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					  REGULATORY AND COMPETITION-
RELATED REFORMS IN KENYA’S POWER
    AND PETROLEUM SECTORS




                            By
                C. Onyango, G. Njeru and B.
                         Omori



                  21st October, 2009
PRESENTATION OUTLINE



l   Study Context
l   Terms of References
l   Methodology
l   Literature Review
l   Main Findings
l   Constraints & Challenges
l   Conclusions
l   Recommendations
1      CONTEXT OF THE STUDY


    MOTIVATION OF THE STUDY


l   Effective management and regulation of
    restructured energy sector
l   Need to support on-going utility reforms
l   Efficiency in service delivery and
    enhancement of consumer welfare
l   Promotion of synergies and cooperation
    amongst regulators
1     CONTEXT OF THE STUDY


TERMS OF REFERENCE

l   To assess the institutional framework and
    structure of the national competition policy;
l   To review and evaluate the competition-related
    regulations and institutional framework in the
    energy sector;
l   To undertake a comparative analysis of
    competition and regulatory framework in energy
    sector in other countries.
1       CONTEXT OF THE STUDY


Tasks
l   Evaluating the independence, transparency and
    clarity of existing regulations;
l   Assessing the market structure and performance
    of the electricity and petroleum sub-sectors;
l   Evaluating the institutional framework and
    capacity for enforcement of competition-related
    laws and regulations in the electricity and
    petroleum sub-sectors;
l   Establishing and assessing the existing
    administrative procedures for enforcement of
    competition laws in the electricity and petroleum
    sub-sectors;
l   Evaluating the relevance of existing laws and
    enforcement powers;
1       CONTEXT OF THE STUDY


Tasks…..cntd
l   Assessing the quality, service delivery and dispute
    settlement mechanisms;
l   Evaluating the coordination and information
    exchange between the competition authority and
    the energy sector regulator;
l   Assessing the level of awareness about
    competition-related regulations among
    stakeholders;
l   Identifying implementation and enforcement
    challenges and constraints.
2        ENERGY SECTOR IN KENYA…cnt’d


l   Major regulatory statutes: RTPM&PC
    Act 1989; Energy Act 2006;

l   The case for regulatory reforms
    –   Incentives to regulated firms
    –   Cost Reduction
    –   Efficiency and service delivery
    –   Realization of Vision 2030
2    ENERGY SECTOR IN KENYA…cnt’d


Domestic Consumption/Sales
A: Electricity
l Large/medium commercial users (56.2%)
l Domestic and small commercial (37.4%)
l Rural electrification (4.5%)
B: Petroleum
l Retail pump & road transport (51.4%)
l Aviation (18.1%)
l Industrial, Commercial (15.4%)
l Power generation (11.5%)
l Agriculture (1.2%)
3.       METHODOLOGY

a.    Scope of study

n     Electricity and Petroleum sub-sectors:

b.    Sample Design

l     Study Population: (i) key institutions and organizations; and
      (ii) key informants and users of energy

(i)   Key institutions and organizations: Regulators and regulated
      firms


(ii) Key informants: The private sector players and associations,
      consumer organizations, professional associations and
      selected Civil Society Organizations (CSOs)
3      METHODOLOGY

c. Data Sources & Analysis

l   Questionnaires: Interviews with Key institutions and
    informants: Regulatory institutions, Industry players,
    private sector, CSO & consumers

l   A total of 70 (out of 100 targeted) interviews across 4
    regions (Nairobi, Mount Kenya, Western and Coast)

l   Review of various reports, policy documents and
    internet sources. Documents were obtained from the
    MOE, ERC, Ministry of Trade, MOF & other government
    agencies

l   Qualitative & statistical methods
3.      METHODOLOGY



Study Limitations

l   Weak databases of regulatory institutions

l   The Triton scandal at the time of the survey

l   Financial constraints
4      ANALYTICAL FRAMEWORK




Figure 1: Regulatory Framework Design




Source: Adapted from Levy & Spillar (1994)
4 ANALYTICAL FRAMEWORK……CNTD


l   Governance structures: Regulatory
    discretion , contractual obligations
l   Incentive structure: Rules governing utility
    pricing, subsidies, entry, interconnections


