The Experts Speak:

A Roundtable Discussion on the

Elements of Effective Regulation

A Roundtable Discussion with:

Frank Sebbowa,
Chief Executive Officer of the Electricity Regulatory Authority (ERA) in Uganda
(Agency was established in 2000)

Mario Bergara,
Commissioner from the Unidad Reguladora de Servicios de Comunicaciones (URSEC)
(Agency was established in 2001)

Bonaventure Niyibizi,
Chairman of the Rwanda Multi-Sector Regulatory Agency (RMSRA)
(the law establishing the Agency was published in 2001, but the agency was not set up until two months ago)

Introduction

As governments move towards greater private sector participation in the provision of public services, sound regulatory authorities are becoming increasingly important. Regulatory bodies vary from country to country, but share may similarities on how they are financed, what services they regulate, and how independent they are from central governments. On Friday, June 13, 2003, IP3's President Matthew Hensley, and regional coordinator for Africa, Carreen Behrens, had the opportunity to sit down with three regulators from Uganda, Uruguay, and Rwanda to discuss the key characteristics of their regulatory agencies and the issues they face today as they move forward with their regulatory initiatives. The comments are by the individuals and may not necessarily reflect official policies of each regulatory agency and/or government.

Matthew Hensley, President, IP3:

First off, I would like to thank each of you for taking the time to sit down with IP3 to discuss a number of the key issues facing new regulatory agencies around the globe. Our format is a "question and answer" structure whereby I will be posing a number of questions for each of you. Let's begin. What sectors do your organizations regulate? Are some sectors easier to regulate than others? If so, why?

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

The ERA regulates electricity services. In Uganda, I think the electricity sector is more difficult to regulate than, for example, the telecommunications sector, whose regulatory agency started before us. This is because the demand and supply levels are different in electricity, and the supply is smaller than the demand. Therefore there are certain things you cannot enforce because you can't close down generation units simply because of non-compliance. Also, the infrastructure in the electricity sector is older, and the investment requirements are much heavier in our sector than in the telecommunications sector.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

We regulate the telecommunications and postal services sectors. Of course the postal services is much easier to regulate, because besides some quality service standards, the only conceptual issue that is involved is the one related to "universal service", and how to provide such service. It is quite straightforward to do, as we have quite an open and competitive postal services market. We have more than 140 operators. The telecom sector is much more complicated. There are in fact several segments that have to be regulated in different ways. We have the fixed local telephone which is still a state-owned monopoly, while the rest of the telecommunications services are open to competition. Most of them were have been "competitive" from the beginning, like data transmission and other communication services. International telephone, previously a monopoly, was opened to competition approximately one year ago. We have around 10 operators right now and we are still in the process of consolidating the competition in that market. We are also trying to consolidate competition in mobile telephone industry as well. This sector was legally open to competition from the beginning, but the state-owned company had a huge advantage in that area, including favorable regulation. Of course all the markets that involve the state-owned company are very challenging to regulate, because we are dealing with a company with a very intense monopolistic view of service provision.

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

In our case, we have not yet begun to regulate all of the sectors that are to be regulated: energy, telecommunications, water, transport, and waste management. I cannot say which is more difficult than any of the others at this point because we are just at the beginning of the process. But I expect that the immediate workload will be on the power and telecommunications sectors due to the planned privatizations of these sectors. We have a sectoral law on telecommunications, and are in the process of having a law on power, which is lays out the structure from which we can regulate. The government will then be required to put in the legal framework for water, for waste management, for transportation, and so on. Since we've started, we've had a few issues to deal with in the telecommunications sector, mainly in the area of issuing licenses for radio communications. We have not yet had the demand from the power sector, but I think we will be required to oversee and supervise the management contract that the government is going to sign with a private operator of power sector, which is still a government monopoly. The telecommunications sector has been liberalized; we have two operators now; one private and the other a soon-to-be privatized government-owned company.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

One additional aspect I forgot is that besides the broad responsibilities in the telecommunications and postal sectors, we also have some responsibilities in regulating broadcasting. The main policy responsibility in broadcasting is located at the executive branch of government, but we also do a lot of things with broadcasting, and we advise the executive on broadcasting issues. This will become very important in the coming years, particularly with the technological convergence and the digitalization of TV and radio. With technological convergence, for example, you will be able to receive telephone, Internet, radio and TV through the same wire. So it will be quite a challenging regulatory issue in the coming years.

Matthew Hensley, President, IP3:

What types of data does your regulatory agency require companies to supply, and how do they comply in order to be licensed?

