In search of the independent regulator

The search is on for the independent regulator or the "grand equalizer" of the power industry.

Just exactly what is the independent regulator? In simple terms, these guys will make up the team that will make sure that the industry players are kept honest but, at the same time, are kept whole. The role of the regulator cannot be taken lightly as it will insure the success of the deregulation of the power industry not only for the industry players but especially for the consumers.

To date, there has reportedly been a marked interest by some qualified and some "not-so-qualified" professionals to be appointed to this body. After all, the chairman will have the same benefits as a Supreme Court Chief Justice and each of the four commissioners the benefits of an Associate Justice of the Supreme Court.

Under Republic Act. No. 9136 or the Electric Power Industry Regulatory Act, the independent regulator will be called the Energy Regulatory Commission (ERC). It is different from the previous Energy Regulatory Board (ERB) as it will be overseeing the power industry under a deregulated environment where the industry is expected to be more dynamic as it responds to market forces day-to-day.

The ERC chairman must be a lawyer. The four other members should be experts in the fields of energy, law, economics, finance, commerce or engineering.

The chairman will have a term of seven years, two commissioners shall hold office for five years and the remaining two commissioners for two years. They will be appointed by the President.

Big task

While the benefits seem attractive, the scope of the ERC’s work is not something to laugh at. Aside from its main functions of enforcing the implementing rules and regulations of the EPIRA, the pressure to maintain a healthy balance to protect the consumers, please the goverment and make sure the industry players’ will stay in business is a gargantuan task in itself.

"Ideally, aside from integrity, it is important the appointed ERC especially the chairman, has a knowledge of the environment and what is happening in the industry. He should know what his role is as the regulator," said Marcelo Fernando, former ERB chairman during the Aquino’s administration.

He recalls that there was a time in the 1990s that based on technical computations, an increase in oil prices was the right thing to do. However, he did not expect the severe adverse reaction from government and the public. And as history would have it, there were immediate price rollbacks. It was not anybody’s fault, said Fernando, but a "gut feel" of how what’s happening in the various sectors affect the industry. "You cannot operate in a vacuum ... Listening to what the others are saying doesn’t mean you are being dictated upon," he adds.

Based on "Regulatory Institutions for Utilities and Competition," a technical paper by Warric Smith and R. David Gray, University of Florida experts on economic regulation, the key to a successful economic regulation is its independence.

This independence is based on two major safeguards: "arms-length" relationship with regulated firms and other private interests and "arms-length" relationswhip with political authorities. These two major safeguards, along with accountability to ensure that the regulator does not abuse the trust vested on it, are the foundations needed for an effective regulatory body, the study stressed.

Of the two major safeguards, the "arms-length" relationship with the regulated firms, including state-owned firms, is the least contentious. This can easily be achieved by ensuring the regulator is "separate" from regulated firms. Likewise, imposing restrictions on conflicting interests like holding directorships or shares in a regulated firm will affect employment later on with these firms.

Political tool

The arms-length relationship with political authorities is "often contentious," according to the paper. Control of tariff or rate increases or decreases has always been a convenient political tool as consumers are voters, too. This is particularly evident before elections. The paper adds that it is hard for the regulatory body to distance itself from the government as "it challenges the traditional prerogatives of ministers and other elected officials. A growing number of governments now understand the costs of maintaining political control over tariffs and other matters, however, and the number of regulatory bodies that enjoy safeguards in this area is growing rapidly."

The need for an independent regulator has been one of the major issues raised by the AIM-Washington SyCip Policy Center during the crafting of the EPIRA. It has come up with a position paper which basically egged all stakeholders, including government, to the institutionally strengthening of the regulatory body. It raises the issue of technical competence not only among the commissioners but also on the staff. With countries now just adopting to deregulation, the swift changes calls for swift decisions by the regulatory bodies. As such, technical competence will come in handy.

The paper cites the need for continued expertise in economic regulation. "In the case of utility regulation ... rules typically need to be aplied, adapted and enforced by an agency with specialist expertise in technically complex industries. Reliance on private enforcement alone is rarely effective when consumers lack the information or tehnical expertise to evaluate whether a particular conduct is in conformity with prescribed standards. Moreover, even when non-compliance imposes larger costs on consumers as a group and society as a whole, the costs faced by each individual consumer will often be too small to motivate the launching of expensive and time-consuming private enforcement activities."

At the end of the day, the success of the country’s power industry hinges on the appointment of a rare breed of men and women – those who can muster the courage to say NO to political squeezes or unjust industry pressure for the benefit of the industry and ultimately, the consumers.