Regulatory commissions: resource challenges

The infrastructure sectors in the South Asian countries are undergoing reforms and restructuring. The micro objectives could differ from country to country but the overall goals of such economic reforms have been to create a stable economy, and to make conditions conducive to private sector participation in various spheres of economic activity, improving the efficiency and competitiveness. India and Sri Lanka were the first to liberalize their economic policies. Pakistan has also set up independent regulatory agencies in the gas and electricity sectors. Nepal, too, has taken a lead and established an independent regulatory authority in its telecom sector. Other South Asian countries, too, are contemplating setting up regulatory commissions on similar lines in future. Thus, regulation and regulatory authorities are in their nascent stage in all these countries. The concept of independent regulation is new to India as well as to its neighbouring countries. The members and staff of these commissions have to deal with new regulatory methodologies; and guarantee a fair, transparent, and democratic decision-making process involving technical, political, social, and economic issues. They also have to conduct data management and analysis, which are essential to the success of reform. The common functions across various regulatory commissions in infrastructure sectors in the region are to: establish tariffs; promote competition, efficiency, and economy in the activities of the sector; facilitate mobilization of adequate resources; protect consumer interests while providing a level playing field to all stakeholders; and associate with other environmental regulatory agencies to develop appropriate policies and procedures for environmental regulation, etc. Though regulatory commissions are supposed to deal with all such issues, reforms are still in the transitional phase, and the regulators in the region are facing several resource challenges in discharging these functions. Not only the newly appointed regulators, but policy-makers and public managers as well, face the challenge of sustaining reforms beyond the launch phase so that those policy changes whose benefits rarely appear in the short-term can bear fruit. However, the job of inexperienced regulators coming from sectors in which they have never worked, to provide justice to all, at the same time insulating it from the government?s influence, is perhaps more challenging. This paper is aimed at highlighting the ?resource challenges? being faced by regulators in various sectors in South Asian countries, particularly India, and discussing the necessary tools and techniques required for an independent economic regulation by them. Regulatory utilities : a challenge Regulating utilities is a complex and challenging task in every country, in both its technical and political dimensions. The regulators have to perform a complex balancing act between various objectives and stakeholders. They have to protect consumers from possible abuse by monopoly service providers, provide utilities with an incentive to produce as efficiently as possible, and an incentive to promote investments, promote efficiency, and address other socio-environmental concerns. Addressing these sectoral issues is obviously a challenge to new regulators. But simultaneously, they face internal organizational challenges too. The challenges may be of various nature, like the degree of autonomy and political interference, inadequate resources to recruit competent staff and arrange for their continued training, credibility of such agencies in the eyes of the common public and investors, and access to new analytical tools and techniques. However, the challenges that arise on account of the lack of resources with such agencies could be classified as ?resource challenges?, and can be broadly grouped into four categories, namely: financial resources, human resources, information and analytical resources, and knowledge resources, The effectiveness of regulatory agencies will largely be determined by the adequacy of these resources. Financial resources The adequacy of financial resources is an important issue. The smooth and effective functioning of newly created regulatory agencies has been affected by their lack of financial resources. Many commissions do not have adequate resources to establish their offices, recruit competent staff and arrange for their continued training. The money collected by way of charging a levy for scrutinizing the annual tariff proposals or the issue of licences is meagre and just not adequate to make them financially self-reliant. Moreover, the funds so collected go to the consolidated funds of the government and the agencies do not have easy access to this money. In the majority of cases, the funds are earmarked and the commissions have to submit an annual budget, which must be approved by the legislative assembly or the parliament, as the case may be. Such arrangements are the prime source of impediment in the independent functioning of the regulator. In developed countries, such resources were traditionally funded from general tax revenues. Now, most regulatory agencies get their income from levies on consumers (Smith 1997). These are more often collected indirectly by imposing a levy or a licence fee on regulated firms and allowing them to pass the cost on to the consumers through tariffs. In OECD (Organization for Economic Cooperation and evelopment) countries, this approach is usually adopted to reduce the demand for general tax revenues, but collected only from its beneficiaries, i.e. consumers. Further, the mobilization of additional resources for continued economic growth by the regulatory agencies is also vital. The infrastructure sectors in India are characterized by a lack of financial resources. With the underdeveloped infrastructure, improvement in economic growth and lifestyle cannot be expected. Regulators will have a major role here in enhancing the investor?s confidence andcreating an environment conducive forinvestments. This could only be achieved by better regulatory practices and by providing a level playing field to all investors. So far, the experience in the electricity sector has not been very positive, even if we were to ignore the unprecedented growth of the telecom sector for which there is a different set of reasons. The regulatory agencies have not been very successful in mobilizing financial resources in general. The reasons given for that include lack of implementation of government policies and limited jurisdiction of commissions, frequent challenging/non-implementation of its orders, and lack of clarity in the definition of roles and objectives, and autonomy and predictability of the regulators in the legislation itself. Human resources Universities, management and technical institutes, and other research organizations have all through provided the human resources needed by the government and the industry. Traditionally, the sectors were government monopolies, with the government acting as the regulator. The operational aspects of the sector were taken care of by the service providers who were staffed with technical experts. The competent government administrative officials, on the other hand, handled the administrative issues of the sector. However, in the new environment, the commission is entrusted with the task of creating and maintaining a sustainable self-sufficient sector. This necessitates that the commission possess a detailed understanding of the sector in terms of its functioning, which include a broad-based appreciation of technical issues, administrative factors, and the underlying economic, social, and environmental implications. Thus, the new role of regulators calls for capacity building. The regulatory commission requires personnel with a mix of skills in the field of economics, engineering, finance, law, and accountancy. Among these, some understanding of economic principles of regulation is of the greatest significance, as it is the