QUALITY OF REGULATION
AN ANALYTICAL CASE STUDY APPROACH
INDIAN CASE STUDY
International Conference on Quality of Regulation
CUTS International
March 2010, New Delhi
Payal Malik
Ashok Desai
Ramrao Mundhe
Introduction
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New regulatory economics treats
regulation of such industries as a
principal agent problem
Design contracts for the firm
Contracts in regulatory practices
translate into:
Tariff orders
Standards of performance contracts
Access Rules etc.
Indian Electricity Industry
Analytical Framework
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Regulatory Incentives
reducing information asymmetry (through its
tariff setting role)
fostering competition (through its success in
implementing open access)
creating competitive electricity markets such that
power trading does not lead to profiteering and
anti-competitive practices but instead encourages
price discovery
reducing externalities (through its promotion of
environmentally benign sources of electricity)
Regulatory Governance
Tariff Regulation
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Some attempts at Tariff rationalization but crosssubsidy element is still high
SERCs have been handing out tariff orders often
(implicitly) endorsing populist initiatives
Cost-of-service regulation stifles utility innovation
Causes utility managers to be responsive to
regulators than to customers or financial incentives
Present MYT framework is actually a multi-year
trajectory for performance parameters, and
determination of ARR and tariff is undertaken on an
annual basis, which defeats the purpose
Competition and Open Access
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Presence
of
network
effects
complicate
the
management of partial transition to competition in
electricity
Implementation of open access at the distribution level
has not been encouraging
Magnitude of wheeling charges and cross subsidy
surcharges has de facto made open access unviable.
Biggest offenders are Tamil Nadu, West Bengal, Kerala,
Jharkhand, Himachal Pradesh and Haryana
Lack of autonomy of SLDCs – identified as the weakest
link in implementation of open access provisions
Annual volume of electricity traded through open
access route is of the order of 12-13 BU constituting
about two percent of the total energy availability
Trading of Electricity: Creation of
Efficient Markets
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CERC recognised trading both for meeting short term
fluctuations in demand and for resource optimization
Trading at present is feebly meeting the former objective
Design of the market microstructure has paid little
attention to resource optimization
Rather than procuring electricity in a competitive mode
distribution utilities have been using short-term contracts
whenever the power requirement goes up and have been
willing to pay to Rs. 8 per kWh or even more
Met by hasty regulatory interventions such as trading
margins and caps on short term price caps and banning
electricity futures
Rather than tackling the disease i.e. insufficient capacity
the regulatory efforts have been misplaced in their
interventions that are aimed at tackling the symptoms
Promotion of Environmentally Benign
Electricity Sector
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Have specified the renewable purchase obligation
(RPO) for their distribution companies as required
under section 86(1)(e) of the Act
However, the specified RPO varies from 1% to
10% across the country
Wide divergence in the tariffs of different
technologies set by different Regulatory
Commissions
Till each State Commission specifies a minimum
RPO of 5% in line with the National Action Plan for
Climate Change, progress inadequate
Governance
Staff and resource
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At the end of 2008, on an average
28% sanction posts were vacant
across ERCs.
In some ERCs as much as 40% to
54% of the posts were vacant
41% of the total sanctioned posts of
professionals were vacant in the
period.
Staff and resource
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More than 94 % of the recruitment
is done from government/utilities.
Talent from other sectors is
considered only in exceptional
cases.
Transparency and accountability
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Rules & regulation in place,
however progress is slow
For example:
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Only 3 SERCs have up to date annual
reports on their websites.
7 SERCs have not publish any annual
report on their websites yet.
Others have published with a lag of 1
to 6 years.
Stakeholder participation and
consumer protection
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Steps have been taken in different states
towards institutionalising mechanism of
grievance redressal: Internal Grievance
Redressal Cell (IGR Cell), Consumer
Grievance Redressal Forum (CGRF) and
ombudsman.
Performance standards have also been
specified to ensure quality of supply.
Difficult to judge these parameters as
many SERCs are still at initial stage in
this regard.
Stakeholder participation and
consumer protection
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Ombudsman
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Needs proper monitoring mechanism to
monitor performance of ombudsman by
SERCs.
