ARTICLE

Economic regulation of the

electricity sector in Ivory Coast
Economic regulation in Africa

On 1 January 2021, the 12-year agreement signed last October between the Government
of Ivory Coast and the country’s integrated electricity utility CIE (Compagnie Ivoirienne
d’Electricité) became operational, establishing one of the first incentive-based regulatory
regimes in Africa. FTI Consulting acted as advisor on economic and financial aspects to
help achieve the Government’s goals: to improve quality of supply, increase cost efficiency
and transparency, prepare for sector liberalisation, and establish a clear and dynamic
remuneration mechanism.

In 2019 and 2020, FTI Consulting helped define an entirely new regulatory
regime for the Ivorian electricity sector, aiming at improving service quality
“1,000 thanks to the whole for the Ivorian population, reducing costs, and increasing accountability.
FTI team for your incredible
commitment […] We have An Ivorian electricity sector fit for the future
greatly appreciated all of The Compagnie Ivoirienne d’Electricité (CIE) had been the privately-owned
your advice.” electricity monopolist in charge of most of the electricity sector operations
since 1990 in Ivory Coast.
Office of the Energy Minister of
Ivory Coast After several amendments, the agreement between the Ivorian state and CIE
was due to expire in 2020.
To meet the challenges of a growing and more diverse electricity sector,
the government wished to go beyond the pre-existing agreement and
fundamentally renew its relationship with CIE. In particular, it wished to
improve performance, expand electrification, increase cost accountability
and transparency, achieve financial sustainability and prepare for the further
liberalisation of the sector.
Economic regulation of the electricity sector in Ivory Coast FTI Consulting, Inc. 02

In 2019, Ivory Coast’s Energy Ministry, and its electricity for, meaning that high bonuses in one period for one
sector supervising agency Côte d’Ivoire Energies, assembled indicator will become harder to achieve in the next period
a team of legal, technical and economic advisors, including as the target is adjusted upwards. This continuous revision
FTI Consulting, to devise a new agreement between the process is illustrated in the figure below.
State and CIE which would support the expected growth
FIGURE 1: INCENTIVE-BASED REGIME FOR QUALITY OF SUPPLY
of consumption and deliver the framework to achieve the
renewed objectives set for the electricity sector. Value of the I
performance indicator The achieved
overperformance is linked
Working alongside public authorities, FTI Consulting mechanically to a bonus

developed the economic concept and supported the

drafting of the new agreement to govern the remuneration Average performance achieved
Period 1
and operations of the private national utility CIE for the
Target
next 12 years. FTI provided international benchmarks, Period 2

developed and reviewed business plans, highlighted Target

Period 1 The target is updated
relevant regulatory options and their impacts, offered based on achieved
performance

recommendations for ministerial approval, as well as II

Time
provided draft wordings for all economic clauses to the
Regulatory period 1 Regulatory period 2
legal team. Revision of performance targets

With a view towards modernising the economic regulation

of the electricity sector by drawing on international best This framework constitutes a significant leap in
practices, FTI Consulting helped develop and adapt the sophistication compared to the preceding agreement
following key regulatory mechanisms to achieve the between the government and CIE, which provided only for
government’s objectives. ad-hoc penalties (with no bonuses) for only four indicators –
penalties which were ultimately never applied.
KEY REGULATORY MECHANISM
Increasing cost efficiency, accountability and
Objectives Regulatory mechanism economic understanding of operations
Improve quality of supply Incentive-based regime The electricity sector in Ivory Coast is set to grow significantly
Increase cost efficiency, Business Plan with triennial over the next decade, with the current population of c. 26
accountability and economic reviews 1
million expected by the UN to double by 2050, combined
understanding of operations 2
with an ambitious 99% electrification target by 2035. CIE’s
Preparing for further Progressive accounting and activity is accordingly set to expand over the course of the
liberalisation while maintaining operational segmentation
horizontal synergies new agreement, reaching more remote customers with
higher costs to serve, which makes it more important than
Establishing predictable Cap and floor on financial
remuneration mechanisms and incentives ever for the government to ensure CIE is run efficiently to
containing risks maintain electricity affordability.

