Pros and Cons of a Super Regulator – The case of the Spanish Regulator

This article was first published by Inter Press Service (IPS)

SPANISH VERSION

Leonardo Beltrán and Andrés Chambouleyron are non-resident Fellows at the Institute of the Americas located in La Jolla, California.

Extraordinary session of the Senate of the Republic of Mexico, June 29, 2020. Credit: Senado de Mexico.

 

LA JOLLA, California, United States, Jul 20 2020 (IPS) – On June 10, 2020, Senator Ricardo Monreal, President of the Political Coordination Board of the Senate of Mexico, presented a legislative initiative to reform Article 28 of the Political Constitution of the United Mexican States, in order to cluster in a single regulator of economic competition, the Telecommunications, Broadcasting and Energy sectors.

The initiative contemplates the creation of the National Institute of Markets and Competition for Social Well-being “INMECOB” as an autonomous constitutional body with legal identity, technical, operational and management autonomy that would replace the following institutions:

  1. The Federal Commission of Economic Competition (“COFECE”)
  2. The Energy Regulatory Commission (“CRE”)
  3. The Federal Telecommunications Institute (“IFT”)

The main purpose of the initiative is to contribute to the austerity policy of President López Obrador administration, with the integration of these three regulators that, although they share some general characteristics and objectives, the final goods and/or services they provide are different.

The three regulators are intended to ensure that social welfare is maximized through economic competition in each sector, for example, by ensuring free access for competitors in cases where due to the characteristics of the infrastructure they naturally tend to become monopolies (i.e. electrical networks or gas pipelines, where duplicating the infrastructure would result in a much higher cost to the final consumer).

Although the legal framework of the three regulators, in terms of competition, is the same, each institution applies a different set of processes, which can result in different evaluation standards that could penalize or benefit individuals simply due to the interpretation and organizational culture of each entity in question.

Likewise, administrative management in terms of procurement of goods and services, material and equipment, social communication, among other functions, could be optimized by integrating them into a single institution.

The initiative estimates that from the merger of the three institutions, savings of 500 million pesos per year (22 million dollars) could be obtained, as a result of the reduction in the workforce and operating budget of both COFECE and IFT, where 79.6% is represented by cutting out 440 positions (1 in 5 employees) and the rest would come from general services or operating expenses.

The initiative also argues that in addition to the financial benefit, there will be a lower risk in the capture of the regulator by the private sector, as the relative importance of a certain sector would be reduced within the activities of the regulatory body.

Considering that Senator Monreal’s project cites the National Commission of Markets and Competition of Spain as a precedent for consolidating competition authorities and sector regulators in a single body, we analyzed in detail this particular case and its potential application to the Mexican case.

 

The role of the National Commission of Markets and Competition in Spain

According to its own internet portal, the recently created (2013) National Commission of Markets and Competition (CNMC) aims to guarantee, preserve and promote the proper functioning and transparency of markets, ensuring the existence of effective competition and defending the interests of consumers and companies.

It is a public body with its own legal personality under parliamentary control, which guarantees its independence from the government and legal certainty.

The CNMC is the result of merging the former National Competition Commission (CNC) created in 2007 with sector regulators – the National Energy Commission (CNE), the Telecommunications Market Commission (CMT), the Committee of Railway Regulation (CRF), the State Council for Audiovisual Media (CEMA), the National Commission of the Postal Sector (CNSP) and finally the Airport Economic Regulation Commission (CREA).

The functions of the National Competition Commission (CNC) were essentially three, a) the prosecution of anticompetitive behaviors such as collusive behaviors and abuses of dominant positions, b) the control of operations with economic concentration (prior control of mergers or acquisitions), and c) the promotion of competition in those concentrated markets through liberalization or a greater opening.

Similarly, the National Energy Commission (CNE) created in 1998 had as its essential mission to ensure effective competition in energy systems, which would include the electricity market, as well as the markets for both liquid and gaseous hydrocarbons (natural gas and oil).

The CNE regulated tariffs and service quality in natural monopolies (electricity and gas distribution and transport networks), but also promoted competition in those segments where competition was not effective (gas and electricity commercialization) and resolved conflicts or disputes between different market agents (access to transport networks).

