Evolving relationships under the new regulatory regime: the regulators and the government

Introduction The ongoing reforms in the power sector have brought in a change in the roles of players who have been providing policy directions, regulating and running the sector for over 50 years. New institutional entities are also getting established. A healthy relationship between these institutions is crucial to ensure sustained development of the sector and to realize the goals of reforms. This calls for not only a clear delineation of functions between the different functionaries but also for proper interpretation in implementation. In a transitional phase, this might pose some problems especially when each one is trying to adjust to its new role. The approach and attitude of the personnel concerned could also be an issue in this regard. An understanding of these from the perspective of the functionaries is important. TERI has recently taken up a study in this regard, with the support of the United Nations Development Program, which will address these relationship issues as well as the strategy for the evolution of the regulatory set-up in the power and telecom sectors. This article presents some of the findings, based on personal interactions with a number of stakeholders, on the relationship between the government and the regulators in the power sector in performing the crucial function of tariff setting. Changes in the regulatory scenario The industry structure that existed in the pre-reform scenario is basically derived from the provisions in the Electricity (Supply) Act, 1948. The Act provided for the constitution of two statutory bodies, namely the CEA (Central Electricity Authority) and the SEBs (state electricity boards), who along with the government functioned as the main players in the sector. There were also a few private licensees who were covered under the provisions of the Indian Electricity Act, 1910. Subsequent amendments to the 1948 Act in 1976 and 1991 paved the way for the establishment of government-owned generating companies and IPPs (independent power producers). In this scenario, the CEA was responsible for economic regulation functions primarily related to techno-economic appraisal of power projects under the central, state, and private sectors subject to certain limits (as notified by the GoI [Government of India]) and accord of concurrence (techno-economic clearance) to the schemes, and recommending tariff for power generation and transmission in respect of central sector projects to the GoI. The tariff for sale of electricity by a generating company to an SEB was to be determined in accordance with the operational norms laid down by the CEA and the financial norms (depreciation, rate of return, etc.) by the GoI. However, in the case of generating companies fully or partly owned by GoI or state governments, terms, conditions, and tariff for such sales were to be determined by the concerned government. The SEBs had powers to frame tariff for the sale of electricity to persons other than licensees. However, over the years there has been significant political and bureaucratic interference in the functioning of the SEBs, and the tariffs were getting decided at the governmental level. Thus in the above set-up, governments were exercising wide-ranging regulatory powers. Since the government itself was the owner of most of the regulated entities, the understanding and relationship between the two was hardly an issue. The regulated entities had also reconciled to the position that the government as the owner had the final say in the matter. The reform programme aims to distance the governments from the tariff-setting functions. The role of the government is restricted to policy making. The regulatory commissions are expected to perform their functions in an independent, transparent, and accountable manner. This change was expected to bring in rationalization in tariff structure, improvements in efficiency, and better consumer protection besides providing right signals to private sector investments in the sector. Stakeholder perceptions of issues Interactions with a wide section of the stakeholders have brought out a number of issues relating to the government?regulator relationship, especially in the context of tariff setting. These include government?s powers to issue policy directions, process of tariff determination, institutional competence and independence, and tariff setting for government-owned entities. Powers to give policy directions Government is empowered to give policy directions to the regulatory commission, in public interest, in matters which it feels are necessary for the development of the sector. These have to be consistent with the objects thought to be achieved by the Act. Where there is a dispute, the commission can write back to the government. The decision of the government will be final, except in the case of Andhra Pradesh, Delhi, Haryana, Karnataka, Orissa, Rajasthan, and Uttar Pradesh where the Reform Acts have a provision for appeal. However, there is lack of clarity on the scope of these directions and there is an apprehension that these powers may be misused.A section of the stakeholders feels that these would get sorted out over a period of time based on case laws that may get built up. We give some examples of how the policy directives have interfered with the functioning of the sector. First, the industrial policy issued by a state government relating to captive power plants in certain industries was directly interfering with the economic regulation functions of the commission. The commission had to point this out to the government. Such actions by the government should preferably be preceded by consultation with the regulatory commission. On another occasion a minister in a public forum put the entire blame of tariff hikes and poor quality of service on the commission. Concerns have also been expressed that some of the regulators are