Independent fund could be created to
meet expenses of ombudsman office.
Capacity of stakeholders
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Presently inadequate representation
of/contribution by consumers/consumer
groups due to lack of capacity
Petroleum and Natural Gas
Stages
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Three stages :
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Exploration and production
Refining
Distribution
Government participation
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The bulk of India’s exploration, production
and refining industries is owned by the
central government.
Hence its role as regulator is mixed up
with its role as a market participant.
This is an additional reason why a
regulator independent of the government
is needed for the industry.
Rational for regulation in the
sector?
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Insufficiency of investment
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Scarce resource
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Bulky investments are required
Access to international market necessary to raise
require investments
Monitoring reserves and their exploration
Insufficient competition
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NELP was introduced to stimulate competition
PSUs have been dominant gainers in NELP, which
did not help in creating competition.
Rational for regulation in the
sector? Cont…
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Anticompetitive practices
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Externalities
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Lack of level playing field between pvt and govt firms
Conform to safety standards
Licensing of pumps through distribution companies
eliminates potential competition
Risk minimization
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Govt is neutral between its own companies and
others.
This has discourage other investors to participate in
NELP (most E&P licenses went to PSUs)
Regulation
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Currently, there are only two regulators;
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The directorate for hydrocarbons oversees
exploration and production activities,
The Petroleum and Natural Gas Regulatory
Board whose functions remain opaque.
The ministry of petroleum and
hydrocarbons supervises the producers
owned by the government.
This role will continue unless and until
government enterprises are privatized.
The Directorate General of
Hydrocarbons (DGH)
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DGH functions include the following:
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Signing and implementation of production
sharing contracts,
Geological surveys of sedimentary basins,
Monitoring of drilling by licensees, and
Reservoir monitoring.
The Directorate General of
Hydrocarbons (DGH)
cont…
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Appointment of govt official to head DGH has led
to conflict and inconsistency.
DGH needs a chairman who is independent of the
govt.
Powers and responsibility of DGH should be
defined by an act of the Parliament, which is not
the case presently.
The utility of DGH depends on how expeditiously
and cheaply it gives out information.
DGH has been mired in allegations of bias and
corruption.
Petroleum and Natural Gas
Regulatory Board(PNGRB)
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PNGRB functions are as follows:
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To register all entities involved in the
production and distribution of hydrocarbon
products,
To regulate access to and pricing transport of
hydrocarbon products by pipelines,
To monitor pricing, distribution and
availability,
To set standards, and
To adjudicate disputes.
Petroleum and Natural Gas
Regulatory Board(PNGRB)
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cont…
PNGRB has been active, but has as a result run
into strong resistance from a government-owned
company and been rendered impotent.
Delayed notification of Sections 10 and 16 of the
PNGRB Act
This delay enabled the ministry to encroach on
the functions of PNGRB.
Transfer of power from the ministry to the
regulator was not expeditious and cleaner.
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The ministry preferred to excise the powers, which
they were required to transfer.
Remarks
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Ownership of firms
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Number of regulators
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Two regulators are enough but clearly defined
jurisdictions required.
Policy vs regulation
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Govt is both owner and regulator of firms.
Merging “policy” and “regulation” into one regulator
would be efficient.
Petroleum ministry and regulators
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The regulators are subordinate to the ministry and the
ministry seem to be the usurper of regulators’ role.
Remarks
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Design of regulators
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Too complex and lengthy laws render regulation
ineffective.
Powers of regulators
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Usually regulators are selected from oil PSUs, which
raises doubts about their neutrality.
Current structure does not attract quality persons from out
side govt.
Content of regulation
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cont…
Current regulators are not backed by legislation, which
compromises their effectiveness.
Judicial structure
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Appellate tribunal should be more representative: industry
experts, lawyers, accounts, etc.
Judicial bodies should follow development approach in
dealing with sector.
Conclusion
Creation of institutions without
credible political commitment for
independent functioning
 Regulation is costly
 Multi-sector regulation requires
serious consideration
 Makes regulator less susceptible to
industry and political capture
 Insufficient regulatory capacity
 Exploit scale and scope economies
of regulatory governance and
provide a consistent approach to
regulation
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