On the other hand, the objectives of the Telecommunications Market Commission (CMT) created in 1996 were a) to be the arbitrator between operators in the face of conflicts such as network interconnection, b) to control compliance with universal service obligations, c) to assign numbering to the operators, d) to adopt measures to ensure free competition between operators, e) to set rates for regulated services, f) to set interconnection charges between networks, g) to exercise sanctioning power, h) to carry out analysis and definition of markets and finally i) to coordinate its functions with the National Competition Commission.

Lastly, the objectives of the Committee for Railway Regulation (CRF), the State Council for Audiovisual Media (CEMA), the National Commission for the Postal Sector (CNSP) and the Commission for Airport Economic Regulation (CREA) were to regulate each of the markets by setting tariffs where competition was not possible and deregulating and promoting competition where it was technically feasible and desirable.

The creation of these regulatory bodies was due to the privatization of state-owned public service companies, the end of state monopolies and the need for Spain to adapt to European regulations.

 

Operation of the CNMC

The CNMC exercises its functions through two governmental bodies: the Council and the President, who is also the Council’ president. The Council is a collegiate decision-making body made up of ten members appointed by the Government with the proposal of the Economy and Competitiveness Minister, and includes persons of recognized prestige and professional competence, after the candidate appears before the corresponding Commission of the Congress of Deputies. Their mandate is for 6 years, non-renewable and is subject to a strict incompatibility regime.

The Council can act in Plenary or in Room. To this end, it is organized into two rooms: one dedicated to competition issues (Competition Room) and the other to supervision of regulated sectors (Regulatory Supervision Room). The Plenary is made up of all the members of the Council and chaired by the President.

In addition, the CNMC has four directions of instruction: Competition; Energy; Telecommunications and the Audiovisual Sector, as well as Transport and the Postal Sector, as illustrated in the following table.

 

 

What are the advantages of a consolidated body?

The arguments used by the Spanish government to justify the consolidation process of the competition authority and the sector regulators in a single body are basically the following: 1) guarantee legal certainty and institutional trust, 2) avoid unnecessary duplication of control of each operator and contradictory decisions in the same matter, 3) take advantage of economies of scale and regulate the administered sectors, establishing an integrating vision in terms of regulation and the defense of competition to adapt it to the changes that have occurred in the economic environment for the benefit of consumers, 4) aim at effectiveness, efficiency, rationalization, agility, objectivity and transparency, 5) unify criteria to offer a balanced and comprehensive solution to consumer problems, 6) adjust the operation of the regulatory authority to the regulations of the European Union, especially in the telecommunications and energy sectors, seeking a greater market integration of the European Single Market.

In summary, what they were looking for was to save administrative costs, streamline and make management more transparent, avoiding duplication and preventing potentially contradictory opinions by unifying criteria in a single agency.

 

Economic analysis and application to the Mexican case

The creation of the original sectoral regulators that regulated energy, telecommunications, railways, ports and the postal market occurred due to the need generated after the privatization of the former state monopolies by becoming private monopolies.

Sector regulation in this case is essentially an ex-ante regulation that is applied to those segments of the markets considered natural monopolies, which are unable to compete due to their technology. These segments are normally electricity and gas distribution and transport networks as well as the old landline network before the irruption of mobile and internet.

In these cases the regulation is ex-ante because it is applied before observing how the market behaves, since it is assumed that natural monopolies (by definition) cannot compete and therefore their rates must be regulated and they must provide their services with a minimum acceptable level of quality.

The body in charge of defending and promoting competition, on the other hand, exercises supervision and eventually also regulation, but of an ex-post type, on those markets in which anti-competitive behavior is observed. In this case the remedy (e.g. sanctions or prohibitions, obligations etc.) is applied after observing how competitive the market is, not before, because it is not possible to predict how competitive a market will be before observing how the companies behave in that market.

The eventual state intervention in a market is normally subsequent to the observation and verification of anti-competitive behavior by the authority.

It is for these two reasons that both types of agencies (competition and sector regulator) are normally separate: their nature is different because they serve markets and/or companies with different characteristics or technologies. Some are natural monopolies that require ex-ante regulation of rates and quality due to their technological impossibility of competing and the others operate in markets that are not competitive enough and that require supervision and (eventually) ex-post regulation to inject more competition, which is, by nature, impossible to achieve in the first group.

