In Media : June 2010

Making regulators work
Business Standard, June 05, 2010

A critical look at the Planning Commission’s draft Bill on regulatory reforms

India’s financial sector has a set of independent regulators, under the finance ministry. Independent regulation of infrastructure is more recent. There are appellate tribunals for telecommunications, electricity and competition. Also, independent regulatory commissions are proposed for coal, national highways, railways, etc.

Infrastructure regulators have been created in a haphazard manner with no coordination among the ministries concerned in terms of their functions, powers, reporting relationships, etc. While some have no tariff-setting powers, others have not been notified any powers from their respective ministries and thus they have no work; and governments use their powers to overrule many of their orders. Members are appointed almost exclusively from among retired government servants; and there is a bias towards compliance with government requirements.

The Planning Commission released an approach paper with an overarching approach to independent regulation as well as a draft Bill on regulatory reform. The Consumer Unity and Trust Society organised a conference to discuss this draft Bill. Among the participants were the deputy chairman of the Planning Commission and a member, his principal advisor, present and former regulators, etc.

The deputy chairman said that independent regulatory commissions became relevant when the private sector presence existed or was expected in the sector. A public sector monopoly like Railways also must be independently regulated to enable transparency and reasoned decisions in consultation with all interested parties. He did not mention that the Bill must provide for its provisions to override any conflicting provisions in existing legislation regarding any infrastructure regulatory body.

The Planning Commission member commented that a policy paper that was binding on all ministries might be simpler than a new legislation. This ignores the tendency of bureaucrats and ministries to protect their turfs. Unless compelled by statute, they will not change their existing regulatory legislation. In the context of coalition governments, a mere policy statement will not be implemented.

The regulatory diarrhoea must also be controlled. For example, all energy issues (power, oil and gas, coal, atomic energy, renewable energy) must be under one regulator as must transport (road and railways).

Accountability of regulators is not addressed by any of the present legislation or the draft Bill. At present, regulators are accountable through the annual report they submit to the legislature, though these are never discussed by legislators.The other accountability is to the superior court or tribunal on appeals of their decisions. The Bill must introduce the American system, where members of independent regulatory bodies appear regularly before a committee of the legislature to answer its questions. Thus the principle of legislative oversight is recognised, especially over independent regulators who have no electoral mandate. Since regulatory commissions are quasi-judicial in nature and their orders are subject to judicial review, some safeguards will be required to ensure that the commissions do not have to explain the rationale for their orders to the legislature committee.

What’s needed is an injunction to regulatory commissions to either allow or disallow expenses of the regulated entities in determining their tariffs. Many electricity regulatory commissions minimise tariff increases by terming legitimate expenses as “regulatory assets”, adversely affecting their cash flows, but taxed on accrued incomes. The practice is a response to the pressure from governments to avoid tariff increases. It must also lay down caps on cross-subsidies and penalties must be imposed on the office-bearer of a utility for non-compliance of orders.

On the formation of the Tamil Nadu Electricity Regulatory Commission, and later the Petroleum and Natural Gas Regulatory Board (PNGRB), governments either delayed notification of their powers or did not notify them at all. The PNGRB does not issue licences for oil and gas pipelines because the powers are not notified. The draft Bill must provide that governments notify all powers provided to the commission by the legislature, within a stipulated time.

The Selection Committee proposed in the Bill is packed with bureaucrats and must make provision for non-bureaucrats. The regulatory commissions today are packed with current or ex-government servants. There must be a numerical limit on present and former government servants who are appointed. The Bill provides an upper age limit of 66 and a fixed term of four years for any member. The Bill lays down the employment an outgoing member cannot take after demitting office, which is too restrictive and must be limited to not appearing before the commission of which he was member. On the question of termination of a member, there must be a provision for an investigating and penalising agency, perhaps a tribunal or high court, with investigations by a judicially appointed body. Further, the grounds for investigation must include allegations of corruption or conflict of interest.

There is a feeling that there could be jurisdictional conflict with sectoral commissions whose legislation allows hearings on issues relating to competition. However, with the Competition Commission yet to establish itself, sectoral commissions are better qualified to decide on competition issues in their sectors. The Bill should, however, provide for mandatory consultation by sectoral regulators with the Competition Commission when specific issues that abut on the jurisdiction of the latter are being considered. A provision might be added that a member of the Competition Commission shall sit on the bench of the sectoral regulator when such matters are being considered.

There is no provision in the Bill for developing consumer associations that can appear knowledgeably before the regulatory commission. It should provide for funding to a limited number of qualified consumer organisations. There must be consumer associations represented on the national advisory committee for each commission. The minutes of the meetings of the national advisory committee must be published and publicised.

The author was the first chairman of CERC and has written extensively on infrastructure regulation;

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