M Govinda Rao: Issues in electricity governance

The dominance of retired bureaucrats in the field of power regulation is an undeniable fact.

The world over, there has been a significant change in the concept of market failure associated with public utilities like electricity supply industry. The inability of the governments to make large investments required in public utilities and need for efficient management of the industry have transformed the industry from a vertically integrated public monopoly to unbundled utilities. Although the industry continues to be dominated by the public sector, the system has created scope for a significant participation of the private sector. In the prevailing situation, regulation has assumed urgency. There is significant public interest due to the technological characteristic of the good--of simultaneity of supply and consumption, and other issues of lumpiness of investment and potential to create oligopolistic tendencies. At the same time, developing the capacity to regulate the market to ensure fair competition, protect consumers' interest, prevent predatory behaviour and dealing with asymmetric information in a technologically complex environment is truly challenging.

Setting up independent regulation has been an essential component of reforming electricity supply. The state of Orissa was the first to set up a regulatory commission, in the early 1990s, and the Central Electricity Regulatory Commissions Act (1998) broadly followed the Orissa model. Subsequently, regulatory commissions have been put in place at the Centre and in the states. The experiences of these have been varied and this is an opportune moment to assess their strengths and weaknesses. Thus, the study by Navroz Dubash and Narasimha Rao on electricity regulation in Andhra Pradesh, Delhi and Karnataka, completed at the NIPFP and Centre for Public Policy, IIM, Bangalore, is timely. This study goes beyond the legal framework and attempts to unravel the political economy elements in regulatory processes and its implications on regulatory outcomes, and analyses the scope and content of stakeholder engagement in regulation. The findings of the study were discussed in a seminar last week attended by an impressive list of experts. Hopefully, in the coming days and months there will be considerable discussion on the issue to help improve the regulatory governance.

An important aspect of regulation is the independence and capacity of the regulators. Complexities in the nature of the industry require that the regulators should have specialised knowledge and experience in the industry, should be independent and impartial, and should not have conflict of interest. Thus, qualification, experience, independence and objectivity should be the core criteria for the choice of regulators. It should not matter whether the persons come from public or private sectors.

Almost a year ago, in one of the columns in this newspaper, I had lamented that the regulatory commissions were used to extend patronage to retired bureaucrats. In the case of electricity regulators, the requirement that Chairmen and Members should have "adequate knowledge, experience or shown capacity in dealing with problems of law, economics, commerce, finance or management" makes every retired senior bureaucrat eligible for the positions. Limiting remuneration to government pay scales and mandating that after their term, the regulators cannot take further employment with the government and should not accept commercial employment for a period of two years virtually rules out young and suitably qualified persons from the commercial sector. As regards independence and impartiality, we only seem to trust retired government officials. Indeed, there is nothing wrong with retired bureaucrats and there are many who are extremely competent and suitable for the job. The problem is with the barriers to the entry of young and qualified professionals from the commercial sector, which is important to bring new perspectives in as yet a nascent system of regulation.

Indeed, I had the audacity to bring up the issue in the seminar. Former Power Secretary R V Shahi was quick to point out that the regulatory commissions headed by former officials had performed better and therefore, this was a non-issue. Another important former official and electricity regulator, Jagmohan Lal Bajaj, was more emphatic. His contention was that there was no substance in the argument because bureaucrats constituted just 16 per cent of the total number of regulators. He went on to state that a lie spoken repeatedly was assumed to be the truth and the overwhelming presence of bureaucrats in the regulatory system is one such case.

Indeed, it is important to nail the lies. While my earlier column on "bureaucratic capture" related to regulatory systems in general, we are now referring to the electricity sector. A quick analysis of electricity regulatory commissions in 17 states from their websites provides interesting information. First, let us see the composition of chairmen. In one of the states, there was no chairman, and information was not available for three states. Of the remaining 13 chairmen, 11 were retired senior IAS officials, one from the IAAS and one a technical person. Indeed, the qualifications of these ranged from postgraduate degree in philosophy and economic history to physics and electrical engineering. Surely, we know who the chairmen of the regulatory commissions are.

An analysis of the composition of all commissioners is equally revealing. Of the 46 commissioners, information is not available on 11. Of the remaining, 12 are from the IAS, one from the IRS, one from the IAAS, one from the Indian Railway Accounts Service, two from commercial entities, and the remaining are retired officials of electricity utilities. Another notable feature is that every regulator is more than 60 years old. As far as the performance of regulators is concerned, we do not have any indicators to judge them and in any case, as almost all chairpersons are retired government officials, there are no counterfactuals to compare.

I must clarify that my intention is neither to deride retired senior officials nor to belittle their contribution to governance in the country. I do consider that their contribution has been immense. The issue is of developing a framework for developing effective regulation as part of the reform to ensure adequate and quality supply of power so that increasing demand is met in a cost-efficient manner. Effective governance is critical to creating an enabling environment for efficient electricity supply industry. Therefore, the choice of suitably qualified personnel as regulators is important for electricity governance. Hopefully, this will not become a hostage to special interest group politics.

The author is Director, National Institute of Public Finance and Policy. Comments at mgr@nipfp.org.in