Improving quality of supply At the heart of the new financial framework lies CIE’s
business plan, which sets out CIE’s detailed estimated
Based upon FTI Consulting’s recommendations, the
costs for each segment, which are:
Energy Ministry adopted a financial incentive scheme for
CIE to improve its quality of supply and services based on — Production;
a list of 23 performance indicators. — Transmission;
CIE will see its profit margin increased or reduced according — Distribution;
to pre-determined formulas linking the achieved values of
— Dispatching;
performance indicators to financial bonuses or penalties.
— Retail; and
The target values for the indicators are revised every
three years based on the Energy Ministry’s accumulated — Import-export.
information regarding CIE’s performance, while also
considering international benchmarks. For each triennial
1 United Nations (population.un.org/wpp/)
review, the performance over the past period is accounted 2 World Bank (banquemondiale.org/fr/news/feature/2020/07/23/the-secret-to-
cote-divoires-electric-success)
Economic regulation of the electricity sector in Ivory Coast FTI Consulting, Inc. 03

CIE’s base remuneration consists of the coverage of its Based on experience of electricity sector liberalisation in
estimated costs, plus a regulated margin which was other markets, FTI Consulting recommended focussing in
determined after a review of national and international the first place on establishing an accounting separation
benchmarks. between CIE’s different segments, before working towards
After each year, the Energy Ministry measures CIE’s actual operational and de jure separation, aiming notably at
costs against the estimated costs from the business plan. potentially opening up the retail segment for competitors.
If CIE outperforms the estimates, it can improve upon its Based on these recommendations, the new agreement
base remuneration by earning a fixed percentage of the cost places a strong focus on cost transparency and separated
savings. On the other hand, if CIE underperforms, it bears accounts between each of CIE’s segments. This enables
the additional costs and thus reduces its final profit margin. both increased accountability on operations of similar
A new business plan is submitted by CIE for every three- nature, and preparedness for the potential separation
year period, which must account for the cost reductions of one or more segments to be opened to private
effectively achieved in the previous period. Based on competitors.
reviews of CIE’s historic spending as compared to previous FIGURE 3: KEY INITIAL STEPS TOWARDS SECTOR LIBERALISATION
business plans, the Energy Ministry can analyse, challenge Current situation
and propose revisions to the new business plan for the Vertical
next period, which is eventually agreed between the State dimension Consumers
and CIE before the start of the new three-year period.
This system creates a virtuous cycle: CIE is incentivised Retail

to lower its costs in the medium term (three years)

Distribution
to improve its profits, however for each subsequent
business plan the target costs become increasingly
Transmission Integrated monopoly
difficult to achieve and so CIE must find new innovative
ways to reduce costs further. This dynamic mechanism is
Dispatching
illustrated in the figure below.
Horizontal
FIGURE 2: REVISION OF THE BUSINESS PLAN BETWEEN REGULATORY PERIODS
Production IPPs
dimension

$ Lack of clear separation between the roles and costs

Projected costs - period 1 within the integrated monopoly’s segments

Cost reduction for

the electricity sector
CIE gains from Projected
cost savings costs -
CIE gains from period 2 Government’s envisaged objective
cost savings Vertical
dimension
Actual Consumers
costs

Time
Retail CIE Retail Private retailers
CIE Retail
Regulatory period 1 Regulatory period 2
Revision of projected costs Distribution CIE Distribution

Preparing for further liberalisation while maintaining Transmission CIE Transmission

horizontal synergies
Dispatching
As part of its long-term strategy, the Ivorian Government CIE Dispatching

asked FTI Consulting for a roadmap to liberalise the Horizontal

Production CIE Production IPPs
electricity sector, where CIE is currently the monopolist dimension
in the transmission, dispatching, distribution and retail
3
Clear separation between the roles and costs within
segments. the integrated monopoly’s segments

