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Making the case for government oversight Consultant says government regulation of industry ensures people have effective access to energy supplies Alan Bailey Petroleum News
The thorny question of how much involvement, if any, government should have in the oversight of energy industries operating within a free capitalist market forms the subject of perennial and sometimes polarizing debate. But for Branko Terzic, an erstwhile commissioner in the Federal Energy Regulatory Commission and now executive director of the Deloitte Center for Energy Solutions, there is no doubt that government has to play a key role in ensuring that everyone has effective access to the electricity, natural gas and other energy sources that have become essential to modern living.
“I will assert that we need that good (government) regulation to bring the benefits of 19th and 20th century technology to people living in the 21st century,” Terzic told the International Association for Energy Economics’ North American conference on July 31.
Government oversight Terzic blamed a lack of effective government oversight in some countries, rather than economic constraints, for the facts that only about two billion out of the seven billion people now living on the planet have access to adequate and reliable electricity services, and that more than 1.4 billion people have no electrical services whatsoever. Around 16 percent of urban citizens and 84 percent of rural citizens have no electricity, he said.
By contrast, cellphone services, provided by entrepreneurs and requiring minimum government intervention, are widely available to many more people than have access to electricity.
“There are more cellphones in Africa (for example) than there are electric customers,” he said.
Governments are responsible for ensuring that suitable arrangements are in place for the delivery of electricity — in countries with power supply problems those governments have failed, Terzic said.
Terzic said that during his four-decade worldwide career he had worked with former communist countries that were trying to figure out the optimum structures for their energy industries, whether to establish energy monopolies, whether to establish public ownership, and whether to use private capital. One option is a mixed system, as in the United States, where government-owned entities such as the Tennessee Valley Authority and municipal electricity utilities operate in parallel with a well-established, investor-owned electricity industry, he said.
Setting policy But a government always has a role in setting national energy policy objectives such as energy supply efficiency and reliability. And, alongside these energy objectives, governments generally have environmental programs. Governments usually have a role in providing some consensus level of social subsidy, although they also need an objective to remove energy subsidies, Terzic said.
And the regulation of energy utilities must take into account national differences, adapting to social philosophies and political considerations, allowing legislatures to determine the scope of the regulation.
In the United States, government regulation of some private industry originated in the early years of the 20th century, when independent government commissions emerged, initially to curb the excesses of railroad companies that were taking advantage of monopoly positions, Terzic said. Regulation later extended to other businesses with “natural monopolies,” including energy utilities.
“According to the World Bank, regulation is to protect customers from large market power, to protect investors from abuse by government … and to promote economic efficiency,” Terzic said, adding that in his view regulation also has a role in promoting the availability of required services.
Adequate return However, when regulating an industry that is dependent on capital from private investors, it is vital that those investors see an adequate return on their investments, Terzic said. Under fair-return-on-capital rules people nowadays have a clear understanding of how regulated rates should be set, to yield the revenues that utilities require to recover their cost of capital, he said.
And effective regulation has “to display a transparent process; to be timely in the issuance of decisions; to provide a balance in treatment; to have a review mechanism available; to lead to stable orders; and to be independent of pernicious political influences,” Terzic said.
A regulatory model with those characteristics, able to fix rules and as necessary enable the use of private capital, could be applied around the world to make the benefits of modern technology more widely available.
“I would put my trust in regulation,” Terzic said.
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