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Regulating Electricity in India

Regulating Electricity in India

The Practice and Politics of Regulation: Regulatory Governance in Indian Electricity by Navroz K Dubash and D Narasimha Rao;

Reviews

Regulating Electricity

in India

The Practice and Politics of Regulation: Regulatory Governance in Indian Electricity

by Navroz K Dubash and D Narasimha Rao; National Institute of Public Finance and Policy, MacMillan India, 2007; pp 224, Rs 290.

E A S SARMA

T
he concept of independent regulation in the Indian electricity sector came into existence around eight to nine years ago. During the 1980s, increasing political interference in tariff settings eroded the financial health of public sector electricity utilities. In turn, the utilities were unable to raise sufficient resources to be able to adequately invest in generation, transmission and distribution facilities that adversely affected the quality of electricity supply to the consumers. Considering the importance of electricity as a critical intermediate input for almost all economic activities, the planners felt that the government should shed its role as a behind the scenes regulator and entrust that responsibility to an independent statutory authority that functions in accordance with the norms set out in a separate legislation. This explains the genesis of electricity regulation in India.

While India has been a new entrant in the field of electricity regulation, the concept itself has been extensively tried out for decades in many other countries. The Indian law has benefited from this experience in many ways.

While the legislation lays down the overall framework for regulation, the effectiveness of the regulator depends a great deal on the extent to which the government allows the regulator to exercise independence in tariff setting, perception of the regulatory authority of its own role and stakeholders’ readiness and ability to take active part in regulatory proceedings. The influence of each of these factors changes over time and so does the role of the regulator.

The electricity regulators in different states have had their initial constraints and teething problems. Notwithstanding, they have slowly but steadily gained credibility in varying degrees. At the same time, they have gone through a process of transformation, both institutional and organisational, for the overall good of electricity consumers. It is important that both practitioners and researchers devote time and effort to evaluate the process of these changes. The insights gained from such studies will go a long way in shaping the future of electricity regulation in the country.

Several efforts have already been made in this direction. ‘A Good Beginning but Challenges Galore’ (by the Pune-based Prayas (Energy Group)), was the first comprehensive study on electricity regulation in the country. This study is unique in the sense that, as a non-governmental organisation representing the interests of the consumers, Prayas had painstakingly elicited responses from 12 regulatory authorities, evaluated their performance in a fairly comprehensive and objective manner and made important suggestions for planners. A year later, as the first chairman of the Central Electricity Regulatory Commission, S L Rao documented his own experiences and perceptions of regulation, as a central regulator, in his excellent book, Governing Power. A review of this book appeared in this journal on October 16, 2004.

The present study, carried out three years later, looks at the comparative performance of regulation in three states, namely, Andhra Pradesh (AP), Karnataka and Delhi. Its uniqueness lies in the detailed empirical evidence it has gathered from the field, various facets and perceptions of regulation it has considered and incisive analysis on the basis of which it has arrived at its findings. The insights provided are valuable, as they could form the basis for future reform in this vital sector.

Different Regulation Scenarios

The authors have chosen the three states mentioned above with a purpose. AP’s electricity utilities are efficient; the state has adopted the World Bank model of reform, introduced independent power producers (IPPs) to a limited extent and is apparently committed to independent regulation. AP and Karnataka, unlike Delhi, have large numbers of agricultural consumers who have been recipients of large subsidies. Karnataka’s electricity industry was highly efficient at one time but of late, the distribution of utilities have come under pressure; the state has accepted World Bank’s financial restructuring of loan and is required to put in place an effective regulator. Historically, the state has a good track record of furthering consumers’ interests. Delhi is a high-profile state that is the seat of the central government. Its electricity industry has been in doldrums for quite some time and the newly appointed regulator is expected to insulate it from political interference. After putting in place its regulator, the Delhi government had decided to privatise its distribution entities. Each of these regulators thus functions in contrasting environments but within a similar legal framework.

The study is organised around three primary themes, viz, institution and political context in which regulation had been introduced in each state, the regulatory processes in practice and the role of the stakeholders.

The overview section of the study provides the background of electricity regulation in India, objectives of the study itself, methodology of data collection and findings arrived at on the basis of a comparative evaluation of the experiences in the three states. The three chapters that follow provide the empirical evidence gathered with respect to each state in considerable detail. The appendix at the end of the study is a useful evaluation of the changing pattern of public objections to utility filings before the regulators over a four-year time-span commencing from 2002-06. There is an executive summary

Economic and Political Weekly August 18, 2007 at the beginning of the study that provides the findings at a glance.