linking concept between the technical and financial considerations. Some people argue that there is no dearth of people with these attributes in the country, but the commissions have not yet been able to attract the right set of bright minds, due partly to their poor selection process, andpartly the sub-standard level of remuneration offered. Those who match the requirements of regulatory staff and have the requisite experience and skills often receive attractive job offers from the private sector. So, to attract and retain well-qualifiedstaff, the government should make them attractive offers and exempt the commission?s staff from any cap on their salary and restrictions in employment after demitting office. The salary should be commensurate with their experience and skills. Currently, the trend in most commissions is that the support staff consists of engineers and competent senior employees deputed from the erstwhile state electricity boards. Though they are adept in providing excellent technical support, there remains a possibility of in-breeding, and very often their bias to their parent organization poses a hindrance to fair and just analyses of the petitions of the utility under consideration. The regulatory agencies have the freedom to outsource consultants and firms for assisting them in a particular work. The Electricity Regulatory Commission Act states that the commission may determine the number, nature, and the categories of officers and employees to assist it. However, the approval of the designated government (central or state) is required. Similarly, the TRAI (Telecom Regulatory Authority of India) Act permits the Authority to appoint staff as it considers necessary for the efficient discharge of its functions under this Act. However, the salaries and allowances shall be as prescribed by the government. These are some of the constraints, which come in betweenwhen a commission wants to hire a known individual professional or a consulting firm. Another concern is that the tenure of some of the regulators is too short. By the time they start comprehending the complexities of the sector, their tenure is over. The hunt for new regulators starts, and often it is seen that there are sometimes deliberate long delays in filling up these posts. This seriously affects the smooth and effective functioning of the commission. The task of getting a competent person, again, poses a big challenge in itself. In order to avoid such situations, there should be a period of succession in retirement of regulators, as this would provide an opportunity to the newly appointed regulators to acquire an understanding of the sector with the help of their colleagues. Therefore, a large majority of the regulators should not retire at the same time, which would create a void of sector experts, and may cause delays in the review and award of orders. Such difficulties and restrictions affect the manning of commissions both in terms of adequacy and quality of staff. Information and analytical resources For good and effective regulation, regulators require a good quality information base to begin with. For example, while designing tariffs, a regulator should have information regarding the scope of future efficiency gains, size and timing of future investment plans of the utility, scope for reducing T&D losses, cost of financing, interest costs, O&M costs, future projections of demand, inventory of assets, consumer category-wise sales, etc. A poor information base or lack of information may result in ineffective regulation, and will also have bearings on future investments by the prospective investors. The regulator has to send positive signals to the investors, at the same time protecting the consumers? interests regarding prices and quality of service. Regulators also expect detailed information to develop indicators for judging the performances and quality of supply and services provided by the utilities, which demands additional efforts, often requiring a stretching of their capacities. Most of the utilities have a poor information base: though the regulators have prescribed information formats, utilities do not furnish information accordingly. Very little importance is given to data/information by the utilities. This lack of information not only results in inefficient orders by the commissions, but also makes it difficult to benchmark their performance with other similar service providers. Therefore, the priority for a commission is to ensure that the information gaps are bridged. On the part of the utility, extra efforts have to be made to streamline the information accumulation process and furnish the same to the commissions. However, the availability of information is just the beginning of the process. The primary task for the commission is to analyse and understand this information. Thus, the regulatory staff needsto know very well the mechanism and tools necessary for the review and process of annual tariff filings, award of licences, etc. The commission?s staff should also be trained in areas such as demand forecasting, financialmodelling, setting performance standards, techniquesfor assessing the level of losses, calculation of cost of capital, depreciation methods, and evaluation of assets. It has been observed that the commissions, in general, are not equipped with staff having these attributes, often, when such help is required, they prefer to outsource the resources, which has its own constraints. This causes additional financial burden on the limited resources of the commission as well. Knowledge and understanding of the economic principles of regulation are a must for regulators and regulatory staff. Although these have been taught in US universities, not many universities in the region offer courses on this subject. Regulatory bodies would, therefore, have to rely on persons with the required work experience, though they may not necessarily possess formal qualifications in the area of the principles of economic regulation. Knowledge resources One area, which is often overlooked by the commissions, is an understanding of issues pertaining to the sustainability of the environment. With the growing environmental concerns nationally and globally, the services of utilities have to be critically analysed from this angle, so that these cause minimum possible damage to the environment. In view of this, it is desirable that the commission?s staff be aware of local and global socio-environmental issues and problems. They should be in a position to gauge the likely level of environmental impact arising out of any particular activity both in the short and long terms. In this regard, there is a lack of clarity in the commissions? jurisdiction in matters pertaining to the environment, and the overlapping of responsibilities with other regulatory agencies dealing with the environment. In many cases, environmental regulators are uncomfortable and apprehensive of the encroachment by other regulators, since the role of the latter is not clearly defined. Therefore, sensitivity to international/ national socio-environmental concerns is important, and in order to be aware of such matters, frequent interactions and exchange with other regulators (domestic and international) and fora of regulators should be encouraged. Asthere will be a market for emission trading in the near future, knowledge about clean development mechanism issues and development on thetechnological front is desirable. The obligations under the WTO (World TradeOrganization) will have broader implications for the country. Some of the objectives of the WTO are to remove tariff barriers, liberalization in foreign investment policies, removal of quantitative restrictionson import, etc. The regulators do not have to deal with WTO-related issues directly. It is, however, important and desirable for Indianregulators to be aware of any such developments and implications of the WTO?s moves on their sector. The provisions of the WTO may have implications for competition, cost of service, environmental parameters, etc.