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Regulation in Energy Sector: South Asian Conclave on Enabling Regulation in Infrastructure, Shri R V Shahi, Former Secretary, Ministry of Power

The South Asia Forum for Infrastructure Regulation (SAFIR) organised a two day Conference on "Enabling Regulation for Investment in Infrastructure", at Delhi on November 3-4, 2009. I had been invited to be on the panel in the Session on Petroleum and Natural Gas.

At the outset, the choice of the title of the Conference itself needs to be recognised and appreciated. Quite often, a number of Regulators seem to think that consumers' interests are best protected through a control mechanism which aims at minimising the tariff structure. No doubt, providing infrastructure services at the lowest possible price is one of the major objectives of regulation. However, what is often forgotten is that the quality of service cannot be improved unless adequate infrastructure is created. All the countries in the South Asian region have almost similar problem of inadequacies of infrastructure, be it power, port, airport, road connectivity, energy inputs like coal, gas etc. As a result, per capita consumption of energy, electricity as well as per capita availability of other infrastructure, in all these countries, is below even the world average, and far below the levels prevailing in developed countries. Therefore, substantial increases in capacities and availabilities in respect of each of the infrastructure facilities has to be uppermost in the Agenda. Another important feature of all these countries is also the lack of financial resources to develop infrastructure. Therefore, attracting investments in infrastructure becomes an essential requirement if the quality of service has to be improved. It is for this reason that I compliment this Regulatory Federation, viz. SAFIR that they have selected the topic "Enabling Regulation for Investment in Infrastructure". It is really thoughtful of them that they have stressed on two important elements - (a) Enabling Regulation, and (b) For Investment. This not only reflects their appreciation for the need to attract investment in infrastructure sector, but also the fact that regulations need to be enabling. Developmental role of Regulators has to receive important priority as compared to the controlling role. Unless sufficiency in every infrastructure is brought about, which will not be possible without adequate investments by both public and private sectors, regulating any of the infrastructure activities and players therein will practically have no meaning.

Almost all the countries in the region also have the political compulsions under which they seem to feel that prices of infrastructure services could be allowed to increase in a manner that their constituency does not feel disturbed. Invariably under the control of the Governments, it has been seen, over the years, that decisions to revisit prices and increase them to sustainable levels have always been subjected to political considerations, and, therefore, commercial working of utility organisations has invariably been under substantial stress and strain. Emergence of regulatory institutions is expected to provide a suitable solution to this problem. The process of tariff determination, when distanced from Governmental jurisdiction, is bound to address the issue caused due to political expediencies. Process of regulation, which is circumscribed by a transparent mechanism on the one hand, and the placement of regulators, which is normally free from frequent transfers and postings, as in other cases, on the other, may lead to much better outcomes. If Regulators construct a vision, and implement with determination, chances of success are more than through any other Governmental dispensation.

The Panel discussion in the petroleum sector covered experiences of regulation in India, Bangladesh and Pakistan. The Session, which was presided over by the Chairman, Petroleum and Natural Gas Regulatory Board, India, was addressed by Member, Bangladesh Energy Regulatory Commission, Chairman of Northern Gas Pipeline Ltd., Pakistan, Executive Director, Bharat Petroleum Corporation Ltd. and myself. I would like to highlight the issues brought out through my own brief comments and observation:

  • Quite often it is believed that market by itself could regulate the conduct of the business and the best way of regulation is to leave the business activities to the market forces. This School of Though has tremendous commitment to the concept of Market Mantra and believers of this group are averse to any regulatory interventions. Another School of Thought believes that market forces may not be able to achieve the objective of ensuring protection of interests of consumers. They believe that the main market players viz. the producers and providers of goods and services would be so motivated about their profit consideration that consumer's interests may not be fully protected. It is not unusual to experience the cartel formations which such players often tend to create normally contrary to the consumer's benefits. Therefore this School of Thought believes that so long as there are serious mismatches between demand and supply and the market is dominated only by a few players, inevitability of Regulation needs to be recognised and appreciated. The conditions in the South Asian region are such that in no infrastructure sector we have parity between demand and supply, consumers have to face extreme situation of shortages and there is tremendous need for attracting massive investments, so that the mismatches are minimised, if not eliminated. I tend to agree with the second School of Thought.

