By Somit Gupta
Before the electricity regulatory commissions were set up in the country, the administration of the power sector was entirely in the government’s domain. The government determined the retail tariffs, issued licences, adjudicated disputes, monitored key performance indicators, and so on. This ultimately led to a complete breakdown of the financial health of the state electricity boards (SEBs)—because retail tariffs were kept below cost of supply, thanks to political compulsions. Readers would recall that only retail tariffs were placed in the public domain and one could
not distinguish between generation cost, transmission cost, and distribution cost. What the element of cross-subsidy amongst all these activitieswas, lay hidden in the records of the government.
It was around the mid-1990s that there started to be any talk of distribution reforms, and setting up of regulatory commissions became one of the key discussion points. It was proposed that the regulatory commissions would do the job of tariff determination, licensing, adjudication of disputes, etc, and the role of the government would be purely that of a facilitator and catalyst.
A series of national consultations were organised and there was initial reluctance on the part of the states to agree to the setting up of the regulatory commissions. Finally, the Electricity Regulatory Commissions Act, 1998 (ERC 1998) was enacted, which facilitated the setting up of the Central Electricity Regulatory Commission (CERC). The states could also invoke this central Act to set up their
own commissions, if they so desired. Incidentally, there were a few enterprising states like Odisha and Haryana that enacted their own reform laws even before ERC 1998 and set up their commissions under their respective reform laws. The central government finally enacted the Electricity Act 2003, which was a holistic Act that repealed the earlier electricity laws including the ERC 1998.
The entire process of setting up of the regulatory commissions has been a painstaking process and it has taken more than a decade to just set up these institutions. They, however, have not turned out to be the magic pill that one was hoping for. It is not the intention of the author to go into the reasons for the failure of the commissions, but it would suffice to mention that both the government and the regulators are to be blamed, in that order. What the Union government has been doing of late, though, has led to further erosion of the authority of the regulator and has undermined the regulatory process. The latest act of the Union government, issuing policy directions (which is considered to be mandatory) to the CERC to first consult the government even before any regulation is framed, is certainly a gross violation of CERC’s regulatory authority. According to the Electricity Act 2003, regulations are to be finalised through previous publication, which means that a draft would first be floated and comments of stakeholders would be sought before the regulations are notified. This is the process that is being followed by all commissions, including the CERC. The government is free to give its comments at this stage. To direct the regulator to float a draft only after it has been vetted by the government certainly seems to be out of step. One will not be surprised if the state governments were to take a cue from this too and issue similar directions to the state commissions.
This is not the first time the Union government is taking a step that encroaches upon the territory of the regulator. In April 2023, the central government announced the scheme of pooling of coal/gas plants after the completion of 25 years without waiting for CERC to amend its regulations. The intention, it seems, was to coerce the CERC into accepting the scheme of pooling. Perhaps the most glaring example of encroachment is the enactment of the Electricity (Rights of Consumer) Rules 2020, which speaks of procedures to be adopted for release of new connections, metering, reliability of supply, and standards of performance. All these issues are matters to be dealt by state commissions and they have, in fact, done so. There could be variations in the rules framed by the states because of different ground realities of each state. To illustrate further, the government issued draft rules for matters such as change in law, late payment surcharge, etc, which led to a retort from the CERC in the form of statutory advice (October 15, 2010), reminding the government that they should desist from making such rules that are in the domain of regulatory commissions. The government went ahead and notified the rules anyway. Then, there are cases of selective targeting of state commissions, for example, asking the Appellate Tribunal for Electricity to look into violations of the Electricity Act 2003 by the Delhi Electricity Regulatory Commission (DERC). The issue in hand was amortisation of regulatory assets, and the fact is that several other commissions are also guilty of such omission.
The limited point that is being made here is that it takes several years to build institutions which can be destroyed in no time by overstepping one’s jurisdiction. The government should not issue policy directions at the drop of a hat and, in any case, policy directions should not be issued in a matter that is the prerogative of the regulatory commissions.
Instead, the government should use the National Electricity Policy and the Tariff Policy to guide the commissions. There is definitely a need to have wider consultations as to what could really qualify as a bona fide policy direction. The problem is that this will only happen when the regulatory commissions take up the matter firmly with the government, perhaps, under the aegis of the Forum of Regulators (FOR).
(Somit Gupta is senior visiting fellow, ICRIER. Views are personal)
