More power to the regulators

Electricity regulators are under the thumb of State Governments. They are unable to revise tariffs periodically

The honeymoon period of the new government is over and it is evident that the focus has now shifted towards policies and programmes. Prime Minister Narendra Modi has spelt out the role the States have to play in the new paradigm of governance.

States can either be drivers of growth or can become “hurdles” in development. Pratap Bhanu Mehta in a recent article (Indian Express, August 29) rightly observes that a serious challenge to regulatory institutions comes from the States.

For instance, the power regulators, namely, the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERCs), have been overly influenced by the Centre and State Governments for more than a decade.

Despite protection of tenure and other safeguards in law, the state regulatory commissions have failed in their mandate of balancing the interest of consumers and producers, or in stimulating competition in the sector. Criticism from different corners, for not being effective as regulators, seems to have had little bearing on their functioning.

Ineffective agencies

Regulators have proved inept in discharging their legal duty of revising tariffs annually. The Appellate Tribunal for Electricity intervened and directed them to do so in 2011.

Perhaps, it was too naive to expect that these institutions, lacking in credibility and institutional strength, could function in a fair manner and effectively carry out their mandate. It is evident that states have not come to terms with regulatory institutions. Not just that, States do not let go of any opportunity to intervene to serve vested or political interests.

Equally, perhaps, the regulators were overwhelmed by the prospect of enforcing efficiencies and timely tariff revisions. No wonder, they preferred to accept the State Governments’ intervention in these matters, as it was the easier option.

Regulatory capture by the States has pushed the power sector into a dire crisis. Losses of the state power utilities (SPUs) touched ₹2 trillion in FY2011-12.

As a consequence of the regulatory mess, the power sector has run up a debt of ₹5,00,000 crore, to both public sector and private sector banks. These lenders are already grappling with the restructuring of debt of ₹200,000 crore to SPUs.

Financial institutions can’t escape their responsibility of becoming “revolving window” for short term loans and consequently building an “overhang” of huge debt which could turn into non-performing assets. Bailing out power utilities has not helped in the past (recall the financial package to them in 2001) and it is unlikely that financial health of the SPUs can be restored, given the current state of regulatory bodies — the fact that they have been reduced to handmaidens of the state governments.

Regulatory capture

The institutional integrity of the State regulatory commissions should be a matter of great concern. The Supreme Court rightly, in its September 16 order, underlined the danger of interference in the functioning of autonomous bodies in a case relating to the University Grants Commission (UGC). The apex court censured the “intrusive and unwarranted interference” by the government in the functioning of an autonomous body.

The loss of credibility of regulators has adversely affected the power sector. The State Governments do not realise that regulators are expected to deal with investments across the value chain in the industry.

Detailed processes involving tariffs and pricing of electricity are involved. The objective is to balance the interests of all stakeholders, a process that is meant to be driven by observing constitutional principles, fairness, transparency and equity. Unfortunately, States have instead treated the regulator’s job as a “sinecure” for loyal politicians or pliable and favoured officials. The bureaucratic-cum-political nexus has continued over the years and the ministry of power has helplessly watched the same.

Credibility crunch

Delays, and the absence of credibility, in the appointment of members and chairpersons to these institutions are now commonplace. In a recent report of Forum of Regulators it was revealed that in several States, positions of chairpersons and members are vacant since 2013 with a view to find the so-called “right” persons. In Haryana, the State Government was in a great hurry to select the chairperson of the power regulator, perhaps before the election code was to be enforced.

The incumbent chairman was made to resign a fortnight before his actual tenure was to end. The Ministry of Power was a party to this “administrative coup” in violation of transparency, fairness, equity and reasonableness.

The Modi government’s emphasis on performance will be judged by integrity and autonomy in the selection process.

The States’ tendency to harm to regulatory institutions would defeat the objective of promoting investments in infrastructure and power, from countries like Japan and China.

Will economic regulatory institutions be given genuine autonomy by the States? This is something that the new government has to ensure.