WEBINAR

ASSESSING THE INDEPENDENCE OF ENERGY

REGULATORS IN CHILE, PERU AND MEXICO
Francisco X. Salazar Diez de Sollano
Non-resident fellow, Institute of the Americas
Chair, Mexicos World Energy Council Committe

THE IMPORTANCE OF INDEPENDENCE

Regulatory risks and independence

Two kinds of regulatory risks:
1. Capture
2. Politicization

Solutions
Against capture: transparency & accountability.
Against politicization: autonomy & stability (independence).

Independence means not depending on other authority, being self governing

or capable of acting by itself.
Independence encompasses several types of autonomy: technical,
operational, financial. It also implies institutional stability.

Why independence?
Mandate of regulators: balance the interest of the stakeholders, or better
yet, align them with the public interest.
Independence from 3 stakeholders:
1. Investors
2. Government
3. Consumers

Independence helps governments to shift the blame.

Independence also brings certainty to consumers that the regulators are not
sponsored by the investors (complement to accountability and transparency
mechanisms).

The investors point of view

Fragility of investments in energy related public services, due to:
Large sunk costs to be recovered in very long periods of time.
Single or very few suppliers.
Consumers as voters.

Associated risks:
Legal expropriation.
Reduce prices below costs (administrative expropriation).

Independence brings certainty to investors by separating technic & economic

decisions from political ones.

Independence and delegation

Independence is the ultimate step of Delegation.

Delegation in governments is convenient for:
1. Overcoming information asymmetries & enhance efficiency in technical areas of
governance (employ expertise & reduce policy costs).
2. Avoiding to take blame for unpopular policies (blame shifting).
3. Resolving commitment problems (enhance credibility) or granting political certainty.
Politicians, in view of elections, have a short time-horizon (myopia) and often have
incentives to change their decisions, which leads to time-inconsistent policies that are
not credible. The more commitment (credibility) is needed, the more autonomy is
given. Also, the greater the risk of change in governments and policies the more
autonomy is needed.

The Principal-Agent Theory

Drawbacks of delegating have been analyzed by the Principal-Agent Theory

Delegation is understood as a social transaction, or interaction, in which one
actor, the agent, carries out actions that are intended to fulfil the interests of
another actor, the principal.
3 Behavioral assumptions :
actors are rational and opportunistic;
potential conflict of interests between the two actors , and
asymmetric information in favor of the agent.

Potential problems that arise:

adverse selection
moral hazard

Independence and controls

In order to minimize delegation or agency losses, some controls are
needed.
Typical controls (incentive structures) include:

Requirements for candidates

Transparency obligations
Public consulting obligations
Institutional checks

Since controls limit the autonomy of the agent, the degree of

independence can be measured by assessing the strength of these
controls (Cukierman & Gilardis Indexes assumption).

THE GILARDI INDEX

Background
The creation of independent bodies starts with Central
Banks (credibility of monetary policy). Then it followed
with regulators as the result of market reforms and
privatizations.
In 1992 Cukierman, Webb & Neyapti developed an
index to measure the independence of Central Banks.
In 2001, Fabrizio Gilardi adapted the index to measure
the formal independence of regulators in Europe.

Structure of the index: 5 categories

Status of the agency head
1/5

1/5

1/5

1/5

1/5

Status of the members of the

management board
Relationship with government and
parliament
Financial and organizational
autonomy
Regulatory competencies

I. Status of the agency head

Term of office
1/6

1/6

Who appoints the agency head?

Dismissal

1/6

1/6

1/6

1/6

May the agency head hold other

offices in government?
Is the appointment renewable?
Is independence a formal
requirement for the appointment?

II. Status of the members of the board

Term of office
1/6

1/6

Who appoints the agency head?

Dismissal

1/6

1/6

1/6

1/6

May the members of the board

hold other offices in government?
Is the appointment renewable?
Is independence a formal
requirement for the appointment?

Status of the head and board members

Term of office

Who appoints the head?

Over 8 years

1.0

6 to 8 years

0.8

5 years

0.6

4 years

0.4

Less than 4 years

0.2

No fixed term

0.0

The members of the board

1.00

A mix of congress and government

0.75

Congress
Government collectively
One or two secretaries

0.50
0.25
0.00

Status of the head and board members

Board members?

Dismissal

The head of the agency

1.00

A mix of congress and government

0.75

Congress
Government collectively
One or two secretaries

0.50
0.25
0.00

Dismissal is impossible

1.00

Only for reasons not related to policy

No specific provisions for dismissal
At the appointers discretion

0.67
0.33
0.00

Status of the head and board members

Other offices in government?
No
Only with permission of the government
Yes/No specific provisions

0.5
0.0

Is the appointment renewable?

1.0

No

0.75

Yes, once
Yes, more than once

1.0
0.5

0.75

0.0

Is independence a formal requirement?

Yes
No

1.0
0.0

0.75

III. Relationship with government & congress

Is the independence of the agency
formally stated?
1/4

1/4

Formal obligations of the agency

vis-a-vis the government?
Formal obligations of the agency
vis-a-vis the congress?

