Amendment_No._1_-_Annexes_N_-_Q.pdf

July 2013 This report was produced for review by the United States Agency for International Development (USAID). It was prepared by International Resources Group (IRG) for the Institutional Support & Strengthening Program (ISSP)

INSTITUTIONAL SUPPORT &

STRENGTHENING PROGRAM

ASSESSMENT OF MULTI-SECTORAL REGULATORY

OPTIONS REPORT

Annex N - 1

INSTITUTIONAL SUPPORT

AND STRENGTHENING

PROGRAM (ISSP)

ASSESSMENT OF MULTI-SECTORAL

REGULATORY OPTIONS REPORT

July 2013

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government

Annex N - 2

TABLE OF CONTENTS

ACRONYMS ································································································ I

1. EXECUTIVE SUMMARY ······································································ 1

1.1. First, Improve the Regulatory Regime

1.2. Jordan Can Benefit through the Selective Establishment of a Multi-

Sector Regulator

1.3. Specific Recommendations for Multi-Sector Regulatory Bodies

1.4. Some Sectors can be Regulated from the Ministry (without an independent Regulator)

1.5. Other Regulators should Not be Merged

1.6. Next Steps/Timing

2. INTRODUCTION················································································· 7

3. DEFINITIONS AND METHODOLOGY ····················································· 8

3.1. Definitions

3.2. Methodology

4. GOOD REGULATION ········································································· 11

5. CHOOSING THE RIGHT MODEL: SINGLE SECTOR AND MULTI-

SECTOR REGULATORS ···································································· 15

6. RECOMMENDATION: OPTIMAL ORGANIZATIONAL STRUCTURE

FOR NEW REGULATOR ····································································· 24

7. FINANCIAL ANALYSIS······································································· 29

7.1. Introduction

7.2. General Financial Analysis

7.3. Financial Analysis of Establishing a Utility Regulatory Commission

8. ANNEX 1: DESCRIPTION OF REGULATION IN JORDAN ························· 33

9. ANNEX 2: CASE STUDIES ·································································· 46

10. ANNEX 3: PEOPLE INTERVIEWED ······················································ 49

11. ANNEX 4 REFERENCES ···································································· 52

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ACRONYMS

Aqaba Aqaba Water Company

ASEZA Aqaba Special Economic Zone Authority

AVC Audio Visual Commission

CARC Civil Aviation Regulatory Commission

ERC Electricity Regulatory Commission

ISSP Institutional Support and Strengthening Program

JTA Jordan Transport Authority

MOPIC Ministry of Planning and International Cooperation

MPSD Ministry of Public Sector Development

MWI Ministry of Water and Irrigation

NGO Nongovernmental organization

JMA Jordan Maritime Authority

PMU Program Management Unit/WAJ

PSP Private sector participation

TMT Technology, media and telecommunications

TRC Telecommunications Regulatory Authority

USAID United States Agency for International Development

WAJ Water Authority of Jordan

WURU Water Utilities Regulatory Unit/WAJ

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1. EXECUTIVE SUMMARY

The Multi-sectoral Regulation Study undertaken by the USAID/Jordan Institutional Support and

Strengthening Program (ISSP) in 2013 aimed to assess the feasibility and potential results of merging infrastructure regulatory commissions in Jordan. ISSP worked together with the Ministry of

Planning and International Cooperation, the Ministry of Public Sector Development and other government institutions to consider these issues and to make a recommendation on the best way forward.

Many regulatory institutions have been established in the past decade, both in the Middle East and around the world. Although there are no clear international guidelines or standards governing the choice of single or multi-sector regulatory bodies, best regulatory practices are instructive. Multi-sectoral regulatory commissions are thought to be most useful for small countries, such as Jordan, where the population is small and resources are limited. MOPIC and MPSD sought to know if there were cost savings and efficiency gains to be achieved by merging any of the nine identified regulatory commissions with jurisdiction over utilities, such as energy, minerals, telecommunications, transport and water.

On the basis of our examination of regulatory bodies in Jordan and internationally, the Team’s findings and recommendations are as follows:

1.1. FIRST, IMPROVE THE REGULATORY REGIME

The multi-sector regulator model is not more efficient or more effective than the single sector model.

Neither is it a remedy for other weaknesses in a regulatory regime. Generally speaking, a regulatory regime is effective when regulators have a sound legal framework upon which to operate and when the government is willing to support and sustain the regulatory process. Then, a multi-sector regulator may bring better regulation to similarly functioning sectors. While there are numerous examples in developing countries where single and multi-sector regulators bring improved services at reasonable prices, there are also many examples where, because of unhealthy regimes, the goals of effective regulation have never been realized.

ASSESSMENT OF MULTI SECTOR AL REGULATORY REPORT

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Most of the time ineffective regulation can be attributed to defects in legal and structural frameworks.