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

Initially, to be licensed, we have a 2-tiered arrangement. First, for new licenses or projects, companies must supply us with a statement saying that you want to carry out a project in the electricity sector. ERA then gives a permit to conduct a feasibility study. Then we require a technical and financial proposal, in addition to the environmental assessment of the project including, permits, etc. Then we require a comprehensive proposal for the financial arrangements for the project or the audited accounts if it not a new company, and other documentation that proves that it is a genuine company. If all of this information is okay, we then grant a license to start the project.

Now let's go to the companies who are already licensed; what do they give us? When they want their license renewed, they must submit their account information, budgets, an application for the license, and an application for the tariff they are going to apply. If they have power purchase agreements and so on, we need to have those as well. Now all of those will be individually scrutinized as individual documents before we give the license.

Every three months during the year we require updates on the financial performance of companies. We also require things like technical performance, load factors, all that so that we are sure that they have complied with the terms of the license itself. These are given to us in a format that we ourselves set so that a standard is set for all organizations we licenses. The information that we collect during the year helps us to coordinate with the final information that they give us. It also helps us to adjust to things like foreign exchange effects and inflation.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

Postal services it is always easier; the only thing we ask for from operators to be licensed is legal documentation. In telecoms we have four types of licenses. They differ in rights and obligations related to interconnections issues and services issues. There are, of course, requirements for legal documentation and technical projects. If under the same license you want to add more services in the future you have to submit to our agency the technical project to be approved, but you do not have to ask for another license, because some licenses allow you to develop several services. In telecoms, we approved our Licensing Rules in telecommunication services in March of this year. We are currently working on the data we will be collecting from all operators: financial performance indicators, commercial data, and technical data. In general, we don't set tariffs, since most of the services we regulate are operating in competitive markets.

Matthew Hensley, President, IP3:

So no formal monthly reporting requirements?

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

Well, we are defining that right now. I'd say that by August we will have the complete set of data requirements that we will be collecting periodically from operators. Up to now we've been asking for some information relating to specific points on issues on the table, but not a formal system yet.

Matthew Hensley, President, IP3:

Okay, How about Rwanda?

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

What we are planning to do is best illustrated with the contract we are preparing with the power sector. Basically it is going to be a performance contract for five years, and we have set targets that the operator will have to meet. First, the performance is based on the reduction of commercial and technical losses. Next, we will evaluate efficiency, the time it takes to respond to the demands of customers, the time it takes to respond to down lines etc. Those are going to be transmitted regularly to the agency for review, and the contractor's payment will be largely based on that performance. In the telecommunication sector, for example radio services; we have two types of Licenses. One is called an individual license, the other a standard license. There is some difference there. People who desire to operate a radio for example do not need to provide comprehensive information to get the license. But if someone wants to enter the mobile telecommunications industry, we have a number of requirements like universal aspects, investment requirements, financial management, and so on for us to be able to issue the license. But as I said, we are at the early stage. In water, the government decided just recently to approve the strategy that we are going to follow in this sector, the number of operators that we are going to have, and some of the regulatory aspects that we will have to change to define the conditions under which new operators will apply for a license. At the same time, we will be able now to define new data requirements by which we will be able to assess the performance of the operator or to determine the tariff. Nevertheless, at this stage, we do not have a defined set of reporting requirements other than those defined in the laws or in the contract, as will be the case in the power sector.

Matthew Hensley, President, IP3:

What is the process of appeals if a party disagrees with a regulatory decision?

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

In Uganda if two companies we regulate have a problem, they come to us and we make a decision. If either party doesn't like the decision, they can appeal to a court system. But ideally, the law says that they will appeal before a tribunal, a tribunal for utilities, but unfortunately one hasn't been put in place. On the other hand if we make a decision for a single utility and they don't like it, they can only go to the court on procedure not on regulatory content. On regulatory content we are final.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

If a party doesn't agree with a decision, it can ask for a reconsideration with URSEC, or it can appeal or challenge the decision to the executive branch of government. They could also go to the judiciary. In general, they could go to the judiciary if it is a formal procedural appeal, but in general everybody has the perception that the judiciary is not yet prepared to deal with the complex economic or technical issues associated with communications regulation.

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

The law provides for the possibility of appeal in the courts. But in some cases we have put in place arbitration systems. And in some cases we have what we call a designated ministry or a designated minister who can reverse the decisions of the board in very precise conditions like national security or situations like that. But when it comes to private matters with the "protesting" utilities, the board is the final authority.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

One further means of appeal arises when there is a question on either consumer's rights or competition law. We share regulatory responsibilities in these two areas with the executive level. Thus, the public could choose file appeals in these areas either at the ministerial level or with URSEC.

