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Electricity Regulation in India: Problems & Prospects, Shri R V Shahi, Former Secretary, Ministry of Power

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:

  1. 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 autonomy.

  1. Uncertainty about selection process for regulators and weak regulators and weak regulatory capacity hampers effectiveness and undermines legitimacy of regulators.

  1. 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;

  2. 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;

  • Regulators, with support of donors and governments, should structure consultant contracts to ensure transfer of skills and knowledge to build self-sufficiency.

  1. 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.

  1. 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 disclosure obligations;

  1. Where possible, regulators should seek to enshrine these norms in detailed procedural regulations and disclose their compliance with these regulations.

  1. 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.

  1. 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 consumption;

  • Detailed, transparent and ongoing data collection backed by visits to utilities, if necessary, to monitor performance;

  • Regulatory scrutiny that includes not only implementation details but also larger question of rationale, design and justification;

    1. 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.

  1. 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.

    1. 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 by:

  • Building on and expanding the current use of discussion papers through explicit consideration of different interest;

  • Reorienting hearings form an adjudicatory process to a deliberative process aimed at constructing `social compacts' or negotiated ways out of conflicted problems.

  1. 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.

    1. 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 stakeholder engagement;

    2. 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 indexed database;

  • The terms and conditions for exclusion of documents from transparency content;

  • Regular production of annual reports with minimum specified information content;

  • 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 engagement.

    1. Develop and follow norms around an appropriate standard of reasoning in response to stakeholder comments and input;

    2. 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 problem.

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:

  1. 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.

  2. 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 interim solution.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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 this.

  9. 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 consumers.

  10. 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.

  11. 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.