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About PUC

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Strategy of Public Utilities Commission
 

Approved on Public Utilities Commissions
Board session on January 9, 2002

Strategy and Basic Principles of Operation of Public Utilities Commission

  1. Public Utilities Commission considers public services[1] to be necessary for the population and the regulation of those is a precondition for countrys economic growth and increasing competitiveness. The goal of PUC is to ensure that consumers can receive high-quality services at reasonable prices, and additionally to stimulate effective operation of the service providers and ensure a reasonable profit. For this purpose PUC shall create a safe and stable environment for public service regulation that is fair towards service providers and consumers. PUC regards the trust of the society and service providers as its main asset and a necessary precondition for successful work.

  2. To achieve the above-mentioned goal PUC shall form an independent, credible and fair model of public utilities regulation in Latvia, which is characterized by:

    availability of the services across the country without consumer discrimination;

    competition among service providers and a possibility to choose for consumers;

    continuously increasing quality of the services;

    consumer-oriented price and tariff setting methodology, determining reasonable prices that correspond to the service quality;

    investment return principles that minimize investors risk;

    defined and comprehensive procedures for consumer protection;

    ethical principles of operation consistency, predictability, fairness, responsibility, transparency.

  1. PUC in its operations shall fully realize the advantages of a multi-sector public utilities regulation system in Latvia, implementing uniform regulatory principles for all sectors, including:

    coordination of all public utilities sectors regulation and predictability for consumers and service providers;

    introduction and implementation of coordinated sector development and competition indicator system;

    using proven regulation principles and instruments in all the public utilities sectors[2], noting the peculiarities of separate sectors;

    a uniform approach to multi-sector service providers, at the same time paying particular attention to possible violations of competition rules in connection with activities of multi-sector and interconnected companies.

  1. For the implementation of the model it is necessary to minimize the risk factors connected with PUC operations. Understanding and support from the society shall be achieved through transparency of the decision preparation and decision-making process, openness of regulatory actions and procedures, explanation of the adopted decisions. PUC shall avoid excessive regulation, an antagonistic style, and conflicts with service providers, which would worsen the whole business environment in the country. The intellectual potential and capacity of PUC shall be strengthened by involving independent experts, thus promoting adequate decision-making.

  2. In order to achieve the set goals one of the main tasks of PUC is to promote the currently restricted competition[3] according to the long-term sector policies accepted by the government. Competition will stimulate the service providers to operate with a maximum efficiency and ensure alternative choices for consumers, lower prices and higher quality of services. PUC shall directly intervene in the service provision process only where competition is limited. PUC shall cooperate with the Competition Council on a regular basis.

  3. Stimulating the entry of new service providers in the market is a significant function of PUC, especially in the service sectors where the markets are saturated[4]. For this purpose PUC shall:

    promote awareness of the society and understanding about the development of competition in the respective sectors;

    prevent possible preemptive actions by existing market participants which are negative towards the entry of new market participants;

    follow full scale implementation of collective usage regulations (resource allocation, unbundling, interconnections, etc.) by service providers with significant market power;

    promote the use of the account settlement systems of service providers with significant market power to settle the accounts of sector new-comer services.

  1. During the process of public utilities sector liberalization PUC tasks as a whole shall remain unchanged, but action priorities and significance shall alter depending on the degree of market liberalization. Sector deregulation shall be implemented as a transition from direct monopoly regulation to indirect sector regulation with the development of competition, not decreasing PUC attention to the sectors in which the market is formally liberalized[5]:

    in monopoly regulation the main tasks are the determination of prices and tariffs and/or their calculation methodology, prevention of broadening of monopoly rights, as well as consumer protection from monopolistic abuse;

    after formal liberalization of the market when the monopolist becomes the dominant service provider, the main task is to promote the entry of new competitors into the market;

    as the market develops, it is necessary to determine service providers with significant market power[6] in a given sector according to defined procedures based on such criteria as sufficient market segment, ability to operate independently from other service providers, ability to affect competition development processes etc.;

    under the conditions of well-established competition the main functions shall be monitoring compliance with licenses, quality standards and competition rules, connection of infrastructure networks, arbitration in case of disputes, monitoring compliance with social, environmental and health protection requirements.