Matthew Hensley, President, IP3:

How is your regulatory agency financed?

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

The law says that we should be financed by the government from the central fund, from donors, from license fees and levies. Currently the bulk of our budget comes from license fees and a levy on all revenues from generated electricity in the country.

Matthew Hensley, President, IP3:

What percent? Can you give us an idea?

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

About 74% of the budget comes from license fees. Currently the rest is from donors, but that is mainly to cover our capital expenditures, which we don't see being repeated that much. So we should say that in the long term the regulator will be financed by license fees.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

We collect license fees and also fees for the use of the radio electric spectrum. In general we collect enough money for the agency. We do not require funding from government, but we are constrained in how much we can spend under general government rules. We are not allowed to spend all the money we collect.

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

So far the agency is being funded by the government in the initial stages, but the laws allows that the licensing authority will be given to the agency to fund the agency. I cannot tell how much it will be or at which percentage it will be to meet the agency's needs. We also receive some funding from the World Bank …much like a start-up fund. We are negotiating with the international organizations to finance training and all sorts of technical assistance and so on. But at this stage it is government funding that we are using to finance the agency. In one year we will be able to begin processing licensing fees, which will allow us to rely less on the government and provide more self-financing.

Matthew Hensley, President, IP3:

Tell us about the decisions that led you to become a multi-sector or single sector agency.

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

It was for practical reasons in the case of Rwanda. We are quite a small economy and at the beginning of the process so we thought it would be more economical to have one agency that could reduce costs and so on. We were taking into account human resource issues also and the size of the economy. Rwanda is 8 million people, which is still small to expect a huge level of activity, or many utilities to be regulated. For example if we had an agency dealing only with power in the electricity sector, I think the level of activity would be too small, and we would have a level of overhead that is too high to justify having a single sector agency. So we took those aspects into account. Initially, by the way, we were thinking of having sectoral agencies (communications, water, electricity, and so on), and as time went by we thought it would be better to have one for all of those reasons I have mentioned previously.

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

Actually it's interesting, because in Uganda it's a matter of history. Telecommunications was regulated first. When it was time for power, it was decided that we should do power, water, and transport together. In fact there is a government cabinet paper on that. In principle they say that is a good idea, but they said that the level of development of these regulatory mechanisms were different, so they said let's work on electricity, and then we'll develop the next one in water, and after that transportation. I think now that the government is finding that sectoral agencies are much better for us because of specific interests. We are interested in attracting investors to all the various sectors. The investors seem to be interested in dealing with a unilateral sectoral regulator who will understand and focus on their needs rather than on several others, so we may have to remain sectoral (power, electricity, communications, water). In water now, there has been a tendency to say that maybe we shouldn't go the full-thrust independent regulatory way, maybe we should have a different arrangement. I am not conversant with the details, but I think that may stop us from eventually merging into what they thought might be a multi-sector agency.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

We are halfway, because we only have two regulatory agencies, ours and the energy and water agency, which is responsible for regulating energy, gas, oil, and water. I think it is quite an interesting solution, particularly when considering the scarcity of human and financial resources.

Matthew Hensley, President, IP3:

As we've been discussing for the past couple of weeks in the course on Managing Regulatory Commissions you all are attending, perception is often an important as fact when it comes to utilities regulation. How would you describe public perception of the effectiveness of the regulator and the regulated utilities in protecting consumer interests?

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

Unfortunately I think that in Uganda the general public and the consumers think that the regulator is there to fix the tariffs. They don't see many other aspects we do and maybe we have not communicated that well yet. We are a new organization, and we must first work with the core staff, which have been in place for a year and a half now. The other aspects have not yet come out, but as for the tariffs, the public is beginning to realize that we are tough. At the beginning they thought that we were being manipulated by the executives, by government, but now they realize that we are not. As I mentioned elsewhere, there was a tariff that was protested both by government and by consumers, but we still stuck to our guns and it went through. In that respect, we think that was a good thing. Now we want to start tackling consumer satisfaction and the quality of service. Once we get into quality of service, the consumers will see us a bit more in the true light. Fortunately for us, the investors and potential investors (we've licensed more than 2 new ones from outside the country) trust us. We are negotiating a concession contract for the distribution network, but each time the potential people come, they insist on seeing us separately, away from the other players. They seem to be developing an idea that we will give them a fair picture of what is going on, and we are happy about that.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

