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
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.
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.
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?
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.
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.
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.
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.
Authority functioned as regulatory institution, in a limited way, for all
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.
regulatory Activities were controlled by the respective govt. ministry/
departments both at the central and state levels.
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:
The losses of state
utilities continued to increase.
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.
There were state
utilities which could not prepare their annual accounts for several years, 4-5
years, in many cases, seven to eight years.
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.
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.
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
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.
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".
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
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
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".
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".
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
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