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S L Rao: A stronger backbone for regulators

According to reports, statutory regulators were first created in India in the financial sector. The Reserve Bank of India, the Forward Markets Commission and the Railway Rates Tribunal were some of the regulators created before Independence. The Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority followed later. The Telecom Regulatory Authority of India was created in 1997. The Central Electricity Regulatory Commission came in 1998, and other state electricity regulatory commissions followed. In more recent years, the Petroleum and Natural Gas Regulatory Board (PNGRB), the Information Commission at the Centre and states to implement the Right to Information Act, the Airport Economic Regulator and Competition Commission of India were created. Others in the offing are statutory regulators for coal, roads and real estate. Their decisions are subject to appeal to appellate tribunals headed by retired judges.

The functions, appointment, composition, terms of service and reporting relationships of the various statutory regulators have varied with the willingness of the ministry concerned to hand over its authority to an independent regulator. In the case of infrastructure (telecom and electricity), the intention was to encourage private investment (domestic and foreign) in capital-intensive projects, stimulate competition and safeguard the consumer interest. External pressure was exerted by the World Bank that felt private investment required decisions with major financial impact be taken independently, transparently and in consultation. The need for this was greater in India, where most infrastructure was dominated by government-owned enterprises. Given the multiplicity of ministries and the intense battle to protect turfs, each ministry created its own statutory regulators. There was no coordination between them as there was none between the ministries.

The powers of each infrastructure regulator ranged from decision-making on licensing entrants, determining tariffs, approving capital expenditures, settling consumer grievances, safety issues, encouraging competition at all levels (investment, tariffs, consumer choice) to stimulating investment. Government departments that had to notify the rules that activated the regulatory authority under the relevant Act did so partially and/or after long periods of time. Some regulators could not exercise full authority for a long time. Many state governments instructed their enterprises not to implement the regulator’s order. Penalties for non-compliance ranged from a pittance to substantial ones.

The selection of regulators was by government functionaries. Tenures were sometimes very short, since the retirement age was 65. The secretary of the ministry was permitted to become a regulator. Selections were almost always confined to central service officers of government, and sometimes other services and government-controlled enterprises. Government servants were paid the approved salary after deducting their pension from earlier service, thus, demonstrating that their work as regulators was a continuation of their past government service. There is no provision for their oversight except by courts on appeal against their orders, and for an annual report tabled with the legislature.

Since 2011, the Planning Commission has been unsuccessfully trying to put together a common framework for infrastructure regulation. The draft Bill deals with some infirmities of the past, but leaves untouched the major faults. It gives tariff-setting powers to all regulatory bodies. Governments have to explain to their legislature if they use their powers to overrule a regulatory commission’s orders. Government servants appointed to regulatory positions will retain their full pensions. No one from the ministry concerned will be appointed to its regulatory commission for some time after he has left the ministry.

There are lacunae that must be addressed. “Offices of profit” are forbidden to members. This is too vague and ignores newspaper columns, writers, adjunct professors, membership of boards of companies in quite unrelated areas. The draft Bill also does not provide overriding any conflicting provisions in existing legislation regarding any infrastructure regulatory body. It still does not seek to rationalise the proliferation of regulators, with every ministry creating one or more independent regulatory commissions. “Regulatory diarrhoea” is not sought to be controlled. As an example, all energy issues are not under one regulator (power, oil and natural gas, coal, atomic energy, renewable energy). The case with transport – roads, inland waterways and railways – is the same.

The accountability of regulators continues to be restricted to the annual reports they must submit to the legislatures, though they are never discussed in those forums. There is no mechanism to discipline them and their members. We should introduce the American system of independent regulatory bodies appearing regularly before a committee of the legislature to answer its questions. The regulatory commissions must not have to explain the rationale for their orders to the legislature committee. The fiction of “regulatory assets” introduced by some state electricity regulatory commissions, whereby legitimate expenses are kept aside and not given in tariffs, should have been specifically forbidden. All approved expenditures given in tariff submissions must be allowed in tariffs. Regulatory commissions must either allow or disallow expenses of the regulated entities in determining their tariffs. The draft must put a limit on cross-subsidies and its reduction each year.

Penal powers for regulatory commissions to be imposed on the office-bearers and functionaries of a utility for non-compliance of orders must be laid down. PNGRB and the Tamil Nadu Electricity Regulatory Commission were non-functioning for some time because the administration did not notify their powers. This should have been forbidden. Such a provision exists in the Right to Information Act. The selection committees for regulators must make a provision for non-bureaucrats from academia, chambers of commerce, the media, and so on.

The Bill must provide a penalty on officials who delay completing the selection process in the stipulated time. There must be a numerical limit on present and former government servants appointed to any independent regulatory commission. An upper age limit for candidates above which they cannot be considered must be kept at 62 years, so that the appointee can serve a full term of four years.

The provision for termination of a regulator must include provision for an investigating and penalising agency, perhaps the tribunal or high court. Grounds for investigation must include allegations of corruption or conflict of interest. Consumer associations must be funded to appear knowledgeably before the regulatory commission. The minutes of meetings of the national and state advisory committees must be published and publicised. Provision for all appointees submitting an asset list at the outset and thereafter every year includes spouse and children. So what happens when the child is estranged or living abroad?

Regulatory commissions must be required to ask utilities to submit a time-bound plan for implementing their orders – for example reducing transmission and distribution losses. This will enable mid-course correction of tariffs or other matters, if the implementation is unsatisfactory. The commissions must have a regular monitoring over the year. Some directions of appellate tribunals should find place in the draft. This could be about not allowing “regulatory assets”, or not filing tariff requirements in time or at all.

The author is Distinguished Fellow Emeritus, Teri, and former director general of the National Council for Applied Economic Research (NCAER)

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