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Accountability of Regulators, Shri R V Shahi, Former Secretary, Ministry Of Power

Accountability of Regulators

Monday, May 28, 2007

R. V. SHAHI

In the last few weeks, several reports have appeared in the media about suggestions and views of a number of government & non governmental organizations on the issue of accountability of regulators. A reference in these reports has also been made about a suggestion from some Hon'ble Members of Parliament that there should be a seperate Standing Committee on Regulatory Commissions/ Authorities. It has also been reported that Administrative Ministries feel that the respective Standing Committees of various Ministries are enough and there would be no need of a seperate Standing Committee.

With the opening up of various sectors of industry and economy, facilitating entry of large number of players, it was felt necessary to have regulatory institutions to take care of the interests of all stakeholders including consumers. In our country, we have Telephone Regulatory Authority, Central Electricity Regulatory Commission, State Electricity Regulatory Commissions for each State, Appellate Tribunal for Electricity. Soon, there would be a regulatory institution for petroleum called Petroleum Regulatory Board. This Board is being operationalised shortly. There is also a talk about regulatory institutions for Civil Aviation, Port etc. Some of the Ministries and professionals have been suggesting regulatory institutions for Coal and for Railways also.

Basically, the concerns of those who have reflected the views on regulators accountability seem to be on following lines:

  1. We have distanced the government departments from some of the issues concerning license, tariff rationalization and overall regulation of the industry, and have attempted to regulate the activities in the respective industries through quasi judicial regulatory institutions. This is a welcome development. But, how do we ensure that these institutions perform in the manner expected and meet the objectives for which they have been set up? This is the main concern that has emerged.

  2. This issue assumes added relevance because, once appointed, Regulators, during the tenure of their appointment, cannot be shifted or removed. This provision has, infact, been kept to ensure regulator's independence. But it is being voiced as a concern from the point of view of regulator's accountability.

  3. Accountability of the executive wing of the government to the Parliament is for various actions or inactions, for performance and shortfalls. Working of government departments and various organizations under them are examined by various Parliamentary Committees. Finally the executive is accountable to the Parliament. Is there a missing link is so far as this basic requirement vis-?-vis the regulatory institutions is concerned?

  4. What remedial actions are available for corrections and in what way Parliamentary control can be exercised? The belief of this school of thought is that it is the Parliament which represents views of people and it is they who are in touch with and are fully aware of the problems of the people. Could the functioning of the regulatory institution, just because they have been distanced from the government departments, be taken away form Parliamentary oversight?

These are very weighty arguments, no doubt, being advanced in favour of strengthening the system and procedure, and if required by introducing necessary provision in the Act to ensure accountability of regulators. However, there is another school of thought which advocates that if this is done, the whole purpose of distancing the decision making on these vital issues such as development of market, tariff fixation, subsidies and cross subsidies etc. would be defeated. It may lead to the same situation as it was happening in the past when the Ministries and Departments had the control on these functions, and political system, through these departments, had the necessary influence in the decision making process. This argument is equally weighty.

Each school of thought has its own points of view. It would be necessary to examine the background under which the concept of regulatory mechanism emerged. While we need to keep in view the concern of those who want regulatory commissions not to be subjected to accountability of the type that is being projected, we also need to address the concern of those who articulate that in some manner the framework must provide for ensuring regulator's accountability for their performance. If we proceed examining the issues, taking the electricity sector into the focus, it could provide a reasonably good solution. Why electricity sector? Because, here the regulatory mechanism is most complex. We have a Central Regulatory Commission and we also have State Regulatory Commission for each of the States. Also, we have experience of about 10 years of these institutions now. Therefore, the examination of this sector could, to a great extent, take care of the concerns relating to other sectors as well.

It would be necessary to present, a brief historical background of regulations in electricity sector.

  1. Even before the Electricity Act 2003 came into being, an exclusive legislation on regulation, viz. Electricity Regulatory Commission Act, 1998 was enacted as a Central legislation. Apart from many other functions, the task of tariff fixation was envisaged as one of most important responsibilities for these commissions.

  2. Even prior to this Central legislation, Orissa Electricity Reform Act came into being in 1996 which not only provided for restructuring of the State Electricity Board but also for setting up of the State Electricity Regulatory Commission, with a number of tasks assigned to them, the most important of them being tariff fixation.

  3. Prior to these regulatory institutions, the job or tariff fixation was being done for central generating companies and transmission company by the Ministry of Power in consultation with Central Electricity Authority.

  4. Central Electricity Authority functioned as regulatory institution, in a limited way, for all practical purposes.

  5. At the State level, it is the State governments, which would finalize the tariff for their own power plants of Electricity Boards and also for the tariff for consumers.

  6. Various other regulatory Activities were controlled by the respective govt. ministry/ departments both at the central and state levels.

