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OUR against BOJ, Cabinet and interest groups making decisions on electricity rates

Published:Wednesday | November 4, 2015 | 11:00 AMCamilo Thame
Albert Gordon, director general of the OUR.

Sweeping amendments of the law overseeing the Office of Utilities Regulations (OUR) has mandated that the state agency adhere to any "policy directions" issued by the Cabinet.

They also require the regulator to seek guidance from the Bank of Jamaica (BOJ) to determine "appropriate rate of return on investment required to satisfy the interest of persons investing (in utilities) in Jamaica".

And the Private Sector Organisation of Jamaica and a group representing consumer interests have been given the power to appoint two of the seven members of the OUR's board.

These changes, among others, were said to be aimed at enhancing the regulatory environment for utilities by establishing a governance framework which encourages development investment and growth while protecting the interest of consumers.

The regulator contends that the amendments do the opposite.

More specifically, it says that legislative changes reduce transparency; blur the lines between policy and operations; and reduce predictability and consistency given the possibility of situational shifts in policy directives.

The amendments also reduce regulatory independence; increase vulnerability to regulatory capture; create regulatory asymmetry; and make regulatory decisions less objective, according to the OUR.

Indeed, that the regulator now has to adhere to any policy direction given by the Cabinet significantly shifts decision making on matters related to utilities away from the OUR and to politicians.

"This specific requirement represents a fundamental departure from the existing regime governing relationships between the executive arm of Government and independent public bodies," said the regulator in its comments on the amendments to the OUR Act.

reduced transparency

"The unrestricted power of the executive arm of Government to direct the OUR in the exercise of its regulatory functions has the potential to erode the independence of the regulator," the regulator added. "This is inconsistent with the evolution of modern regulatory institutions and is in conflict with international regulatory best practice.

"A regulator whose activities and decision making are transparent, predictable, participatory and insulated from political influence represents best practice and can promote investor and consumer confidence."

Cabinet decisions are also confidential and protected from public disclosure, which signals a risk of reduced transparency.

Bringing the central bank into the decision making on rates, such as electricity tariffs, might not seem so far-fetched. The BOJ already has the responsibility for influencing monetary stability and developing money and capital markets in Jamaica.

However, the OUR thinks the central bank's involvement could conflict with the BOJ's primary mandate.

"For example, the BOJ, by prescribing a return on investment (albeit for the electricity sector), may unwittingly be sending a signal to potential purchasers of Government of Jamaica instruments regarding the levels of returns the Government of Jamaica is prepared to pay on those instruments," said the OUR in its comments.

The regulator seemed more opposed, however, to the inclusion of private sector and consumer interest group representatives on its board.

"This approach to appointing the members of the OUR appears to be emphasising a 'representative board' as opposed to making technical appointments," said the regulator.

The OUR amendments prescribe broad qualifications for persons to be appointed by the interest groups. These persons' eligibility are dependent on their experience and demonstrated capacity in matters relating to industry, finance, economics, engineering, accountancy, commerce, or law. However, expertise in the operations or the regulations of utilities is absent from the criteria for qualifications.

The regulator said it was unable to find similar instances where eligibility to boards were defined by interest groups.

"Rather, technical competencies and experience were specified (for example, the FSC)," it added.

"A matter to consider is whether by this approach the Government is signalling that regulatory decision making should tend more to sector interest considerations as against economic, technical and quasi-judicial considerations. If this is the intent, then this change in the nature of the regulator should have been subjected to a wider consultation with stakeholders, including private operators across all regulated sectors," the OUR said.

camilo.thame@gleanerjm.com