Regulator in the dock

BS OPINION

Last week, the Supreme Court admitted an appeal made by the Andhra Pradesh Electricity Regulatory Commission and the state's power transmission corporation.

The two have appealed against a High Court ruling that the Commission does not have the power to determine wheeling charges for generating companies. Wheeling charges are the price paid by a power producer to the owner of the transmission lines for carrying his power.

AP Transco's wheeling charges vary from 2 per cent to 20 per cent, depending on factors such as load, distance and type of power. The High Court ruling came after a couple of private generating companies pleaded that the regulator did not have jurisdiction over wheeling charges.

Their real complaint was the high wheeling charge that the Commission had imposed. This case is important because, as the share of private producers in total generation increases, and as a more mature market for power develops, wheeling charges will become critical, especially as the transmission lines are all owned by state governments.

Since all the states are in poor financial health, the temptation to abuse their monopoly power over the transmission lines to make some money will be very great "" provided they can make the state power regulators do their bidding, which seems to be the case in Andhra Pradesh. The case is a fit one for the Competition Commission.

Four major features are worth noting in respect of wheeling charges. First, they are not easy to calculate and involve complex formulae. Crude rule-of-thumb measures that the civil service prefers are sure to lead to chaos.

There is, for instance, a cupboard full of literature on network pricing that the regulators are probably unaware of. Second, after all the maths is done "" and there is lots of it "" they have to meet the test of reasonableness.

Third, wheeling charges cannot be treated as source of revenue for cross-subsidising other activities of the government, the revenue for which must properly come from taxation, rather than selective extortion of the private sector.

Fourth, there is the larger issue, namely, that since the transmission lines have been built with tax revenues, tax-payers must not be deprived of the benefits that accrue from cheaply generated private power.

In other words, the government cannot use its monopoly to nullify the benefits of private power by imposing a high charge. That said, there is also the rather tricky question of who should decide what the wheeling charges should be. If the regulator is impartial, and is willing to heed the above norms, the matter can be left to him or her.

But what if there is a bias? One way out would be to appoint independent consultants. Another would be to ensure that the regulator is genuinely independent and not a government mouthpiece. This, in turn, means that the power to appoint regulators must be subject to review.