1. Establishing the Regulatory Framework for Competition DAVID PARKER OHR/OECD Conference on Regulatory Governance and Network Industries, Sarajevo 19 April 2002

2. Main Messages OBJECTIVES OF NETWORK INDUSTRY REFORM Efficiency and Private Participation REGULATORY GOVERNANCE CHALLENGES Sequencing of Reforms Institutions Restructuring for Competition and Privatisation The Balance of Regulation and Competition

3. Sequencing of Reforms Surrounding legal/social system New legal framework and institutions - the starting point Detailed Operational Rules - have to build network markets Restructure Companies - get this right at the start Commence new markets - with transitional arrangements Privatise - what balance of objectives?

4. Institutional Issues - Independence and Governance Independence from industry Independent from day-to day political intervention, but accountable u Clear mandate and legal status u Powers balanced with appeal or review rights All reforms need to be adjusted to address unforeseen problems u Flexibility vs certainty and powers of regulator u Take care with self-regulatory models and inflexible governance.

5. Institutional Issues - Good Practice Communication and Consultation - Regulatory plans and RIA Consistency and Predictability - Articulated rules and decisions Accountability - to Parliament, Executive and appeal structure Transparency - open documentation Effectiveness and Efficiency - internal structure

6. Restructuring for Competition and Privatisation Allowing competition isnt enough - it has to be promoted Vertical and Horizontal Dimensions u Competition where feasible regulation where not u Generation / transmission / distribution / retail Privatisation u What objectives (revenue or competition) u Why not privatise monopolies? Regulatory Load u Some irreducible regulation necessary in these sectors but it is difficult

7. Natural Monopoly Regulation Access to infrastructure Pricing of final supply Investment System Operation - the core natural monopoly u Incentivation of efficiency

8. Things to watch out for - the balance of regulation and competition Market power in competitive sectors in network industries can be a big problem - structure and market design is the key. Investment and Market Signals - p lanning and prices Regulation does not go away unless it is made to - interface with competition law vital

9. Key Messages - a summary SEQUENCING Start with a vision that includes implementation and transition - incremental reform will run into problems INSTITUTIONS Independence doesnt mean unaccountable. Good practice is essential Some flexibility is needed to respond to problems INDUSTRY STRUCTURE vs REGULATION Get structure right at the start > privatise for competition Regulation is hard but regulators dont give up easily Watch out for market power in competitive segments ==> Avoid Regulatory or Market Failures