Checks and Balances

Independent regulation in a federal democracy

By Professor S.L. Rao, Former Chairperson, CERC, and Member, Advisory Board, Competition Commission of India

The federal structure

Indian democracy rests on four institutions – legislature, executive, judiciary, and the media. To­day, we have an independent le­gislature, a strong executive, an independent judiciary, and independent media. However, over the years, these institutions have be­co­me considerably diluted and in many cases, are not as independent as they should be. In the last couple of de­cades, the governments in India have invested heavily in major infrastructure such as telecommunications, roads, power, renewable energy, and railways. Since there are many issues that affect the financials of governments and public interest at large, they all had to be regulated for the best results.

Sectors such as telecom, coal and gas, which are defined as central subjects under the Constitution of India, are governed and regulated independently at the central level. Other sectors such as electricity, which are defined as concurrent subjects under the Constitution of India, are governed and regulated in different aspects jointly by the centre and the states. The fact that In­dia has a federal structure means that each state has the right to exercise its own powers within its boundaries and cannot be in­structed or regulated entirely by the central regula­tory authority.

Electricity has three major operations – generation, transmission and distribution. Electricity generation can be underta­ken by the central government and, within a state, by the local state government. Similarly, electricity transmission can be interstate as well as intra-state, which means that both the centre and the state have the authority within their respective jurisdictions; state electricity transmission is under the local government. When it comes to distribution of electricity to users, this is entirely a state matter over which the centre has no authority. The distribution of electricity to consumers involves delivering the requirement, determining the tariff at which the electricity supply is invoiced, ensuring the quality of supply in terms of regularity and consistency, etc.

Case for coordination among  electricity regulatory institutions

In 1998, when I was appointed the first chairman of the Central Electricity Regulatory Commission (CERC), I saw that the law did not provide for coordination among the state regulators, nor between the central regulator and the state regulators. Hen­ce, I initiated the creation of the Forum of Indian Regu­lators (FOIR), which enabled the state regulators to meet regularly and exchange ideas. It also enabled the central regulator to work closely with the state regulators. Although the FOIR was not very effective, it was a significant beginning and is very relevant even today. It helps the regulators coordinate and harmonise their activities regarding regulations within the boundaries of the federal structure. Within each state, electricity distribution being ultimately under the control of the local state government, the electricity tariffs are eventually app­roved by the state commission in coordination with the local government. The electricity distribution company applies to the state commission for approval of the tariff. This application is also usually made after consultation with the state government. There is no such requirement for the CERC to consult the Union Ministry of Power on any subject. The CERC is much more independent than the state commissions.

Even two decades after the creation of the regulatory institutions, the state regulators lack the authority to compel the distribution companies to operate in a manner that meets all costs. That is why the distribution value chain is bleeding.

State electricity regulatory institutions are weak and politically dependent

Given the political character of electricity pricing, the state governments push the distribution companies into pricing their electricity below cost. Even two decades after the creation of the regulatory institutions, the state regulators lack the authority to compel the distribution companies to operate in a manner that meets all costs. That is why the distribution value chain is bleeding. The majority of the distribution companies in India continue to operate below cost even after 75 years of Independence and are dependent on subsidies from the state government. The tariff structures continue to be complicated, with several layers and slabs, and anomalies in the principles of tariff determination as well as heavy cross-subsidisation. As a result, competition and open access that are enabled under the Electricity Act, 2003 are mere provisions and have failed to bring in competition, viability and transformation in the distribution value chain. The government’s aspirations of becoming atmanirbhar (self-reliant) and a $5 trillion economy will ne­ver be realised if such distortions continue. This situation can only change if the state regulators are made strong and independent, and if they can compel distribution companies to allow competition, and pass tariffs that cover all costs.

Enabling competition and strengthening regulatory oversight

We might require the empowerment of the central regulator or the Appellate Tribunal for Electricity to intervene when the dis­tribution tariff of any state is inadequate. For this to happen, the constitutional relationship in the case of electricity bet­ween the centre and the states must be redefined.

Similarly, at present, the state government has to approve the large consumers, those who consume over 1 MW, who are eligible under the Electricity Act, 2003 to choose their electricity supplier, besides the incumbent distribution company, and procure electricity through open access from captive generators as well as through traders and power exchanges. This must change so that consumers have the freedom to choose their own supplier and to do so without the need for approval of the state government. At present, open access is often denied to consumers since the state government prefers to sell its local electricity to industrial and commercial consumers, even if this electricity is procured through the operation of old and inefficient plants. This again is an area that demands attention if electricity is to be supplied at the best possible tariff.

These instances demonstrate that in a federal structure, as in the case of electricity, unless the central regulator and the state regulators function on common principles and objectives, we cannot have the most effective way of producing and supplying electricity.

Tariff structures continue to be complicated, with several layers and slabs, and anomalies in the principles of tariff determination as well as heavy cross-subsidisation. As a result, competition and open access have failed to bring in competition, viability and transformation in the distribution value chain.

Conclusion

All the observations made above in the case of electricity also apply to other areas of infrastructure, particularly to transportation (roads, railways, etc.). Telecommunications, gas and coal are in a different position because there is only one central regulator that sets principles that govern these sectors across the country. There are other problems as well, but these are not relevant to the discussion here.

India has witnessed rapid growth in infrastructure in the past few years, and this growth has led to regulatory issues becoming increasingly complex at the national, state and local levels. Hence, it is essential to develop, adopt and implement common principles for the regulation of matters that are either not addressed in the Constitution or are not covered by existing laws. Such complex issues cannot be resolved merely through an FOIR institution. The relationship between regulatory bodies for the same product or service should function in a coordinated fashion and should be based on common principles, with national economic and consumer interests being the cardinal principle.

This approach will make the regulatory bodies more efficient and facilitate the overall economic growth and development of the country. However, such initiatives also require fundamental changes to the Constitution and to the relationship between the state and central governments. It is imperative to make this happen. Otherwise, we will be left with a relatively inefficient regulatory system, especially when products and services such as electricity exist within a state and could also be created by the centre in areas under its control. Until significant reforms and Constitutional changes take place, informal associations such as the FOIR should be leveraged in the best possible manner to coordinate and create a more efficient method for independent and robust regulation of the electricity sector.

 

 

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