Regulatory policy

Seventh meeting of the Network of Economic Regulators

 

2 November 2016, Paris, France

 

The Network is growing, with new regulators joining in, including the newly established Electricity and Gas Market Surveillance Commission of Japan and the Regulatory Authority of Public Services and the Superintendency for Telecommunications of Costa Rica.

                                             

This is testimony to the cutting-edge work produced with the input and support of NER members. At the meeting, two new reports were circulated Being an Independent Regulator and the article “Rara Avis? Searching for Regulatory Independence in its Natural Habitat” presenting some of the key messages of the report and Driving Performance at Latvia’s Public Utilities Commission presenting the performance assessment review of Latvia’s multi-sector regulator.

 

The meeting took forward the agenda on the performance of regulators and their contribution to supporting markets’ and investors’ confidence for efficient and effective delivery of energy, communications, transport, water and payment services. Members discussed draft guidelines on creating a culture of independence and safeguarding regulators from undue influence, the role of regulators in the governance of infrastructure,  key findings and recommendations of the review of the external governance of three energy regulators in Mexico and trends and next steps in applying behavioural insights.

 

Some key highlights from the meeting included:

 

Independence and protecting regulators from undue influence

  • Independence is not given once and for all. It is rather gained through the daily work and behaviour of regulators. It ultimately boils down to creating a culture of independence that thrives on a good track record, leadership and incentives to act independently.
  • A culture of independence needs to be embedded in the values and attitudes of the regulatory agency, starting from the top with board and senior management behaviours and positions. Incentives and rules, such as staff codes of conduct, training and monitoring, and periodic re-allocation of staff can prop up such a culture of independence.
  • Undue influence-- pressure from someone to do something that the regulator otherwise wouldn’t do--can come from government or industry, but it can also originate from interest groups or be inspired by political populism, ideology, or precedent. Resisting this undue influence from a variety of sources allows the regulator to uphold and propose a long-term vision that will be beneficial for consumers and markets alike.
  • Doing a conspicuously good job and gaining public trust are key to protecting regulators from undue influence that can undermine a culture of independence, To gain public trust, regulators need to explain to the public what they are doing and why, backing it up with evidence and communicating this in a clear and understandable way.

 

Regulatory governance of Mexico’s energy sector

  • As part of a comprehensive structural reform programme launched in 2013, the government of Mexico restructured the oil and gas industry and opened access to the country’s hydrocarbon resources to national and foreign, public and private entities. The national power system was further opened up to private competition in order to reduce electricity costs, facilitate the transition to renewable sources of energy and extend electricity coverage.
  • While many tasks lie ahead in order to mobilise new investment and develop regulation & institutions, the initial steps in reform implementation and its results are positive.
  • To continue along this path, the review and discussions concurred on the need to move towards more formal co-ordination mechanisms across regulatory agencies which should be based on a common strategic agenda and aligned resources, enhance transparency of the operations of regulators, increase flexibility in attracting and retaining talent and align the status and processes of the three agencies.
  • A second phase of this work will include individual PAFER reviews of the three regulators (ASEA, CNH and CRE) and will be discussed at the next NER meeting in April 2017.

 

The role of regulators in the governance of infrastructure

  • Economic regulators contribute to a stable investment environment while at the same time ensuring that regulated firms deliver services that consumers demand at an efficient price. At the same time economic regulators have needed to deliver this stable investment environment while also dealing with changes in their roles and functions (primarily driven by new technology).  
  • Results from a survey of 33 economic regulators from 24 OECD and partner countries, to be presented in a forthcoming OECD report, showed that, most economic regulators are not directly involved in decision making in the infrastructure lifecycle. Instead they indirectly influence investment outcomes by influencing the investment environment in carrying out their functions (tariff setting, infrastructure access obligations).
  • As a result, economic regulators are well aware of the infrastructure needs for the sectors they regulate. In addition to traditional investment drivers, such as increasing network capacity to meet additional demand and replacing assets as they age, investing in order to upgrade to new technologies is a significant driver of investment.  
  • The survey highlighted that economic regulators were still grappling with challenges in delivering their mandate. Amongst other things, economic regulators sought to balance implementing regulation while maintaining investment incentives, address the impact of new technologies on regulatory role, and collect data that was important to the delivery of their mandate and address information asymmetry.

 

Applying behavioural insights to policy

  • Results of a collection of 120 plus case studies from 60 public bodies across the world, to be presented in a forthcoming OECD report, showed that behavioural insights are taking root in many countries and sectors. However, gaps still remain in the reporting of results, especially in regards to the (1) costs, (2) obstacles to behavioural insights, (3) sample size, (4) transparency through sharing of results, and, (5) evaluation of results.
  • How to ensure that behavioural insights are perceived as a robust tool, and what standards can be set to achieve that goal? Ways to address this question could include engaging in a multi-staged strategy for implementing behavioural insights, focusing on good and reliable data grounded in robust calculations, ensuring validity in experiments, and increasing transparency of results are key answers to this question. Sharing platforms, particularly through the OECD Observatory of Public Sector Innovation (OPSI), the European Nudge Network (TEN) and ideas42, represent potentially powerful tools to disseminate what works, and what does not, in the application of behavioural insights to policy.
  • What are the possible frontiers for behavioural insights? To date, behavioural insights have been mostly applied to the choice architecture and environment that shapes individual choice. More forward-looking work on individuals could focus on how to boost decision-making competency, which can have longer-term impacts on choice architecture. An additional frontier is the application of behavioural insights to organisational behaviour, both in terms of institutions, regulators and regulated entities as well as individuals who make up organisations. Behavioural insights can also be used throughout the policy cycle into rarely applied areas, particularly regarding the early diagnostics and agenda-setting stages of policy formation.

 

For more information, please contact Faisal Naru.

 

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