Such defects often lead to political interference, financially weak regulators, regulated companies that are stronger than the regulators and reduced regulatory capacity. All regulatory authorities in Jordan suffer to some degree from poor regulatory designs and structures. The principal exceptions are the regulatory authorities governed by international laws, treaties or conventions which the Government of

Jordan has signed. These organizations exhibit excellence in regulatory practices.

Ineffective designs and structures are usually intentional. In Jordan, the Government has consciously determined to limit the impact of regulators by retaining political control of the most important regulatory powers, namely, access to markets and prices. While there is no doubt that politics and regulation are intimately related (usually on matters of prices and subsidies), regulation is a technical, not a political act. Political decisions on matters affecting end user prices should come only after the regulator has done its job. In Jordan the line between politics and costs needs to be much more clearly defined.

Over and above ineffective regulatory designs and structures, most regulators in Jordan also suffer under the weight of other governmental burdens on the regulatory process. One such burden is that the government sees regulatory bodies as sources of income; not as institutions that will bring better services at reasonable prices. In best practices, regulatory authorities are not established to be contributors to cash poor governments. Although it is true that in all countries some regulatory functions do result in the collection of funds for the budget (e.g., auctioning of licenses and bandwidth), in best practices, regulatory fees and levies are not intended to be budget enhancers; they are intended to fund the regulator’s operations. Excesses, if any, are either held over for the regulator’s subsequent fiscal year or they are refunded to the rate payer by way of lower fees.

Because a regulator’s financial resources come not from the taxpayers, but from the ratepayers, they should not find their way into the general budget. Until Jordan’s decision makers draw this fundamental distinction, the regulatory regime will remain financially dysfunctional.

A second burden is that the government and/or the ministry responsible either sets or approves the budgets of Jordanian regulators. This also violates best practices, which require regulators to be financially independent. In best practices, the regulator will be subject to public reporting of budgets and expenses and to audits by independent auditors. While there may be a case for government participation in budget setting where the institutions are funded from the budget, in those cases where a regulator’s activities exert no negative effects on the government’s budget, the regulator should be free to determine how best to raise and use its financial resources.

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A third burden is related to the second. In Jordan the process of approving regulatory budgets (by the minister responsible or the prime minister) extends to the approval of budgets for regulatory training.

This immediately raises a conflict of interest, because for most regulators, funds not used for training will increase the amounts turned over to the national budget. In best practices, regulators set their own training budgets, which are included in their operating expenses. Lack of adequate training will negatively impact a regulator’s capacity to regulate competently and this will further damage the nation’s regulatory regime.

The fourth burden is perhaps the most damaging. In Jordan, the government has placed the staffs of all regulators under civil service laws. This limits amounts that can be paid for staff salaries and significantly interferes with the regulator’s ability to compete in the labor market for needed technical expertise. Regulators, caught between the need for competent staff and the inability to pay in excess of civil service rates, naturally seek to avoid civil service restrictions by “contracting out” for essential expertise. As a result, Jordanian regulators now operate under a two-tiered pay scheme; those

“grandfathered in” to the old regime with higher salaries, and new hires that are second-class employees.

This practice lowers morale and reduces the ability of regulators to “keep up” with the companies they regulate. Inevitably, this will lead to poorer regulation and reduced faith in the regulatory regime.

The best-designed regulatory authority will struggle to thrive in the unhealthy regulatory environment described above. For that reason, no structural changes to any regulatory bodies should be made and no merging of existing regulators should be undertaken without taking concrete steps to improve the quality of the overall regulatory regime.

These negative comments should not obscure the fact that examples of outstanding regulation exist in

Jordan, specifically at NRC, CARC and JMA. These regulatory bodies are established pursuant to international treaties that set higher regulatory standards than the Jordanian laws provide for domestic regulatory bodies. NRC, CARC and JMA are clear examples of how regulation can function effectively and efficiently in Jordan. They should be considered models of how a well-designed and well-functioning regulator can make significant contributions to delivery of essential services. Further, the governmental burdens on regulatory authorities described above are not difficult to remove. By doing so, the government will demonstrate its willingness to improve the nation’s overall regulatory regime and open the door to a discussion about the true merits of multi-sector regulation.

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1.2. JORDAN CAN BENEFIT THROUGH THE SELECTIVE ESTABLISHMENT OF A MULTI-

SECTOR REGULATOR

Today, significant financial advantages accrue to the government as a result of regulatory fees for the extraction or use of natural resources (e.g., bandwidth and licenses). In best practices these funds are part of the national patrimony that should accrue to the government. This is true irrespective of whether the regulator that collects those fees stands alone or is merged under the multi-sector model.

