Partially unbundled with Private Sector Participation
ARME was established by an Act of Parliament, Law no. 14 / VIII / 2012 of 11 July amended by Law no. 13 / VIII / 2016. The Electricity law, Decreto Lei no. 04/2013 governs the electricity sector. As an entity established by law, ARME has credibility, which has a positive impact on investor and consumer confidence.
Clarity of Roles and Objectives
ARME’s regulatory function are not clearly defined in the primary legislation but are described in a separate document, Decreto Lei n50, 2018 on ARME’s statutes. The duties and obligations of regulated entities are also clearly defined in secondary legislation.
ARME maintains a substantial level of “arm’s-length” independence from government. A mixture of the legislature and the executive appoints commissioners of ARME for a term of 5-7 years, renewable once. The President appoints the chairperson of the board, but the CEO is appointed by the Board members. There is no requirement for institutional representation on the board but there is a provision and mechanism for staggering the terms of commissioners to ensure knowledge transfer and continuity.
ARME rates low with regards to independence from stakeholders. Section 4 of Article 45 - incompatibilities and impediments (annex DL-50/2018 of 20 September – Statutes of the ARME) prohibits the appointment of persons who have worked in regulated utilities as commissioners and also bars commissioners from accepting immediate appointments in regulated institutions after their term in ARME. A cooling-off period of 1-2 years is required. However, there are no laws that prohibit the CEO/Commissioners from having interests in the regulated utility. The criteria for dismissing agency head/board members during their terms in office is published and the majority of ARME permanent staff are recruited through a competitive process.
ARME’s rating in decision making independence is medium. ARME is required to consult the public and stakeholders before taking regulatory decisions. ARME does not need to seek approval from the executive before taking regulatory decisions. The regulator is the final decision maker on tariff determination but plays consultative roles in issuing and amending licences and resolution of disputes between regulated entities and their customers. Furthermore, the executive arm of government cannot overturn regulatory decisions of the regulator. Although the regulator plays a facilitatory role in resolving disputes between companies on the one hand, and between companies and their customers on the other, the regulators’ decision is legally binding.
ARME is rated medium on financial independence. It relies on fees levied on regulated utilities, license/certification fees, penalty fees and government budgetary allocation, approved by the executive. The ministry proposes and discusses the authority’s budget and government and the regulatory board determine the salary levels of regulatory staff which is said to be lower than the levels of utility staff. This has the potential of causing accelerated staff attrition and possible regulatory capture. Parliamentary approval of the level of fees will help reduce arbitrariness and executive influence.
ERA maintains a substantial level of regulatory development with regard to accountability to sector stakeholders. The authority reports to both Parliament and the sector ministry and has a legal obligation to produce annual reports on its activities, which it presents to Parliament and the executive. Regulated utilities may challenge ARME’s regulatory decisions, but this is done through the normal Judicial system, a process which could be lengthy and complicated.
ARME rates high in transparency, as the public has immediate on-line access to key regulatory documents like license procedures and tariffs from the regulator’s website. All major regulatory decisions taken by the regulatory agency and the rationale/reasons behind them are also published and are accessible at www.arme.cv. The publication of major regulatory decisions and the reasons behind them is mandatory under art.83o DL.50/2018.
ARME rates low in predictability. It has a documented tariff methodology, published in 2010, which can be changed by the regulator in consultation with regulated firms and stakeholders. The methodology sets out the procedures for major tariff reviews but has not been reviewed for more than 5 years. Timetable for tariff reviews has also not been developed. There is a predictable mechanism used by the regulator to disallow costs considered unreasonably incurred by a regulated entity.
There is no documented procedure for obtaining licences, which is published but key regulatory documents such as licences, contracts and authorizations and quality of service indicators can be modified by mutual agreement between parties to the regulatory instrument.
