Competition encourages companies to become more efficient and innovative and ultimately to offer services at lower prices and higher quality. In the electricity sector in Oman, production facilities enter the generation and desalination markets through a competitive tendering process, and thus tariffs are determined by competition. Even in a competitive market, it is important for the regulator to monitor the market to ensure competition is fair and not distorted. The Authority has a statutory obligation to ensure that OPWP undertakes a fair and transparent competition when procuring any new (generation or desalination) capacity. Furthermore, the Authority also applies market share thresholds for applicants of any new capacity or expansion of existing capacity to safeguard against any market power abuse. The Sector Law also allows the Authority to impose restrictions on the economic interest a Person may have in a licensee or licensees. The Authority has discretion to relax the market share thresholds and economic interest restrictions on public interest grounds, provided that any such relaxations are consistent with its statutory obligations.
In the absence of competition, regulation is necessary in order to prevent the abuse of market power and to protect consumers from potentially higher prices and lower quality of service. In the electricity sector in Oman, network companies such as transmission (OETC), distribution and supply (MEDC, Majan, Mazoon and DPC) as well as RAEC and the single buyer and seller of electricity and related water (OPWP), are all statutory monopolies established by the Sector Law. The Authority constrains the exercise of market power of these companies through economic regulation by:
- Enforcing economic purchase conditions
- Approving the pricing structures of intra-sector transactions such as electricity and water bulk supply tariffs and charges for connection and use of network companies’ systems; and
- Using RPI-X type price controls; a principal instrument of economic regulation through which the Authority ensures improved efficiency and constrains costs assessed against benchmark service quality standards.
The RPI-X type price controls are implemented through Charge Restriction Conditions within each of their respective licenses. Price controls remunerate Licensees for efficient capital and operating expenditure and a reasonable return on capital. RPI-X also provides efficiency incentives where Licensees retain benefits from operating more efficiently than Authority’s forecast but also incurs losses if operating less efficiently.