Power reforms: Evaluate regulators’ performance

Published: March 23, 2020 8:01:17 AM

The Forum of Regulators should make independent evaluation of CERC and SERCs, against fixed parameters, an annual exercise

This legislation was restrictive since it provided the option to the state governments to allow limited jurisdiction over functions to the commission, apart from a few other constraints. This legislation was restrictive since it provided the option to the state governments to allow limited jurisdiction over functions to the commission, apart from a few other constraints.

By RV Shahi

The Institution of regulatory commissions is the fulcrum of a series of power sector reforms initiated through Electricity Act, 2003. Outcome and success of the Act, and several statutory policy instruments mandated under it, is dependent on how the regulatory bodies implement them for deliver maximum benefit to all, particularly to consumers. The Indian power sector did grow over 50 years after Independence. However, it could have unlocked the potential of the country much faster than it has to provide energy access to >60% of the population deprived of this essential service, which would have accelerated economic growth.

We had regulatory commissions at the Centre and in a number of states even before the Electricity Act, 2003—under the Regulatory Commission Act, 1998. This legislation was restrictive since it provided the option to the state governments to allow limited jurisdiction over functions to the commission, apart from a few other constraints. The Electricity Act 2003 strengthened the regulatory framework considerably. A few examples illustrate how expectations from the commission were set and commensurate empowerments were attempted for better deliverables.

State commissions were better structured and made obligatory, and not optional, for state governments.

The 1998 Act envisaged appeal against commissions’ judgements at the High Court-level. The provision of Appellate Tribunal with specific focus and further appeal at Supreme Court SC introduced in the 2003 Act was much-needed.

In the Electricity Bill, 2001, the term of the chairman and members was kept at three years, extendable by another three. This was changed to five years to avoid any discretionary power to the government.

The 2001 Bill gave the Appellate Tribunal a wider authority of superintendence and control over the commissions. The 2003 Act limited this to only judicial functions for the commissions.

Commissions were given authority to introduce competition to introduce efficiency and choice to consumers.

In the related statutory policies viz. National Electricity Policy, Tariff Policy, Rural Electrification Policy, Competitive Bidding Guidelines, etc, Commissions have been given specific authority, with great potential to change the power industry.

The cutting edge of this industry is electricity distribution and supply—a licensed activity—which has interface with consumers. The Act has relied a lot on state regulatory commissions, giving them powers to grant licence, extend/suspend/cancel these, fix tariffs, approve discoms’ plans to improve infrastructure, regulate their bulk power procurement process, punish the licensee, etc—sweeping powers for ensuring efficient discom functioning and provision of services to consumers.

Before we get into the issue of regulatory performance evaluation, let us briefly evaluate the outcomes in the sector of various initiatives, starting with the historic Electricity Act and the associated statutory policies mentioned earlier. On the power generation front, we have done reasonably well. There are issues in this segment, sure, but the larger picture is that delicensing generation and bringing competition has helped. From about 1,05,000 MW of capacity in 2002, we now have 3,67,000 MW. The private sector’s share has increased from <10% then to >46% today. On the transmission side, we have done reasonably well. Though it is a licenced activity, we have managed to introduce the private sector whose contributions have significantly supplemented Power Grid’s efforts. Transmission constraints are practically negligible. However, on distribution and supply, there are huge gaps, both technical and financial. This, in turn, adversely affects all others in the supply chain generation, transmission and fuel. With practically no competition, quality of service obviously becomes a casualty. There aren’t obvious answers to why we did not de-licence distribution or why we did not invoke the provision in the 2003 Act which allows multiple licences in the same supply-area. There are technical and other challenges as well, but, on balance, the present situation seems quite bad. Our goal of 24×7 power supply,,despite power availability, is hindered on account of serious performance gaps in of distribution management. This constrains our ability to provide a choice to to the consumer to choose between power suppliers, spurring competition that improves quality of service.

The sector as a whole is not doing well. We have power, but we also have load-shedding. State-owned discoms’ annual financial loss are at over Rs 25,000crore, cumulative loss is over Rs 3.5 lakh crore. Outstanding amounts payable to generators have increased to about Rs 88,000 crore. Investments in the power sector are amongst the most stressed in the country.

