Public Disclosure Authorized ROMANIA: REGULATORY AND STRUCTURAL ASSESSMENT IN THE NETWORK UTILITIES Edited by Ioannis N. Kessides Public Disclosure Authorized The World Bank Poverty Reduction and Economic Management Sector Unit Europe and Central Asia Region Public Disclosure Authorized June 15, 2000 Public Disclosure Authorized CONTENTS Foreword Acknowledgment Executive Summary EXECUTIVE SUMMARY Objectives and Scope viii Background ix Telecommunications ix Electricity xii Oil xiv Natural Gas xvi Transportation xvii International Policy Developments xix Challenges in the Transition Process xxii Development of Effective Regulation xxiii The Regulatory Process xxviii Current and Forthcoming Substantive Regulatory Issues xxxi Rules Governing Access to Bottleneck Infrastructural Facilities xxxii Economically Efficient Pricing Policies xxxiii Competitively Neutral Mechanisms for Funding Universal Service xxxiv TELECOMMUNICATIONS REFORM IN ROMANIA Roger Noll Performance 1 Institutions 8 Players 8 Assessment 12 Autonomy 16 Accountability 16 Transparency 17 Conclusions 18 ROMANIA: OIL AND GAS REFORM David M. Newbery Background 20 Oil 23 Industrial Structure and Ownership 23 Production and Distribution Companies 24 Transport 25 Storage 27 Licensing and Exploration 27 iii Pricing and Taxation 28 Competition Policy 28 Pipeline Tariff Regulation 29 The Pipeline Tariff Study 29 Assessment of Liberalization in the Oil Industry 31 Gas 31 Industrial Structure, Ownership and Restructuring Plans 32 Other Players 34 Regulation 34 Taxation and Pricing 38 Non-payment 40 Tariff Study 41 Impact of Tariff Rebalancing on Consumers 43 Privatization and Liberalization 45 Conclusions 50 References 50 Appendix: Relevant Romanian Legislation 51 The Law on Public Property 51 The Law on Concession 51 The Petroleum Law 51 Emergency Ordinance 29 52 REPORT ON ELECTRICITY INDUSTRY RESTRUCTURING IN ROMANIA Frank A. Wolak Introduction 60 Background on Romanian Economy and Electricity Supply Industry 60 Current Re-structuring Process in Romanian Electricity Supply Industry 66 Requirements for a Successful Electricity Industry Restructuring Process in Romania 71 Costs of Current Government-Owned Monopoly Supplier Regime 72 The Benefits of Privatization and a Gradual Introduction of Competition 75 Staging the Transition to a Competitive Market 78 Establish the Regulatory Process Early On 78 Nature of Commitment Problem in Regulatory Process 79 Characteristics of Regulatory Process Necessary to Solve Commitment Problem 80 Implementing Desired Regulatory Structure in Romania 83 Establishing Regulatory Credibility 87 Necessity of Establishing the Bills will be Paid 87 Separate Prices for Each Service 88 Introducing Competition into the Romanian Electricity Supply Industry 90 Consolidation of Regional Electricity Companies May Not Be Necessary 92 Conclusion 92 References 93 iv TRANSPORTATION IN ROMANIA: AN ASSESSMENT AND POLICY RECOMMENDATIONS Clifford Winston Introduction 104 Institutional Background 105 An Assessment of the Romanian Transport Sector 109 Learning from International Experience: The Case of U.S. Airline and Railroad Deregulation 112 U.S. Airline Deregulation 112 U.S. Railroad Deregulation 114 Implications of the Deregulation Experience for Roman 115 Efficient Transportation Infrastructure Policy 116 Policy Recommendations for Romania 117 Concluding Comments: Toward an Integrated Transport System 121 v Foreword The Poverty Reduction and Economic Management Unit in the World Bank’s Europe and Central Asia Region has been undertaking analytical work on issues pertinent to the economies in the region. These issues include: transition issues, issues of economic integration pertinent for the Central and Eastern Europe countries which are candidates for accession to the EU, poverty issues; and other economic management concerns. The analytical work has been conducted by staff of the unit, other Bank staff, and specialists outside of the Bank. This technical paper series was launched to promote wider dissemination of this analytical work, with the objective of generating further discussions of the issues. The studies published in the series should therefore be viewed as work in progress. The findings, interpretations, and conclusions are the authors’ own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries. Pradeep Mitra Director Poverty Reduction and Economic Management Unit Europe and Central Asia Region The World Bank vi Acknowledgments This report is based on information collected during operational missions in 1998 and 1999. The missions were led by Ioannis N. Kessides, Development Research Group (DECRG) and Poverty Reduction and Economic Management Sector Unit (ECSPE), and included Roger Noll (Stanford