and economic costs. The combination of these two factors means that the ongoing

functioning of an electricity company needs to be protected. Tariffs need to be set in a way that enables utilities to recover their costs.

5) Competition and/or third-party participation should be encouraged where this is

both feasible and desirable—not all aspects of utility provision, including electricity,

are necessarily ‘naturally monopolistic’. Where feasible, some aspects of service

provision can be opened up to competition and/or third-party participation of some form. This might even replace the need for regulation of that particular aspect of service provision. Competition and/or third-party participation will be desirable if, over the medium to long term, it is likely to lead to lower costs, greater resilience, or other net benefits.

6) Regulation should be appropriate to the setting—in particular, in a small-island

context, regulation should seek to control monopoly power and encourage efficiencies, but in a way that minimises the regulatory burden, is proportionate (in cost terms) to the benefits obtained, and is practical to implement. Regulation on TCI cannot economically replicate fully the more detailed systems of regulation implemented in larger

jurisdictions.

Notably, principles 2, 3 and 4 above all concern the degree to which tariffs should be aligned with actual costs. There are some important considerations to balance here. For example, while customers should be protected from monopoly profits (principle 2), the regulator may still want to provide the companies with an incentive to improve their efficiency (principle 3), which can mean allowing the companies to make profits above their cost of capital for a period of time. Another issue is that, while utilities should be able to recover their costs (principle 4), they should also be required to demonstrate that their costs are prudently incurred (principle 3).

A corollary of the above principles for economic regulation is that an adequate institutional structure and appropriate regulatory processes need to be present to deliver against them. Failure in this area can easily undermine the legitimacy of regulation as perceived by some, or even all, stakeholders. The key features here are as follows:

7) The institutional set-up should support the system of regulation—the adequacy of

the institutional set-up is central to make the regulatory process work and to ensure the buy-in and trust of all relevant stakeholders, including the regulated companies;

8) The regulatory process should be transparent—thisis central to reduce risks that

arise from the process itself, to allow stakeholders to position themselves appropriately within that process, and to understand the process outcomes.

As noted, the above principles can then be used to examine the performance of the existing regime, and to explore options for reform going forward.

5.2

The current regulatory regime: an assessment

The analysis in previous sections illustrates the main features of the existing regime. These can be assessed against the principles of economic regulation outlined above. This section does this under three key headings which, taken together, comprise a regulatory regime:

– The policy context—in particular, whether government policy is clear, and whether the current system of regulation adequately facilitates energy from renewable sources, and results in fair tariff structures across different customer classes.

– The core regulatory model—whether the existing regime adequately balances the

issues of ensuring cost reflectivity and cost recovery in tariffs, while promoting efficiency and facilitating competition (and/or third-party involvement) in areas where this is likely to be beneficial.

– The institutional set-up and transparency of the regulatory process—in particular,

the degree of independence of regulation under the current system, and the

transparency of the regulatory process (including the information relayed to and from the parties involved).

5.2.1 The policy context

Promoting renewable energy

When assessed against the principles outlined in section 5.1, government policy is not clear on the role of renewable energy in TCI, and the current regulatory framework does not facilitate renewable energy. This is a potential area in which some form of third-party participation and competition could emerge. Hence, the current regime is also inconsistent with the principle of encouraging competition and/or third-party participation where this is efficient (see also the discussion in section 5.2.2 below).

The existing legislation and regulatory framework is not conducive to permitting new

electricity suppliers to generate electricity from renewable sources in the franchise area of a public supplier. This is because, at present, other electricity generators are not permitted to feed any electricity generated into the main grid. In addition, the existing public suppliers appear to have insufficient incentive to develop renewable generation themselves. This could derive from the fact that companies consider that, within the current regulatory process, it would be difficult to achieve an adequate return on investments in renewable sources if the costs of renewable energy are higher than the avoidable costs of not supplying the electricity from the existing diesel generating sets.

As indicated in section 3, in TCI electricity from renewable sources (wind and solar, in

particular) could be an option to increase differentiation in the generation mix, and reduce the dependence on diesel generation, should wholesale diesel prices faced by TCI continue to rise. However, while work has been undertaken on renewable energy in TCI, at present it is not clear what the government policy is in this area.

The lack of clarity and incentives for energy suppliers (existing and potential) to supply electricity from renewable sources is a shortcoming that should be addressed if this source of energy is to be developed. In addition, the regulatory implications of a policy on energy from renewable sources would need to be clarified (eg, how would the renewable CAPEX be treated in the context of the tariff-setting).

Tariff differentials between customer classes

The tariff structures of both Fortis TCI and TCU provide for base-rate differentiation by customer class. This differentiation may or may not reflect differentials in the companies’