Unless civil service rules are changed, merged regulatory bodies will not be able to rationalize staff in the near to medium term. In the medium to long-term, merged regulators can expect to enjoy limited benefits from reductions in staff. Some limited financial benefits may be gained as a result of office space consolidation. This will depend on whether the accommodation is rented or owned by the government. Nevertheless, for some sectors, a merger of some regulatory authorities can be expected to bring some improvements to the quality of regulation. By improving the regulatory regime, the government will increase the ability of existing regulators to be more efficient and effective. Multi-sectorial regulators send a common signal to companies, customers and potential investors concerning regulatory policy, pricing methodologies and customer service expectations.

1.3. SPECIFIC RECOMMENDATIONS FOR MULTI-SECTOR REGULATORY BODIES

The principal criterion for merging regulators relates to functionality. In this context, functionality has two elements. First, the companies being considered for a merger should function in a similar way.

Second, the best practices for regulating the sectors to be merged should also be similar. In addition to this “functionality” argument, other considerations may also weigh in favor of a merger. For example, the convergence of technology, media and telecommunications sectors and other public utilities sectors over the medium term may also be relevant.

Other general advantages of multi-sector regulation, including reduced costs, best use of scarce resources, efficient use of staff, cross fertilization of staff skills, improved effectiveness, protection from capture, broad-based signals to investors and improved regulatory permanence may also be pertinent.

If the general regime for regulatory authorities in Jordan were to be improved, a merger between the

TRC, the ERC and a new water sector regulator would be feasible and advisable. Specifically, multi-sector regulation would bring immediate and tangible benefits to the water sector, one of the most important yet poorly regulated sectors in the country. By taking regulatory functions out of WAJ (the owner) and the MWI (the government) and placing them in an institution with two relatively strong regulators (telecoms and electricity), immediate regulatory gains in the water sector could be expected.

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The electricity sector should also benefit, as the stronger TRC spreads its strong regulatory practices to electricity regulation.

There are numerous examples from other countries of multi-sectoral regulators that include telecommunications, electricity and water. Telecommunications in Jordan and globally is more advanced than electricity and significantly more advanced than water1. Any effort to merge electricity and water into telecommunications should take care to ensure that advancements in technology and services available to telecommunications customers in Jordan are not delayed while attention is focused on the other two sectors.

Other merger candidates include the maritime sector (the JMA) and the transport sector (the JTA).

Here, however, other considerations outweigh the obvious advantages to the establishment of a multi-sector regulator. The JMA is governed, at least in part, by international treaty obligations; the JTA is not.

Geographical considerations also weigh heavily against merging JMA and JTA. JTA’s principal business is in Amman while JMA’s principal business is in Aqaba. Taking these two issues into account, it is therefore not recommended to establish a multi-sector regulator for the surface and marine transport sectors.

1.4. SOME SECTORS CAN BE REGULATED FROM THE MINISTRY (WITHOUT AN

INDEPENDENT REGULATOR)

Some regulatory authorities should be merged into their line ministries. Mining is predominantly a state business and could be managed inside the ministry. Since the Audio-Visual Commission (AVC) is merely a grantor of licenses and regulator of customer service issues, its work could also be managed inside the ministry.

1.5. OTHER REGULATORS SHOULD NOT BE MERGED

The Government should not consider merging the NRC, CARC, or JMA. These bodies function more on the basis of international law than Jordanian law and each is functioning well. Any actions that might diminish the capabilities of these three outstanding regulators will have an impact on Jordan’s obligations as a signatory of international treaties.

1 For example, telecommunications is a competitive market for most services. 4G networks are being rolled out in many countries, with private investment by private companies. The electricity sector has limited private investment and no competition. The water sector has very limited private investment and no competition.

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1.6. NEXT STEPS/TIMING

There should be an immediate and close examination of how a merger of TRC, ERC and the water regulatory body inside the Ministry of Water and Irrigation would happen, what functions would be contained in a potential new Utilities Regulatory Commission and what the costs and benefits would be.

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2. INTRODUCTION

The Government of Jordan, through the Ministry of Planning and International Cooperation (MOPIC) and the Ministry of Public Sector Development (MPSD) have embarked on a broad program to restructure Jordan’s regulatory and administrative bodies. In order to streamline Government procedures, the Government is conducting a study (the feasibility study) on the advisability of merging several single sector regulatory bodies into one or more multi-sector regulators based upon their performance and the economies of scale that might be gained through restructuring.

The regulation described in this report relates to price (tariffs), market access (licensing) and performance standards for utilities. It is not concerned with environmental regulation, health, sanitation, customs, labor, automobiles, pharmaceuticals, or any other regulatory systems.

To facilitate the feasibility study, the U.S. Agency for International Development (USAID has agreed to provide technical support and regulatory expertise from its Institutional Support and Strengthening

Program (ISSP), which is working with the Ministry of Water and Irrigation (MWI) to develop a set of institutional reforms to strengthen and consolidate authority for water resources planning and management in MWI. ISSP, which is currently involved in developing a new water sector regulator, has assembled a team (the Team) of regulatory and technical experts to carry out the work.

