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The relationship between one regulator and one utility
was unlikely to lead to independent regulation because Tariff Regulation is an important economic factor in a
the company providing the service under conditions of a regulated market. The mechanisms used for this type
natural monopoly has a dominant position. In contrast, the of regulation are price cap regulation, rate-of-return
risk of abuse was lower with a higher ratio which would regulation, and yardstick (benchmark) regulation. Price
assure the regulator’s independence. The Caribbean cap and yardstick regulation suggest a strong drive
region consists mainly of Small Island Developing States towards efficiency and quality improvements. Incentive-
(SIDS) with individual regulators and electric utilities. The based regulation was increasingly being introduced
work of independence is particularly complex in SIDS since the regulator, being a “surrogate for competition”,
because the small sizes of these economies make could stimulate efficiency improvement and quality by
true arm’s length relationships difficult to establish and establishing incentive schemes. This occurred particularly
maintain. In addition, the development of independence when performance-based regulation was introduced with
in such economies involves changing informal rules a price-cap formula containing incentives for efficiency
and relationships that are well-known and valued . The improvements and mechanisms for quality improvement.
establishment of the Eastern Caribbean Energy Regulatory Under this regime, regulators would often use the industry
Authority (ECERA) regional regulatory body should provide benchmark studies primarily the multi-dimensional
added value to the regional statutes and for the countries benchmarking to help them determine relative efficiency
in the region to respect the decisions of the regulator on among a peer group of similar utilities thus setting efficiency
both economic regulation and service quality regulation. targets. Regulation covered the mechanisms through
The independent regulator should be accountable for its which the regulator determined the allowed income for an
procedures and conform to the statutes laid out. Change Electric Utility company. Pricing or tariff design referred to
requirement of statutes and procedures should adhere to the process of determining the structure of these tariffs for
transparency and publicity as discussed previously. the different customer categories. The price control and
tariff design are related but separate issues. Price control
Electric Utilities are making preparation for the introduction dealt with the determination of the allowed income to the
of Eastern Caribbean Energy Regulatory Authority Electric Utility Company. Pricing was related to the issue
(ECERA) in their markets. While the industry welcomes the of designing a bundle of tariffs so that together they could
establishment of ECERA it does not know exactly the form generate the allowed income for the Utility as determined
it will take; will license obligation granted under the Electric by the regulator (price control). Pricing aspects were all
Service Act be affected, will proposed amendments to related to the utility’s base rate with which the operational
the license be negotiated and what will be the impact on capital costs were recovered. For fuel costs, a pass-
the tariff and service obligation? Whatever form it takes, through mechanism was introduced in most countries
regulation has value to the sector and will change the way since these costs tended to be volatile. Pass-through
they currently do business. Utilities have been prompted of the actual fuel costs was often linked with a heat-rate
to develop a Change Management strategy that will target and system losses target.
prepare them adequately for the imminent introduction
of ECERA. This will include clear line of communication Quality regulation in conjunction with price cap regulation
with stakeholders, public relation, leadership and a robust was widespread adopted primarily because of the
structure. In addition to their Change Management perceived danger of lower quality under a monopoly regime.
strategy, the companies should develop a competitive Under this hybrid regulation, the regulator sets targets for
strategy, education plan, and legislative review among the reliability indices and awarded better performance in
others. the so-called Q-factor and penalized worse performance,
taking into account a dead band of around 10 per cent
FORMS OF REGULATION AND PRINCIPLES in some cases. Furthermore, the regulator set standards
for power quality, voltage level, speed of connecting new
customers (with penalties to be paid to the customer in
The major regulatory areas are tariff regulation, quality case of delays) and customer service.
regulation and market regulation. These are governed by
the principles of regulation. Regulation involves balancing Market Regulation within the small island context refers
the interests of the customer who require low tariffs and to the introduction of competition in generation. The
best service quality, and the interests of the utility company competition could be favourable where Independent Power
who require a reasonable rate of return and maintain Producers (IPPs) were allowed in the event power could
financial health. In order to balance these two interests, be delivered at a lower price than the Utility. This would
utility efficiency is a very important factor in addition to provide some support for the introduction of Renewable
maintaining high reliability and quality of service.

INDUSTRY JOURNAL 4