Every problem cannot be attributed to regulatory commissions. But, many important ones can. Could working-capital management have been better facilitated through timely decisions on some of the less controversial issues like change in law, fuel escalation, rail freight increase, coal cess, etc? Is there any justification for a state regulator not reviewing the tariff for years when policy provides for an annual review? Policy has empowered the state regulators to even initiate suo motu review, even if a discom avoids making and submitting its proposals. Is there any justification for indecision leading to heavy burdens on discoms, which they will be unable to recover from consumers? Most SERCs have virtually disregarded an important provision of tariff policy, to structure tariff and limit cross-subsidy within plus/minus 20% of average tariff over a five-year period. It was meant to avoid excessively high tariff for industry which generates employment and GDP. A similar situation exists on allowing open access as mandated in the Act, with time-bound obligations of SERC. The approach, instead of being facilitative, is restrictive, defeating the spirit of this provision of the Act. The concept of regulatory assets adopted by some of the regulators has only led to the postponing of the right decision and the buck being passed to a future regime of regulatory officials, who will be unable to handle this if regulatory assets become excessive. In many states, regulators have not been able to enforce the principle of merit order despatch, thereby, further burdening the discoms.
While discoms are beset with serious performance gaps, why they face staggering financial burdens needs highlighting. Transmission infrastructure must keep pace with rising trends of power supply. However, expansion of transmission for unprecedented expansion of solar power generation is stressing discoms further. Solar will happen, and should happen. But, there is a strong case to support the financing of transmission infrastructure through funds available from the coal cess.

CERC’s stand in this regard is laudable. The massive burden of solar power procurement, and of financial obligations under existing power purchase contracts, is another factor behind the discoms’ stress. Must Run Condition for renewables and continuation of coal cess are other issues which need re-examining. In several states, non-payments and delayed payments to discoms by state organisations like municipalities, hospitals, educational institutions, etc, are quite common. SERC’s roles in flagging these issues and, sometimes, even passing candid orders could be helpful.

We may now consider the main issue of regulatory performance evaluation. CERC has defined roles and functions with corresponding authority, just as each SERC also has defined functions and authority. Altogether, we have about 30 regulatory commissions in the sector. Relevant sections of the Act provide for the functions of the commissions. Besides specific roles as stipulated, commissions are guided by the National Electricity Policy, Electricity Plan, Tariff Policy, Rural Electrification Policy, etc.. The Electricity Act also provides for another institution, the Forum of Regulators (FOR). The Rules notified by the government in this regard stipulate several functions of the FOR, which, inter alia, include evolving measures for protection of interest of consumers and promotion of efficiency, economy, and competition in power sector. Evaluation of regulatory performance must capture the performance based on roles and functions assigned and outcomes. It will be a good idea to comprehensively identify all these factors and attempt a reasonable weightage structure to arrive at a performance index. In 2003-04, two dozen performance parameters with weightages were identified to rate each state on power sector reforms. Over next few years, the scheme got refined.

This initiative worked well in bringing important issues to focus, comparing with others and trying to improve with reference to benchmarks and best practices. A sense of competition did emerge with required degree of debate and uneasiness. This performance evaluation was given to Crisil and Icra to ensure independent analysis.

The FOR could make this as an annual exercise. CERC’s performance evaluation may focus on power availability, power generation profile, transmission constraint, performance of generation and transmission firms, including their financial health, any mismatch with fuel sector, etc. It could also cover delays in decisions on cases filed, pendency, time gaps in orders reserved after hearing is over, raising of national level issues concerning power sector, advice to Centre, effective functioning of the FOR, functioning of the central advisory committee, etc.

SERC’s performance evaluation may cover all aspects of performance of discoms, including power procurement optimisation, state-level transmission constraints, adequate availability of distribution infrastructure, ATC Loss reduction, load shedding, consumer services, payment to gencos and others, financial health, introduction of competition at distribution level, open access implementation and outcome, regularity of tariff review, compliance with statutory policies under the Act, alignment of cross-subsidy with tariff policy, pendency of petitions and judgement delays, advice to the state government, functioning of the commission’s advisory committee, etc.

The above are not exhaustive lists. Other relevant factors could also be identified. Giving weightages to each factor is important and must be done carefully. Making this exercise annual will be equally important. The FOR may organise a discussion after the evaluation is available. Transparency of this exercise will also be very important so that there is debate toward making improvements. Accountability of regulatory institutions on performance has rightly emerged as an area of concern, and their performance evaluation will greatly address this issue.

Abridged version of the author’s address at the GBM of the Forum of Indian Regulators, on February 21, 2020

The author is Former power secretary, Government of India

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