Electricity Regulation in India: Problems &
On 28th April, 2007, National Institute of Public Finance & Policy
together with center for public policy of Indian Institute of Management,
Bangalore organized a round table discussion on Indian Electricity Regulation.
The agenda of the discussion was a research cum study report by the above
institutions on the regulatory practices in India, with exclusive focus on
Andhra Pradesh, Karnataka and Delhi. The team conducted the study for almost one
and half years and came out with their findings and recommendations. These
findings and recommendations were subjected to extensive debates and
deliberations at the round table discussion.
The main findings and recommendations of the research are summarized below:
New electricity regulators are constrained in acting as active stewards of
electricity reform. There is potential tension between regulatory predictability
and regulatory independence.
Governments should work actively to establish regulatory
credibility before entrusting them with reforms, not least by providing clarity
and consistency on their respective role in reform policy.
Governments should strengthen early institutional capacity and
credibility in the appointment of regulators, and actively promote competent
staffing and supporting infrastructure.
Governments should also deliberately signal the importance of
regulators to other government departments, notably state-owned utilities, and
equally important, refrain from actions that appear to undercut regulatory
Uncertainty about selection process for regulators and weak regulators and
weak regulatory capacity hampers effectiveness and undermines legitimacy of
Government should strengthen procedures for selection of regulators by
requiring that selection decisions be formally justified through a
reasoned statement with reference to the qualifications of candidates,
and that candidate names, qualifications, and reasoning for final
selection be made public;
Remove constraints to stronger regulatory staff;
Governments should lift
restrictions on hiring staff on a long-term rather than deputation
basis, which currently undercut development of institutional memory;
Government, in conjunction with
donors, regulators, utilities and civil society should develop
training programmes and incentives to develop regulatory agencies as
a long-term and viable career trajectory;
with support of donors and governments, should structure consultant
contracts to ensure transfer of skills and knowledge to build
Ambiguity in the operating procedures and the lack of guiding norms around
regulatory procedures leave scope for considerable variation in approach and
exercise of individual discretion. Where there is a common approach, it is based
on the prevailing mindset of public utilities.
Regulators should collaborate with each other and external advisers to
explicitly devise norms of good practice around procedures in key
regulatory functions such as:
Technical validation process for
annual revenue requirement filings;
Scrutiny of generation projects
and approval of power purchase agreements;
Interpretation of information
Where possible, regulators should seek to enshrine
these norms in detailed procedural regulations and disclose their
compliance with these regulations.
Regulators exercise limited use of their powers due to an arms-length
approach to scrutiny. While even this limited approach has led to
non-trivial benefits, it has led them to avoid grappling with the most
intractable problems in the sector.
Regulators should develop and adhere to a more proactive approach to
regulatory scrutiny in key areas that include methods such as:
Site visits of investment schemes
and to back up studies to critical information such as agricultural
Detailed, transparent and ongoing
data collection backed by visits to utilities, if necessary, to
scrutiny that includes not only implementation details but also
larger question of rationale, design and justification;
Regulators should collaborate with each other to articulate and justify
norms around reasonable scrutiny and intervention so that their actions
are more predictable and do not arouse resistance from utilities and
other bodies such as the Appellate Tribunal.
Regulators side-step overtly political decisions by erring on the side of
safety and defensibility, balancing pressure to accommodate while striving
to maintain an apolitical.
Regulators should consider using the regulatory platform for debate and
discussion on overtly political issue, as a way of gathering more
information, building credibility and reconciling competing interests
Building on and expanding the
current use of discussion papers through explicit consideration of
hearings form an adjudicatory process to a deliberative process
aimed at constructing `social compacts' or negotiated ways out of
Procedure for stakeholder involvement have introduced a welcome measure of
transparency, but loopholes in procedure and their implementation remain,
particularly with regard to information disclosure and regulators
responsiveness to stakeholder interventions. Stakeholder participation
overall is weak, and the impact of stakeholder participation falls well
short of a desirable `stakeholder model' of regulation.
Provide greater attention to governance consideration in the start up
period, to ensure that there are no procedural loopholes and that
regulators and their staff understand and appreciate the reasons for
Strengthen implementation of procedures and plug existing procedural
loopholes in the stakeholder process relating to:
Measures for easy access to available documents such as a well
The terms and conditions for exclusion of documents from
Regular production of annual reports with minimum specified
Terms and conditions of transparency for investment schemes;
Conditions under which hearings are required;
Format and conduct of hearings to allow for greater two way
Develop and follow norms around an appropriate standard of reasoning in
response to stakeholder comments and input;
Support quality and quantity of stakeholder engagement with particular
attention to ensuring a balance of perspective by;
Proactive efforts at disseminating information;
Developing training programmes on regulatory engagement in
association with research organizations and NGOs, particularly targeted at
unrepresentative group and vulnerable populations;
Provide a mechanism to financially support responsible and
credible stakeholder engagement;
Consider an institutional mechanism to regularly voice consumer
interests, such as an Office of Consumer Advocate.