1/4

1/4

Which body, other than a court,

can overturn the decisions of the
agency?

Relationship with government & congress

Is independence formally stated? Obligations with government
Yes
No

0.0

1.0

There are no formal obligations

0.75

Annual report for information only

Annual report that must be approved
Fully accountable to government

1.00
0.67
0.33
0.00

Relationship with government & congress

Obligations with congress
There are no formal obligations
Annual report for information only
Annual report that must be approved
Fully accountable to congress

0.67
0.33
0.00

Who can overturn decisions?

1.00

No body

A specialized body
The government, with qualifications
The government, unconditionally

1.00
0.67
0.33
0.00

Relationship with government & congress

Obligations with government
There are no formal obligations
Annual report for information only
Annual report that must be approved
Fully accountable to government

0.67
0.33
0.00

Obligations with congress

1.00

There are no formal obligations

Annual report for information only

Annual report that must be approved
Fully accountable to congress

1.00
0.67
0.33
0.00

Relationship with government & congress

Who can overturn decisions?
No body
A specialized body
The government, with qualifications
The government, unconditionally

0.67
0.33
0.00

Is independence formally stated?

1.00

Yes

No

1.0
0.0

0.75

IV. Financial and organizational autonomy

1/4

1/4

What is the source of the agency's

budget?
How is the budget controlled?
Which body decides on the
agency's internal organization?

1/4

1/4

Which body is in charge of the

agency's personnel policy?

Financial and organizational autonomy

Source of budget
Fees levied on the regulated industry
Government and regulatory fees
Government budget

0.5
0.0

How is the budget controlled?

1.0

By the agency

0.75

By the accounting office or court

By both the agency and the government
By the government only

1.00
0.67
0.33
0.00

Financial and organizational autonomy

Who decides internal organization? Who decides personnel policy?
The agency
Both the government and the agency
The government

0.5
0.0

1.0

The agency

0.75

Both the government and the agency

The government

1.0
0.5
0.0

0.75

V. Regulatory competencies
The agency only

1.00

The agency and another independent agency

0.75

The agency and congress

The agency and government
The agency has only consultative competencies

0.50
0.25
0.00

RESULTS

A word of caution
The maximum value of the index (1.0) equivalent to absolute or
literal formal independence is both unachievable and undesirable.
In practice, independence is limited due to:

Judicial appeals
Legal overrides
Financial markets
Public anger

Also, independence should be balanced by accountability and

transparency.
Effective independence is what is important

CHILE

Status of the agency head

1.00

1.00

0.90

1.00

0.80
0.70
0.60
0.50
0.46

0.40
0.30
0.20
0.10
0.00

0.33
0.20

Term of office

0.25

Who appoints?

Dismissal

Other jobs in
government

0.00
Renewal

Requirement of Weighted value

independence

Status of the board members

1.00

1.00

0.90

1.00

1.00

0.80
0.70
0.60
0.50

0.50

0.40
0.30
0.20
0.10
0.00

Term0.00
of office

Who appoints?

0.00
Dismissal

Other jobs in
government

0.00
Renewal

Requirement of Weighted value

independence

Relationship w/government & congress

1.00

1.00

0.90
0.80
0.70

0.67

0.60
0.50
0.40

0.42

0.30
0.20
0.10
0.00

0.00 formally
Independence
stated?

0.00 with
Obligations
government?

Obligations with
congress?

Who can overturn the

decisions?

Weighted value

Financial & organizational autonomy

1.00

1.00

0.90
0.80
0.70
0.60
0.50

0.50

0.40

0.38

0.30
0.20
0.10
0.00

Source of0.00
the budget?

How 0.00
is budget
controlled?

Who decides on internal

organization?

Who is in charge of
personnel policy?

Weighted value

Regulatory competencies & total

1.00

1.000

0.90

0.900

0.80

0.800

0.70

0.700

0.60

0.600

0.50

0.500

0.40

0.400

0.30

0.300

0.20

0.25

0.200
0.100

0.10
0.00

0.401

Regulatory competencies

0.000

Gilardi index

PERU

Status of the agency head

1.00

1.00

0.90

1.00

0.80
0.70
0.60
0.50

0.67

0.67

0.60
0.50

0.40
0.30
0.20

0.25

0.10
0.00

Term of office

Who appoints?

Dismissal

Other jobs in
government

Renewal

Requirement of Weighted value

independence

Status of the board members

1.00

1.00

0.90

1.00

0.80
0.70
0.60
0.50

0.67

0.67

0.60
0.50

0.40
0.30
0.20

0.25

0.10
0.00

Term of office

Who appoints?

Dismissal

Other jobs in
government

Renewal

Requirement of Weighted value

independence

Relationship w/government & congress

1.00
0.90

1.00

1.00

1.00

1.00

1.00

Independence formally
stated?

Obligations with
government?

Obligations with
congress?

Who can overturn the

decisions?

Weighted value

0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00

Financial & organizational autonomy

1.00
0.90

1.00

1.00

1.00

1.00

1.00

Source of the budget?