Political Context of Regulation

The crucial requirement for good regulation is the independence of the regulator from political interference. In a way, this is determined by the objectivity and transparency of the process of selection of the regulator. The study clearly highlights the shortcomings in this.

Among the three states studied, retiring bureaucrats had been appointed in two states as the chairpersons of the regulatory authorities, whereas, a retiring technocrat had been appointed in the third one. On the face of it, the selection process itself lacked credibility. While the study may not have brought this out explicitly, public perception seemed to be that these offices were treated as objects of political patronage. This is neither healthy from the point of view of regulatory autonomy nor is it a positive signal to the civil services in general. Predominance of civil servants at the helm of regulatory bodies could progressively pave the way, as it is already happening, for bureaucrats claiming these offices as a matter of right. Bureaucracy will bring along with it its own work culture and mindset that may not be appropriate for independent regulation. Its multiplier effect is equally disconcerting. The regulator tends to draw his staff predominantly from public sector utilities. Such employees would have their own mindsets and approaches. AP seemed to have overcome this problem, to some extent, by recruiting professionals from other disciplines from outside.

The relationship between the regulator and political and bureaucratic leadership in the state is another aspect that is covered well in the study.

Regulation in Practice

In AP, the level of political commitment to reform seemed to be high, as evidenced by the willingness of the government to allow the regulator enough space to set the tariffs but through explicit subsidies, cushion the tariff burden on the politically important agricultural consumer. In a give and take gesture, the regulator himself has moderated the high tariff by directing the utilities to reduce the unit costs through efficiency improvements, whether such improvements were practically realisable or not. On the other hand, the regulator has not been effective in questioning the demand forecasts made by the utilities in their revenue filings and moderating them to optimise the generation capacity so as to benefit the consumer. On the generation side, the regulator questioned the high cost of electricity from IPPs, highlighted the adverse implications of the “alternative fuel” clause in the power purchase agreements (PPAs) and the high cost of imposed by non-conventional energy suppliers but felt hamstrung by the law to proceed further, except directing Transco to negotiate the prices. There were occasions when the political elite seemed to be on the side of the private IPPs rather than the consumers. The outreach of the regulator to the consumers had been somewhat limited.

In this respect, both the Karnataka and Delhi regulators faced more severe challenges. In both states, the ruling elite found regulatory autonomy far too uncomfortable from the political point of view. The study refers to some of these challenges briefly but not explicitly.

Under pressure from the World Bank, Karnataka had tried to elicit private participation but found it difficult to attract private investors willing to be subject to rigorous regulatory discipline. A World Bank consultant’s bright idea of tiding over such “regulatory risk” by introducing the so called “multi-year tariff” (MYT) came to their rescue. MYT is an euphemism for exempting private players from regulatory oversight for about five years, i e, till such time they would have fully recovered their investment and would be in readiness to pack off! The Bank consultants are indeed ingenious; they could make and unmake things at their pleasure! The regulator resisted this move for quite some time but only till such time that the MYT concept smuggled itself into the latest overarching law (2003) on electricity to become a fait accompli.

Due to the government’s apathy towards regulation, the regulator’s directives found limited compliance from the utilities, especially as the utilities had direct access to the ruling elite. The Karnataka regulator faced other challenges as well but had ample support from the consumers. In the case of the two controversial IPPs, Tannir Bhavi and Jindals, the regulator adopted a highly independent stance, stretched the frontiers of the regulatory law to its limits and invoked full consumer endorsement. Like in AP, the Karnataka regulator failed to make any perceptible impact on the demand projections of the utilities. To the

MANOHAR – AD

Economic and Political Weekly August 18, 2007

credit of the regulator, a consumer advocacy office had been set up in Karnataka.

For a long time, the Delhi regulatory authority had to contend with only one member, i e, the chairman, a competent and enthusiastic electrical engineer. During his tenure, the state government issued him a “policy” directive on the intended privatisation of the distribution utilities and introduction of the much touted MYT. It is debatable whether the government was legally competent to abridge the statutory authority of the regulator by issuing such directives. The MYT would have implied abridgement of the regulatory authority, as per the legal provisions that existed then. The regulator resisted this move. The study describes, somewhat inappropriately, the resistance put up by the regulator as “quixotic” (p 147). One should recognise that regulatory autonomy is central to the success of regulation as a concept. The government later went ahead with privatisation, as spelt out in the directive. The aggregate technical and commercial loss trajectory for the next five years became a part and parcel of the privatisation agreement itself, as the original bids were evaluated on that basis. This has had the effect of diluting regulatory oversight of private utilities in Delhi.