l   Institutional endowments: Institutions
    (Legislative, executive & judicial institutions);
    customs and norms; social interests,
    ideologies and administrative capabilities
5      BEST-PRACTICES AND EXPERIENCES

a. Best practice features of CAs (UNCTAD, 2005)
l Independence
l Transparent, well-designed administrative
   mechanisms, regulations and procedures
l Separate investigation, prosecution and
   adjudication functions
l Checks and balances with rights of appeal,
   reviews of decisions and access to information on
   legal and economic interpretations
l Expeditious and transparent proceedings with
   safeguard sensitive business information
l Provisions for imposing significant penalties
5      BEST-PRACTICES AND EXPERIENCES

b      CA and Sector Regulators Models (UNCTAD,
       2006)

I.     Technical and Economic regulation: Enforcement
       of competition exclusively done by CA

II.    Technical and Economic regulation: Regulator has
       some or all competition law enforcement functions

III.   Technical and Economic regulation: Coordination
       btw CA with Regulator to enforce competition law

IV.    Technical regulation done by sector regulator,
       while economic regulation within the CA

V.     Reliance on competition law enforced by the CA
5       BEST-PRACTICES AND EXPERIENCES…


c. Country Experiences
Brazil: Type I - Competition law fully applicable to
    regulated sectors and CA in charge of
    enforcement in cooperation with sector regulators
Mauritius: Type II - Some sector regulators have
    competition competencies.
South Africa: Type III - Sector regulators have
    concurrent jurisdiction. However, the competition
    act neither explicitly claims precedence over it.
    CA negotiates agreements with sector regulators
South Korea: Types I, II, III - Moving towards III
5    BEST-PRACTICES AND
EXPERIENCES…


d.       Energy Sector Models
l    Unbundling of Generation from Transmission and
     Distribution (ISOs model): Latin America – Chile 1978-
     1988; Argentina -1992; In Africa – Senegal, Uganda and
     Nigeria.
l    Asian IPP Model: Incumbent owns transmission &
     Distribution and purchase from IPPs
l    EU Reform Model:       Independent incentive-based
     regulation; no requirement for ownership of unbundled
     transmission;
l    The SE Europe:      Wholesale competition, legal
     unbundling of networks, a fully independent regulator,
     price or revenue cap with a 3-5 year incentive period
5       BEST-PRACTICES AND EXPERIENCES…


Major lessons Learnt

l   Adequate legal backing in statutory law
l   Good leadership
l   Adequate staffing resources in terms of staff
    numbers and skills
l   Political and economic independence
l   Institutional Collaboration: Domestic & external
l   informal exchanges of information and pooling of
    resources between national regulators
6       Main Findings of the Study




a)   Weak enforcements of competition-related laws i.e. no
     proven cases for anti-competitive practices

b)   Inadequate technical regulatory capacities e.g. MPC had
     32 employees of which 21 are Economists; ERC has 36
     employees against an establishment of 56;

c)   Poor delivery of services: At importation, refinery and
     storage; Suspect quality of petroleum products despite
     surveillance and quality inspections; Shortages, price
     fluctuations, blackouts, accidents & settlement of
     disputes etc

d)   Poor co-ordination and information exchange btwn ERC,
     MPC & other govt agencies. No clear legal provisions for
     co-ordination;
6      Main Findings of the Study


f)   Limited awareness about competition policy and laws by
     stakeholders. ERC has been engaging the public in the recent
     past particularly on formulation of wholesale and retail pricing.
     However, room to improve transparency in providing
     information & documents.

