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How Strong Regulatory Frameworks Support Development

How Strong Regulatory Frameworks Support Development

Working in partnership with our funders and partners around the world, NARUC International seeks to empower the global community of regulators to drive meaningful change in their energy sectors. Regulatory reforms can open up new opportunities for businesses, improve the health and safety of a country’s citizens and facilitate greater connections within a region.

But don’t just take our word for it -- here are three ways strong regulatory frameworks can support development:

Improving Utility Credit Ratings

Improving regulatory accounting practices within a country can positively affect a utility’s credit rating, helping to drive additional investment and support capital improvements. For instance, a key factor in Moody’s methodology for evaluating regulated electric and gas utilities is the regulatory framework.

“Broadly speaking, the Regulatory Framework is the foundation for how all the decisions that affect utilities are made (including the setting of rates), as well as the predictability and consistency of decision-making provided by that foundation,” Moody’s says in its methodology for the sector.

Moody’s evaluates regulatory frameworks in part on the stability, transparency and predictability of the regulator and related institutions, which is key to providing confidence. “A utility operating in a regulatory framework that, by statute or practice, allows the regulator to arbitrarily prevent the utility from recovering its costs or earning a reasonable return on prudently incurred investments, or where regulatory decisions may be reversed by politicians seeking to enhance their populist appeal will receive a much lower score,” Moody’s said.

Additionally, sound financial reporting contributes to better ratings for other score factors, such as ability to recover costs and earn returns, and overall financial strength. As favorable ratings indicate lower risk, the utility can then benefit from lower borrowing costs and attract the needed investment to improve and expand service.

Driving Entrepreneurship and Economic Growth

The World Bank’s Doing Business Report evaluates a myriad of factors that affect efforts to start and maintain a new business across 139 economies across the globe. In assessing a business’ access to electricity, the World Bank evaluates the time and cost of interconnection, electric reliability and tariff transparency, all of which are interrelated with a regulator’s work in the sector.

“Broadly speaking, the Regulatory Framework is the foundation for how all the decisions that affect utilities are made (including the setting of rates), as well as the predictability and consistency of decision-making provided by that foundation,” Moody’s says in its methodology for the sector.

For businesses in developing countries, reliability of electricity is seen “as the fourth largest obstacle to doing business,” the 2018 report found. “Both an efficient connection process and safeguards to mitigate outage risks are crucial to business owners. Effective customer protections and regulations also provide predictability for firms, enabling them to better forecast risks.”

Meeting Clean Energy Targets

Countries around the globe are implementing a diverse set of strategies to spur investment and increase renewable generation. According to the United Nations Environment Programme, regulatory levers like specific tariffs and auctions are key to driving progress toward broader targets.

“Policymakers often strive to implement a unique mix of complementary regulatory policies, fiscal incentives, and/ or public financing mechanisms to overcome specific barriers or meet individual energy sector development goals. These mechanisms, if well-designed and effectively implemented, can help spur the needed investment in the energy sector to meet national RE and/or EE targets,” UNEP said in its recent report, “Renewable Energy and Energy Efficiency in Developing Countries: Contributions to Reducing Global Emissions.”

From assistance on Uniform Systems of Accounts and other regulatory accounting practices to support on renewable energy, NARUC is working to strengthen regulatory frameworks in collaboration with its federal funders and international partners. Through these efforts, NARUC hopes to support reforms that facilitate investment, strengthen energy security and promote progress. 

The contents of this post are the responsibility of NARUC and do not necessarily reflect the views of the United States Government.