This report presents the Team’s conclusions regarding the advisability of establishing one or more multi-sector regulators in Jordan. In addition, it takes into account that any new regulatory regime should include an independent water regulator. This report will consider:

• The feasibility and advisability of merging the existing telecoms and electricity regulatory commissions, a water regulator and perhaps other administrative/regulatory bodies into a new and independent multi-sector regulatory authority. A key consideration related to the establishment of such a multi-sector regulator is the similarity of regulated functions as well as any efficiencies or financial savings that might be gained by combining a number of regulatory and administrative activities.

• The benefits (if any) that might be realized by merging the Land Transport Regulatory Authority and the Marine Transport Authority. A key factor to this merger is the effect that Jordan’s geography plays on the regulation of land and marine transport.

• The optimal organizational structure for new regulatory authorities;

• The appropriate legal framework for a new regulator.

• Feasible time frames to carry out such restructuring.

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3. DEFINITIONS AND

METHODOLOGY

3.1. DEFINITIONS

“To regulate” means to govern or to direct according to a detailed set of rules and procedures that market participants must follow2. In this report we are concerned primarily with the economic, technical and service quality regulation of infrastructure sectors. A principal focus of our analysis is on those aspects of pricing and performance that typically lies within the jurisdiction of infrastructure regulatory authorities, or as is the case in the water sector, under the jurisdiction of an entity acting as

“the Regulator”3.

In common usage, multi-sector regulation is understood to be the functioning of a single administrative body that has regulatory jurisdiction over several sectors, including, for example, telecommunications, electricity, gas, water and various types of transportation. The classic multi-sector regulatory agencies are the State Public Utility Commissions (PUCs) in the United States.4 It might also extend to surface and marine transport (including rail transport) and regulation of other infrastructures such as airports and the port of Aqaba.

During the last generation, the number of regulatory bodies in the world has grown rapidly. This has given scholars, regulators and policy makers an opportunity to consider the optimal design of regulatory institutions. There have been numerous studies on the issue of whether it is more efficient to have a number of single sector regulators or alternatively, a small number of multi-sector regulators with jurisdiction over several infrastructure sectors. Some of those studies are summarized here. If there are any conclusions to be drawn from these studies, they are that good regulation comes in many forms and does not depend on whether the regulator governs a single sector or several. The selection of one model over another often depends on the specific characteristics of the place where the regulation will occur and the inclinations of the government involved.

Black’s Law Dictionary, Bryan A. Garner, Editor in Chief, Second Pocket Edition, West Group, St. Paul, Minnesota, USA, 2001.

Assignment Agreement between the Water Authority of Jordan, Assignor, and the Aqaba Water Company, WLL, Assignee, signed June

19, 2004 and Assignment and Development Agreement between the Water Authority of Jordan, Assignor and the Jordan Water Company, Miyahuna LLC, Assignee, 9 January 2007.

4 (World Dialogue on Regulation for Network Economies, Discussion Paper #0203, January 30, 2002.

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3.2. METHODOLOGY

In this report, the term “Regulatory Model” includes issues related to location (within the government’s administrative framework) as well as structural design. Our research5 has identified the following structural types:

• Single sector regulators with a single decision-maker;

• Single sector regulators, operating either as a commission model or with a board of directors;

• Single sector regulators situated within or under the complete control of a ministry or other governmental body;

• Single sector regulators called “commissions”, yet with no commissioners, operating with a single decision-maker;

• Multi-sector regulators operating either as commissions or according to the board of directors model;

• Multi and single-sector regulators operating quasi-autonomously and with only minor inputs/controls from either the government or a ministry;

• Multi and single-sector regulators operating as fully autonomous and independent bodies.

In the course of this feasibility study, the Team met with the regulators, their related ministries and some of the companies they regulate. With the valuable assistance of MOPIC and MPSD, the Team conducted interviews with the following nine regulatory authorities:

• Audiovisual Commission

• Civil Aviation Regulatory Commission

• Electricity Regulatory Commission

• Jordan Maritime Authority

• Land Transport Regulatory Authority

• National Resources Authority

• Nuclear Regulatory Authority

• Program Management Unit/WAJ (Water Sector)

• Telecommunication Regulatory Commission

5 See list of references in Appendix 4. See also: EURELECTRIC report on Regulatory Models in a Liberalized European Electricity Market, 2000.

www.eurelectric.org/Download/Download.aspx?DocumentID=14576.