There are some common patterns observed in tariff setting by the regulators. While the tariff increase in the first year of regulation was generally steep, in the later years, it tended to be somewhat flat. To some extent, public sentiment against tariff hikes could explain this. In AP, there were open public protests during the initial years of regulation. The residents’ associations in Delhi also resorted to similar protests during subsequent years.

In terms of in-house capabilities of the regulators, the AP regulator seemed to have an edge over the others, as he had no hesitation in tapping external consultancy support wherever needed and built up indigenous capacity without becoming overly dependent on the consultants. Right from the beginning, the Karnataka regulator adopted a “self reliance” approach but that implied excessive dependence on deputationist and retired electricity utility employees. On the other hand, the Delhi regulator had become excessively dependent on external consultancy services.

It is well known that investments on transmission and distribution facilities have continued to be highly inadequate. Prudent investments in this segment should therefore reduce the technical losses and bring down the unit cost of delivery of electricity.

How prudent an investment proposal is would thus be a matter of concern for the regulator. None of the three regulators seemed to have dealt with this aspect in an aggressive manner. The Karnataka regulator had indeed questioned a major proposal of investment but the general approach adopted by all the three regulators had been one that was merely passive.

The regulatory authorities are required to submit annual reports to their respective legislatures. Adherence to this stipulation would ensure accountability of the regulator to the legislature. In practice, however, the degree of accountability had varied across the three states. The Karnataka regulatory authority was the only one that had submitted its annual reports to the legislature regularly.

As far as transparency of the regulatory proceedings is concerned, the three regulators presented somewhat different pictures. The AP regulator was unwilling to disclose to the public the correspondence with the government on such matters as scrutiny of investment proposals received from the utilities, cross-subsidy surcharges in tariff setting, etc. The Karnataka regulator had displayed willingness to disclose information relating to many areas of regulation. However, in the matter of scrutiny of investment proposals, both Karnataka and Delhi regulators seemed to adopt the same stance as their AP counterpart.

Interests of Consumers

Regulation is not a mechanical process of tariff setting. The regulatory law itself needs to be constantly reviewed and adapted to safeguard the interests of the consumers. There are two issues, that may not be strictly within the ambit of the present study but they are relevant from the point of view of the consumer. First, on questions of wider and more far-reaching investment decisions, such as those involving the choice of fuel and mode and location of generation, the regulators would have liked to intervene but felt hamstrung by the existing law, as such investment decisions could impose an avoidable cost burden on the consumer. It is important that such issues are brought within regulatory domain.

The second issue relates to the regulator’s interface with his counterparts dealing with the upstream sectors. Specifically,we have the ongoing tussle between the AP government and the Reliance Group that has discovered natural gas along the AP offshore areas. The recently enacted law on petroleum regulation does not seem to empower its own regulator for fixing the price of gas. The production-sharing petroleum contracts visualise “market price” being allowed to gas producers for their own share of gas. The pious wish behind all this is that competitive gas markets would prevail and take full care of the gas price. Unfortunately, the gas markets world over are highly fragmented and the prices vary from situation to situation. The Indian gas market is anything but competitive. Taking advantage of this regulatory vacuum, Reliance has devised its own ingenious method of “discovering” the market price by auctioning the gas in what is clearly a seller’s market. As it is to be expected, the prices quoted in such a situation are unconscionably high, far in excess of what a competitive market would have indicated. Reliance would thus be charging a high rent on the gas. Compounding this problem further, the PPAs signed by the IPPs with the state utilities are so one-sided that whatever be the cost of the fuel, it could be readily passed on to the utility. In other words, these PPAs would force AP to pay for the high price of gas for electricity and also force the state to pay a similar high price for the gas for use in transport and domestic sectors.

Gas is a natural resource held in trust by the government on behalf of the public. A few influential investors should not be allowed to hold it in monopoly, to the detriment of the consumers.

In this situation, the electricity regulator in AP has to exercise all his ingenuity in order to protect the legitimate interests of the consumers. This brings us back to the first issue cited above. Would it not be desirable to harmonise the regulatory laws in the two sectors, namely, electricity and petroleum to safeguard the consumers’ interests?

In conclusion, Navroz and Narasimha Rao need to be complimented for this landmark work on electricity regulation. Any person interested in understanding the politics of state electricity regulation and the pressures and pulls that influence regulatory processes should compulsorily go through their study as it provides valuable insights. Their study clearly shows how crucial it is to invigorate civil society, i e, the non-governmental organisations working on electricity and electricity consumers at large to exert pressure on the regulator and government, so that this newly created institution may become truly consumer-oriented.

EPW

Email: eassarma@gmail.com

Economic and Political Weekly August 18, 2007

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