ARME rates high in stakeholder participation in regulatory decisions. Stakeholder consultation is mandatory under section 2 of art. 19o DL50/2018. The law provides for consultation with regulated utility companies, other industry players, consumers, Civil Society Organizations (CSOs) and government through public hearings, ad-hoc meetings, and submission of written comments. The regulator considers stakeholders’ inputs and responses received during the consultations in arriving at regulatory decisions and publishes stakeholder comments received during the consultative process. The regulator provides feedback on comments received from stakeholders.
Open Access to Information
ARME is rated high in openness to the public with information. The authority has a public website www.arme, which carries information on primary and secondary legislations , regulatory documents such as tariff methodology, grid code, Quality of Service Code/Regulations, Consultation Papers, Schedule of Tariffs for regulated companies, Regulatory Decisions and Reasons, Annual Reports of the Regulator, Compliance with legal obligations by the regulator.
Economic Regulation -Tariff Setting
ARME is rated low in the development of its economic regulation framework. It has a tariff setting methodology, dating back to 2010, which includes procedures for tariff reviews but lacks tariff review schedules. It however includes an automatic tariff adjustment framework (ATAF), under which tariffs are adjusted every four months but does not cover major tariff reviews. There is no written formula that prescribes how end-user tariff levels must be set. The regulator has not developed a model regulatory accounting framework for tariff applications. There is also no, mechanism for compensating generators for ancillary services but there is a requirement in the tariff methodology that requires the utility to seek approval from the regulator prior to making major investments.
ARME ensures that utilities are compensated for stranded assets. ARME has developed a network connection policy but, which is not part of the tariff methodology. Social rates are tariff mechanisms adopted to support low-income consumers, the poor and vulnerable.
Technical Regulation - Quality of Service
ARME is rated substantial in its technical regulation framework. It has developed quality of service (QoS) regulations for monitoring the performance and technical requirements for grid connection and compensation. Time for utility company to respond to customer request for new connection, Time for actual connection to be made , Response time to customer complaints, Time given from issuance of “Notice-to-pay” until disconnection, Time taken for reconnection after payment is made, Response time for metering queries are the time-based QoS requirements in the regulations. The QoS regulations approved in March 2021imposes fines on utilities that fail to meet quality of service standards. ARME has not carried out a comprehensive assessment/analysis on the quality of service performance of the utility but the operating license requires the regulated entities to provide periodic reports on performance indicators to the Regulator. A grid code and a distribution code are yet to be developed.
The country receives a rating of substantial for the licensing framework, developed by DNICE (National Directorate for Industry, Commerce and Energy) under the Ministry of Tourism, Industry and Energy. This is for grid-connected systems and small-sized off-grid systems for which there is a separate simplified and light-handed licensing framework and procedure.
ARME is rated low because there is less than adequate qualified and experienced staff to deal with all regulatory issues, including tariff modelling and engineering analysis.
Renewable Energy Development
ARME is rated low for its renewable energy (RE) development framework. There is a renewable energy policy and Decree-Law no. 01/2011 of 3 January as amended by Decree-Law no. 54/2018 of 15 October provide a legal framework for renewable energy development. ARME is in charge of renewable energy regulation, but DNICE implements RE projects. The decree on RE allows the private sector to participate in grid-connected renewable energy investments.
ARME has developed different tariffs for different technologies and sizes of generation plant but not technology-specific model contracts or Power Purchase Agreements (PPAs) for different renewable energy technologies. There are no rules or codes that guarantee access to the grid for RE although electricity generated from renewable energy sources and based on least cost is given priority for dispatch.
Mini-Grid and Off-Grid Systems
The framework for mini-grid and off-grid systems is rated medium. The law DL no 14-06 de 20.02 provides for the development of the mini-grids and off-grid systems. There is no national program to support the development of mini-grid systems but Article 68 of DL-01/2011 as amended by DL-54/2018 clarifies the arrangements for transfer of asset ownership and/or ongoing operation and maintenance when the national grid envelopes a privately owned mini-grid system as well as regulatory policies which allow privately owned mini-grid operators to sell mini grid energy into the grid at a sustainable tariff. Duty (and other Tax) exemptions and Capital subsidies are fiscal incentives available to mini grid developers.