While there are segments within regulated sectors that are potentially competitive, such as the production, generation, and commercialization of natural gas and electricity, where sector regulators normally have the power to make ex-post regulation by deregulating potentially competitive markets, the competition agencies are the natural authorities to apply such policies.

Having said all this, there is no argument (economic at least) that justifies the adoption of a super regulatory body that consolidates the competition authority and the sector regulators.

Reviewing the arguments put forward by the Spanish authorities in the previous section, it can be easily verified that: 1) All the advantages that a single regulator supposedly has would also be shown by two separate regulators: one competition authority on the one hand and another multi-sector regulator on the other that regulates natural monopolies, 2) In fact, the CNMC works with 2 suites, the Competition Suite and the Regulatory Supervision Suite, each suite with its directions of instruction that operate separately.

Apparently, and judging by the arguments wielded by the Spanish authorities, the only advantage that the creation of a single authority would offer (in addition to complying with some European regulations) would be to have a single board of directors and a single president, avoiding duplication and reducing administrative costs.

It is clear that for the Mexican case, neither of the two apparent advantages put forward by the Spanish authorities would apply, since, on the one hand, there are no USMCA regulations obligating to adopt a similar measure (Canada and the United States have separate authorities) and there is no assurance that consolidating the current competition authority and sector regulators into one body will result in lower administrative costs.

The CRE of Mexico also has the power to dispose of the income derived from the rights and uses that are established for its services to finance its total budget and a public trust in which it will contribute the remainder of the excess income that it has to accumulate the equivalent to three times its annual budget and if there are additional resources, these will be transferred to the Treasury of the Federation.

This means that CRE’s operation does not represent a burden for public finances and that the cost is self-sustaining from the payment of those regulated by the reception of the service. The CRE, in addition to the regulatory mandate in economic matters, has the mandate to establish technical regulations to address the reliability, stability and security in the supply and provision of electrical energy services, a technical attribute that does not share with the other two Mexican institutions.

In summary, the consolidation project presented does not seem to be able to guarantee any of the objectives it pursues, neither reduction of administrative costs nor less capture power by the authorities. In fact, consolidation into a single agency could generate a superstructure with greater duplications than those that exist today, and nothing guarantees that the new agency will be less prone to capture by the regulated sectors.

Energy Integration Key After the Pandemic

This article was first published by Mexico Business

 

By Leonardo Beltrán | Wed, 07/01/2020

If there is one thing, we have learned with the pandemic is that we cannot live in isolation. Developed and developing countries alike are struggling to maintain their economic sustenance, irrespective of their individual specialization and/or competitive advantage. Whether it is an agricultural, industrial or services exporting world power, the lockdowns have suddenly halted their momentum. However, the pandemic has shed light on the opportunities to enhance our collaborative work and strengthen our resiliency and stamina to weather the crisis.

There are a number of companies, labs, and academic institutions doing research to advance knowledge and develop solutions to reduce the cost of treatments or to eradicate diseases. However, individual efforts are not enough to solve a global challenge. There are several examples of the power of international cooperation. According to the World Health Organization (WHO), in 1988, the poliovirus was affecting more than 125 countries and paralyzed around 350,000 people per year. That year, the international community set the goal to eliminate the disease, and the Global Polio Eradication Initiative was launched. Ever since, the number of cases has been almost eliminated (over 99%) due to immunization efforts, sparing over 13 million children from paralysis.

Another example of the benefits of international cooperation in public health is Malaria. This disease can cause lifelong intellectual disabilities in children, and its economic impact is estimated to cost billions of dollars in lost productivity every year. An estimated 219 million people suffered from the disease in 2017 and about 435,000 died. However, in the last two decades, mortality from malaria has been halved, thanks to a coordinated research agenda, and a rise in funding. It is clear that isolation is just a local and transitory measure that requires a global coordinated effort to speed up the process out of a pandemic.

