Styles Of Regulation: The Choice of Approach to Utility Regulation in Central and Eastern Europe

Abstract

Since 1990, the countries of Central and Eastern Europe have been under considerable pressure to develop explicit regulatory institutions. Initially, the main pressure for this policy came from the World Bank and other international lending agencies. Indeed, the requirement for an independent regulator was often included as an explicit loan condition by lending agencies. Subsequently, and in practice more importantly, there was the pressure for transparent regulation arising from the need to provide an effective basis for private investment and privatisation. More recently, there has been the impetus from desired accession to the European Union (EU) and the need to meet the terms of the relevant EU Directives. Before 1990, in all CEE economies, the economic regulation of utilities (including energy, telecommunications, etc) was not at all recognised as a separate activity. It was carried out along with policy and the ownership/management of the state-owned enterprises by the relevant Government Ministries. Indeed, the regulation of eg investment and prices was not recognised as at all separate from policy or from the running or financing of the enterprises. The dominant forces involved were typically the Communist Party leadership and the senior managers of the relevant enterprises (the nomenklatura) who paid little weight to commercial factors. As a result of these factors, the CEE countries have had to start from the very beginning in developing regulatory functions for utilities - just as in the financial sector and other parts of the economy. In addition, there has been considerable competition from supporters of different regulatory models. Thus, not surprisingly, USAID assistance has tended to promote the US model of rule-based, legally-driven regulation; UK assistance and companies has tended to promote independent but less formal regulation; Continental European countries and companies have tended to urge caution on the development of explicit, independent regulatory institutions, and so on. Perhaps more importantly, potential foreign investors and privatisation purchasers have also been active lobbyists for their preferred style of regulation and, even more so, for their preferred degree of liberalisation. The energy and other companies involved in activities in CEE countries, not surprisingly, also tend to advocate the style of regulation of their home country. This tendency does, though, have some interesting exceptions, as we shall demonstrate below. In consequence, we can see that, over the last decade, CEE countries have seen a competition among external forces over the relative merits of the various different approaches to utility regulation as used in Western Europe, North America and elsewhere.