Lessons from America: If only the GEMA was more like a US Public Utility Commission
Catherine Mitchell, IGov Team, 4th July, 2014
The outcomes wanted from energy systems tends to be similar around the world: an efficient and secure service, with fair prices, and some protection for customers. However, the structure and regulation of those energy system varies considerably.
The US model of regulation revolves around some form of State Regulatory Commission, generally either a Public Utility Commission (PUC) or a Public Services Commission (PSC), although there are other nomenclatures. These PUC/PSCs are usually responsible for more than energy (for example, telecoms and water as well) and they are usually led by 3 or 5 (California has 7) more or less full-time Commissioners , who are the formal, public face of the decisions. The Commission has a professional staff of officials, as their European counterparts, who undertake the analysis to back up those decisions. They have formal, public hearings and hearing officers, which is more like a Select Committee type arrangement than the usual Ofgem public consultations. There is also a formal role for a consumer advocate. Moreover, the Commissioners are able to direct investigations into particular topics, thereby enabling them to keep up with the changing energy environment. This means that, at its best, PUC regulatory decision-making is more transparent, flexible, accessible and legitimate than in the British, and arguably the European, model.
In Europe, Regulators tend to be set up with a Director General (i.e. a DG) or a Chief Executive Officer (CEO) with a (part-time) Board which generally has powers of oversight – i.e. the Board, in the final analysis, are responsible for the Regulatory decisions. Britain, Norway and Denmark are examples of this type of regulatory model. Ireland, however, has a Commission structure similar to US. In the European DG/CEO model, it is the DG who is the face of the decisions rather than the Board. The size and remit of the European Regulators can differ greatly. For example, Denmark has a staff of 45 and a narrow compliance role which does not make policy or regulation. Ofgem has 769 full time staff, although 100 or so of these are consultants.
In the US, FERC (the Federal Energy Regulatory Commission) regulates transmission, wholesale markets and general inter-state requirements. US PUC/PSCs regulate distribution and retail rates , the revenues requirement and rates; resource acquisition, securities issuance, affiliated interests (meaning authority over the relationship between a utility and the affiliated interests); service standards and quality; utility regulation and environment interfaces. There are clear processes for participation by stakeholders in the rulemaking process and there are clear procedural elements of the tariff proceedings. Regulatory bodies can be small (i.e. the Vermont Public Service Board has 44 staff) or they can be large (California Public Utility Commission has 940 staff). They are paid for in different ways but tend to be paid via a charge on the regulated utilities, and therefore not subject to political whims of rising or falling budgets.
Quality of PUCs/PSCs will depend on the Commissioners, and the quality of commissioners varies enormously across the PUC/PSCs. To a large degree, this will be the result of the way that they are chosen. Most are appointed, with some appointments more political than others; some are elected and are seen as a first rung of political life; some are advertised appointments with a clear process so that knowledge of utility matters is necessary and will count for something; some have an application process followed by ratification by State legislature. Of the 3-7 members, the Chairperson is full-time and generally responsible for the administration of the Commission; while the other Commissioners are also usually full-time. The larger Commissions provide a small team of advisors for the Commissioners thereby enabling knowledge-based leadership. Majority voting occurs but for major decisions joint agreement by Commissioners is expected, and will usually be ratified by State legislature.
The Gas and Electricity Markets Authority (GEMA) is the Board of Ofgem. GEMA appears to have an unwieldy 13 members (of which 6 are non-executives): the Chairmen (ex Ofgem), Dermot Nolan (new CEO and ex Commissioner from CER in Eire); Ofgem Group Finance Director; Leader of Ofgem’s Sustainable Development Division and only women; a Secretary to the Board; Ofgem’s legal advisor to the Board; the non-execs (of which there is an academic economist; an ex Broadcaster; a consumer advocate; two ex (traditional) industry members; and an ex civil servant); and Lord Mogg (ex Ofgem Chairman, 2003-2013). They attend monthly meetings, the minutes of which are published although the information in those minutes is absolutely minimal, descriptive- only and with no analysis.
Can such part-time members really adequately fulfil their responsibility for the 769 full-time equivalents working for Ofgem, never mind keep up with what is going on around the world in terms of energy and take an informed view of where Ofgem should be heading? In the situation of the part-time non-execs, it is very difficult to maintain enough knowledge to be able to challenge the views of the CEO / full-time Ofgem members or to make sure that Ofgem is undertaking appropriate analyses or market monitoring. In this way, it seems that the GEMA board has (at least) 3 failings: it is unwieldy in size, and therefore it is difficult to take decisions; the Non-Executives appear to be outnumbered on the Board by the Executives, which makes the Non-Executives effective role questionable; and the Non-Execs time commitment is too small to be meaningful. This is therefore a light-touch, institution-led approach to governance with insufficient independent oversight.
The Labour Party (LP) has said that it will rethink the role of the Regulator and its structure and that it will consider putting in place an Energy Security Board. There is also to be the CMA investigation into the energy sector. Both of these are to be welcomed. However, the terms of reference (ToR) of the CMA inquiry does not now appear to examine the role of governance in the outcomes of the energy market – something at one point which did appear to be a possibility. This omission is a significant mistake on the part of those who agreed the ToR, and will fundamentally undermine the relevance of its ponderings.
I have elsewhere argued for a complete rethink of the role of regulator, its governance and its aims ie output-based versus (some form of) the traditional historically-linked rate of return because of the huge and rapid changes transforming the energy system. I also agree that the role of utilities; the role of business and the role of customers should also be re-examined, as NY State is doing in its Reforming the Energy Vision (the subject of another blog). A fruitful area to examine is (1) the merit of a full-time Commissioner-based output-orientated regulatory body rather than the Ofgem model of an institution-led body with part-time oversight; and (2) its potential roles, and where such a body could sit in the overall governance structure of the energy system, and what relationships it could have in terms of (hierarchy of) power.