Public health examples offer a wealth of knowledge to understand the complexities, interdependencies, and implications of a global challenge. In a pandemic, the more integrated a country, the faster the virus spreads across borders. In the economy, similar to what happens in a pandemic but in positive terms, the more complementary and complex the value chains across products, the more sophisticated and developed the country would be. The interconnectedness of a globalized world enhances economic development grounded on the accumulation of knowledge and its use in both a larger number and more complex industries.

According to Harvard’s Growth Lab, Mexico at the beginning of the century ranked 25th in their Economic Complexity –EC– index (measures the number and complexity of the products they successfully export). That year, more than half of Mexico’s exports were automobiles and auto parts, machinery, electronics and minerals, and the Mexican economy represented around three-quarters of the Chinese economy, which ranked 39th, and the majority of its exports were services, textiles, machinery and electronics. Eighteen years later, China has quintupled its economy, ranking 18th in the EC index, diversified its exports and increased the contribution of its electronics, metals, and chemical exports, surpassing Mexico in the EC index (19th). Meanwhile, Mexico´s economy in the same period increased 43 percent and has maintained a similar export pattern, although with a larger proportion of auto and auto parts exports than in 2000. Thus, in spite of Mexico being the country with the most trade treaties signed (more than 50 countries, over 60% of world GDP), a focus on less complex goods (manufacturing and agriculture) has resulted in a more competitive environment for its products; whereas in China, an increasing specialization in technology-oriented exports have resulted in less competition for its products, and faster development paths, similar to what happened as well in South Korea (ranked 19th in 2000 versus third in 2018) and Singapore (ranked 11th in 2000 versus fifth in 2018).

Both public health and trade offer best practices and lessons learned applicable to the energy sector. One of the lessons learned is that isolation limits the potential to create virtuous cycles, and one of the best practices is international cooperation because it opens the opportunity to multiply the combined capabilities of the partners to tackle a challenge.

The challenge in the energy sector of the 21st century is to have a balanced system, one based upon energy security, sustainability and equity (the World Energy Council´s Energy Trilemma). Such a system would enable economic prosperity, social development, and environmental conservation. Some countries would choose to focus on energy sovereignty as a means to enhance their energy security, which would require a coordinated national effort and would be subject to their domestic resources (talent, innovation, and funding) that can lead them to the best those capabilities can offer. But some other countries would choose to enhance their energy security by integrating, which would also need coordination (national and international), and would be subject to both their domestic resources and the complementary resources of their partners, leading to a better result by multiplying resources and taking advantage of a combined potential.

A great example of the power of international cooperation applied in the energy sector is the Nord Pool. In 1996, Norway and Sweden decided to integrate their power markets. Today, Nord Pool is a system that trades 40 percent more energy than Mexico (321.2 TWh vs. 592 TWh Nord Pool) with 380 companies from 21 countries in the Nordic and Baltic regions, Germany and the UK. They established what a modern power exchange business looks like, and what has now become the EU European Target Model. It is a system that has brought economic prosperity, social development, and environmental conservation not only to Scandinavia, but soon enough to all of Europe.

In terms of equity and sustainability, the international scientific community has provided evidence to support that the way forward is to reduce the use of fossil fuels; thus, the international community committed in 2015 to decarbonize their economies by 2050. Some countries would speed up this process, by closing fossil fuel plants and electrifying their economies. Some others would work on developing technology to continue to use their existing assets, but limiting their environmental footprint. Some others would accelerate the uptake of renewable energy technologies. Irrespective of their individual paths, the energy transition would require both the public and private sectors, and national and international institutions, to decarbonize their energy sectors and their economies.

In this context, Mexico has a superior advantage to choose the most efficient path toward decarbonization for five reasons: it has an unlimited amount of renewable resources; it has a strong domestic market; is located south of the largest market in the world, with the potential to integrate both with the US and Central America; it has access to 60% of the world’s GDP with its network of free trade agreements; and an already proven investment-attractive energy legal framework. Therefore, the choice is for us to make. Nevertheless, after the pandemic, energy integration would place our country on the most efficient path to economic recovery and deep decarbonization.

