Wither independent electricity regulation?

October 20, 2020 5:45 AM

The apex court’s direction to appoint a member (Law) at the CERC is an opportunity to revive independent regulation. To that end, the CERC must have full autonomy and accountability, apart from being supported in developing expertise

Regulatory institutions can be provided flexibility to recruit specialists, for career positions, with market-based compensationRegulatory institutions can be provided flexibility to recruit specialists, for career positions, with market-based compensation

By Rakesh Kacker, Somit Dasgupta & Gaurav Bhatiani

Independent regulation of electricity entered its 25th year in August this year. The Orissa Electricity Reform Act, 1995, enabled the creation of first such regulator. The event went unrecorded, except for the coincidence that two members of the Central Electricity Regulatory Commission (CERC) were forced to go on leave. A contempt petition in the Supreme Court, citing non-implementation of a 2018 order, to appoint a Member Law, was the cause. The CERC is temporarily non-functional, unable to issue regulations or orders.

Independent regulators were established to distance tariff-setting and commercial matters from political interference. To ensure autonomy, specific laws prescribing their powers, functions and the terms of appointment were enacted. The Electricity Act, 2003, also established the Appellate Tribunal for Electricity (APTEL), to review regulatory orders. Much was expected and predicated on the regulators.

A stock taking at such a juncture is natural. Our review reveals limited and uneven progress. Financial viability remains weak. The PFC reports increasing
financial losses—from Rs 350 billion in FY04 to Rs 4.9 trillion in FY19—even as aggregate technical and commercial (AT&C) losses reduced from 35.5% to 22%.

Regulatory pressure, through increased transparency and directives, nudged utilities to act. Tariff reform, the raison d’être of electricity regulators, however, made little progress.

Between FY04 and FY19, the gap between average revenue and average cost increased from Rs 0.36 per unit (15% of the average cost) to Rs 1 per unit (17% of the average cost). Cross-subsidies continue. Agriculture consumption and revenue were 25% and 3.5% in FY19, relative to 25% and 7%, respectively, in FY04.

Industrial sales and revenue were marginally better at 29% and 35% in FY19, relative to 32% and 47% in FY04.

The CERC has been more progressive. Its regulations enabled evolution of the short-term power market. A flat 10% share over the last decade means the progress stalled. Inability to enhance open access and introduce financial derivatives constrained liquidity and reduced available counterparties. Several regulations continued, though the market changed. Trading margin for short-term contracts, based on a 12% deficit, remains unchanged, though the deficits were almost eliminated. The recent launch of the real-time market, though, is a plus.

Regulatory cases at appellate tribunals increased rapidly. By 2018, a stock of about 1.8 lakh cases, with an average age of 3.8 years, was pending at the six economic tribunals. Amongst infrastructure, electricity had the highest, quadrupling from 1,200 in 2014 to over 5,000 by 2018.

After two-and-a-half decades, the performance of regulators is underwhelming. The Supreme Court’s direction to appoint a Member Law presents an opportunity to revive independent regulation. We suggest a three-pronged approach.

First, the autonomy must be made real. This requires independence and resources, which have been inadequately provided. According to SL Rao, the first chairperson of the CERC, “…the CERC in particular was subject to the Ministry for disbursals … staff appointments have been much delayed.” Not much has changed. Earlier this month, the CERC questioned the ministry’s authority to enact rules (late payment surcharge, etc) under the Electricity Act, citing jurisdictional impropriety. The recent APTEL order, striking off the APERC directions on renegotiation of renewable tariffs, suggests continued capture. The case of missing tariff petitions, delayed implementation and failure to pay the due subsidy are all well known.

Second, the regulatory accountability needs to be enhanced beyond submission of a perfunctory annual report. In the UK, the regulators are required to publish key performance indicators, prescribing specific targets and report on actual achievement. The Office of Gas and Electricity Markets (OFGEM), the electricity and gas regulator in the UK, had a variety of targets, ranging from processing a licence application within 45 days to selection of preferred bidder within 120 days.

Accountability can also be increased through formal review of regulators by parliamentary committees. This approach is common in the US and has been tried occasionally in India. RBI Governors have deposed before parliamentary committees to present their rationale and impact of regulatory decisions. Such checks and balances are critical for rules-based economies.

Third, regulatory institutions need to develop expertise. This has been generally ignored. A Forum of Regulators (FoR) study encompassing five regulators, including the CERC, revealed several lacunae. Of the combined sanctioned strength of 675 positions, 187 (27%) were professional. The rest were administrative or clerical. The CERC had 83 positions, of which half were professional. The Federal Energy Regulatory Commission (FERC), the equivalent of the CERC in the US, has over 1,200 staff, majority being professional.

The FoR study also notes restriction on recruitment from the market and pay structure as barriers to expertise development. A paper by Navroz Dubash is less kind. Citing a Prayas study, it concludes that having two-thirds of the technical staff on deputation from the regulated utility compromises regulatory autonomy. Dubash questions their ability to act professionally in the best interest of the sector.

A different approach to staffing is, therefore, necessary. Regulatory institutions can be provided flexibility to recruit specialists, for career positions, with market-based compensation. The central government has made a good start by lateral hiring of eight officers at the joint secretary level. Recently, a private sector professional was appointed the MD of the EESL (Energy Efficiency Services Ltd). Lateral recruitment of 400 directors and deputy secretaries is also proposed. These are welcome steps. A similar process for the regulators is recommended.

Poor regulation means bad outcomes—shortages, inefficiency and poor quality. Poor regulation is not intentional. Converting good intentions to good outcomes requires good regulation. Expertise, resources and functional autonomy are key ingredients of good regulation. An amendment to the Electricity Act, 2003, proposed recently, to incorporate Member Law and other changes, is under review. Its ambit can be broadened to include the complementary changes suggested.

The author is Kacker is a retired secretary to the Government of India; Dasgupta is former member, Central Electricity Authority; Bhatiani is director, Energy & Environment, Research Triangle Institute (India). Views are personal

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