See also Competition and Economic Regulation in Water: The Future of the European Water Industry. Tony Balance and Andrew Taylor 2005.

http://iwapublishing.com/pdf/contents/isbn1843390493_contents.pdf

ASSESSMENT OF MULTI SECTOR AL REGULATORY REPORT

Annex N - 13 http://www.eurelectric.org/Download/Download.aspx?DocumentID=14576 http://iwapublishing.com/pdf/contents/isbn1843390493_contents.pdf

In addition, the Team met with the following ministries:

• Ministry of Transport

• Ministry of Water & Irrigation

• Ministry of Energy & Natural resources

• Ministry of Information & Communication Technology

Lastly, the Team met with the following regulated companies:

• In the electricity sector and under the jurisdiction of the Electricity Regulatory Commission):

o Central Electricity Generating Company o Electricity Distribution Company

• In the transport sector and under the jurisdiction of the Land Transport Regulatory Commission:

o Jordan Hejaz Railway

• In the water sector and under the jurisdiction of the PMU o Aqaba Water Company o Miyahuna Water Company

• In the telecoms sector and subject to the jurisdiction of the Telecommunications Regulatory Commission:

o Orange o Umniah

Because of the special status of the Aqaba Special Economic Zone (ASEZ), the Team also met with representatives of Aqaba Development Authority.

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4. GOOD REGULATION

This section will consider the following issues:

• What is good regulation?

• How does Regulatory Independence Affect Good Regulation?

• What are the Principal Obstacles to Good Regulation in Developing Countries?

What is Good Regulation?

The purpose of regulation is to force or encourage companies to provide better services to customers at the lowest possible prices. Better service is always the result of better company operation. The studies of Baietti et. al.6 have recognized that the following steps will nearly always lead to improved operating performance: separate resource regulation (upstream activities) from the regulation of distribution (downstream) services; separation of the government’s policy making functions from those of a regulator; the establishment of systems to monitor and enforce performance benchmarks; and finally, continual training to enhance regulatory capacity and develop human resources.

The University of Florida Utility Research Center7 has identified the following characteristics of good regulation:

• It depends completely on the quality of the regulatory design;

• It is the direct product of legislation;

• It is politically and financially autonomous from any government body;

• Its jurisdiction is clearly established and its tasks do not overlap with other government bodies;

• It successfully avoids conflicts of interests with government, industry and customers;

• It operates with technical and professional expertise;

• It treats all stakeholders in the regulatory process fairly and equally; and

• It promotes and encourages intensive public scrutiny.

“Characteristics of Well-Performing Public Water Utilities. Water Supply & Sanitation Working Note No. 9.” Washington DC.: Baietti, Kingdom and Ginneken. The World Bank Group; 2006. Report No.: vi-107.

7 Annotated reading list for a body of knowledge on infrastructure regulation developed for the world bank by: Mark A. Jamison, Sanford V. Berg, Public Utility Research Center, University of Florida, revised August 15, 2008.

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Each of these characteristics is central to good regulation, irrespective of whether the regulator is a single-sector or multi-sector body, and whether the regulated companies are state-owned, privately held or involve public-private participation.

How Does Regulatory Independence Affect Good Regulation?

Not all regulatory bodies are independent. Some operate as little more than appendages of government or a ministry. Regulatory bodies are considered to be independent if they:

• Operate under a law that clearly sets out tasks, obligations, rights and powers;

• Have administrative autonomy, meaning that their decisions are final and not subject to political control; powers to appoint regulators are separate from the powers to remove them and the power to remove only arises as a result of a professional fault;

• Are financially autonomous, meaning that they are not financed by the budget and that their budgets are not controlled by a ministry or other government organ; and

• Operate at a distance from the government that created them, the companies they regulate and the sector’s end users.

In the developed world, financial independence of regulators is the iron rule. In the developing world, is it the rule for nearly all good regulators as defined above. As indicated, one of the characteristics of good regulation is that it is politically and financially autonomous from the government that created it.

Political independence is impossible without financial separation.

Financial independence does not mean that such bodies are above oversight. In best practices, a regulator’s legal framework ensures that it is constantly accountable to the public, which has a right of access to all information it uses when taking a regulatory decision. On the financial side, transparency of process requires the regulator to develop its license fees or financial levies on the basis of projected budgets and stakeholder input. Surpluses are either carried over to the subsequent year or refunded to the regulated companies together with an accompanying reduction in fees or levies in that year. In addition, the regulator is, by law, required to issue an annual report, to have its books audited by an independent auditor and sometimes also by a government auditor. Lastly, the regulator is accountable when all who are adversely affected by its decisions have the right to appeal to an impartial body such as a court of law or a regulatory tribunal.8

8 Designing Independent and Accountable Regulatory Authorities for High Quality Regulation. Proceedings of an Expert Meeting in London, U.K., 2005. http://www.oecd.org/dataoecd/15/28/35028836.pdf

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What are the Principal Obstacles to Good Regulation in Developing Countries?

One of the biggest difficulties in designing an effective regulatory regime is that of replacing the political accountability of a ministry or the government with the technical accountability of a regulator.

Institutional reformers around the world struggle to develop independent regulators in the face of the felt needs of government to ensure that regulation remains in government, or at least politically accountable.

