As part of the drive to attract private investment, the Saudi Arabian government established the Electricity Regulatory Authority (ERA) in November 2001. A short time later, in January 2002, Dr. Fareed Zedan was appointed ERA’s governor. Dr. Zedan studied engineering at the University of Karlsruhe in Germany and graduated in 1970. He took a PhD in high-voltage power systems from the University of Southern California in 1979. He taught at King Fahd University of Petroleum & Minerals in Dhahran and was an adviser to Industry & Electricity Minister Hashim Yamani. He has also been a member of the Saudi team negotiating the gas initiative.
Speaking to Arab News, Dr. Zedan outlined his vision for the ERA as well as the Kingdom’s power sector: “Human activities are dictated by costs and benefits, rewards and punishments. If costs and benefits are gagged by the balance sheet, society may look to the private sector. That is one extreme. If you go to the other extreme, when costs and benefits are not gagged by the balance sheet, society will turn to the government, the public sector. Electricity, gas, education and healthcare lend themselves with varying degrees to the private sector. Strategic importance however dictates that the government maintain some control or you get what happened to the electricity services in California. We have to look at electricity as having firm government control but with an open door for the private sector. And we are not going to stop there. Gradually we will move these activities to the private sector but with sufficient control so that they do not backfire. How will we do this? The government has decided that electricity will be opened to the private sector so that we can divert our financial resources to segments, which don’t lend themselves easily to the private sector. There are success stories of establishing a link between government and industry which is mandated by the government to go out and encourage the private sector to become involved and invest in electricity. Such entities are also mandated to restructure the industry in a manner to enhance the competitive process.
Private sector newcomers should all be on a level playing field, so to speak. Moreover, one must also look after the consumer, which means catering for his needs. This has been successful in some countries while others went overboard and moved too fast.
Q. How long will it take to establish ERA as the regulatory authority?
A. “For some issues, it will take years and for others, weeks. Remember that Britain started only a decade ago and as we speak, is still evolving. The process is ongoing. We need to change with time but change so that benefits are increased.
Q. What is ERA’s priority — generation, transmission or distribution? Will SEC be split into separate entities?
A. “Generation, transmission or distribution all have the same priority. The difference is that transmission is much easier to deal with. The boundaries of transmission are well known whereas distribution spreads everywhere. Generation is important, because investment in generation is the largest, and savings to be gained are primarily in generation. How are we going to go about it? ERA’s board of directors has not yet been appointed. So whatever I say is my own personal opinion. I would like to sit down with SEC and ask when it can spin off transmission as a separate company. We need one transmission company nationwide to focus and build the infrastructure so that we can send power from one place to another. Even more importantly, we need the transmission sector to be an honest broker, a neutral party, that buys energy from whomever can generate it most cheaply and supply it to the distribution company that needs it. In fact, in certain countries, the generating companies are not legally allowed to have shares or interests in transmission companies because the transmission company might favor one generator over another. We need to go gradually in the Kingdom so we’ll ask SEC to spin off the transmission as a company on its own or with a strategic partner to bring new cash for building the infrastructure. For example, we still don’t have connections between the Central Region and the Western Region or between the West and the South. These require money. We need to strengthen transmission lines from Riyadh to Qassim, from Qassim to Madinah. So we’ll have a transmission company, and perhaps we’ll call it Saudi National Grid Company. That can be implemented in months and then we’ll ask SEC to conduct due diligence, to value its generating assets. Then with a plan for each generating unit, we’ll sit down with SEC and divide the generating assets into a number of separate companies since we want to establish a culture of competition among existing assets. In order to have competition, we must divide assets fairly and we do not yet know hoe many companies there will be. Distribution is an issue which we’ll look very carefully at. We may have one company or we may have a number of companies. Our ultimate goal is a distribution company, or companies, which owns the wires and rents them to service providers. There will be a number of service providers who will approach consumers and say: “I can give you this or that” and the consumer will then choose what he wants. If the service provider does not deliver, the consumer will be able to go to another provider. By doing this, we establish the idea of somebody catering to the consumer and through this, we establish demand for cost-effectiveness not only from the top but also from the bottom. Sometimes people are ingenious enough to come up with new ideas to save money for both provider and consumer. So SEC will be split into separate entities but we have to be very careful since it is the company that has been entrusted with keeping the lights on. And the company is ours.”
Q. Can you confirm that the power industry in Saudi Arabia (generation, transmission and distribution) will be opened up to local and foreign private investors?
A. “As you know, transmission is on the Negative List. But the answer is yes, in principle, but eventually. When we have serious offers. Then it could take a few weeks.
Q. As you have said generation lends itself more to private sector. How do you see this taking place?
A. “We have decided categorically that these projects will not be accepted unless we have a full-fledged competitive process and the invited developers are among the top developers of similar projects. How will we do it? Usually these agreements are between the off-taker and the developer. You have two reasonable, parties who reach a commercial agreement. We at ERA will look at the agreement. If the price is reasonable, we will take that into account. If need be, we will incorporate that into our recommendations for tariffs and adjustment. If we see that the off-taker did not do a good job, that’s their problem with their shareholders. But they may also agree with the developer on unfavorable terms in order to corner the market. If we get the impression that someone is undermining the private sector and underbidding the private sector, we can stop it and we have the right to do so.”
Q. Do you view ERA as an independent regulator or as part of the Ministry of Industry & Electricity?
A. “ERA is a fully independent authority. It is not part of the ministry. Our relationship with the ministry is that the chairman of the board is the Minister of Industry & Electricity. It is only natural to coordinate with the Ministry which is in charge of these activities”.
Q. Have you decided what kind of structure you will use for the power sector: Single-buyer model or competitive generator market/merchant market?
A. “Our goal is to arrive at the merchant market. If you have the resources, you should be able to do so. That is the stage at which we would like to arrive. But you cannot leapfrog at this stage. If someone did it today, we would wish them good luck but they would not be connected to the network because they cannot have done their homework. Right now we are not ready; we do not have the infrastructure. Consumer awareness is not ready for this competitive process. Until we have reached that point, we will be in the so-called single buyer model for some 10 to 12 years. At that time, we hope to move to the merchant market model. Meanwhile investors will be coming in and in order to depreciate their investments they will need long-term agreements. In that case, we will permit agreements to be signed and when we are ready to move into the merchant market, we will give them the option. If investors want to move into the merchant market and take the risks, they may but if they do not want to make the change there will be a formula to compensate them for their assets. ERA’s role is to protect investors. How will we? By being transparent. When we make decisions, we will have hearings. All parties affected by our decisions will be invited and we will ask for their opinions. On that basis we will make recommendations and if a party is dissatisfied, it can take its case to higher authorities and defend its interests. We will also look after the consumer. Our goal is to provide quality service and reliable service, at the lowest possible cost. And the way is through competition. We must establish the culture of competition and the key is to attract investors rather than sticking to the monopoly of the electricity company. We will listen to consumers and we will accommodate their legitimate needs.”
Q. The Council of Ministers Decision No.169 contemplates relevant regulations to be issued by the Minister of Industry & Electricity. Will these regulations in any way stop or restrict investment by local and foreign private investors in the power industry?
A. “Our mandate is to encourage investment. If we make mistakes, we will be the first to acknowledge and correct them. Restrictions will not be by design or to limit investment opportunities.”
