The Hindu Business Line : Irony of (in)dependent regulation

Creating regulatory commissions and then depriving them of their powers will only damage the face of the regulatory bodies and lead to loss of credibility both in the sector they are mandated to regulate and among the consumers at large.

WE CREATE institutions. Then we develop a deep intolerance for them. Further we make demands for those very institutions in different areas. That sums up the story of independent regulation in India. When the economy was liberalised and reforms introduced in the early 1990s, the power and telecom sectors were gradually thrown open to private investment and competition.

At the heart of the reforms process was the creation of independent regulators in these sectors that would be equidistant from all service providers and stakeholders, including the government. That the government was unwilling to let go of its powers first became clear with its intolerance for the first TRAI (Telecom Regulatory Authority of India). TRAI was reconstituted in 2000. One would do well to recall that many orders and decisions of TRAI were challenged and there were a growing number of cases in court between TRAI, the private operators and the Department of Telecommunications.

There were also some untoward incidents in power sector regulation as well. Ever since their inception, the primary focus of the Electricity Regulatory Commissionshas been tariff setting, which was earlier being done by the governments.

However, there are numerous instances of the regulators not being able to do this independently. A number of State governments have overturned the orders given by the electricity regulators on tariff rebalancing — be it the case of agricultural tariff in Maharashtra or of domestic tariffs in Himachal Pradesh. The Himachal Pradesh Government rolled back the tariff increase approved by the Commission for 2001-02 to the levels before the tariff order. It is another thing that in most cases State governments have also announced compensatory subsidy support for the utilities but then the record of State governments in releasing these subsidies is well known.

But the enactment of the Electricity Act 2003 brought hope for independent regulation. The Act strengthened the electricity regulators by giving them more powers, leaving certain decisions to their judgement (such as the phasing of open access and gradual elimination of cross subsidies) and recognising their role in policy formulation in certain places (such as rural electrification and local distribution). It seemed that regulators would finally succeed in the mandate given to them.

The Electricity Act 2003, in its current form, specifies that ERCs are to use the National Electricity Policy and tariff policy as overall guiding principles and regulators can adopt tariff structures on the basis of ground realities. It also specifies that ERCs shall be guided by the directions of the concerned Government in matters of policy involving public interest.

It has now proposed to amend Section 61 of the Electricity Act 2003 to the effect that the tariff setting by the ERCs shall be in conformity with the National Electricity Policy and Tariff Policy. Similarly, Sections 107 and 108 (1) are proposed to be amended to the effect that the ERCs shall act in conformity with the directions of the government concerned in matters of policy involving public interest. It is now clear that the fate of `independent regulation' depends on the government in power.

If the proposed amendments go through, they would rob the ERCs of their flexibility and independence. The National Electricity Policy and the Tariff Policy can be modified by the government in power and the ERCs will have no option but to abide by them. The very purpose of setting up independent regulators and distancing the government from the determination of tariffs will be negated. The ERCs will become mere mouthpieces of the governments in power.

The irony is that while the government wants to curb the powers of the electricity regulators, it plans to set up regulators in other sectors. There already are suggestions for a steel regulator. When the Petroleum and Natural Gas Regulatory Board (PNGRB) Bill is passed, it will lead to the setting up of the regulator in the downstream petroleum segment.

The concept of an independent regulator for water sector at the State level or a `Public Service Tariff Board' to determine tariffs in the transport, education, health, irrigation and public health and other social sectors, as in Himachal Pradesh, is also gaining ground.

Just when the new regulatory commissions are able to stand on their own feet and work on their mandate, the government of the day may find their actions unpalatable and amend the legislation concerned to reduce these regulatory commissions to puppets as well.

An essential characteristic for any independent regulatory body is that it should be independent from those it regulates, protected from political pressure, and given complete authority to regulate the sector. It is important that there is a clear delineation of responsibilities between the government and the regulators and an understanding by each of the other's position.

What the government needs to do is encourage regulatory commissions to act proactively for the development of their sector and give them the support they need to execute their mandate by enhancing their capacities and funding them well. Creating regulatory commissions and then depriving them of their powers will only damage the face of the regulatory bodies and lead to loss of credibility both in the sector they are mandated to regulate and among the consumers at large.

(The authors are respectively Senior Analyst, ICRA Management Consulting Services, and Area Convener, Regulatory Policy, The Energy and Resources Institute.)

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