University), David M. Newbery (University of Cambridge), Frank Wolak (Stanford University), and Clifford Winston (Brookings Institution). The work of this report was cofinanced by the Government of Romania, the Public-Private Infrastructure Advisory Facility (PPIAF) and the Europe and Central Asia Region (ECA), and was carried out under the direction of Andrew Vorkink, Director, Bulgaria/Romania/Cyprus. We would like to express our gratitude to the numerous officials of the Government of Romania, the regulatory agencies, and the operating entities, for their valuable time and assistance. In particular we would like to thank: Traian Basescu, Minister of Transport; Radu Berceanu, Minister of Industry and Trade; Sergiu Iliescu, President of the National Agency for Communication and Informatics; and Vasile Olievschi, Director, Ministry of Transport. We would also like to thank: Arabela Negulescu for coordinating the mission work and organizing the workshop held in Bucharest on March 27-28, 2000; Varadarajan Atur, Hafez Ghanem, William Porter, David Satola, and Khaled Sherif for their guidance and support; and Maria Florini, Cecilia Briceno-Garmendia, and Helena Makarenko, for their excellent research assistance. vii EXECUTIVE SUMMARY Objectives and Scope In the fall of 1999, at the request of the Government of Romania (GoR), a team of international experts performed a structural and regulatory review of the country’s key infrastructure sectors (telecommunications, electricity, oil and gas, and transportation). The review focussed on the market and governance structures of these sectors and the GoR’s policy plans for their competitive restructuring and regulation. This emphasis on industry structure and regulation was motivated by the emerging international experience that the organization and architecture of market and governance structures are critical to the ongoing success of any privatization process; and that achieving the public interest goals of privatization requires a commitment to planning and clearly defining the post-privatization governance and industry structures ahead of time. As a consequence, both the institutional mechanisms of governance as well as the guideposts for the substantive content of that governance and the policy plans for structural reorganization were analyzed by the experts. Discussions focussed, in particular, on pressing issues and potential challenges and obstacles in connection with Romania’s preparation for accession to the European Union (EU). The objective of the discussions was not to audit the status of measures being taken to implement the EU regulatory and structural directives in the network utilities. Rather, an effort was made to identify areas of regulatory and structural policy that might benefit from special attention in order to accelerate the transition to market liberalization and deregulation in these important sectors of the Romanian economy. The review was undertaken in the context of a widespread perception that Romania has been falling behind in the transposition of the EU Directives in the network utilities. The implementation of these structural and regulatory harmonization directives is one of the prerequisites for accession to the EU. This report summarizes the findings and recommendations of the experts’ review and has both substantive and procedural aspects. At the substantive level, it seeks to: (i) examine the structure of supply in the network utilities of Romania; (ii) analyze further options for the horizontal and vertical restructuring of these industries to enhance their efficiency, market responsiveness, and fiscal responsibility; (iii) identify areas of market dominance and potential monopoly abuse, and propose regulatory safeguards as a transition to an acceptable level of horizontal competition; (iv) identify the major regulatory issues that need to be addressed and propose strategies for addressing these issues; and (v) summarize the relevant international experience in the competitive restructuring and deregulation of the network utilities and evaluate its applicability to the unique circumstance of Romania. At the procedural and institutional level, the report seeks to: (i) evaluate the coherence, transparency, independence, and accountability of the regulatory process- its insulation from the executive and legislative branches of government, the extent of regulatory capture, whether interested parties are afforded an opportunity to be heard on major issues, the obligation of regulatory agencies to justify their decisions, and statutorily-imposed deadlines for reaching decisions; (ii) identify additional substantive restraints and procedural safeguards that need to be implemented to limit regulatory opportunism and enhance