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 THE CONCEPT OF REGULATION: Why Regulate the Energy Sector?

WHAT IS REGULATION?

The art of regulating is to fix, establish or to adjust by rule, method or established mode, subject to governing Laws or principles.

In the case of the energy sector, some of the governing laws include the Energy Regulation Act, Chapter 436, the Electricity Act, Chapter 433 and the Petroleum Act, Chapter 435 of the Laws of Zambia.

It is not the same as price controls.

In situations where you have what are commonly referred to as natural monopolies or companies with dominant market positions, regulation can be considered as a means of replicating the effects of competition as closely as possible in terms of just and reasonable prices, profits and quality of service.

Regulation does not entail micro-management of regulated companies/undertakings by the regulator. In other words, once the regulator has set the necessary guiding principles or conditions, the regulated companies are left to carryout their day-to-day operations without undue influence from the regulator.

ARE THERE VARIOUS TYPES OF REGULATION?

Generally, regulation can be categorised into two main types:

Economic Regulation
The explicit public or governmental intervention into a market to achieve public policy or social objective that the market fails to accomplish on its own.

Natural Monopoly
A market in which a single firm can produce a desired level of output at a lower cost than any output combination of more than one firm.

Typically, it is an industryâââs technological characteristics that lead to natural monopoly and we often see that a common feature of natural monopolies is a high ratio of fixed costs to total costs. Consequently as output increases average costs decrease. For instance, the technological elements of the electricity industry that create natural monopoly conditions are first and foremost the transmission and distribution (T&D) systems. They have very high fixed costs and low operating costs. It does not pay to have two or more sets of wires running down the street.

Objectives of Economic Regulation
In light of economic features of utilities certain objectives for price regulation emerge. The two are economic efficiency and fairness.

Efficiency: both allocative and productive. Since utilities are not operating in competitive environment that would impose cost discipline on them, regulation must fulfil that role.

Fair Price: to both consumers and investors. Price regulation is intended to guard against reaping of economic profits (ROR).

Adequate quality and reliability

Check also Importance of Regulation

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