The energy regulator's priorities

Late last Friday the media was informed that the energy regulator, the Malta Resources Authority (MRA), had published a report wherein an auditing firm of international repute had audited an exercise also carried out by a similar firm of international repute, in turn based on a set of assumptions and financial data supplied by a monopolistic utility corporation, Enemalta.

This was the regulator's own response and report on why it deemed fit to approve the current set of electricity and water tariffs first suggested by minister on behalf of Enemalta last October.

Some 16 years ago, in 1993, the Federation of Industry had commissioned me to carry out a study on the restructuring of the Maltese economy. This subject we felt then was appropriate, because it was a time when Malta had renewed its efforts to join the European Union. The study was meant to show which areas Malta needed to restructure in order to make its economy modern and closer to the economies of the member states of the EU.

Chapter three of the study dealt with price liberalisation. It suggested to the government a better way of controlling prices through the markets. At that time our method of controlling prices was through a special police force (called "control police") whose job was mainly to prosecute salespersons for not having a visually upright price tag on their cabbages. It was pointed out in the study that the best way of restructuring was to set up regulatory authorities whose job would be to ensure competition, and where there are monopolies regulate in an appropriate manner. This system existed then in the EU and many non-EU countries, Malta excluded.

Some years had to pass before the government introduced these regulatory authorities in the telecom field through the Malta Communications Authority (MCA), competition field (the Office of Fair Trading), and in the energy and water sectors through the MRA.

One needs to review this background to appreciate the current controversy surrounding the suggested electricity and water tariffs and the role of the energy regulator in this debacle.

Protecting consumers should be the MRA's first priority. It should do this by promoting competition, wherever appropriate, and regulating the monopoly companies which produce and distribute electricity, water and gas. Another function is to take account of the needs of vulnerable customers, particularly older people, those with disabilities and those on low incomes. Helping these industries use cleaner technologies and ensuring future supplies are also within their remit.

The regulator should be truly independent and transparent in its deliberations. In fact its budgets are normally based on the revenues derived from licenses imposed on the corporations in the sector being regulated, and not on the central government budget.

The crucial question then is this. How is the MRA, as the energy regulator, regulating and controlling the market price of electricity on behalf of the consumer? The government has tried hard to give the impression that this should be done through a full cost recovery exercise carried out by an audit firm of repute. This is amusing were it not to have had a disastrous effect on the economy and the non-amused consumer. Because if tariffs are based on what the monopolist costs are, then we do not require an energy regulator. An audit firm's exercise would be adequate.

The exercises which need to be carried out by the regulator before approving tariffs in a monopolistic market are essentially economic exercises. The sole objective of the regulator is to estimate the market price of electricity as if such a market existed. If Enemalta were one of many energy producers or distributors in the country, which price or set of tariffs would have applied in that liberalised market? Although these are initially based on financial variables, the key assumptions and objectives of the model should be purely economic.

It is obviously within the remit of the government or the public utility to commission an auditing firm of repute to find out what the corporation's costs are. However, it would be really outrageous if the regulator, as the consumer's defence attorney, were to treat these reports as the final word on the subject.

In this situation to whom would the consumer now turn for protection?

But in Malta this surreal set of events indeed took place. As Malta's energy regulator, the MRA took these sets of accounts passed on to it by the minister and approved them. Now many weeks later, following a request by a number of inquisitive unions, the MRA has informed the public of the basis on which the tariffs had been approved. The approval was based solely on a report that the workings carried out by the first auditing firm were found by a second auditing firm to be arithmetically correct and followed religiously the assumptions set by the corporation and the minister in the first place.

It appears very significantly from "the way forward" section statements suggested by the second auditing firm that even the first accounting exercise was based on questionable assumptions and unaudited financial data furnished by the corporation. In this article these remarks though relevant should not directly detract us from the fundamental point at issue. The MRA has not only been conspicuous by its absence from the very beginning but seems to have no clue of what its legal obligations really are.

One could audit the auditors as many times one could care to audit, because one would not be able to arrive at the level of tariffs that should apply in our monopolistic market without using the appropriate economic tools suggested by the economic literature and current practice used elsewhere in the EU. If the Authority does not have the necessary expertise to carry out these exercises it should state so.

The consumer would then have to search elsewhere to protect itself. But to state that the tariffs are justified because an audit firm of repute found that the arithmetic workings of a study commissioned by the government were without mistakes is a clear acknowledgement of a regulator failure.