media savvy and have been resorting to publicly criticizing some of the stakeholders. Some restraint appears necessary in this regard as otherwise it could lead to a loss of credibility for the institutions. A third example is an issue that came up recently as to whether operational and financial norms and parameters notified by the government are part of a policy and, when these are modified selectively by a commission, which could lead to a distortion of the level playing field, whether the government should issue a policy directive. In yet another instance, while processing the tariff order for 2000/01, the Orissa Electricity Regulatory Authority had, after scrutinizing the tariff petition, approached the government to find out possible subsidies to any particular section of consumers intimating, inter alia, about a possible tariff hike. In its response, the government wrote to the commission that firstly, it is not in a position to provide any subsidies; secondly, the proposed tariff hike might not have been necessitated had distribution companies reduced the transmission and distribution losses. Also, no improvement in performance has been noticed. Therefore, any increase will be a premium to DISCOs (distribution companies) over the allowed returns. This communication was also made public. The commission noted that this was not a policy directive and went by its own judgement. But this resulted in severe media backlash against the commission alleging that the tariff hikes are unjustified. Lastly, mention may also be made in this context that the Electricity Bill 2001 tabled in the Lok Sabha provides for a National Electricity Policy to be prepared by GoI in consultation with state governments and the CEA, which would cover, inter alia, tariff policies. Some open discussions on the borderlines of these policies appear desirable. Process of tariff determination The commissions are adopting a quasi-judicial process for tariff fixations so as to provide requisite transparency and accountability. This process has also been justified by the fact that the decisions ofthe commissions can be appealed in a court of law. But there is a feeling among a certain section of the stakeholders that there is too much of a judicial aura to the proceedings and in the process the regulators are not in a position in many cases to understand and appreciate the technical complexities. The open consultative process is advocated in this regard by some of the regulated entities. Most of the regulators, however, contend that there are enough opportunities at the staff and commission level to have discussions, and whenever any complex technical issue needed clarifications they have been calling the regulated entities for discussions. Some of the issues are also discussed in the Advisory Committee meetings of the commissions. Perhaps the regulated entities are not used to the open process where many issues of their data and assumptions may be questioned. This is very different from the protected and not-too-transparent environment that existed earlier. This mind set should change with time. In the transition period, it appears desirable that a suitable mix of consultative and judicial approach is followed, so that communication gaps do not arise, eventually leading to strained relationships. Institutional competence and independence The competence of the personnel manning the regulatory commissions needs no special emphasis. They should have a feel of the sector and balance the interest of consumers as well as of the utilities. Lack of empathy on the part of regulators and at times a tendency to ?play to the gallery? have been reported by a few. Some of the commission members are also reportedly ?trying? to over-demonstrate the independence from the government and at times to ?cocoon? themselves. Another concern is that the tenure of some of the regulators is too short. By the time they understand the complexities of the sector, their tenure is over. In many cases there are long delays in appointing successors. The onus in this regard is squarely with the government. On the other hand some regulators have been consulting the government either formally or informally to inform them about the likely tariff hike and government intentions of providing subsidy to any particular class of consumers, if they so desire. This is a dicey situation and whatever the commissions decide, they should not only act but also seem to act in an independent manner. It is hoped that these are transitory problems and will get over as time progresses. It should make all efforts to ensure that persons with adequate experience, ability to understand the complexities of the sector and no attitudinal biases are selected to man the commissions. The governments should also give more freedom to the commissions to recruit a competent team of support staff. In this context it is felt that the proposed 3-year term for regulators with provision for reappointment might adversely affect the independence and functioning of the commission. Tariff setting for government-owned entities This is yet another area where the influence of the government is often apparent. There have been instances when tariff filings have been deliberately delayed by the regulated entity to suit some vested interests of the government. There is also concern that in some cases the governments are ?encouraging? the entities to go to court whenever decisions are not favourable to the entity. Also, according to some, any action apparently against the interest of the entity is viewed as an action against the government. There is an apprehension on the part of some regulators that since most of the regulated entities are government-owned, the government would prefer framing policies favouring its own entities. This could spoil their efforts to have a level playing field and to promote competition. An objective outlook and trust in the new institutions are needed in this context.