Regulatory Commission or Captured Regulation?

27 Aug

During last month’s blackout in India, my husband and I were happily vacationing in the Himalayas. Of course, there was no electricity, but then, we weren’t expecting any either up there in the pristine hills. So we were oblivious of all the drama surrounding grid failure down in the plains.  On our return, our tax consultant told us that last date of tax filing has been extended by a month, thanks to a massive grid failure on the 31st July when no one could file their returns.  What an unintended happy consequence of a mess that is India’s power sector!

It was precisely to manage this mess that Electricity Act of 2003 stipulated that independent electricity regulatory authority be set up in every state. And most states complied. Just after the recent power crisis, I noticed that many newspapers were blaming ineffective regulation by these very regulatory authorities as one of the reasons that pushed our power systems on the brink on those fateful nights in late July. And, I believe, rightly so.

As a part of a project on energy-irrigation nexus, we have been looking at the role that these electricity regulatory authorities have played in streamlining methods for calculation of agricultural electricity supply. This is one of their many roles. Agricultural electricity is an Achilles heel of our power sector – not so much because electricity is free or subsidized, but because meters were removed from tubewells decades ago with the result that no one had a clue about agricultural electricity consumption. Then, as a part of the sector reforms program in the 1990s, former state electricity boards were unbundled and asked to work on commercial profit making principles. They were also told that should they provide free or subsidized electricity to the farmers at the behest of the state government, they would be compensated for the same by the government. Now, imagine a situation where Electricity Company does not know how much electricity goes to agriculture and on top of that government commits to compensate them for all the electricity they provide to the farmers. What will they do? Indeed, what will anyone do under the circumstance? They will inflate their estimate of electricity supplied to farmers in order to claim larger subsidy from the government. And this is where the regulatory commissions come in. They are supposed to provide checks and balances and ensure that the electricity utilities do not claim inflated amounts of subsidy in the name of the farmers.

And how well are the electricity regulatory authorities functioning in this regard? We found that Punjab SERC has taken its mandate more seriously than most. They have over the last 10 years almost forced the state electricity utility to do a better job of energy accounting through fixing of 10% sample meters on tubewells, third party audits, commissioning studies for estimation of correct estimation methodologies etc. Karnataka SERC seems to have floundered, with the result that agricultural energy consumption estimation methodologies are very problematic. And some states like Madhya Pradesh does not even have proper records available online for us to understand its current state of affairs.

Why is there such variation in performance of regulatory commissions when all of them have the same mandate? I am told by many experts that this is a classic case of regulatory capture. Most of these commissions are headed by retired Power Secretaries. To me the conflict of interest is so glaringly clear that I am surprised that no one thought about barring ex-bureaucrats from assuming such regulatory roles immediately after retirement. Looks like the recently launched and much discussed Shunglu Commission Report has done precisely this. To quote:

“It is also recommended that an individual having worked in any capacity with the state government during immediately preceding five years should not be eligible for appointment as a Regulator in that state. Similarly, the Regulator should not take up further employment with the concerned state government on relinquishing office.” (Chapter 4:105).

Will this recommendation be accepted? I doubt it. After all, when has the ruling elite (and our bureaucrats are the elites of the elite) agreed to reduce their own power?

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