IMPOSSIBLE MISSION

Maka Ghaniashvili

What regulating committees are (not) doing in Georgia?

After Rose Revolution in 2003, government decided to carry out a liberal policy. Basic principle of this policy was minimal intervention of the government in an economy. The process of state property privatization was started; taxes were reduced, together with the number of licenses and permissions. The regulation of various fields was made either by the market itself or by the independent regulating national committees. Antimonopoly service was abolished in the country also.
Nowadays, when due to global financial crisis, economic approaches and views are being changed. In the times when it is necessary to nationalize many financial giants or enterprises; When is becomes obvious that government intervention and state funds are necessary to overcome economic crisis, one might conclude that free market economic principles cannot fully ensure healthy development of economic processes. Moreover, government’s intervention and toughening of regulation norms is essential. Bright example of this is a newly approved economy stimulation plan of Obama administration. The plan supposes increase of the funds appropriated by the government for economic recovery.
Simultaneously with the events developing in the world, discussions concerning antimonopoly service restoration and increase of regulation norms renewed in Georgia. Moreover, EU Eastern Partnership agreement has been concluded few weeks ago. Eastern Partnership purports visa system simplification and establishing of trade benefits for Georgia. The agreement is considered as long-term preparation period on the way to European Union. However, it would be inconceivable to think of integration with EU and its market if Georgian economy regulations and rules of play do not comply with European standards. One of the main requirements of EU is establishment of antimonopoly service in the country and other regulations of various fields.
Non-governmental sector is actively working in this direction. More researches are published revealing the results of the regulations processes started in Georgia in 2003. Presentation of one of similar projects has been held by Center for economic problem studying on 12 July. Project was accomplished with financial support of Friedrich Embert Fund. Experts of the centre (Davit Narmania, Shota Murghulia, Nodar Khaduri, Teimuraz Murghulia) presented to the audience the conclusions of independent regulating committees concerning the results of abolishing market regulating mechanisms.
Antimonopoly law and field of healthy competition cover quite a number of aspects and directions. One might discuss this subject endlessly. However, the theme of our discussion today will be so-called natural monopoly (energy, water supply, and communications) and current situation in these fields.
The aim of the research authors was to acquaint society with the results of the deregulation process in Georgia. Authors reveal sharp problems and offer their views of problem solution to the society.
One of the problems discussed in the research is the regulation of water supply problem. Experts reckon that taking this function from local self-governments and withdrawing them out of non-transferable state property list has not been followed by divestment of government property. This field remains to be subsidized by the government. However, according to the changes made in the law, subsidization of this field is not allowed at any level of budget. Despite this, most of local self-governing units violate the law and subsidy the water supply.
After deregulation of gas-sector tariff is not regulated between supplier and consumer. Consequently, supplier, which holds a monopoly in a specific region, can establish prices independently. Because of mentioned changes, country’s economic safety is in danger, as there is no legal barrier to restrict abuse of monopoly. Experts of Economic problem study Centre reckon that it is necessary to reestablish state regulation mechanisms in gas supply sector. Generally, it should regulate tariffs and restrain abuse of a monopoly.
Financial independence of regulating committees is one of the main aspects. Research emphasizes violation of the law on regulating committees and law on regulation fee over several years. Both of the regulating organs (National committee of communication of Georgia and Energy and water supply regulating committee of Georgia) have unused funds that should have been resulted in regulation fee decrease. However, during last two years the fee remained the same.
Allow me to overview funds of each committee and their allocation, as this clarifies the issue of our discussion.
Funds of Energy and Water Supply regulating committee of Georgia and their allocation: According to the legislation operating in Georgia, energy and water supply regulating committee is financially independent from the state. It fully depends on the price paid by the companies operating in this field. Payment for the regulation is transferred on the committee’s account. Only the committee administers the funds. The funds unused during a year are moved to an account of next year and the regulation fee is reduced accordingly.
According to the diagram, the income of regulating committee has significantly increased in the recent years. Main reason of this was the growth of electricity and natural gas prices. Water tariff regulation is done by the committee since 2007 and as a result the regulating committee budget increased as well.
Due to existing rate policy and methods of calculating regulation fee, regulating committee might become interested in price growth as its “share” in the rate is reflected in percentage. It is worth of noting that despite significant development of electricity and gas supply sectors, regulation fee is not decreased and it amounts the maximum allowed by the law.
The budget of regulating committee is assigned for the remuneration of the salaries of the committee members and employees. There is an article on material stimulation and aid funds that made up more than one million GEL in 2007. Salaries and stimulating remunerations made up 65-70% of the budget.
The funds of both 2007 and 2006 budgets were not fully acquired and the rest of the money was transferred to next year budget. The remainder made up 128.493 GEL (6.3% of 2005Y budget) in 2006 and 324.510 GEL (11.3% of 2006Y budget) in 2007.
According to the 19th article of the law on “Electricity and natural gas”, the procedure of transferring remainder of previous year to next year’s budget is defined. “The funds unused by the committee are transferred to the account of next year, with corresponding reduction of regulation fee”. As we already mentioned, despite the fact that the remainder in 2006 made up 11.3% of the budget the regulation fee hasn’t been decreased that contradicts the demand of the law.
