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Best Practices Guidelines on Restructuring (including Privatisation) in the Energy Sector (2003)

Published in 2003

Best Practices Guidelines on Restructuring (including Privatisation) in the Energy Sector
Руководство по наилучшей практике по вопросам реструктуризации (включая приватизацию) в секторе энергетики

On 26 June 2003 the Energy Charter Conference welcomed a set of Best Practice Guidelines on Restructuring (including Privatisation) in the energy sector. The aim of the Guidelines is to assist those countries in the Charter's constituency that are in the process of transition to competitive domestic energy markets. The Guidelines provide advice for the governments of such countries, based on analysis of the experience gained and lessons learned by countries that have already introduced competition and privatisation in their energy sectors.

Addressing Barriers to Investment

The origins of the Best Practice Guidelines date back to a report on Energy Investments submitted jointly by the Energy Charter Secretariat and the International Energy Agency to the G8 Energy Ministers at their meeting in Moscow in 1998. The Energy Charter Conference subsequently mandated the Secretariat to carry out follow-up work on how to address the barriers to attracting energy sector investments. The Best Practice Guidelines were developed in accordance with this mandate, based on a thorough analysis of experience gained to date in the Energy Charter's constituency in restructuring domestic energy markets. Work on the Guidelines was conducted through the Charter's Investment Group, drawing also on input from relevant international bodies.

As the Chairman of the Charter's Investment Group Professor Argyrios Fatouros (Emeritus Professor of International Economic Law at the National University of Athens) underlines, the aim of the Guidelines is not to impose any specific template for restructuring energy markets, to be applied in all cases. "Our member-states are under an obligation, under the Energy Charter Treaty, to work towards the development of open, competitive energy markets", notes Professor Fatouros. "But this does not mean that they have an obligation to restructure national energy markets in a particular way. For example, there is no obligation on our member-states to privatise entities operating in their national energy sectors."

"However, where countries do elect to undertake a process of energy market restructuring, including privatisation, it is important that they do so in as efficient, cost-effective and socially responsible manner as possible. In this situation, there is clearly much to be gained by studying and drawing conclusions from the experience of countries that have already gone through the same process. And the Energy Charter, bringing together as it does the transition economies of Eastern Europe and the CIS with leading OECD member-states, provides an excellent forum within which to do this".

The Best-Practice Guidelines are structured according to six major themes - the processes needed to create competitive energy markets; how to maintain competition in the energy sector; regulation of the market; how to prepare entities for privatisation and/or competition; aspects of conducting the process of privatisation; and advice on how to monitor or "benchmark" progress achieved in the restructuring process. Within each of these categories, the Guidelines seek to identify the main obstacles that may arise during the process of energy market restructuring, and to suggest optimum approaches to tackling them. Specific case examples from the experiences of energy market restructuring acquired in both OECD states and transition economies are quoted in illustration of many of the recommendations made.

Issues Addressed

Among the issues addressed and recommendations made in the Guidelines, the following can be highlighted:

  • Frameworks: successful privatisation requires the development of a functioning, stable and predictable legislative and institutional framework, as well as a political environment that inspires confidence. Restructuring and privatisation programmes should take into account any history of non-payment and/or services that have in the past presented problems relating to pricing issues. The introduction of bankruptcy procedures and the support of a right to disconnect non-paying entities is one way to mitigate future debt collection problems. Where appropriate, human needs should be addressed by building a safety net, on which individual customers can rely in times of temporary adverse circumstances to avoid disruption of service.
  • Accounting: regulatory and competition authorities must have full access to the accounts of companies with monopolistic functions (if any), and other companies under regulatory/competition supervision. Regulatory and competition frameworks should include disclosure rules, ensuring an easy and prompt access to all relevant cost data and specify sanctions for profit shifting.
  • Prices and subsidies: restructuring and privatisation programmes should eliminate state subsidies as far as possible. Where this is not possible or feasible, programmes should define the criteria and amounts of subsidy and, if possible, the process of phasing out. Energy taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria and procedures should guide the administrative discretion in their application.
  • Competition: in emergent markets there is often a need for a gradual introduction of competition. The market organisation should be designed with due regard to this constraint, without losing sight of the ultimate objective. Undue market power, such as monopolistic and/or concentrated markets in the energy sector should be identified, together with its sources, such as, for example, laws granting exclusivity, and concessions. To the extent possible, price controls should be removed. Where appropriate, "same fuel" competition (e.g., gas-to-gas) should be encouraged, by phasing out the practice of linking the price of a fuel to that of another (e.g., natural gas prices linked to oil prices), and thus allowing prices to be truly based on the supply and demand situation for distinct energy products.
  • Regulation: various options for securing the independence of the regulator, such as terms of appointment and sources of funding, should be considered. Whenever possible, options should be chosen that create a system of checks and balances and enhance the regulator's financial independence, such as, for example, fixed term appointment and funding through license fees. The regulator and competition authority must have full access to accounts of companies with monopolistic functions (if any), and other companies under regulatory/competition supervision. The basis for price and tariff determination must be unambiguously defined, clearly prescribed, reviewed from time to time, and transparent at all times to the public.
  • Employment: the effects of competition on employment and the ways to deal with the likely decrease of the size of the workforce (which may be due to, inter alia, technological change, reduction in non-core personnel, and outsourcing of some functions) should be accounted for. Programmes should thus be considered that help deal with these effects in a socially consensual manner, e.g., through skill profile changes, voluntary early retirement schemes, re-training and re-deployment, working time reductions, etc. Strategies that enhance adaptability and employability, rather than workforce conservation, need to be developed.
  • Legislation: proper company law and rules of corporate governance, with a view to ensuring proper protection for all investors and particularly those with minority shareholdings, must be introduced. Government must indicate the matters on and circumstances in which it might exercise its vote as a residual shareholder. Controls must be established over remaining state entities in the sub-sector to ensure they do not discriminate against private sector companies in favour of their own subsidiaries. Adequate transparency in the privatisation process must be ensured. Evaluation criteria for bids for companies should be clearly set out in advance.
  • Monitoring the process: a permanent vehicle must be provided for consultation and reconciliation between government, business, consumers, unions, environmental groups and other stakeholders who may be affected by the restructuring and/or privatisation process. A clear set of criteria should be put in place, against which the merits of grievances and proposed solutions would be assessed.


Next Steps

Following the positive consideration given to the Best Practice Guidelines by the Energy Charter Conference, follow-up work is envisaged in order to raise awareness of them and stimulate debate as to their potential application in individual cases. "We see the Guidelines as an ongoing project, with the Charter's member governments looking to develop a continuous dialogue with industry and other stakeholders on their design and implementation, in order to reflect new developments in future versions" comments Professor Fatouros. Specifically, the Secretariat plans to organise a Workshop on the Guidelines in Brussels during the early part of 2004, with the participation of industry, academics and representatives from governments and international financial institutions.

The publication "Best Practices Guidelines on Restructuring (including Privatisation) in the Energy Sector " is available in English and Russian.