Latin America’s Potential Green Hydrogen Economy

This article was first published by Inter Press Services

By Cecilia Aguillon
Cecilia Aguillon is Director of the Energy Transition Initiative at the Institute of the Americas in La Jolla, California

 

Providencia Solar Company

The Providencia Solar company, El Salvador. Latin America counts some of the globe’s most abundant and cost competitive renewable energy resources including hydroelectricity, solar, and wind. Credit: Edgardo Ayala / IPS


 

LA JOLLA, California, Jun 22 2020 (IPS)

The COVID-19 pandemic and crisis has led to increasing attention and clamor to redouble efforts toward an energy transition that would help the world reduce C02 emissions. In many countries of the region, how to manage hydrocarbons, but with an eye on the energy transition has only been accentuated. We believe clean hydrogen is part of that broader policy and reconstruction debate.

Clean hydrogen markets can be a key part of the economic recovery from the COVID-19 pandemic, accelerate the decarbonization of Latin America’s electricity and transportation sectors, attract investment and create jobs. Indeed, the possibilities for oil and gas companies to produce and deliver hydrogen should facilitate and accelerate its adoption in Latin America particularly when combined with the region’s considerable renewable energy upside.

As the US Energy Information Administration notes, hydrogen is the most abundant element on the planet and the simplest. Furthermore, the EIA underscores that “hydrogen, like electricity, is an energy carrier that must be produced from another substance.”

Clean energy policies with clear objectives and successful implementation have resulted in renewable auctions that were over-subscribed throughout the region. The policies also engendered competition and electricity prices among the lowest in the world all the while injecting billions of dollars of direct investment into their economiesAccording to the US Department of Energy, most hydrogen today is produced from fossil fuels, specifically natural gas, but there is also increasing production from electricity including renewable sources such as biomass, geothermal, solar, and wind.

With regards to technology, most hydrogen is produced through steam methane reforming, a high-temperature process in which steam reacts with a hydrocarbon fuel to produce hydrogen. Electrolysis is also commonly used to produce hydrogen by separating H2O into oxygen and hydrogen. Hydrogen can be compressed, liquefied, transported and used at gasoline stations to fuel vehicles.

Latin America counts some of the globe’s most abundant and cost competitive renewable energy resources including hydroelectricity, solar, and wind. The elements that make the region a world-leader in renewables can facilitate a similar ascension for clean hydrogen production this decade. But it is important to note that in order to spur investment, economies of scale must be supported and enhanced through policy and market incentive programs.

Take the photovoltaic (PV) industry. PV has demonstrated that policies with a well-conceived implementation strategy greatly incentivizes the market and leverages steep cost reductions. Average PV prices in the United States dropped 89% from $359 USD per MWH in 2009 to $40 USD per MWH in 2019.

Over the last ten years, most countries in Latin America enacted clean energy targets and laws that include fiscal incentives and goals to achieve a determined percentage of their electricity mix from clean energy sources by specific timeframes. Using a reverse auction mechanism, solicitations were announced attracting bids from mostly wind and solar developers. A major energy auction in Mexico in 2017 delivered prices in the $20´s USD per MWH.

Clean energy policies with clear objectives and successful implementation have resulted in renewable auctions that were over-subscribed throughout the region. The policies also engendered competition and electricity prices among the lowest in the world all the while injecting billions of dollars of direct investment into their economies.

Latin America’s power sector is well-positioned to be the main driver for a clean hydrogen boom as the pace of solar and wind energy projects continues to accelerate. In some cases, their intermittent nature, however, creates mismatches in the supply and demand of electricity in the system which prompts grid operators to temporarily shut down generation when it exceeds demand.

This reduces return on investments. Reliable and cost-effective batteries are needed to address the problem. Hydrogen-based storage is emerging as a technically viable and effective solution, but more has to be done to foster a competitive industry.

According to IRENA´s latest report on hydrogen and renewables, the lowest average cost of producing hydrogen from wind is $23 USD per MWH. There is consensus that reducing the cost of storage will help maximize the use of renewable energy generation, reduce energy imports, and contribute to economic prosperity.

There are natural allies in this effort. Policymakers and regulators together with power companies and renewable energy investors are increasingly aligned with similar objectives and goals. Latin America does not have to start from scratch; there are important lessons from around the globe.

Clean hydrogen projects being developed in Asia, Europe, and the United States could lead to policies, programs, and robust industries. Lessons learned and best practices from early adopters can be harvested and adapted to develop successful hydrogen markets.

