Foundations of Regulation

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[Response by Sophie Trémolet and Diane Binder, August 2009]

Legislation can be used at two distinct stages of the regulatory process to promote stability and continuity in the reform:

• At start-up phase, legislation can be used to establish the regulator.

Even in countries that have tended to rely on regulatory contracts to adopt regulatory reforms, such as concessions, hybrid regulatory systems have been explored combining regulation by contract and by independent agencies. Regulatory contracts may indeed be more sustainable when backed by independent regulators. However, it has been realized that independence, while of paramount importance, must be combined with a political contract (Bakovic, Tenenbaum, Wolf, 2003): commitment will not be believable unless it comes from the country’s highest political authorities. The underlying principles and initial parameters of regulation mechanisms (whether by contract or by an independent agency) should therefore be clearly specified in the country’s primary or secondary laws¹². Where the regulatory framework is set out in legislation but private sector participation is introduced through a contract (such as concession agreements), it is important to avoid any contradiction between the two instruments as this could otherwise lead to differences in interpretation and potential conflicts. For example, in the Mali water and electricity sectors, contradictions in the texts of the law and the contract with respect to the regulator’s tariff-setting responsibility and mechanisms for adjustment led to conflicts between the regulator and the private operator, which in turn led to early termination of the contract.

Legislation is then used to:

• Improve clarity in the institutional set-up;
• Give additional powers to the regulator;
• Ensure continuity in the regulatory regime: as legislation is lengthy and costly to abrogate, it reduces the risk that the regulatory agency would be arbitrarily removed.

• Once the regulatory agency has been established, legislation can be used to facilitate continuity in the reforms.

Adopting legislation would usually be the preserve of policy makers rather than regulators. The latter can only give advice on the legislative changes in their position as sector experts.

Legislation may be needed to authorize the government to enter into service and supply contracts or to issue licenses or let concessions. In privatization, legislation often governs the parties’ rights and obligations, even though they are further defined in licenses. Regardless of the form of ownership, some countries rely primarily on statutes and laws that define the roles and responsibilities of all operators³.

Legislation can be used to adopt major changes in the regulatory regime: for example in the UK, water and sewerage companies have been prevented by regulation from cutting off domestic supplies over non-payment, a decision then enacted in a legal ban in 1999. Legislation may help strengthen a regulatory regime by consolidating all previous incremental changes in a single instrument. The fact that legislation is difficult to pass reduces the risk of arbitrary legislative changes that could reduce stability. However, a pitfall of legislation is that it needs to be responsive to global trends in order to be efficient. It is especially the case in telecommunications, where there are constant technological breakthroughs.

Legislation can be used to improve on transparency and monitoring of impact – if requirements of prescheduled, periodic, independent reviews of regulatory performance and impact are made in legislation, then legislation would be a powerful mechanism to build the competence, credibility, legitimacy and therefore stability of regulatory institutions.

Related Questions

• What are the foundations for regulatory activities in infrastructure?
  • Historic Rationale – What are the historical reasons leading to the creation of regulatory agencies around the world?
  • How can policy makers incorporate market failures in the design of infrastructure reforms?
  • Nature of the Benefits – Historically, what have been the main benefits of reforms?
  • Reformers – Who usually drives infrastructure reforms: governments, utility providers or sector regulators?
  • Beneficiaries – Who are the main beneficiaries of infrastructure reforms?
  • Opponents – Who may be hurt by infrastructure reforms and their unanticipated consequences?
  • Instability – How can regulators ensure stable (and predictable) regulatory regime under changing market and technological conditions?
  • Lack of political continuity – How can legislation be used as a tool for promoting stability and continuity in the reform and regulatory processes?
  • Risks – How can the regulator avoid unintended negative consequences when it adopts regulatory decisions?
  • Federal systems – What reform strategies and regulatory structures are best suited for large countries with federal system (multiple layers of regulation)?
  • Failed states – What reform strategies and regulatory structures are best suited in failed / post-conflict states?

Footnotes

1. In UK-style regulatory systems, the regulator’s discretion is bounded by legislation, case law and evolving regulatory practice. Back to Content
2. In Jakarta for example, a regulatory body, the Jakarta Water Supply Regulatory Body was established in 2001 under contract rather than law to regulate the two private water companies supplying water services to the city. However, although the essential regulatory mechanisms have been operating, the status of the regulator gave him less political clout to perform properly its role of consumer protection than if it had the authority derived from legislation (Water Dialogues, March 2009). Back to Content
3. See 1.C. Back to Content