I think that the public perception of regulatory activities is crucial and definitely a key factor. In my view, the importance and the usefulness of the regulatory activities increase when the activities are relatively independent. In general, at least in our country, most of the areas that we now regulate or try to regulate more independently were areas in which the political system had a lot of influence or intervention. So somehow you are taking out of the political system part of its influence, which of course is a very complicated and difficult process, so I think that you can do it relatively nicely only if the society appreciates that the regulatory agency is protecting their rights. We are relatively new, but I would say that our agency publicizes a lot of activities and there were some decisions that were more salient in terms of the public perception, but we dealt with them relatively well. The public is beginning to feel that there is some government body that cares for them.

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

I think it is interesting to see the relationship we have with the public. Basically because the regulatory agency is not yet well know the reaction from the public sector is one of concern over the forthcoming privatization in electricity and telecommunications. The government has not raised electricity tariffs since 1997, for example, and the public is concerned that a private operator will immediately hike the tariff. In telephone and Internet services, we have very bad public communications, and no effective regulation yet. The operator is raising his tariff on a day-to-day basis, and because the market is liberalized, nobody is putting targets on him and following and monitoring his performance. So my feeling is that the regulatory agency will have an important and crucial role to play to make sure that you do not have two operators who can collude and set tariffs and who may not be worried about efficiency, and so on.

Matthew Hensley, President, IP3:

Let me just say on this last issue, I'd be interested in hearing your reactions later to the idea of polling, using polls to gage how the public feels about things and use that as a tool to build trust. I think personally that the relationship between a free and independent media, and the effectiveness of policy-making, especially regulation, is really essential. In the US the press/media is always on the regulators to make sure that they are doing their job, and they are all over them if they fail, and I think that they can be mutually supportive.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

Don't forget that regulators also regulate the media.

Matthew Hensley, President, IP3:

That's the dilemma…and that's why it should be as free as possible. As we finish, give us your opinion of what will be the key challenge to success in the next five years.

Mr. Sebbowa - Uganda Electricity Regulatory Authority (ERA):

I think the most important thing is going to be balancing the "supply and demand" equation. Supply is small, yet there are peak times when we have excess. And then access by the population is small, yet you have this excess during the off peak times. Now, how to regulate within that environment is difficult. Not only that, but we also have a slightly different problem…the government is making a strong push for rural electrification. Our regulatory role in that environment is going to be complicated because in some cases these are going to be smaller units, which fall below the levels we typically regulate. Eventually these may become substantially big systems independent of the main grid, which will have its own regulatory needs.

Mr. Bergara - Uruguay Unidad Reguladora de Servicios de Communicaciones (URSEC):

I think that the main challenge will be to strengthen the independence of regulatory institutions. This is a very complex process because it is not easy to convince the political system that having more independent regulatory agencies is in the medium and long-term benefit for everybody, because it lends credibility to the whole investment processes.

Matthew Hensley, President, IP3:

How about Rwanda?

Mr. Nigybizi, Rwanda Multi-Sector Regulatory Agency (MSRA):

I think the first challenge will be institutional…building the capacity of the agency. And also making sure like Mario says, being able to put the agency in its place in terms of independence, financial resources, technical resources and so on. So I think over the next few months the institutional strengthening side is going to be predominant in what we need to do.

And also the legal and regulatory framework need a lot of acts and decrees that we have to put into place to improve the overall environment, but also to make sure that the situation is predictable. The second challenge is making sure that the agency's capacity is going to be conducive to attracting private sector participation in the sectors. In Rwanda, we need new investment in the sectors…we need privatization in telecommunications; we need private investment in water, electricity and so on. For us to be able to do that we need to make sure that the agency is efficient and that the whole conditions put us in a situation where the private sector comes in and says yes this is good, I know what to expect; I know that the agency is there, and so on, and I know that it will not be subject to arbitrary influences.

There is a third challenge, which is going to be on the consumer side. Consumer demand is increasing in all sectors, and people expect the supply to increase. They expect better services. The agency will have to be able to meet the people's expectations. Of course our three challenges are interrelated, but they will be coming in stages…the institutional side, then the legal and regulatory framework to make sure that you have private sector participation in the sectors, and then finally to be able to respond to the consumer's expectations.

Matthew Hensley, President, IP3:

Thank you again for your time and your insightful knowledge. I know our readers of the PPP Newsline will find them very engaging and interesting.