The same can be said about Georgian National committee of communications. On the basis of the showing published by the committee, the centre experts conclude that coming out from the volume of the committee income, it constantly has unused funds from the budget (so-called transitional remainder). Transitional reminder of the planned budget made up 75.5% in 2006. Despite the volume of transitional reminder, committee did not revise the regulation fee, though this was its direct obligation.
Instead, the major part of the committee’s budget was spent on remunerations and purchase of permanent assets. Thirty-nine percent of 2005Y budget was spent on remuneration, 38.7% – in 2006, 49% or almost half of budget was spent in 2007. Thirty-two percent was spent on purchase of permanent assets, 39.4% in 2006, while 36.2% in 2007.
If we take into consideration that 69 employees were working in the company in 2005 and remuneration of labour made up 1995.1 thousand GEL, average salary of an employee amounts 28914.5 GEL that is 2309.5 GEL a month. The number of employees was increased in 2008, but at the same time remuneration package was increased either. The number of employees by that time made up 76 people, while work remuneration amounted 3069.0 thousand GEL. Average annual salary of an employee made up 40381.5 GEL that is 3365.1 GEL a month.
Considering all the above-mentioned data, research authors conclude that existing model of financing regulation committees cannot ensure their independence. They are not financed by the state; the source of their financing is a fee paid by the entrepreneurs operating in this field. Regulation fee is directed connected with the company’s income. The main source of regulating committee’s budget is the money paid by major companies that causes dependence of the regulating committee on those companies. Regulating committee cannot be objective while settling disputes between major and smaller companies. Even though, regulating committees are independent of state, their dependence on major entrepreneurs is rather dangerous either. Therefore, “The model of regulating committee financing should be changed. Some combined model of financing might be designed that includes financing by the state also. However, in this case normative act should define the formula of calculating the funds. The mentioned act will considerably decrease the chance of making subjective decisions. Regressive regulation fee might be established that even more encourages the enterprises operating in this field” – conclude the centre experts.
Once again, I note that these are the results of monitoring carried out by Centre of economic problem study and their ways of problem solving.
Allow me to discuss foreign models and practice of energy regulation.
After the reform started in 1990, separate companies conducted electricity supply and distribution operations independently.
Electricity supplier companies and distribution network operators with separate licenses were established. The decision made by gas and electricity regulation office considerably fastened development of competitive environment in this field. Initially the prices remained regulated, while from 2002 the regulated prices were abrogated.
However, despite restructing of electricity energy field and its division in to distribution and generation fields, full vertical separation wasn’t managed. Moreover, supply and distribution separation and frequent changes of owners of regional offices caused necessity of reflecting reorganization expenses in the rates.
After a while, as a result of disbanding twelve regional offices the control was taken by 8 distribution companies (though each distribution company hold individual licenses) and 6 supplier companies. This points to high quality of supply concentration. As the experts supposed horizontal integration process would led Great Britain to consolidation of supply and distribution sectors with maximum five or six owners.
If horizontal integration of individually licensed supplier companies continues, this might become a reason of concern as in this case the main goal of regulation – encouragement of competitive environment will be endangered.
From an example of natural monopoly successful restructuring of Great Britain one might derive that if government managed to take the generation issues out of regulation spheres, it were unable to fully separate supply and distribution fields. Therefore, the companies operating in this field need to be strictly regulated in order to maintain “artificially” created competitive environment. British experience makes it obvious that simultaneously with the reduction of state share in energy sector necessity of regulating privatized sectors increased either.
Reforms were carried out in Italy either. European Union’s direction on electricity energy sector liberalization was adopted in Italian legislation. Major natural monopolist ENEL has been privatized and restructured. As a result, ENEL’s 90% share in aggregate generation has been decreased to 50 percents. This enabled new participants of the market to enter new segment. In addition, electricity distribution system has been separated from ENEL administratively and operationally. In order to ensure proper operation of the system, distribution system operator, a state owned company has been founded. Moreover, in order to create wholesale market – market operator has been founded. However, it should be noted that despite the steps made to liberalization of electricity energy sector, Italian energy sector is considered as most weakly liberalized energy sector in Europe because of ENEL’s dominant and actually monopolistic state. Additional obstacle is the state ownership of control packet of shares that increases political influence on the company’s activities.
Regulation of Germany’s energy system was made without regulating institution for a long time. However, this imperfection was compensated by relevant legislation and agreement of energy associations. Since the second half of 2005, new law on energy sector became operative that considered regulation of specific fields of the sector. The example clearly shows that natural monopolies need to be regulated, while the theory of full regulation is not unsuccessful even in the developed countries up today.
Comparatively different situation is in Japan, a country with scarce resources and fully dependant on import. In the course of last 25 years, Japan stands out for stable energy supply. This is the first-priority issue for Japanese government. The Ministry of Economy, Industry and Trade regulates electricity energy sector in the country. The ministry issues licenses and regulates the rates.
We discussed examples of four countries and their models of energy regulation. It might be said that they differ from each other, but none of these countries have electricity supply problems. This indicates that each country has its specificity, traditions and peculiarities that should be taken in account when regulating energy or any other sector of the country.