  • In Indian power sector, post Electricity Act 2003, regulatory institutions at the Central and the State levels have been further empowered. They have taken up the role of balancing the interest of consumers, in the short term, through rationalisation of tariff, and in the long term, looking at their role to develop electricity market, facilitate investments and expansion of capacities, so that adequate power supply is secured. The responsibility of determining tariff has to go through the process of fine balancing between consumer's interests to keep the tariff low and investor's interests to make reasonable returns. In the related energy segments viz. coal and petroleum and natural gas, there are several issues in so far as regulation is concerned. In case of coal, though there has been consensus for quite sometime that regulatory mechanism needs to be put in place, the process has been slow. This is a sector which is mostly controlled by Government Corporations. With the liberalisation of Captive Coal Policy, it is expected that there would be a number of private players who would be owning and operating the coal mines. Role of Regulator has become even more relevant in this context. Here again, it could be expected that Regulators would have the major role of price fixation coupled with developmental aspects.

  • In the area of petroleum and natural gas, India has a Petroleum and Natural Gas Regulatory Board (PNGRB). This Regulatory Authority, however, has a very limited jurisdiction on down stream system. It does not cover the upstream segment of the petroleum and natural gas. From the power sector side, we always suggested that instead of the Regulatory Body having a truncated jurisdiction, it should cover both upstream and downstream segments. Mere regulation of downstream of this sector would have little meaning if appropriate regulation at the upstream producer's level is not made effective.

  • The understanding was that the Directorate General of Hydrocarbon, which is at present a wing under the Ministry of Petroleum and Natural Gas, will be restructured to make it autonomous and convert it into a Regulatory body for upstream gas. This has not happened so far. As a result, the regulatory aspects in the petroleum sector are somewhat confused. There is a need for revisiting and restructuring the entire regulatory framework. Either PNGRB is entrusted with both upstream and downstream issues or, for upstream segment, there is a full fledged separate regulatory body.

  • Bangladesh provides an ideal example of regulatory framework inasmuch as it has Bangladesh Energy Regulatory Commission (BERC). This Commission has the jurisdiction over all the energy areas. This arrangement can provide the most balanced approach under which inter-sectoral issues could appropriately addressed. A few examples of different Regulators in India fighting for jurisdiction have already started surfacing. It would therefore be more appropriate that an integrated institution on energy is set up we should cover all aspects.

  • I recall when the Bill for the PNRB was being discussed the original suggestion was to have a separate Appellate Tribunal. Finally it was decided that Appellate Tribunal for electricity should become Appellate Tribunal for energy and should also cover petroleum sector. Similar dispensation may be necessary for the regulatory institution as well. For some reason if it is not possible to integrate the Petroleum Regulatory Body which is already in existence atleast for coal integration between power and coal at the level of Regulator appears to be desirable. It may be relevant to mention that more than 80% of coal production is consumed by the power sector.

  • Between the gas sector and the power sector there is a lot of similarity. In both the areas we have organisations dealing with production, transmission and distribution. After a lot of deliberations, in the power sector, we have brought the concept of non-discriminatory Open Access on transmission and on distribution. Similar dispensation is relevant also for petroleum and gas sector. Each aspects viz. generation, transmission and distribution need to be regulated.

  • One of the important areas which is very relevant for all the countries in South Asia is the Demand Side Management. Role of increasing supply is no doubt, most important. But, to mitigate the shortages, efficiency in consumption through proper Demand Side Management is equally important. This needs to be incentivised. In many cases, it needs to be controlled and regulated. For both these aspects Regulators have an important role to play.

City gas distribution including transport systems using CNG are becoming important for modernising the urban infrastructure as well as for containing carbon emissions. The role of Regulators in the petroleum sector in all these countries is going to be very crucial for expansions in these areas. In India the growth of city gas distribution in last ten years has been rather slow. In Pakistan the achievement on this score has been significantly better. Expectations in all the countries to get this facility of modern style of living is growing. As compared to these expectations we also have to face the fact of shortages in gas supply. To mitigate this problem partly, import of gas (LNG) and regasification LNG terminals would be necessary. Conceptualising these developments, and creating a regulatory framework, which will attract and promote investments in these areas, would be important role for Regulators.

Regulatory development in last ten years or so in the South Asian countries is a welcome move. General experience has been that if the Government directly controls these activities, Administrative Mechanism is normally subjected to political pressures. As opposed to these, independent regulatory institutions, with quasi-judicial authorities, and placement of competent people without fear of their being moved out, can deliver a much better result. It is important to identify the loose ends and constantly review to further empower these institutions, so that infrastructure in this part of the world is developed expeditiously in the larger interest of the people.