Session 24 Elements of Effective Regulatory Agencies Legitimacy, Credibility, and Transparency PURC/ARSESP Training Sao Paulo, S.P., Brazil October 22-26, 2012 Ashley Brown Executive Director, Harvard Electricity Policy Group John F. Kennedy School of Government Harvard University Of Counsel, Greenberg Traurig, LLP
META Principles Credibility: Regulatory commitments to Investors honored Legitimacy: Consumers convinced they will be protected against commercial and monopoly abuse Transparency: Everyone can know they terms of the system and its processes 2
Introduction: Two Contexts for Legitimacy, Credibility, and Transparency Consistent with Accepted Practice in Country Consistent with Reasonable Expectations of Fairness from International Investors 3
Ten Key Principles 1. Independence 2. Accountability 3. Transparency and Public Participation 4. Predictability 5. Clarity of Roles 6. Completeness and Clarity in Rules 7. Proportionality 8. Requisite Powers 9. Appropriate Institutional Characteristics 10. Integrity 4
FOCUS: Best Practices 5
Critical Standards for Effective Infrastructure Regulation Legal Framework Legal Powers Property and Contract Rights Clarity of Roles in Regulation and Policy Clarity and Comprehension of Regulatory Decisions Predictability and Flexibility Consumer Rights Proportionality Financing of Regulatory Agencies Regulatory Independence Regulatory Accountability Regulatory Processes and Transparency Public Participation Appellate Review of Regulatory Decisions Ethics 6
Legal Framework The regulatory agency should be created in a law Jurisdictional authority Powers, duties and responsibilities Basic regulatory principles, practices, procedures and policies articulated in law All laws enacted on regulatory matters should be prospective in nature and none should have retrospective application 7
Legal Powers of Agency Authority to make final decisions within its statutory domain without having to obtain approval of any other agency of government Approve tariffs at reasonable levels both for consumers and regulated entities Set binding standards in such appropriate areas as technical and commercial service quality Make rules and subsidiary policy Perform routine administrative functions Fully enforce its decisions and rules Range of remedies appropriate to the severity of violations that it is likely to meet Compel the production and provision of the information 8
Legal Powers of Agency con t Adopt appropriate accounting standards Adopt appropriate procedures for carrying out its duties Adjudicate jurisdictional disputes Prevent the abuse of monopoly/market power Promote competition where appropriate and feasible Adequately protect consumers Prevent undue discrimination Monitor the performance of regulated entities, the functioning of the market and reliability of supply Property and Contract Rights The property and contract rights should be respected 9
Clarity of Roles in Regulation and Policy-making The law should also provide for clear and comprehensive allocation of powers and duties between the regulatory agency and the government Basic policy set out in law and prospectively binding on the regulatory agency Ministers and government agencies seeking to influence regulatory decisions should be able to do so only in a fully transparent and open manner The key principles and methodologies on which major regulatory decisions will be made should be clearly articulated in advance 10
Predictability and Flexibility Regulatory decisions should, to the extent reasonable and feasible, be consistent with previous decisions When deviation from previous practice is necessary, it should be undertaken by regulators only after first providing public notice and providing all interested parties with a meaningful opportunity to be heard on the matter Any fundamental change in regulatory practice or policy should, to the extent feasible, be undertaken on a gradual, prospective basis. 11
Consumer Rights Adopt a consumer statement of rights, that at a minimum, should include: Quality of service standards to which customer is entitled to expect Process for handing complaints Remedies to which customer is entitled in case of breach Access to the regulatory agency to seek redress of grievances 12
Proportionality Regulation should always be kept to the minimum necessary to assure efficiency and fairness. Examples: Demonstrable market failure that cannot be removed by other means Where the economic and social benefits of intervention can reasonably be expected to exceed the likely economic and social costs Where significant market power exists Where consumer protection requires it Where clearly specified, government-mandated social policy is most efficiently carried out by regulation 13
Proportionality, con t Where regulatory actions are necessary, they should be: Well targeted Proportionate to the problem being addressed Measured against the alternatives At least cost 14
Financing of Regulatory Agencies The level of funding of the agency should be adequate to allow it to meet all of its responsibilities competently, professionally and in a timely manner A minimum level of funding, expressed in terms of a percent of regulated revenues (not profits) should be set out in law Agency funding should be obtained from a levy assessed on regulated entities Regulated entities should be able to pass through funds collected for the levy to their customers in their tariffs 15
Financing of Regulatory Agencies, con t Funds collected from the levy should be held in a special account and earmarked for the exclusive use of the regulatory agency, and any other use should be expressly prohibited The ordinary fiscal and audit controls should apply to the regulatory agency The overall spending authority of the agency should be subject to government approval 16