  1. In order to ensure stable availability of public utilities in the long term, PUC shall implement fair regulation, observing the interests of both consumers and service providers. For this purpose, regular cooperation with all the stakeholders is necessary, observing the principle of arms-length distance in order to build and strengthen the credibility of all parties. 

  2. Public utilities regulation shall become consumer-oriented, by balancing the short-term interests of the population with the interests of the eligible consumers and sustainability of the operation of utilities sectors. PUC in its relations with consumers shall provide openness and transparency, predictability and consistency of decisions, publicizing all the adopted decisions. For consumer participation in decision preparation consumer sector advisory institutions shall be formed comprising representatives from companies and different groups of the population. At the same time PUC should not surrender to consumer pressure by taking inadequate, populist decisions ignoring general state interests.

  3. Consumer rights protection is a significant function of PUC. PUC shall elaborate and implement non-discriminatory procedures for the review of consumer complaints, and together with the Consumer Rights Protection Centre shall develop a uniform approach and common activities. Service providers licenses shall contain stipulations for the provision of consumer rights and choices, including:

    services of different quality and volume;

    several service tariff systems options;

    several payment systems options;

    soft disconnection procedure[7] of debtors.

  1. During the process of decision preparation and adoption PUC shall consult service providers, creating predictable attitude towards the companies and decreasing regulation risk, motivating the companies to provide full information, reducing the possibility of conflicts among the service providers, as well as between the service providers and PUC. PUC shall elaborate clear principles for cooperation with the dominant service providers, at the same time not permitting PUC to act in their interests.

  2. One of the core functions of PUC is ensuring and constantly improving the public utilities service quality. In order to implement it, PUC shall supervise the development of national standards and the adaptation of international standards in public utilities sectors, carry out monitoring of standard observance, develop and utilize uniform criteria for monitoring and assessment of service quality. PUC shall avert the possibility for the service providers to decrease system safety and service quality in order to achieve higher profits. Consumer compensation procedures shall be determined in case they do not receive the services or receive substandard services.

  3. PUC shall form a stable, balanced long-term relationship with the government, which shall not depend on short-term political processes, hence preventing the interference of the government in daily regulation issues and decreasing political risk. PUC shall actively initialize the necessary legislative amendments.

  4. PUC shall implement a pricing and tariff policy that promotes fair distribution of benefits between service providers and consumers[8]. Policy formation and implementation involves the selection and development of tariff calculation methodology, including the definition of the process and procedures. To stimulate continuous growth of the efficiency of the service providers, the methodology shall provide:

    predictable economically justified changes of tariffs;

    reasonable choice between setting the tariffs for separate services and for the tariff basket;

    the definition of tariff components, including the principles of total expenditure division among different services, the inclusion of investment, innovation, ecological and health care measures in tariffs, the restriction of administrative expenses in monopoly prices, etc.;

    the prevention of service providers cross-subsidies[9] and activities to hinder competition;

    tariff correction in case unpredictable factors emerge[10].

  1. The Universal Service principle shall be regarded as a real instrument for the provision of services across the whole country. PUC shall elaborate and determine the methodology for the Universal Service provision taking into account sector peculiarities. The provision of the Universal Service shall be implemented as a mandatory obligation for service providers with significant market power, including this condition in the license as well as letting every service provider to participate voluntarily (through auction). PUC shall determine the set of universal services for each sector, as well as uniform sources and principles of financing[11] for the Universal Service.

  2. The connection of infrastructure networks, the common use of networks and unbundling consumer access network[12] promote competition and choice opportunities for consumers, simultaneously decreasing service costs. Mandatory stipulations for interconnection[13] and unbundling of access network shall be included in licenses for service providers with significant market power. PUC shall design collective usage methodology of infrastructure networks, as well as a set of measures for the implementation of the methodology, including a requirement for service providers with significant market power to increase the capacity of their infrastructure dedicated for lease.