As regards the conclusion that the government should work actively to establish
regulatory credibility before entrusting them with reforms, it needs to be
appreciated that in any change there will be a learning curve. Electricity
reforms have been over due. Distancing many of the reform activities from
government influence and bringing them into the fold of regulation has been
considered a more desirable and effective alternative than to continue to keep
it under government jurisdiction with inevitable implications of political
compulsion and expediency. Setting up public utility regulatory institutions,
giving them authority and responsibility, capacity building, all have to move
together. Situation has changed significantly during the last 10 years when the
regulatory institutions were first put in place. Obviously there are a number of
lessons and we need to make changes wherever required at the policy and also at
the implementations level.
The processes of strengthening regulatory mechanism in the electricity sector
has been a continuing process. Electricity Act 2003 has further empowered this
institution. A number of important changes were made through this Act compared
to Electricity Regulatory Commission Act 1998 to see that this institution is
strengthened and provided adequate empowerment to be able to initiate reforms
and bring about changes in the electricity sector. The process of stabilizing
these institutions in many States needs to be kept under watch to ensure that
these institutions are supported, accepted and strengthened.
Another finding of the study which was discussed relates to uncertainty about
selection process of regulators. Under Electricity Act 2003, the selection is to
be finalized by Expert Search Committee not under the Ministry of Power but
consisting of very senior level functionaries in the government and also experts
from outside. The provision itself seems to be adequate to make an objective
selection with reference to eligibility criteria as provided in the Act itself.
Final outcome in such selection could be as good as the selectors are able to
evaluate and conclude their recommendation. Experience shows that availability
of willing people, who could make a difference in stabilizing the regulatory
process for the Indian Electricity sector, has been rather limited. Obviously
most of the people have considered this institution as not a good career option
for variety of reasons which might include compensation structure, facilities
etc. In early 2001 when I was myself offered the Chairmanship of Central
Electricity Regulatory Commission, I declined. At that time the provisions in
the Electricity Regulatory Commission Act 1998 in relation to do's and don'ts,
after the tenure with the commission is over, were highly restrictive. Here
again, when the Electricity Bill was being given final touches, some of these
provisions were made more realistic with the objective that competent people
could be attracted towards the placement in the regulatory commissions.
Obviously these changes were necessary and, therefore, were made. But they have
not proved to be sufficient to create and have a wider choice. It must, however,
be recognized that placement in government jobs, in general, is a much wider
issue. There are a variety of constraints and concerns and not only
considerations of remuneration, though that is also an important element.
Perhaps, a well structured regulatory cadre, with proper career planning, for
all state Regulatory Commissions, not only limited to power sector but also
covering other industries, may also be a reasonably good solution to this
Another finding is about ambiguity in the operating procedure and lack of
guiding norms for the Regulatory Commission. Based on the experience of working
with the earlier Electricity Regulatory Commission Act 1998, an attempt was made
to make suitable provisions in the Electricity Act 2003 so that ambiguity or
uncertainty across the State Regulatory Commission is, to a great extent,
avoided. National Electricity Policy, Electricity Tariff Policy, specific
guiding principles in the Act itself, have helped, to great extent, in bringing
about greater degree of clarity which could be expected from various Regulatory
Commissions. Provisions in the Act relating to Multi Year Tariff (MYT), suo-moto
initiation of tariff review are some other provisions in the Act which aim at
clarity, greater degree of certainty and at strengthening the regulatory
process. The Act provides that terms and conditions of tariff determination will
be formulated and notified by the Central Regulatory Commission and all State
Electricity Commissions will follow the same. This one provision in the Act
addresses the major issue of uniformity in approach and certainty and regulatory
predictability. In the Act another important provision is about Forum of
Regulators. Rules framed under the Act by the Ministry of Power in this regard
stipulate that regulators across the country could discuss various issues to
generate consensus and evolve common approaches. This again is with a view to
removing ambiguity. It was well recognized that unlike the telecommunication
sector, the electricity sector would have a regulatory commission for each of
the States besides the Central Regulatory Commission. The Standing Committee of
Parliament on Energy specifically brought out that in order to have a common
approach the Govt. of India should formulate National Electricity Policy, and
Electricity Tariff Policy to be followed by various Regulatory Commissions.