Incumbent Competitors

3 The production sector is partially liberalised, with Independent Power

Producers covering c. 70% of domestic power generation (ibid.).
Economic regulation of the electricity sector in Ivory Coast FTI Consulting, Inc. 04

Establishing predictable remuneration mechanisms In order to contain the financial risk to CIE, while ensuring
and containing risks incentives have an impact on CIE, the cumulative
Regulated companies desire a predictable set of rules from effect of automatically applied penalties is subject to a
their regulator in order to adequately assess risks and plan common floor, encompassing both quality of supply and
for the future, while at the same time regulators wish for cost reduction incentives. Similarly, a cap on bonuses
financially significant and regularly updated incentives is applied, to limit the risk to the Energy Ministry of
to align the regulated company management with the miscalibrating either cost or quality targets.
evolving metrics reflecting public policy goals. Crucially, the agreement ensures that CIE cannot abandon
In this context, the asymmetry of information between quality of supply objectives in order to benefit exclusively
(i) the regulated company performing operations and (ii) from cost savings (or vice-versa). Both quality and cost
the regulator supervising them at only a higher level, may penalties and bonuses are subject to the common floor,
lead to inefficient outcomes: if performance indicators or so that any benefits from cost savings will only accrue
cost benchmarks are poorly calibrated, a risk of excessive to CIE after they have compensated the total amount of
bonuses or penalties may occur. penalties, including penalties beyond the floor. This is
illustrated in the figure below.

FIGURE 4: FINANCIAL IMPACT OF CIE’S COST AND QUALITY INCENTIVES

Avoided mechanism Retained mechanism

Separate floors General floor

FCFA FCFA
Year N Total impact Year N
on CIE’s
remuneration

Total impact
on CIE’s
remuneration

0 0

Cost
Quality saving Quality Cost
penalties gains penalties saving
gains
Floor Floor

CIE could abandon quality to CIE can only profit from cost
focus entirely on gains from savings after first compensating
cost savings for the totality of any quality
penalties
Economic regulation of the electricity sector in Ivory Coast 05

Economic regulation
FTI Consulting’s areas of expertise

Regulatory Commercial &

finance & regulatory
accounting strategy

Economic
Regulation
Economic &
Market, tariff financial
and price design modelling

Arbitration &
disputes

FTI Consulting’s economic regulation experts advise Our team is made up of a diverse mix of experts: former
governments, regulators, companies and their investors sector regulators, in-house regulatory economists,
in the pursuit of regulatory outcomes that strike a engineers, and highly-qualified academics who have
balance between the promotion of efficient operations conducted pioneering research in their fields. Together
and investment incentives, competition and continued with FTI Consulting’s experienced economic and financial
investment in assets and service quality. consultants, contributing many years of sector-specific
expertise, the economic regulation team provides unrivalled
Our advisors combine exceptional technical expertise and
depth of academic rigour, coupled with breadth of practical
economic rigour with extensive sector-specific knowledge,
experience in several languages. More recently, our experts
as they advise clients facing complex and fundamental
have also been advising clients in markets relatively new to
changes in critical infrastructure sectors.
advanced economic regulation, inlcuding Africa.
The economic regulation team is part of FTI Consulting’s
globally recognised Economic & Financial Consulting
practice. Building on our renowned expert witness and The views expressed in this article are those of the
competition knowledge, our specialists advise companies author(s) and not necessarily the views of FTI Consulting,
and regulators across a wide range of industries. its management, its subsidiaries, its affiliates, or its other
professionals.

EMMANUEL GRAND JOACHIM MOWINCKEL

Senior Managing Director Director
+33 1 40 08 12 43 +33 1 40 08 12 53
[email protected] [email protected]

FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate
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