The Telegraph
Since 1st March, 1999
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- Regulatory commissions must be minimal and transparent

A deluge of independent regulators is about to descend on us, apart from the financial regulators. There are now 24 or so in electricity. There might soon be separate ones for gas, downstream oil, exploration, coal, steel, civil aviation, rail, pharmaceuticals, health services and possibly for water at the Centre and the states. Before we go ahead, we need to consider what has been the experience so far, and also whether the people exist to run so many agencies and provide staff with the necessary expertise.

Electricity has had a central regulatory commission since 1998 and state commissions subsequently (except Orissa which had one earlier). The structures of the electricity industry as well as of its principal fuels, coal and gas, are likely to witness major changes over the next five years. Private investment in pipelines and electricity transmission lines will result in independent and non-profit load-despatch operations, not under GAIL or Power Grid as now. Electricity exchanges will be in place, parallel to the load despatch centres at state and regional levels to facilitate trading.

Rural electrification will progress with the replacement of low with high voltage lines, metering of distribution transformers and building capacity in panchayats to distribute electricity and collect payments at tariffs determined by the regulator. Wind-power, along with bio-mass, will become the main renewable sources of energy, also supplying the Grid. Incentives will be related to generation performance and not capacity. New projects will be licensed on the basis of committed forward tariffs, with the regulator laying down formulae for dealing with fuel-price variations. Electricity regulators will, over the next five years, be regulating a changed electricity scenario.

At no point in the next twenty years can we expect that governments will not dominate ownership of the energy sector though there will be a more significant private-sector presence. Transmission and pipeline capacity will be more adequate. Distributed generation will have taken over, to a significant extent, in rural energy supply and panchayats will have become largely responsible for rural distribution and collection. Renewable energy, and particularly wind power, will have risen substantially in total supplies. Subsidized energy supplies, electricity for small and marginal farmers and the rural and urban poor, subsidized kerosene for the poor, will remain but will be better targeted and the expense capped per user. As a result, gas prices will also be regulated to provide satisfactory returns to all participants, but related to prices of electricity.

Vertically integrated operations in energy will require special attention from regulators to ensure that transfer pricing is fair to consumers. Regulators must also deal suo motu with issues that push up cost of projects. The electricity regulators have to find ways to improve the distribution, improve efficiencies in subsidy targeting and costs, reduce or eliminate subsidies to the non-poor and make the subsidy reach the really needy. These require data on the poor and non-poor, and a system to ensure that the non-poor are kept out of the subsidy mechanism. Cross-subsidies must be replaced by direct government funding.

Energy regulators will continue with cost-plus tariffs for many years to come. This is because there will be consumers who are supplied below the cost to serve, capacities might not be adequate and gas prices being subject to international cartels, end users must be protected from paying exorbitant prices. However, such detailed tariff regulation might be confined to long-term contracts. Regulators might focus more on trading, markets and information to ensure that they function in a fair and transparent manner.

Governments must also make greater use of the expertise built up in the regulatory commissions and invite their advice on reform measures in each sector and other areas like taxation.

A formula to assure a relationship between end electricity prices and of coal and gas that also recognizes the requirement of profits for attracting investment into the fuels must be agreed between regulators. That is the logic for hoping that ultimately ministries will opt for a single energy regulator. Regulators for gas, coal and rail must be given responsibility for their tariffs, an element missing from the present oil and gas regulatory bill and in the 1997 discussions on amendments to the Coal Nationalization Act.

For some time, because of the protection by each ministry of its turf, there will be separate regulators for coal, gas and electricity. These will be in addition to ones for rail, shipping, environment and energy efficiency. These regulators, along with Telecom Regulatory Authority of India will need to have agreements with each other to ensure coordination on specified issues between them. For example, how much rent and profit-sharing must the telecom tariff include as payment for operators stringing their lines on electricity transmission and distribution lines' Electricity regulators could also use their tariff determination and licensing powers to enforce regulations relating to environment and energy efficiency. State electricity regulatory commissions could be given powers to oversee ground water regulation, since cheap electricity for agriculture is used to pump ground water and that has become a scarce resource.

We should be aiming to get to a situation where there is a single Central energy regulatory commission for electricity, coal and gas, regulating transmission and pipelines, bulk tariffs, licensing of transmission and distribution entities, setting rules and enforcing them for trading and markets and grid discipline. The state electricity commissions must enforce environmental rules set by environmental agencies, energy efficiency rules set by the Bureau of Energy Efficiency and oversee the functioning of local agencies that enforce rules for ground water usage.

The multiplicity of regulatory agencies by sector and by state in the case of electricity (and perhaps water and other subjects that are concurrent or wholly with the state governments) strains the available limited talent for appointment to them. We must encourage as many states as possible to have common regulators, with benches in each state and the power to the concerned state government to issue directives to the joint commission in relation to its concerns. Search, selection, appointment and training of regulators should not be left to government servants as now, but be quite independent. A single body might be created for this purpose to find members for all regulatory commissions and could also rule on accountability issues relating to regulators. This is a major lacuna today.

Chairmen and members of regulatory commissions must be younger (45 to 55) than at present, appointed for full five-year terms that last irrespective of age, with high status, maximum remuneration and perquisites, at least health benefits for life if not other retirement benefits after they have completed their terms, very limited restrictions on post-retirement employment, and not more than one member in a commission who has moved from employment as a permanent government servant or in a government enterprise. They must all compulsorily undergo training, as must their staff.

We must not create another cushy post-retirement niche for ageing academics, consultants and bureaucrats through these independent commissions. Nor must we allow them to proliferate when less can do the job better. No modern society can do without regulation. Its nature might change as the structure and context change. Better that regulation is done in a transparent, consultative and reasoned way.

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