How to ensure the independence of the energy regulator? (press release)

Reformation of the energy sector and achieving energy independence are key determinants of security of Ukraine and main priorities among reforms. International experience indicates that energy sector reform primarily involves the creation or strengthening of an independent regulatory body. This, in particular, is one the requirements of the European Union’s Third Energy Package, which directly relates to Ukraine as a member of Energy Community.

In the research “How to ensure the independence of the energy regulator?” experts from the Centre for Economic Strategy (CES) determine the conditions under which the Ukrainian energy regulator will be politically and functionally independent of other government agencies, financially independent of the state and third parties, and formulate principles for appointing its members.

The independence of the energy and utilities regulator is crucial for the effective functioning of natural monopolies. The regulator also has an important role to play in stimulating competition in the markets where it is possible. A professional and independent regulator will improve the efficiency of regulated markets and protect the interests of consumers.

The regulator is a referee that ensures enforcement of the rules of the game. Its independence and impartiality are essential for the efficient functioning of the market. The main problems of the Ukrainian energy regulator are:

• institutional dependence (undefined status in Ukraine’s legal system, dependence on other government institutions, particularly the President);
• functional dependence (lack of requirements regarding professionalism and experience of members of the National Regulatory Commission for Energy and Utilities (NRCEU) and its staff, non-transparent appointments and activities);
• financial dependence (inability to set its own budget, salaries of commission members and staff lower than salaries on the regulated markets, lack of funding for attracting local and foreign experts).

We propose a policy of creating an independent regulator based on the requirements and recommendations of the Third Energy Package and Energy Community using the same criteria of independence: institutional, functional and financial. Institutional independence can be achieved by providing for the special status of the NRCEU in the Constitution of Ukraine, adopting a law governing the regulator, and bringing these changes in compliance with the related Ukrainian legislation.

Functional independence can be achieved, firstly, by establishing a Nomination Committee, formulating clear qualification requirements and principles for the appointment of commissioners and the commission’s senior staff, and ensuring that the process of appointment is transparent. Secondly, a transparent decision-making process for the commission has to be developed. This can be done by defining the powers of the NRCEU’s Chairman, Deputy Chairman and other commissioners; setting the term of appointment, the rotation scheme and grounds for dismissal of commissioners; appointing the regulator’s staff; as well as defining the principles of decision-making at commission meetings and the openness of these meetings to the public.

Finally, financial independence implies that principles of independent budgeting and the functioning of the Commission’s Budget Council should be introduced; that funding financing sources, which mostly consist of regulatory fees, should be defined; and that the commissioners and the regulator’s staff should be remunerated on market terms.

We also propose how to coordinate NRCEU’s cooperation with other government agencies. One of these is the Antimonopoly Committee of Ukraine, which also enforces competition regulations on markets for goods and services. In addition, it is important to establish efficient cooperation with judicial and investigative authorities.

“Implementation of this reform will, first of all, benefit consumers through improvements in the quality of services and establishing the regulator as an advocate of their interests. New players (including established foreign energy companies) will be able to operate on markets characterised by fair competition”, commented Andriy Boytsun, research director of CES. “The state will benefit from a reduced burden of administration and new investments in the industry. In addition, there will be a positive effect for reform-minded politicians and the new members of the regulatory commission. Monopolies, some commissioners at the existing NEURC, dismissed staff and political populists will lose out. This reform requires communication with each of these groups, which we describe in this policy paper in detail”.

 

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