Indeed, despite the problems there have been, and continue to be, with telecom regulation in the country, overcharging the customer has generally not been the problem (except in the case of long-distance calls). Initially, the regulatory system put a price cap and, as the competition increased, enforcing the cap was never an issue since intense competition has ensured tariffs have always been below it. But the telecom model is difficult to follow in all areas "" after all, how many companies can operate the same road, airport, or port? Even in electricity, where, with open access you can have multiple electricity suppliers, the competition is certain to be limited.
In most of these areas, regulators tend to fix tariffs to ensure service providers get a certain fixed return on their capital "" so, if an electricity company spends Rs 100 crore in a year and supplies 1 billion units of power, it is allowed to charge 116 paise per unit if it is to get a 16 per cent return (the actual model is more complicated since return is on equity, but this is the gist). The problem with this is that, as we've seen, there is a great incentive to pad costs. Recent examples of this are the NSICT terminal overcharging users by roughly 80 per cent (see "Regulatory Edge," 26/11/2007); in the case of BSES, the Delhi electricity regulatory chief said the firm had overpaid its group company Rs 533 crore, which would, in turn, unnecessarily raise electricity tariffs for Delhi-ites quite significantly (see "Delhi's discom disaster," 31/3/2008). The BSES case shows another aspect of regulation "" the regulated companies can also end up feeling the regulator's giving them a raw deal since BSES maintains its capital costs are the lowest in the business.
So what's the way out? The telecom model, as we've seen, is difficult to follow. One possible way out is through properly-thought-out contracts. In the highways sector, the contract very clearly lays down the maximum tariff that can be charged; the wannabe concessionaires then bid on how much cash they want from the government to build the road (in some cases, the cash they'll pay to get the concession). There have been few complaints of price-gouging by concessionaires in this sector.
But will it work in power, where, after all, there is more than one variable? Apart from the cost of buying power and supplying it, there are the theft levels, which play an important role in determining tariffs. What if the companies wanting to supply power simply bid on the wheeling charges, or what they'll charge on top of the costs incurred in buying power? Since the wheeling charge will vary according to the theft levels (the higher the theft, the higher the wheeling charge required to cover costs), bidders will factor this in, figure out what investments they need to make to reduce theft levels, and determine their wheeling charge bids accordingly. So, the electricity commission will no longer have to sit in judgement on whether their costs are genuine or fake.
In the ports sector, by the way, this is what the cabinet approved a few months ago after the Hoda committee recommended this. From now onwards, the bid documents will state the maximum tariffs that can be charged and bidders will bid on this basis. Indeed, bid documents can also specify how tariffs will be escalated to take into account inflation, or reduced to take into account efficiency gains.
Indeed, given the furore over levies being proposed by the new airports at Bangalore and Hyderabad, a similar model for airports is also a good idea "" by the way, it's not just the private airports, even in government-built airports like the ones at Amritsar, a cost-based user development fee would be upwards of Rs 1,000 per passenger! So, once the maximum tariffs are set in the concession agreement (passenger fees, aeroplane parking charges, etc), let companies bid on the revenue shares they'll share with the government.
So what's the regulator to do then? Exactly what he does in other countries that have chosen to regulate through price caps or through contract. Which is to set performance standards and monitor them, to set norms for how bidding is to be done for major items of expenditure, and so on. The experiment with regulators was about reducing the discretionary power of politicians/bureaucrats, this is about reducing the discretionary power of regulators.
