As “market referees”, regulators contribute to the delivery of essential public utilities. Their organisational culture, behaviour and governance are important factors in how regulators, and the sectors they oversee, perform. The OECD Performance Assessment Framework for Economic Regulators (PAFER) looks at the institutions, processes and practices that can create an organisational culture of performance and results. The report uses PAFER to assess elements linked to both the internal and external governance of Portugal’s Energy Services Regulatory Authority (ERSE). The review acknowledges the well-respected status of ERSE within the institutional framework, analyses the key drivers of its performance, and identifies a number of challenges and opportunities to help the regulator prepare for the future, including in the context of deep market transformation and the COVID-19 crisis.
Driving Performance at Portugal’s Energy Services Regulatory Authority
Abstract
Executive Summary
The Energy Services Regulatory Authority (Entidade Reguladora dos Serviços Energéticos, ERSE) is Portugal’s independent economic regulator for the energy sector. The regulator was established in 1997, concurrently with the liberalisation of the Portuguese electricity market. Throughout its existence, ERSE has provided stability and predictability to the sector. By virtue of technical expertise and capacity, it is currently highly regarded by stakeholders.
The energy sector in Portugal has been transformed over the past 25 years. During this time, ERSE has demonstrated flexibility and has been successful in taking on new roles, matched by a proven agility to adapt governance and regulatory practices to new trends and challenges, most recently during the COVID-19 pandemic. Such experience will continue to be important for the regulation of a rapidly changing sector, driven both by technological progress and the decarbonisation of the Portuguese economy. ERSE’s advanced stakeholder engagement practice, in the form of its consultative councils, will also continue to play a crucial role in delivering on its mandate.
Within such a context, ERSE will need to continue to be forward looking in its decisions and facilitate experimentation and innovation, while maintaining the strong sense of historic continuity and predictability. Such a vision, and its connection to the wider national context, will need to be accompanied by better monitoring against the regulator’s strategic objectives, as well as communication of its performance to a wide range of stakeholders to further demonstrate the value of ERSE and the merits of independent economic regulation.
Role and objectives of ERSE
ERSE has handled the recurrent expansion of its mandate effectively: from regulating only the electricity market upon its creation, to the addition of regulatory roles for gas, electric mobility and, most recently, fuels. ERSE’s activities range beyond national borders, with an active role in the Iberian Electricity Market (MIBEL), in collaboration with the Portuguese financial markets regulator and their Spanish counterparts.
A four-year strategic plan sets out the objectives for ERSE’s regulatory activities. The strategic plan reflects the highly technical work of the regulator, but misses the opportunity to project ERSE’s vision and use the strategic framework to bring the message of its value to a wider audience.
Key recommendations
Reinforce the strategic framework of ERSE by introducing a greater focus on outcomes and more accessible language at all levels. This can be undertaken for the regulator’s next strategic plan.
Strengthen ERSE’s identity as a forward-looking regulatory authority, encouraging its appetite for experimentation and flexibility, including identifying areas where more risks can be taken and innovations tested.
Input
ERSE is funded mainly through contributions from the industry. The fees are defined by ERSE according to criteria set out in legislation, contributing to the regulator’s independence. After the 2009 financial crisis, a number of government austerity measures affected ERSE, such as the retention in the state budget of any ERSE budget surplus, the need for government authorisation to introduce new budget lines, and salary cuts and freezes. There is some concern that the anticipated economic effect of the COVID-19 crisis might prompt the introduction of similar measures.
The ERSE workforce is experienced, knowledgeable and technically proficient. Currently, ERSE needs government authorisation for any increase in headcount, leading to a lengthy recruitment process that may hinder its agility in bringing in new skill sets.
Key recommendations
Take steps to build a constructive, ‘no surprises’ relationship with the executive and legislative, by initiating structured dialogue with the executive in order to set expectations on work priorities.
Advocate for lifting of certain practices that limit the financial autonomy of the regulator and anticipate future challenges.
Process
The three-member Board has vast responsibilities, combining both strategic and executive functions, which might reduce the Board’s capacity to focus on strategic matters. Board members are limited to one term, with terms staggered at 6 months; this means that it is possible for ERSE to have an entirely new board within 18 months. This may undermine continuity in its leadership and strategic direction.
The regulator’s teams are structured by function rather than sector, which enables ERSE to respond with agility to rapid sector changes. The current process of internal restructuring combined with the recent expansion of the workforce highlights the need to consolidate the internal culture of the regulator.
The engagement mechanisms at ERSE are varied. Significantly, ERSE makes use of three consultative councils that allow stakeholders within the energy sector to share information and viewpoints and reach consensus. The councils also ensure that ERSE’s decision making is more transparent and robust.
Key recommendations
Advocate increasing the minimum time required between board appointments from six months to at least one year.
Invest in the Board’s strategic, outward-looking role, dedicating more time to monitoring future challenges and opportunities in the industry.
Embed institutional renewal in the internal restructuring process and take the opportunity to strengthen the regulator’s focus on innovation and foresight.
Continue with the highly positive practice of consultative councils and preserve their value through proportionate use.
Output and outcome
ERSE regularly collects data from market actors. Whilst procedures ensure that companies do not receive multiple data requests from different divisions of the regulator, there is no central portal that enables regulated companies to submit their information. A new cross-regulators platform is used for the supervision of petroleum and biofuels sectors, but has not yet been extended to electricity and natural gas.
The regulator does not report on its own performance against a set of comprehensive indicators, but work is underway to define associated performance indicators for the current strategic plan.
Key recommendations
Reduce regulatory burdens for the sector by streamlining data collection and collaborating on a “one-stop shop” across the energy sector.
Monitor ERSE’s own performance using the strategic framework to define performance indicators for the organisation.
Use reporting as an opportunity to showcase the value of independent economic regulation to key external stakeholders.