Regulatory Independence Regulatory agencies should be created by law (or constitution), rather than by decree or other subsidiary legislation Under the law, regulatory agencies should have the following powers and characteristics: Regulatory decisions should, if possible, be taken by a board of 3, 5 or 7 commissioners Stable and reliable source of revenue for its operations Offer staff competitive compensation packages and viable career opportunities, as well as appropriate training and education Establish the table of organization within the agency and make all relevant personnel decisions To set such rules and policies as it may need to carry out its responsibilities To promulgate a code of ethics applicable to agency personnel and to those who conduct business at the agency To contract for needed outside services Should be encouraged to join/participate in relevant professional, research and educational groupings as well as in regional/international co-operative regulatory organizations 17
Regulatory Independence, con t Regulatory agency directors or commissioners should: Be appointed to fixed, staggered terms of office not coincident with the terms of governments or legislatures Be appointed by the head of government or head of state, with possible legislative approval Only be removed for proven good cause Terms and conditions of employment of any regulatory commissioner/director should not be altered during the course of a term Directors/commissioners should come from diverse professional backgrounds and training 18
Regulatory Accountability/Legitimacy Legislative committees and/or relevant ministries and executive task forces should periodically conduct hearings reviewing the performance of regulatory agencies. Issues that should be covered include: The functions of the agency and continued appropriateness of the division of authority between it and other relevant agencies Transparency, effectiveness and timeliness of regulatory procedures Clarity, coherence, consistency and timeliness of agency decisions Proportionality and effectiveness of targeting in agency decisions Quality of decisions and their sustainability on appeals and in practice Efficient use of the agency s resources Degree of independence, integrity and credibility in agency processes and actions 19
Regulatory Accountability/Legitimacy, con t The government or legislative authorities should periodically engage the services of a panel of financially disinterested outside experts to evaluate the overall performance of the agency, or on specific areas of interest Regulatory agencies should be subject to periodic management audits and to other types of effectiveness review (e.g., policy audits) Regulatory agencies should be required to issue annual reports on their activities 20
Regulatory Processes and Transparency/Legitimacy Except for defined emergency circumstances, no decision should be taken by a regulatory agency until the following have occurred: Proper legal notice is given All parties who wish to do so have been afforded a meaningful opportunity to provide input to the agency Clear guidelines for emergency decisions All decisions by a regulatory agency should be written in a public way, including: A clear statement of the decision A description and analysis of all evidence taken into consideration A summary of the views offered by participants to the proceeding A full discussion of the underlying rationale for the decision 21
Regulatory Processes and Transparency/Legitimacy, con t Multi-member regulatory agencies normally make decisions by: Majority vote, or Credible, consensual, non-voting methods If a multi-member regulatory agency uses a formal voting process, there should be opportunity for: Members voting no may file formal opinions expressing the rationale for their votes Members who concur in the result but do so for different reasons set forth in the decision, may file concurring opinions expressing the rationale for their decisions 22
Regulatory Processes and Transparency/Legitimacy, con t If the regulatory agency decides to use a consensus approach, the agency should proceed as follows: A record of the discussion should be made, reflecting the range of opinions expressed (supporting and dissenting) A summary of the discussion should be made publicly available, along with or soon after the publication of the regulatory decision and its justification Members should have the right to state their views concerning the decision publicly and on an attributable basis All regulatory agencies should have clearly defined, published procedures under which they take decisions Documents open to public inspection 23
Regulatory Processes and Transparency/Legitimacy, con t Opportunity for meaningful participation in regulatory proceedings Regulatory agencies should facilitate and encourage public participation 24
Appellate Review of Regulatory Decisions/Legitimacy All appeals from a regulatory agency decision should be directed to a single, independent appellate forum, the decision of which would be final The appellate forum should either be: A specifically designated court, or A specialized appellate tribunal with the authority to review the decisions of one or more infrastructure regulatory agency/agencies In either case, the appellate forum should possess relevant expertise in regulatory matters Any party believing that it is adversely affected by an agency decision should have the right to take an appeal from that decision within a reasonable period of time after that decision has been taken (e.g., 30 days) 25
Appellate Review of Regulatory Decisions/Legitimacy, con t Regulatory agency decisions should be affirmed on appeal unless the agency: Acted unlawfully or exceeded its lawful authority Failed to follow the required process/processes in making its decision, or Made decisions that were clearly contrary to the evidence The decision of the regulatory agency should remain in effect for the duration of the appeal, unless the agency or the appeals tribunal decides otherwise Ethics/Legitimacy Strict code of ethics pertinent to regulatory agencies 26