In the last few years, regulatory commissions in various States have come out
with a number of documents covering grid code, service norms, method to
entertain and examine various types of petitions, tariff revision proposals etc.
These are all, over a period of time, getting reviewed and improved based on the
experience of the regulatory commissions all over the country. Interactions
among regularory commissions through Forum of Regulators have also facilitated
these processes, particularly after the Electricity Act, 2003 which has provided
a legal backing to the Forum.
The study has also brought about the issue of political interventions in the
process of regulatory activities. This is, no doubt, a sensitive matter. We must
feel satisfied that after several decades, we have succeeded in taking out the
tariff fixation process from the government jurisdiction, and many positive
things have happened. To think that in a democratic set up this would be totally
insulated from political interface may be somewhat an unrealistic expectation.
During the transition period, a few aberrations here and there could be viewed
as inevitable elements of any change process. Electricity Act 2003 itself has
taken care of a very major area of potential problem. If the government in any
State wishes to subsidize a group of consumers, it shall be obliged to make
payments to the state distribution utility. After the Electricity Act, in three
places where this happened in last few years, without exception, this provision
has been implemented. Tariff policy has also circumscribed the limits of cross
subsidies which are required to be progressively reduced over a period of five
years. The maximum bandwidth of the highest and lowest tariff is plus and minus
respectively 20% of the average tariff.
The most important issue that needs to be attended to, rather urgently, is with
reference to placement of professionally qualified people at all levels in the
regulatory commissions. This is an area which needs careful consideration both
for initial recruitment as also for their continuous professional development.
An exercise was undertaken sometime back by TERI and Ministry of Power to start
post graduate courses in Regulatory studies. Such initiatives need to be
encouraged and expanded. The present method of placement of personnel at levels
below the commission members also needs to be revisited.
Success of the Regulatory institution will depend on a number of factors. A few
important requirements are suggested below:
Selection mechanism should evolve method to bring in greater degree of
objectivity and aim at recruiting professionally qualified people. Training,
development and career management issues must be attended to.
Inadequacy in staffing has emerged as a constraining factor in effective
discharge of their role in many cases. Outsourcing could, at the best, be an
Forum of Regulators could gain further momentum and evolve common
approaches. This has started happening. Uniformity, wherever required, and
consistency or approach among various commissions, could be best achieved
through this institution. This is, in fact, the spirit of the Act.
Apart from Tariff determination, the Regulatory Commission may also take up
such initiative which will promote development of electricity market,
facilitate quicker addition of capacity, encourage competition, promote
trading etc. Here, a more pro-active approach would be necessary.
A clear road map of rationalization of cross- subsidy in accordance with
Tariff Policy, if proposed and notified early, will lead to the desirable
positive impact on all stake holders. Very few commissions have done this.
Multi-year Tariff Scheme covering all aspects including cross subsidy, loss
reduction targets etc. will bring about business like approach in the reform
process. A few Regulatory Commissions have already taken action on this.
A workable and implementable approach on open access in distribution
considering state specific peculiarities and requirements, if prepared and
notified, would further enhance confidence of all concerned. Reasons as to
why this is not picking up, inspite of notifications by Commissions, will
need to be addressed.
Tapping captive power to take care of shortages with reasonable commercial
arrangements may, to some extent, mitigate the hardship arising out of power
shortage. Some of the commissions have been pro-active and pragmatic on
Energy purchases by States in situations of unforeseen outrages of State's
own generation, decreased supplies from other generators, failure of
monsoon, and unpredicted rise in demand should be streamlined in advance as
an agreed principle with necessary and timely adjustment in Tariff notified
in advance. Absence of this, in many States, in preventing utilities taking
appropriate and timely action with consequent avoidable hardships caused to
T.O.D. Tariff has tremendous potential for reducing peak hour demand and
mitigate peak hour shortage. Most of the State Regulators have yet to put
this in place.
Commissions have tended to follow a quasi-judicial approach more than
participative and pro-active developmental approach. In some cases there
appears to be some change toward the latter. Perhaps a slight shift from
judicial procedure might be more effective.
Finally, what is encouraging is that there is sufficient awakening and things
are moving on these lines. It is hoped that all these will pick up speed also.
We need to appreciate that this is a major change process involving entire
country and entire sector. Transitional pains and strains are inevitable.