Regulation and Institutional Design

Regulatory institutions can be sector-specific or multi-sectoral and can focus only on prices or have broader regulation responsibilities, such as the regulation of service quality and competition. Issues about country scale and capability, the quality and capability of existing competition agencies, the risk of regulatory “capture” or lack of industry expertise often affect the choice between a single-sector or multi-sector regulator.  The range of responsibilities depends on several factors, such as a potential conflict of interests between tasks, public and government confidence in the regulator, and the regulators’ expertise and potential.

Regulatory decision-making can be undertaken by independent agencies or by the government. Pricing may be specified in contracts and the government as party to the contract would have to consider how it wishes to manage its obligations (and risks) under the contract.  The prevailing model favors institutionalizing utility regulation by establishing separate authorities or commissions, legally separate from the government, which set the maximum prices. This is to reduce the risk of time inconsistent decisions and to give greater assurance to investors.  Increasingly, policy makers and investors have become concerned about the uncertainty that resulted from wide regulators’ discretion given by broad charters.  Various solutions are developed to reduce these concerns.  Some of the examples of the solutions include explicit legislative guidance to regulators, specification of objectives of legislation, specification of key parameters or initial price paths in legislation, along with requirements on regulators to follow transparent regulatory processes.

 The selection of regulators is critical, especially in countries that have yet to establish a reputation for competence and reliability.  A regulator, or regulators if a commission is appointed, should be selected on the basis of the personal qualities needed to ensure the best possible delivery of the duties required by law, exercise independent judgment and resist improper pressures.  An appeals process is also important to ensure that the regulator does not stray from its mandate and that it remains accountable. The right of effective judicial review is generally seen as the minimum level of accountability but the right of a substantive appeal by the regulated firm is also desirable.

The World Bank, in partnership with a numerous regulatory institutions from OECD and non-OECD countries, other multilateral organizations, and universities, has been seeking to improve the exchange of information on policy reforms and utility regulation.