  3. Issuing licenses is a significant instrument of PUC in regulating the structure of public utilities market. Investigation of service providers shall be carried out before the issue of licenses and supervision afterwards. PUC shall elaborate and determine uniform principles, procedures and terms of license issuance and/or extension. Service providers licenses shall contain:

    criteria, phases and terms of infrastructure development;

    measures for provision of consumer rights and choice;

    stipulations for the usage of limited national resources;

    stipulations for increasing service quality and system safety;

    stipulations for the review of consumer complaints;

    compensation procedures in case consumers do not receive the services or receive substandard services;

    measures for environmental and health protection;

    sanctions for license violations.

  1. In order to carry out all the activities PUC requires adequate resources, the most important part of which is PUC intellectual potential and capacity for preparation and adoption of decisions, analytical work, decision implementation. PUC knowledge management model shall be developed and implemented, including personal knowledge of employees, PUC internal knowledge flows and external links. The competence level of the members of the PUC Board is especially important because they shall themselves continuously participate in the process of preparing strategic decisions of PUC. The knowledge potential shall be increased through a regular training of employees, participation in conferences, active international contacts. Independent external experts involvement, the formation of ad hoc and regular expert groups as advisory institutions shall increase the intellectual capacity of PUC. Adequate financial and technological resources for the implementation of PUC functions must be provided and used effectively.

  2. PUC shall actively work to reduce the information asymmetry in order to fulfill its functions successfully and fairly. PUC shall motivate service providers to render full and accurate information. Informative contacts with companies, regular accounts and information to PUC, accounting rules for service providers shall reduce the information asymmetry. PUC shall build a strong internal economic information analysis system.

  3. Public utilities market in Latvia has already become a part of the common global market, and in the future convergence of technologies, free flow of capital and operation of multinational service providers shall continue to promote an even closer integration. Due to these reasons PUC bilateral and multilateral cooperation with the public utilities regulatory bodies of other countries in all public utilities sectors, the development and implementation of uniform regulation principles and policy, the adoption and exchange of experience, participation in seminars and conferences etc. shall become regular activities of PUC on the international level.

[1] In the context of this document public utilities whose regulation falls under competence of the Regulator are electricity supply, gas supply, centralized heating, telecommunications and data transmission, postal service, rail and passenger transportation; the concept also includes the delivered product electricity, gas, information, etc.

[2] For example, universal service, unbundling of consumer access network, tariff calculation methodology, prepayment, soft disconnection procedure for debtors, etc.

[3] Due to objective reasons the market in public service sectors will never be perfectly competitive the required large investment hinders entry of new competitors in the market, the range of offered services by service providers is not homogeneous (especially for services with high value added), specific infrastructure costs do not actually diminish with the increase of market share, etc.

[4] Saturated market sector in the context of this document means that practically all potential consumers of the services already receive services from the existing market participants. Newcomers can develop only by redistributing the market, luring customers by offering wider range of services, higher quality, lower prices, etc.

[5] For example, emergence of new technologies, unsuccessful operation of companies or company merging can renew the dominant status of some market participants.

[6] Including collective significant market power if several service providers are mutually economically connected and dependent on one another in their actions.

[7] Soft disconnection in the context of this document implies gradual change of consumer contract terms if the consumer does not pay for the service, providing supply of services of reduced volume and quality, prepayment and other measures, including debt settlement procedure.

[8] In the context of this document profit growth of service providers simultaneously with service quality increase and price/tariff decrease.

[9] Including cross-subsidies between monopoly services and free market services, as well as between services of different sectors in multi-sector companies.

[10] For instance, passing of new legislation, emergence of new revolutionary technology, setting new prices for products supplied from other countries (for example, electricity, gas), discovery of use of incomplete, incorrect or misleading information for methodology determination, etc.

[11] Universal Service can be financed either by service providers (using payments by all customers or only by business customers) or the state (budget and/or revenues from license auctions, fines on service providers, etc.) or combining both sources.

[12] Costs of consumer access network constitute up to 60-70% of total infrastructure costs, moreover costs of separate consumer access network do not diminish with the increased number of consumers.

[13] Interconnection physical and logical connection of different service supply networks/systems which lets consumers connected to one network to access services which are available in another supply network.




   


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