Power sector regulatory reform in transition economies: Progress and lessons learned

Regulatory reform in the power sector of most transition economies has progressed. Regulatory independence, however, is still limited with direct (statutory) and indirect political input influencing decision making. Further reform is required to secure power tariff increases and private sector participation. Both should improve sector performance, notwithstanding current market sentiment towards the sector and the region. This paper discusses the advances made in regulatory reform, with a focus on end user regulation rather than network access. It suggests that regulatory rules, enforceable in an independent forum such as international arbitration, should be written into contracts to ensure investor security. However, arbitration should not be seen as a substitute for strong government commitment to the reform process. Tariff mechanisms from western Europe or North America, if adopted into contracts, should also be adapted to reflect the specific characteristics of transition economies. For example, poor payments discipline and exchange rate risk are significant problems in CIS countries. Going forward, the challenge in all transition economies will be to strengthen regulatory independence and mechanism design. And, perhaps most importantly, implementation must be enhanced to improve sector performance.