The PUC has taken over regulatory functions previously performed by separate energy and telecommunications councils and by the Ministry of Transport. The FCMC has taken over responsibility for supervising credit institutions from the Bank of Latvia, as well as responsibilities formerly held by the Deposit Insurance Guarantee Administration, the State Insurance Supervisory Inspectorate, and the Securities Market Commission (see also pg. 54).

These developments have brought to the fore a new style of leadership for public agencies. Inna Šteinbuka comes to the PUC after a two-year stint at the International Monetary Fund in Washington, D.C., where she was advisor to the executive director. (See her article in the February/March 2001 issue of Transition: "Latvia’s Dilemma: Financing Accession Costs While Maintaining Fiscal Constraint.") She is committed to developing an institution based on transparency and accountability. FCMC chairman Uldis Cerps represents the new generation of Latvian professionals. Educated in Sweden as well as in Latvia, he was appointed to the PUC after a career at the Riga Stock Exchange, where as president of the exchange he helped make it a leader in promoting transparency in Latvian commercial life.

What motivated the creation of such super-regulators? A key practical factor was the need to concentrate scarce resources. The authorities felt that a critical mass was needed to attract the best people. Thus the new agencies are quite large: the FCMC has more than 90 staff and the PUC has 70. Their size will enable the new agencies to take advantage of economies of scale and scope. For example, in the case of the FCMC, the authorities believe that a unified agency will be better placed to regulate financial conglomerates, while the PUC is working on a unified tariff mechanism for public utilities. The agencies’ larger scale and size (and the accompanying prestige) also help to maintain their political independence and protect them from the danger of regulatory capture.

The FCMC is modeled on lines similar to the British Financial Services Authority, which assumed its powers and responsibilities as the single regulator of the financial services sector on December 1, 2001. Thus Latvia is actually a leader in this area. As with the United Kingdom’s Financial Services Authority, the FCMC has assumed wider responsibilities than those it inherited from the agencies of the previous system. Thus the FCMC’s strategic goals are to promote stability and development in the financial and capital market and to support the interests of investors, depositors, and the insured. In addition to normal prudential supervision, the FCMC is expected to strengthen overall trust in the Latvian financial system, which appears to be weaker than in, for example, the European Union (EU). The FCMC is also charged with fighting money laundering, promoting competition, promoting public awareness of financial services and products, and a host of other tasks. All this is coupled with a tough schedule to re-approve regulatory legislation (five separate laws) in line with EU directives by January 1, 2003, the deadline for completing the harmonization process.

In contrast to the FCMC, which unified different regulators within a single sector, the multisectoral model of regulation adopted for the PUC had no precedent in Western Europe. As a consequence, despite support from the World Bank the super-regulator model encountered opposition in Latvia; however, after much debate, it prevailed. The PUC oversees energy, telecommunications, and the postal and railway sectors. These are important branches of the economy—in 2000 the energy sector accounted for 3.5 percent of GDP and transport and communications together accounted for 14.2 percent—and they include some of Latvia’s most powerful enterprises. Latvenergo, the electricity utility, is Latvia’s largest and most profitable enterprise, closely followed in size by Lattelekom, the recipient of the largest amount of foreign direct investment, and Latvian Railways, Latvia’s biggest employer.

The PUC’s strategic goals are to protect consumer interests and to promote both competition and investment-driven development. A major task of the PUC is to approve tariff-structures, and expectations are that it will go for a uniform tariff setting mechanism in all the sectors under its supervision. The PUC is expected to apply the price-capping principle in the form of the retail price index minus X rule, where X is the rate of cost reduction expected by the regulator. This method is widely used throughout Europe and creates strong incentives to improve efficiency. Moreover, it is relatively simple to implement and is relatively easy for the general public to understand.

PUC chair Inna Šteinbuka strongly believes that because regulated sectors share common network features, this will facilitate the development of common tariff mechanisms. Nevertheless, detailed implementation of the price cap in each sector for the first time will be no easy task for the commission, especially as much of the information it needs has to come from inside the regulated enterprises.

Of course, the PUC will do much more than regulate tariffs. It will issue licenses for utility providers; work to ensure service quality; design detailed procedures for regulatory accounting; develop a regime for providing noncompetitive services, such as rural postal services; and, most important for the long-run, determine rules and mechanisms that promote competition, such as the rules for access to and pricing of common facilities (for example, cable) or for the constraints on cross-subsidization by incumbent providers.

Both the FCMC and the PUC are politically and financially independent institutions. Each is governed by a council of five members, including the chair, appointed by the Latvian parliament for five years. Financial independence is guaranteed by mandatory levies on the regulated sectors (except for some transitory Bank of Latvia finance for the FCMC), so that funding is independent of the state budget. Technically, for constitutional reasons, the PUC is an arm of the Ministry of Economy, but in practice it will be politically independent. The FCMC has no supreme authority.

Independence is necessary, because tough times may lie ahead. Balancing the interests of customers and industry can be tricky. For the FCMC further concentration of financial services in the hands of a few, mainly foreign-owned, financial institutions could cause problems. For its part the PUC will have to implement EU directives on the liberalization of the energy and telecommunications sectors. Latvia’s monopoly providers are not too enthusiastic about these activities. At the same time spending on public utilities looms large in the budgets of Latvia’s poorest residents, who will most likely blame the high-visibility regulators for tariff increases, however necessary those may be to meet the country’s overall goals.

Creating new super-regulators is no panacea for development. However, it demonstrates the authorities’ awareness that a market economy needs a structure, preferably a stable structure, in which rules are clear and transparent and in which surprises are minimized. This is what the new agencies are aiming to deliver.