How is budget
controlled?

Who decides on internal

organization?

Who is in charge of
personnel policy?

Weighted value

0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00

Regulatory competencies & total

1.00
0.90

1.00

1.000
0.900

0.80

0.800

0.70

0.700

0.60

0.600

0.50

0.500

0.40

0.400

0.30

0.300

0.20

0.200

0.10

0.100

0.00

Regulatory competencies

0.000

0.868

Gilardi index

MEXICO

Mexico: status of the agency head

1.00

1.00

0.90
0.80
0.70

0.80

1.00

0.79

0.75
0.67

0.60
0.50

0.50

0.40
0.30
0.20
0.10
0.00

Term of office

Who appoints?

Dismissal

Other jobs in
government

Renewal

Requirement of Weighted value

independence

Mexico: status of the board members

1.00

1.00

0.90
0.80
0.70

0.80

1.00

0.79

0.75
0.67

0.60
0.50

0.50

0.40
0.30
0.20
0.10
0.00

Term of office

Who appoints?

Dismissal

Other jobs in
government

Renewal

Requirement of Weighted value

independence

Mexico: Rel. with government & congress

1.00
0.90

1.00

1.00

1.00

1.00

1.00

Independence formally
stated?

Obligations with
government?

Obligations with
congress?

Who can overturn the

decisions?

Weighted value

0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00

Financial & organizational autonomy

1.00
0.90

1.00

1.00

1.00

1.00

1.00

Source of the budget?

How is budget
controlled?

Who decides on internal

organization?

Who is in charge of
personnel policy?

Weighted value

0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00

Regulatory competencies & total

1.00

1.000

0.90

0.900

0.80

0.800

0.70

0.80

0.700

0.60

0.600

0.50

0.500

0.40

0.400

0.30

0.300

0.20

0.200

0.10

0.100

0.00

Regulatory competencies

0.875

0.000

Gilardi index

Comparing the Gilardi index

Status of the head
1.00
0.80
0.60
Regulatory competencies

0.40
0.20

Status of the board

Chile

0.00

Peru
Mexico

Financial & operational

autonomy

Relations w/government &

congress

AN ALTERNATIVE HYPOTHESIS:
THE INDEX OF ECONOMIC FREEDOM

Index of economic freedom

Annual index and ranking created by The Heritage Foundation and The Wall Street
Journal in 1995 to measure the degree of economic freedom in 186 (now) countries
around the world.
The index scores nations on ten factors of economic freedom, using statistics from
organizations like the WB, the IMF, EIU and Transparency International. In each
factor, countries are scored 0 to 100, with 0 being the least free and 100 the most
free. A score of 100 signifies an economic environment or set of policies that is most
conducive to economic freedom.
Please note that for the purposes of this document, the index is not used for
demonstrating a link with economic growth but only as an indicator of economic
freedom (real or perceived).

Categories and factors measured

I.
II.

Rule of Law
Limited Government

a. Property Rights
b. Freedom from Corruption
a. Fiscal Freedom
b. Government Size/Spending
a. Business Freedom

III.

Regulatory Efficiency

b. Labor Freedom
c.

Monetary Freedom

a. Trade Freedom
IV. Open Markets

b. Investment Freedom
c.

Financial Freedom

Economic freedom index

100
90

Free

80

Mostly free

70

Moderately free

60

Mostly unfree

50

Repressed

40
30
20
10
0

2007

2008

2009

2010

2011
Chile

2012
Peru

2013

Mexico

2014

2015

2016

Economic freedom ranking

0

2007

2008

2009

2010

2011

2012

10
20
30
40
50
60
70
80
Chile

Peru

Mexico

2013

2014

2015

2016

Specific factors
Property rights

Degree of a country's legal protection of private property rights,

degree of enforcement of those laws, independence of and corruption
within the judiciary, and likelihood of expropriation

Investment freedom

Freedom from restrictions on the movement and use of investment

capital, regardless of activity, within and across the country's borders

Monetary freedom

How free from microeconomic intervention and price instability is a

country

Property rights
100
90
80
70
60
50
40
30
20
10
0

2007

2008

2009

2010

2011
Chile

2012
Peru

2013

Mexico

2014

2015

2016

Investment freedom
100
90
80
70
60
50
40
30

2007

2008

2009

2010

2011
Chile

2012
Peru

2013

Mexico

2014

2015

2016

Monetary freedom
100
95
90
85
80
75
70
65
60

2007

2008

2009

2010

2011
Chile

2012
Peru

2013

Mexico

2014

2015

2016

CONCLUSIONS

Final remarks
Delegating economic regulation to independent agencies has more
benefits than drawbacks.
Independence is important for all stakeholders: consumers,
government and investors.
The Gilardi Index is a good indicator of formal independence.
Countries with high levels of (real or perceived) economic freedom
might not deem strong independent regulators as a necessary
condition to attract investments.
In the long term, however, even for these countries, granting more
independence to the regulator will no hurt and bring more certainty
to investors.

THANKS!