In Latin America, Chile could emerge as the clean hydrogen market leader since the country has surplus production of solar and wind electricity that could be leveraged for producing hydrogen. The government is already developing its post-pandemic stimulus package with a heavy focus on energy decarbonization by 2040 backed by aggressive policies targeting growth and further deployment of renewable energy and electric mobility.

The Energy Ministry is even working on a specific plan to develop a hydrogen market. In addition, the Chilean government is enlisting the participation of its power and energy sectors to join the effort. Chile´s success with solar and wind deployment along with its new decarbonization strategy can be a template for developing sustainable and robust hydrogen markets throughout the region.

For many countries in Latin America, one of the thorniest challenges to reduce emissions is in their transportation sector. Even highly-touted renewable energy markets such as Costa Rica have struggled to reduce fossil fuel consumption for transport. Hydrogen offers an important possible solution. Indeed, hydrogen can help decarbonize the fuel sector, most likely as a source for heavy duty transportation such as long-haul buses and trucks, trains, ships, and airplanes.

The current environment of low oil prices is providing many countries relief from onerous fuel subsidies. Indeed, in some markets such as Ecuador have begun to remove them entirely. It could be wise to consider applying some of these savings to promote the modernization of their public transportation infrastructure to accommodate the use of clean fuels and by extension, support economic development and reduction of CO2 emissions.

Moreover, national oil companies have had to shut down refineries due to the recent drop in fuel demand caused by the lockdowns in the fight to manage the COVID-19 pandemic. This forced shutdown could provide an opportunity to use the time to retrofit equipment and train workers on hydrogen fuel production.

Taking such measures in the near-term would allow for an important step towards diversification while transitioning to clean fuels. In some cases, oil and gas companies are able to obtain low-cost financing in addition to having the infrastructure, distribution channels, and know-how to produce fuels. As countries emerge from the pandemic and review policies and stimulus packages to reactivate their economies, governments should further consider designing road maps that include the promotion of clean hydrogen to decarbonize their power and transportation sectors.

Uruguay provides an example that public-private partnerships can work towards developing a local hydrogen market and one that can inform neighboring countries. The national oil company, ANCAP, together with the government, the national electricity company UTE, the Inter-American Development Bank (IDB) and private investors are developing a pilot project to produce hydrogen using renewable energy to power trucks and buses, and to support green electricity through storage. This is to comply with the government´s goal of achieving 100% renewables by 2030.

In Uruguay, a comprehensive roadmap was enacted in 2010 with clear objectives and specific milestones that includes active collaboration of the various public agencies with specific roles to play to achieve the target. The policy also calls for regulations and standards that promotes the use of renewables throughout every sector of the economy making Uruguay a renewable energy leader in the southern cone. The inclusion of traditional energy sectors in the hydrogen pilot project could help the country achieve its decarbonization goal ahead of schedule.

As the example from Uruguay underscores, well-crafted policies and successful implementation of regulations are essential to attract foreign and domestic investments. The technology and resources to produce clean hydrogen are available. Scaling manufacturing to achieve cost-effectiveness is already taking place thanks to programs to promote hydrogen throughout the world.

The current investment profile and soaring amounts for renewable energy has shown the myriad actors and players – from Wall Street and private equity to multilateral agencies to local and international banks – willing to invest in renewable technologies particularly shown by the scale of deployment levels of wind and solar. Furthermore, the potential ability of oil and gas companies to produce and deliver hydrogen should facilitate and accelerate its adoption in Latin America.

Governments throughout the region should also consider direct participation in the clean hydrogen market. By serving as customers, governments can further support and develop critical mass for fast adoption through investment and modernization of state-own transportation infrastructure. Moreover, governments should consider fiscal incentives for heavy industry and traditional fuel suppliers to adopt the technology. Lessons learned from developing successful renewable energy programs should inspire political will to make clean hydrogen the next link in the chain to achieve zero carbon economies for this generation across Latin America.

Navigating the path forward from the COVID-19 pandemic coupled with the persistent threat of climate change makes clean hydrogen a possible solution for the day after and the region’s energy and economic recovery.

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