In developing countries, many regulated companies are state-owned enterprises. Regulators throughout the developing world will attest to the fact that it is extremely difficult to separate politics from management (or regulation) of a state-owned company. This is particularly true where where the regulator is also funded by the government. In that case these three distinctly separate interests

(ownership, management and regulation) become inextricably intertwined. Where the government approves the budget or sets the remuneration for regulatory staff, the government also has the power to limit the regulator’s expenditures in a way that may be counterproductive to the regulator’s mission.

On this point there are two principal areas of concern. The first relates to budgets and line items. In

Jordan, the process of approving regulatory budgets often extends to the approval of regulatory training budgets, thus raising a conflict of interest. The government or ministry wants to limit regulatory costs so that regulatory surplusses will accrue to the budget. For its part, the regulator needs to train, which increases regulatory costs.

The second area of concern relates to the remuneration of regulatory staff. In Jordan, the government has placed the staff of all regulatory authorities under civil service laws. This limits the salaries of regulatory staff and significantly interferes with the regulator’s ability to compete in the labor market for needed technical expertise. Regulators, trapped between the need for capable staff and the inability to pay over the civil service rates, naturally seek to avoid civil service restrictions by “contracting out” for essential expertise. As such, in Jordan, all regulators now operate under a two-tiered pay scheme; those

“grandfathered in” to the old pay system with competitive salaries and new hires that are in effect second-class citizens. Every regulatory authority interviewed shared the same story. Application of civil service rules to “independent” regulators results in decreased morale and increasingly, an inability to compete with the regulated companies. This should raise warning signals, for it is widely acknowledged in the developing world that one of the principle causes of regulatory failure is a lack of regulatory expertise.

There are other reasons that regulatory authorities in developing countries fail. One is the fact that high poverty rates result in higher universal service obligations which are met by state monopolies which are themselves usually cash poor. In addition, shortages of expert skills mean that regulatory staff

Annex N - 17 must come, if at all, from the regulated industry. This raises conflicts of interest and “revolving door” issues. There is also a lack of experience with other autonomous agencies such as central banks, competition offices, and auditors. Further, ties are closer between industry and government than in other parts of the world due to the fact that a significant portion of infrastructure development is state-driven, if not funded. Finally, in the developing world the transparency framework is usually not as well developed and the rule of law (and enforcement) is less reliable.

Several of these obstacles to the implementation of good regulation exist in Jordan. They are not, however, barriers to good regulation, for where there is a will to create and support a good regulator, each of these barriers can be overcome.

On numerous occasions during this study, the Team has been informed that regulated companies in

Jordan really do want good and strong regulators. This reflects a maturity among companies that is remarkable. The Team subscribes to the opinions of the interviewees in this study that good regulation will actually improve sector performance and make all of the companies look and perform better.

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5. CHOOSING THE RIGHT

MODEL: SINGLE SECTOR

AND MULTI-SECTOR

REGULATORS

Oftentimes, when governments take the step to move regulatory functions outside of line ministries, they do so not by establishing one or more multi-sector regulators, but by creating a number of single sector regulatory bodies. This can lead to administrative confusion and uneven regulation. The confusion arises when legal frameworks do not satisfactorily separate ministerial from regulatory functions or clearly identify the locus of regulatory oversight.

Uneven regulation is caused when a number of single sector regulators fail to co-ordinate and harmonize their regulatory processes. This is particularly true in public utilities sectors. By way of example, for reasons completely unrelated to industry structures, approaches to issues such as price regulation, access to essential facilities and the setting of interconnection prices often vary among regulators of similar industries in the same country. Multi-sector regulation can avoid many of these of these problems. This is not, however, intended to imply that in every circumstance single-sector regulators should be amalgamated into a mega-regulator; rather, it implies that like-functioning sector are often better regulated by one regulatory body.

This section will consider the following issues:

• Collegial Bodies and Sole Decision Makers

• The European Experience

• The UK Experience

• The US and Canada Experiences

• The Benefits of Multi-Sector Regulation

• The Benefits of Single Sector Regulation

• A Review of Best Practices

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Collegial Bodies and Sole Decision Makers

There are two common models for decision-making in regulatory bodies:

• An individual decision maker (chairman, director-general or CEO); and

• A collegial body such as a board of directors or a commission composed of multiple members).

Each model brings advantages and disadvantages to the regulatory processes. Either may be “good” according to the criteria developed by the University of Florida Utility Research Center described above.

Finally, in both models, a good regulator will be bound by considerations of due process (natural law) and transparency.

A single decision maker brings a consistent approach to regulation since it is a single individual with a coherent and unified plan for the regulated sector. In addition, single decision makers often make decisions more rapidly, even when operating under the mandates of transparency.

On the other hand is the regulator comprised of more than one decision maker. There are two types.

