Regulating Coal, Gas And Electricity

Updated: Aug 25 2004, 05:30am hrs
India is on the threshold of becoming a major user, producer and importer of gas. Investments in exploration, gas terminals and pipelines will be required for production, handling imports and gas transportation. Private investment and technology must enter in a big way. Safety of investment and adequate return are essential.

Gas is mainly used in electricity generation and fertilizers. For each it is the principal cost item. Independent regulators cap the prices of electricity (as for fertilizers). Electricity has many free and subsidised consumers. Plus, there are large-scale thefts by well-connected groups. The distribution companies find it difficult to make money. State-owned ones, subjected to political and bureaucratic interference, are unable to improve efficiency and collections. But every part of the power system needs huge investments. Adequate return and safeguards from interference are essential. For this, tariffs must be regulated transparently and with all facts and analyses presented with the tariff decision.

Coal and gas prices today are left to the whims of ‘market forces’ and hence with government as ultimate arbiter. Coal is almost wholly government-owned and large-scale organised thefts and excess staffing keeps it unprofitable. Coal and gas prices go up at a faster rate than do electricity prices. Poor coal quality and shortages are a major cost in electricity.

To determine ultimate electricity tariffs in a holistic manner, protect interests of producers of coal, gas and its transportation, and consumer interest, we need independent integrated regulation of coal, gas &electricity. If not, it will be done secretively by government, subject to passinginterests.

The earlier draft legislation for an oil and gas regulator was a token effort. The new bill is better. Hefty penal powers proposed for the regulator, open access to pipelines and independent funding for regulators through licence fees are new features. Govern-ment policy may also abolish GAIL’s monopoly on pipelines. But the bill needs changes.

The ‘market’ (ultimately the government) is to decide prices. But gas prices need to be coordinated with the electricity regulator who decides electricity tariffs. It makes sense to have a single energy regulator, despite coal, gas and electricity being under separate central ministries. Both coal and gas are central subjects and the Central Electricity Regulatory Commission can regulate all their tariffs. It would then be responsible for the enabling environment for large investments in each while safeguarding consumers’ interests.

The oil and gas regulator (in the bill) will regulate pipelines and their tariffs but not gas terminals. New pipelines are to provide 25% extra capacity for enabling open access to other gas suppliers. But such redundant capacity in high-pressure gas pipelines will raise investment costs and tariffs and hinder urgently needed expansion. The regulator must ensure access.

Separation of ownership of gas pipelines from ownership or trading in gas — as the Electricity Act 2003 does for electricity — is essential to avoid conflict of interest. Each activity could be in a separate company. The regulator must also regulate gas terminals, their economic location and costs.

A selection committee of government secretaries will appoint regulators. Instead, a truly independent standing group comprising eminent people should be responsible for selecting regulators, investigating charges and disciplining them for not performing as required by law or when their orders are too often overruled by the appellate authority, even terminating their services after due hearing. Regulators should take charge only when certified as having the necessary understanding of accounting, law, economics, management and product knowledge.

Accountability of regulators to an independent body (perhaps the selection group) is required, without compromising their independence from government or other interests that they have to regulate. Also, the bill puts excessive hurdles on commercial and government employment after the regulator has left his regulatory assignment. These will only prevent qualified people from seeking such positions.

Government policy must be enshrined in the law. Policy directives, if necessary, must be in consultation with the regulator so that his authority is not thwarted. Regulation of electricity, gas & coal and gas tariffs must be under one regulator. Regulators must be selected by an independent group of people, made accountable and policy must enable qualified people to apply.

The author is chairman, Institute for Social and Economic Change