Electricity sector developed and grew under the above framework for several decades. As we all know, we can hardly say that this sector, and this type of institutional framework, gave a good account of its overall performance. The organizational set up and mechanism failed to deliver the results, as can be seen from the outcome listed as below:

  1. The losses of state utilities continued to increase.

  2. Commercial discipline hardly existed. Till the late nineties these situation was that most of the important players viz. the state utilities were not paying fully to generating companies, transmission companies, coal companies, railways, BHEL and infact, to almost any one, whom they owed to pay.

  3. There were state utilities which could not prepare their annual accounts for several years, 4-5 years, in many cases, seven to eight years.

  4. There were state utilities, which were not being allowed to even put up their proposals for tariff. There were extreme examples of tariff exercise not having been done for 8-10 years on one ground or the other - sometimes election of local bodies, legislative assemblies, midterm election, general election etc.

  5. The technical functioning of the utilities, in relation to reliability of power supply, timely provision of new connections and overall accountability to consumers, was very difficult to ensure. These were the issues which seldom received the attention of the departments which were the concerned regulators.

  6. It was a very peculiar situation of State Electricity Boards themselves having the dual role - some regulatory roles while also being the main operator in the system.

It is under these circumstances that it was considered necessary to distance the regulatory function from the government departments. We must also recognize and appreciate that quite often the political system is under pressure from public at large for a type of dispensation or supply of electricity which would render the industry commercially bankrupt and unfit to serve the consumers. Infact, in many cases it did happen exactly that way. We can not blame the political system as they have to be and need to be sensitive to people demands and aspirations while taking decisions. If the mechanism to decide is with them, would they be able to ignore such aspirations even if they are not always on rational consideration? It is in this background that the tariff fixation process was attempted to be insulated from the influence of political compulsion by entrusting it the regulatory institutions.

Now let us examine the relevant provisions of the Electricity Act 2003 and attempt to find out the underlying principles of regulation and process through which these institutions function. Similar provisions may be there in other sectors with some variations here and there. And, therefore, the analysis and conclusions could be, to a great extent, relevant to the regulatory mechanism existing or likely to be created for other sectors as well.

  1. These institutions have been conceived as quasi judicial in nature. Section 95 of the Electricity Act 2003 is reproduced below.

"All proceedings before the Appropriate Commission shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code and the Appropriate commission shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure, 1973".

  1. Similarly procedure and power of the Appellate Tribunal have been provided in section 120 of the Electricity Act. It would be relevant to mention that the appeals on the decisions given by Regulatory Commissions (both Central & State) lie with the Appellate Tribunal (Sec 111) and not with the High Court. And, appeals on the judgement of the Appellate Tribunal lie with the Hon'ble Supreme Court (Sec 125).

  2. An extract of the section 120 is given below.

120 (1) " The Appellate Tribunal shall not be bound by the procedure laid down y the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject to the other provisions of this Act, the Appellate Tribunal shall have powers to regulate its own procedure".

120 (2) "The Appellate Tribunal shall have, for the purposes of discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908.

  1. While examining this issue of accountability of regulators, a very important provision in the Electricity Act, which needs to be mentioned is in relation to power of the Central Government to issue direction to the Central Electricity Regulatory Commission and power of the State government to issue directive to the State Regulatory Commission. The relevant sections 107 & 108 are given below.

107 (1) "In the discharge of its functions, the Central Commission shall be guided by such directions in matters of policy involving public interest as the Central Government may give to it in writing".
107 (2) "If any question arises as to whether any such direction relates to a matter of policy involving public interest, the decision of the Central Government there on shall be final".

108 (1) "In the discharge of its functions, the Central Commission shall be guided by such directions in matters of policy involving public interest as the Central Government may give to it writing".

108 (2) "If any question arises as to whether any such direction relates to a matter of policy involving public interest, the decision of the State Government thereon shall be final".

  1. Therefore, if certain issues are in public interest, the respective governments have the power to issue such directions. However, the Act is quite cautions and clear on such power to the State Governments & Central Government, to issue directions, when it relates to grant of any subsidy to any consumer or to a class of consumers. Section 108 does not empower the respective governments to decide the grant of subsidy without the government compensating the utility affected by the grant of subsidy. Section 65 is amply clear on this.

"If the State Government requires the grant of any subsidy to any consumer or class of consumers in the tariff determined by the State Commission under section 62, the State Government shall, notwithstanding any direction which may be given under section 108, pay, in advance in the manner as may be specified, by the State Commission the amount to compensate the person affected by the grant of subsidy in the manner the State Commission may direct, as a condition for the license or any other person concerned to implement the subsidy provided for by the State Government:
Provided that no such direction of the State Government shall be operative if the payment is not made in accordance with the provisions contained in this section and the tariff fixed by State Commission shall be applicable from the date of issue of orders by the Commission in this regard".