g)   Performance and Market structure

1. Electricity

l    KenGen accounts for 76.6% of effective production
     capacity; EPPs (11.5%) and IPPs(11.3%);
l    A near zero reserve margin i.e. in 2008 max output was
     1,267 MW against Total Systems Demand of 1,044 MW
l    High vulnerability i.e. Hydro accounts for 54.6%; thermal &
     Geothermal (45.4%)
l    Fuel costs account for largest component of purchase
     costs (Table 7)
6      Main Findings of the Study

l   Positive financial performance i.e. generation
    and supply subject to rate-of-return regulations
    and prices negotiated through PPAs

l   Low consumption per capita i.e. 121 per capita
    and national access rate of 15% compared to
    32% for SSA

l   Large commercial and industrial users (41.8%);
    Domestic users (24.9%)

l   Increasing unit costs i.e. 37.3% increases btwn
    2003/04 and 2007/08 i.e. from ksh 5.92 per kw to
    ksh 8.13 per kw
6        Main Findings of the Study

Tariff    Customer category             Ksh/GWh   Ksh/GWh
                                        2003/04   2007/08
A*        Domestic, small &             6.44      9.46
          commercial
B         Commercial & Industrial (M) 6.51        8.09

C         Commercial & Industrial (L)   5.24      7.03


D         Off-peak                      4.95      5.97

E         Street-lighting               7.29      15.23

          Total                         5.92      8.13
6        Main Findings of the Study

2. Petroleum sub-sector

l   Oligopolistic mkt structure i.e.
    –   HHI was 1649.16 (see table 12);
    –   Market concentration Ratio was 76.7% i.e. Kenol
        (24.8%); Shell (20.9%); Total (19.5%) and
        Chevron(11.1%)
7       MAIN CONSTRAINTS AND CHALLENGES


a Competition-Related Regulations

l   Limited regulatory independence of MPC and ERC i.e.
    both subject to State Corporations Act; MPC funded by
    exchequer; Ministerial involvement in decision-making
    etc

l   Limited funding thus affecting staff recruitment, M&E
    and enforcement for the MPC

l   Existing laws do not provide for consumer protection
    and fair trading (incorporated in CB 2009)

l   Exemptions of the public sector from application of the
    Competition act (incorporated in CB 2009)

l   Weak provisions for sanctions, fines and penalties
7       MAIN CONSTRAINTS AND CHALLENGES


b Electricity sub-Sector

l   Limited enforcement powers for competition-
    related regulations

l   Uncoordinated enforcement of competition related
    regulations

l   Inadequate technical and professional staff.

l   Poor Infrastructure affecting data collection,
    information exchange, M&E etc

l   Weak governance of transmission network and
    pricing structures
7       MAIN CONSTRAINTS AND CHALLENGES


c Petroleum sub-Sector

l   Inadequate capacities for regulatory efficiency and
    effectiveness
l   External factors (international oil prices, global
    security etc)
l   Enforcement of standards and quality
l   Weaknesses in existing laws and regulations
8 CONCLUSIONS


l   State owned public utilities dominant in
    generation, transmission and distribution
    of electric power despite increased
    participation of the private sector

l   An effective regulatory system in the
    energy sector is crucial for both investor
    confidence and consumer protection
9- RECOMMENDATIONS

l   Adoption of a HYBRID regulatory model i.e. Types II
    and III

l   Effective coordination of implementation and
    enforcement of competition-related regulations
    amongst various state agencies

l   Strengthening regulatory independence in
    management, dispute settlement and decision-
    making e.g. parliamentary vetting of Board members

l   Widening the scope for competitive power generation
    market which is currently dominated by KENGEN by
    deepening horizontal divestiture

l   Effective governance of transmission network and
    pricing structures.
7.0     RECOMMENDATIONS

l   Strengthening data reporting and M&E through
    increased allocations, and recruitment of
    additional staffs

l   Infrastructure development to improve efficiency
    in provision of petroleum products e.g. oil jetties,
    pipeline, storage facilities etc

l   Engagement and awareness of competition-related
    regulations among stakeholders

l   Improvement of Terms and Conditions of
    employment and retention mechanisms
THANK YOU

				
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