The first operates on a corporate model, with a board of directors that are not full time employees. This model is found most often in England and the Commonwealth countries. The second operates as a commission where the decision makers are full-time employees. This model is most often found in the

United States, some European countries, the Philippines, South Asia (India, Pakistan and Bangladesh) and parts of Africa. It is also seen in Jordan. In both cases, decisions of the authority are taken by way of a democratic vote of individuals with different areas of expertise, each bringing their distinct perspectives to regulatory matters.

Collegial bodies are thought to be more independent because it is less likely that either the government or private sector actors will be able to influence all of the decision makers on the same matter. They are also thought to raise the legitimacy of the decision-making process since it is less likely that a single person will be fully responsible for a particular decision. However, as in any decision-making process involving more than one person, collegial bodies are often slower and more subject to internal struggles.

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The European Experience

The European Union does not require a single structure or approach to infrastructure regulation.

Rather, the choice of a regulatory structure is considered to be a matter for each Member State to decide. On the Continent of Europe, single sector regulators are the rule rather than the exception.

Multi-sector regulators are, however, becoming more common as governments seek ways to reduce overhead and cut regulatory costs. Of approximately twenty European countries analyzed, most have single-sector regulatory agencies. Half-dozen countries have multi-sector regulators while others are still considering the idea of regulatory consolidation.

The UK Experience

The modern trend of consolidating regulators is highlighted by the UK’s decision in 2000 to merge the

Gas and Electricity Regulators for England and Wales. Regulatory bodies in the UK fall generally into two categories. The first is comprised of regulators that are headed by an individual decision maker called a Director General. The second is comprised of multi-sector regulators headed by a board of directors. Both types are independent, meaning that:

• They are operationally and financially autonomous; and

• The decision makers have fixed terms of service and are not subject to removal except for reasons set out in the law that creates them.

OFWAT,9 the independent (non-ministerial) single-sector regulator for the water sector, is a good example. The director of OFFWAT, which has a well-recognized and often-copied structure and mandate, is a single decision maker.

The UK’s multi-sector regulatory bodies have numerous voting members, each of whom are appointed by the Permanent Secretary of the sector. Voting is democratic; a chairman of the board has no more power to control the outcome than any other member. In these multi-sector bodies, procedures for removal are identical to those for single sector regulators; the appointing person is not responsible for removal and removal is statutorily protected (removal only for cause).

http://www.ofwat.gov.uk

ASSESSMENT OF MULTI SECTOR AL REGULATORY REPORT

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Regulatory structures and the functions carried out by regulators also vary widely, not only from country to country but even across sectors within a single country. Sometimes a regulator’s mandate is limited to the regulation of economic, technical and service quality of infrastructure service providers

(telecoms, electricity, gas, water and waste water services, rail, air or marine transport, etc.). Other times legal mandates extend to the regulation of competition issues that may arise within the sector. However it is structured, its relationship to political interests may be close or it may function in virtual autonomy.

Finally, a regulator’s powers may range from the purely administrative to the quasi-judicial. A number of factors will affect regulatory structures and functions, including operational efficiency, available resources, perceived political and administrative necessities and the accepted advantages of independence. Sometimes issues of history, geography and demography also play a role in the selection of a regulatory model.10

Although governments looking for new regulatory arrangements face a wide variety of choices, there is a strong case to be made that countries concerned about resources (human and economic) and political practicalities should carefully consider the multi-sector model, at least for functionally similar sectors. In many, though not all countries in Europe, where multi-sector regulators exist, they integrate common regulatory practices across a number of functionally similar industries or sectors. Generally, these include telecoms, energy, electricity, transport and water sectors.

The US and Canada

In the United States and Canada, multi-sector regulators carry out state and provincial regulation of telecommunications, water & sewerage, gas, transport, electricity and taxis services. The UK has established a converged regulator for communications (OFCOM) taking in the discrete functions previously performed by OFTEL, the Broadcasting Standards Commission, the Independent

Television Commission and the Radio and Radio-communications Authority. The UK has also merged the previous energy regulator (OFGAS) and the then electricity regulator (OFFER), to form OFGEM, Office of gas and electricity markets, in the late 1990s.

Between 1907 and 1930 most states in the US (all but Delaware) established multi-sectoral regulatory commissions to set market entry, tariffs and customer service standards for public utilities. A

“regulatory compact” was created between the regulator and regulated private property put to use in the public interest to the effect that government protects the interests of both the consumer and the supplier and the supplier has both rights and responsibilities. Beginning in 1982 in the Energy Policy

See Levy and Spillers (1996) and Stirton and Lodge (2002).

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Act, the US began to promote competition in the electric and gas industries. Today, residual, non-competitive functions remain under the jurisdiction of the regulators in electricity, gas, water, telecommunications and transport; competitive services (such as many telecommunications services and electricity generation) are not regulated or are very lightly regulated.

