17 April 2015, OECD, Paris
The meeting focused on independence of economic regulators, with CEOs and senior officials from regulatory agencies discussing the rationale, practical implications and impact of independence on regulated sectors. The meeting also included a discussion on using behavioural insights in economic regulation with innovative experience shared by the Swedish energy regulator. This area will be further developed in the next meetings.
Key messages from the discussion on the independence of regulators include:
- Investment and trust: regulators can help align the interests of users and, more broadly, citizens and society with the interests of investors in key sectors like energy, water, transport and telecommunications. Independence from the executive government (which would, for example, require specific procedures for agency head/board appointments and dismissals, protection from political influence on regulatory decisions and some autonomy in managing human and financial resources) can shield regulators from short-term party politics and help ensure a stable and credible regulatory environment that facilitate long-term investment. If protecting regulators from the “undue” influence of the executive can strengthen investors’ confidence, it is equally important that regulators do not fall prey to “undue” influence from the regulated industry. The integrity of the regulator vis-à-vis industry is key to address the shortcomings that usually characterise these markets (e.g. monopolistic power and asymmetric information) and make the best use of available resources. It is equally important for ensuring trust of citizens (i.e. the end users of network industries) in an unbiased regulatory environment: users can thus make decisions that fit their preferences and provide the “right” signals to markets.
- Role clarity and accountability: independence does not mean that regulators will work in a vacuum, without appropriate checks on their work or disconnected from executive government’s decisions. Independence is hard to realise if the roles and respective responsibilities of the executive government and regulators are unclear and ill-defined. Little clarity on the respective roles create “grey areas” where the decisions on policy priorities and objectives (the responsibility of elected governments) are mixed with regulatory decisions that should contribute to achieving these objectives (the responsibility of independent regulators). Setting clear and transparent boundaries on who does what and on what each institution can be held accountable for is essential to guarantee independence of regulatory agencies and make them accountable for what they do.
- Change and the role of the OECD: independence is not a given. The composition and preferences of executive governments (and parliaments) change and, ultimately, these institutions retain the responsibility for the set-up of regulatory agencies. Regulated sectors tend to evolve rapidly, responding to technological change and changing users preferences. In such a dynamic institutional and economic environment, a deeper understanding of the practical implications of independence and how to realise it is paramount, not only for regulators but also for executive governments and other stakeholders. This understanding would complement and refine the knowledge on formal arrangements (greatly improved through the Product Market Regulation indicators on the regulatory management practices of sector regulators) through examples of good practices and those norms that contribute to the development of a culture of independence. The role of the OECD and the NER can be key in this respect.
For more information, please contact Faisal Naru.
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