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  THE ECONOMICS OF ENERGY REGULATION

Regulation is said to be a substitute for competition. The energy sector worldwide is characterised by monopolistic market structures which are an impediment to the economic efficiency that is associated with a competitive market. In other words, monopolies have a propensity to use their market power to the detriment of the customer. Most of these are 'natural monopolies' brought about by several factors including;

  • Ownership of a scarce resource

  • Prohibitive costs of putting up infrastructure

  • Economies of scale.

  • The role of regulation is therefore to deal with this market failure and administratively promote;

  • Efficiency

  • Competition

  • Investment and private sector participation

  • Protect consumer interests in terms of affordability, quality of service and service sustainability.

The ERB has a mandate to promote efficient operation of undertakings in the energy sector, enhance competition, promote investment and safeguard consumer concerns regarding affordability of the various energy services. In order to carry out the above functions, the ERB uses various tools including:

  • Price Regulation (tariff setting)

  • Carrying out economic analysis of investment projects in the energy sector - Licensing condition

  • Periodic financial performance reporting

Energy regulation is a growing practice worldwide as part of infrastructure reform which most developed countries have gone through and developing countries are now going through. At regional level, Zambia through the ERB, is part of the SADC based Regional Electricity Regulators Association (RERA) based in Namibia and at continental level, the African Forum for Utility Regulators (AFUR) based in South Africa.

For historical reasons, most utility infrastructure has been state-owned having been considered of strategic nature for development. Over the past decades, however, most countries have embarked on reforms to ensure increased investment and efficiency in the provision of electricity and other utility services.

The key drivers for utility reform in Africa and other parts of the world have included:

  1. Inefficiencies in investment and operations (poor governance, few incentives for cost reduction, deterioration or collapse of services, etc)

  2. Insufficient public financing for capacity expansion

  3. Part of overall economic restructuring (macro-economic constraints)

  4. Technological innovation (changing economies of scale and scope, new possibilities for competition.

Regulation is therefore one of the major interventions in the agenda of utility reform.

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