The tariff regime allowed under the regulations for mini-grid operators is based on the national average end-user tariff. Technical/quality standards for mini-grids have been developed and there are connection codes which specify technical standards for connecting mini-grid to the national grid. Regulatory and quality standards and certification frameworks for Stand Alone Systems is not yet developed.
Energy Efficiency Development
The energy efficiency development framework is rated low. There is no policy aimed at improving the scale and scope of energy efficiency adoption and there are no national plans for EE but there are plans to reduce distribution network losses although no targets have been set.
DNICE is responsible for the formulation and development of energy efficiency strategy. No Minimum Energy Performance Standards (MEPS) have been developed for any appliance or equipment and there is no building code in the country. Further, there is no monitoring, reporting and verification mechanism for GHG emissions or a carbon pricing mechanism in place for the power sector.
Financial Performance and Competitiveness
The development of the regulatory framework for the financial performance and competitiveness of the utility is rated low from the perspective of the utility.
The regulator has carried out a CoS Study on the utility over the last 5 years and has implemented the findings. A loss level of 23.3% is factored in the tariffs whilst the actual loss level is 26.1%. A collection rate of 80-90% is factored into the tariffs which means that the utility is not covering its cost through the tariffs.
No loss reduction target has been set by the regulator and but the utility collects between 85% and 95% of the total average end user tariff. At the prevailing loss level, the utility is not recovering its full cost through the tariffs. However, a mechanism of indexing electricity tariffs and water charges in fuel costs enables a recovery of the cost of supplying electricity. There are no mechanisms to cover costs that are not recovered through the tariffs.
The current level of the average end user tariff is not in accordance with the utility’s prudent cost of operation and there is no transitional plan to attain cost reflective tariffs. The regulator did not approve PPAs before they were signed but recognises price adjustment clauses in the PPA for tariff purposes. ARME has formulated a transparent procedure for reviewing tariff levels and always follows this procedure.
The authority has developed a mechanism that deals with electricity theft and there is a predictable mechanism used by the regulator to disallow cost considered unreasonable incurred by the utility.
Quality of Service Delivery (Commercial and Technical)
Regulatory framework for Quality-of-Service delivery is rated low. The regulator has not developed QoS regulations to guide the operations of the utility. There is no regulatory requirement for the utility to undertake annual technical audits or a valuation of its assets to establish the true state of affairs. The utility is not required to calculate and publish its System Average Interruption Duration Index (SAIDI) and System Average Interruption Frequency Index (SAIFI).
Facilitating Electricity Access
Access facilitation is rated substantial. There are policy and regulatory mechanisms in place to provide access to electricity, as the country has a high electrification rate. The government provides funds for rural electrification and the costs incurred are recovered through the tariffs.
The regulatory law should be amended, or secondary legislations developed to make provision for:
- Prohibiting the CEO and Commissioners from having interests in the regulated utility during their tenure in office.
- Allowing the regulator to be the final decision maker on licensing, tariffs, and dispute resolution.
- Parliamentary approval of the levels of fees/ levies charged by the regulator, rather than the regulatory board.
Include timetable for tariff reviews in the tariff methodology.
The regulator should develop a and implement a comprehensive capacity building program to ensure adequate capacity of staff in areas of tariff setting and utility performance analysis.
The tariff methodology, adopted in 2010, should be revised to incorporate a network connection policy. A grid code and a distribution code should be adopted.
Develop technology specific model PPAs for different types and sizes of RE plants
Develop a national program to support the development of mini-grids, which will also provide for a seamless integration of mini-grids into the national grid when the latter envelopes a mini-grid. Develop quality standards and certification for stand-alone systems
Develop and implements MEPS for a wide range of electrical appliances.