The Benefits of Multi-Sector Regulation

The following considerations are often cited as reasons for multi-sector regulators:

• Reduced Costs: Multi-sector regulation often reduces the per unit cost of regulation by reducing duplicative costs including staffing, administrative costs, technology requirements, machinery, furnishing, office space, etc. This is one reason that small, developing countries having relatively small populations and limited resources often choose a multi-sector model. It is to be noted that the ability of a multi-sector regulator to reduce duplicative costs is directly related to the entity’s power to rationalize staff. Where hiring and firing are limited by the application of civil service laws, such as in Jordan, reducing staff costs through staff rationalization will be extremely difficult. It is also important to note that while the elimination of duplicative costs is a commendable goal, under best regulatory practices, the realization of that goal will not improve the financial standing of the national budget. It should however, benefit the ratepayers that fund regulation.

• Best Use of Scarce Resources: Closely related to the avoidance of duplicated costs argument is the fact that in developing countries the skills required for utility regulation are often specialized and scarce. Although the number of regulated service providers is usually low in developing countries, regulated companies are generally in a strong financial position to compete for the best technical expertise available. Multi-sector regulation addresses the matter by applying its technical, economic, financial, legal expertise across numerous sectors.

And, as has been argued in the discussion regarding duplicated costs, above, where national laws limit regulatory salaries, the ability to compete on the market for the best talent will be severely limited.

• Efficient Use of Staff: Since not all the entities that are regulated by a multi-sector regulator require the same level of attention at the same time, a multi-sector regulator, while allowing staff specialization, also retains the freedom to deploy its staff according to work requirements across all of its regulated sectors. The advantage is that the regulator can avoid underutilization of staff by allocating staff to sectors that have different peak loads.

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• Leveraging of Skills and Training: While it is true that each regulated sector always has unique technical issues, most of the economic issues faced by utility regulators are in fact, quite similar. These include cost of capital, access to networks, marginal costing, price caps, etc. A multi-sector regulator can leverage the experiences gained in one sector in all others that function similarly. It can also leverage scarce training resources to raise the skills of staff in more than one regulated sector. By way of example, in many countries, experiences gained in telecommunications regulation have also been applied when regulating other sectors. Lessons learned from the development of incentive-based regulation in telecommunications can also be applied to develop similar mechanisms for among others, the water and electricity sectors. The same is true for determining the costs of capital.

• Improved Effectiveness: Most of the “efficiency” arguments addressed above also apply to matters of cost effectiveness, for where structures and functions are efficient they are also effective in that they lead to the completion of tasks in the shortest period of time.

• Protection from Capture: Multi-sector regulators reduce the scope for political and industrial capture. Regulatory capture occurs where regulators come to be dominated, either by the government that establishes them or by the industries they are legally tasked to regulate. At the political level, where a number of ministries have an interest in the work of a multi-sector regulator, it is less likely that the regulator will be captured by any one of them.

At the industry level, when a single sector regulator oversees only a small number of sector companies, the chances for regulatory capture are much greater. The converse is also true--the larger the number of companies there are under regulation, the less likely it is that a regulator will fall under the influence of any one of them. This is particularly true because a multi-sector regulator will have to demonstrate consistency in its decisions across each regulated sector. Finally, where a regulator is funded by way of regulatory levies, the multi-sector regulator’s survival is not dependent on the fortunes or willingness to pay of any one company or for that matter, group of sector companies. Regulatory capture is not solely an issue of structure. If, as is generally the case in Jordan, the law establishing a regulator requires all substantive issues for a given sector to be taken in government by a minister or the prime minister, even a multi-sector regulator will be legally speaking, politically captured.

• Strengthened Permanence: Multi-sector regulators are firmly embedded in a framework of institutional, legislative, and enforcement arrangements covering numerous sectors. The possibility of abolishing a well-embedded regulatory body is far more remote than the possibility of “restructuring” a single sector regulator out of existence.

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• Convergence as an Argument for Multi-Sector Regulation: The term “Convergence” is nearly always used in the context of the changing nature of the delivery of technology, media and telecommunications (TMT) services. It recognizes that technological changes have blurred the boundaries between broadcasting, telecommunications and other communications technology related areas that were previously regulated separately. These changes have caused these formerly discrete sectors to “converge”. Because of this convergence, there is now a logic in the argument that all of these activities should be brought under one regulatory umbrella.

Another dimension of convergence has developed in parallel to the one related to technology, media and telecoms (TMT) and expands the concept to other sectors that are being brought closer together as a result of TMT technologies. It recognizes that convergence will likely revolutionize the organization of all services, including utilities services, by fundamentally changing the ways in which services are commercially distributed and the managed.

By creating tools for the distribution of commonly used services, IT and communication technologies have created a transparency between these markets and the opportunity for them to integrate.