  1. When Electricity Act was first passed by the Parliament in May 2003, section 121 of the Bill provided for superintendence and control, on the regulatory commissions, by the Chairman of the Appellate Tribunal. This provision was debated in both the houses of Parliament. Several amendments had been suggested in relation to this provision, in addition to many other suggested amendments. Finally, the government accepted to make necessary amendments on four issues and, on the basis of this understanding, the Bill was passed. These amendments were then brought by the Government and passed by the Parliament in January 2004. One of these four amendments related to section 121 which, in the Act as passed in May 2003, provided for superintendence and control by the Appellate Tribunals on the regulatory commission. The amended provision which now is a part of the Act, is given below in section 121.

"The Appellate Tribunal may, after hearing the Appropriate Commission or other interested party, if any, from time to time, issue such orders, instructions or directions as it may deem fit, to any Appropriate Commission for the performance of its statutory functions under this Act".

The objective of this change was to free the Commission from any routine and administrative control by Appellate Tribunal but empower the Tribunal in relation to the statutory functions of the commissions.

Thus, the points made, in this paper, as a part of the background, as also the relevant provisions of the Act, make it very clear that Regulatory institutions have to function in an independent fashion. Their proceedings are quasi judicial in nature. The desire, if any, executive or of the Parliament have to be circumscribed by these provisions of law. When, while passing the Electricity Bill, the Parliament did not want superintendence and control by the Appellate Tribunal, and conscionably provided for greater degree of independence to regulatory commissions, restricting the review by the Appellate Tribunal only of its statutory functions, whether any other form of control now would be necessary and justified, will have to be carefully considered.

The rules and reports of the Commission have to be submitted to Parliament & concerned Assemblies. During deliberations on the Bill as also during the examination of the Bill by the Standing Committee of Parliament on Energy, it had been clarified that the Standing Committee of the Ministry would have the power to examine necessary aspects in relation to the Regulatory Commission. Under the circumstances, it appears more appropriate that, since this regulatory commission would be on specialized subjects such as power, petroleum & gas, port, civil aviation, coal etc., the concerned Parliamentary Standing Committee may be the appropriate Standing Committee rather than an exclusive Standing Committee only for regulatory institutions.

That leaves us with the issue of accountability of regulators. In the light of what has been examined above, it appears that the Appellate Tribunal is the appropriate institution to ensure the accountability for performance of regulatory commissions. They have the powers to review, modify and null their judgments. The next level is the Hon'ble Supreme Court as provided under the Act. The central govt. & state governments do have powers, as mentioned, to issue directions in public interest, to the concerned commissions, though one would expect that such cases are few and far between.

Having said that, one more issue needs to be commented upon. Central Electricity Regulatory Commission and the State Regulatory Commissions have been given power, under the Act, to make rules & regulations, under sections 178, and 181, consistent with the Act and to carry out the provisions of Act. Under these sections a range of issues have been listed on which the Commissions have been given powers to make regulations. Thus, the commissions have not only been given the power to implement rules but also to frame rules and regulations. How do we ensure accountability in such a situation? In one of the recent judgments, the Appellate Tribunal for Electricity had observed that these powers of the commissions may need to be revisited. In the judgment of the Appellate Tribunal, since these are statutory powers given to the commissions to make rules and regulations, it may be beyond the purview of the Appellate Tribunal to review these.

A plain reading of section 121 suggests that the Appellate Tribunal may issue such orders, instructions or directions as it may deem fit to any appropriate commissions for the performance of its statutory functions. Making rules and regulations are also the statutory functions. One interpretation could be that the Appellate Tribunals could issue orders, instruction, and directions to the commission in relation to these.

This is an important issue. Appellate Tribunal's Judgement needs to be examined. And, if any clarification is required or an amendment is required the same may have to be done. In the recent judgment of the Supreme Court, however, this issue has been indirectly addressed. The Central Electricity Regulatory Commission framed the regulation in relation to depreciation norm. This was not agreed to by the Appellate Tribunal in the process of hearing an appeal in one case, against the judgment of the Central Regulatory Commission. The Hon'ble Supreme Court upheld the judgment of the Appellate Tribunal. Perhaps an inference could be drawn from this case that the Appellate Tribunal does have the power to pass direction on issues which relate to statutory function of the regulatory commission to frame regulations, and, to that extent, it would be within its right to review the regulations made by the commissions. However, this is a complex legal issue and will have to be further examined. But, the fact is that accountability of regulatory function to be discharged by the commissions has to be ensured through the hierarchy that has been envisaged under the Act and i.e. Appellate Tribunal. The Parliamentary oversight is important and relevant and preferably it could be achieved through the respective Standing Committees of the Parliament.

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