The Hindu Business Line : Developing country paradigm to regulation

With the milieu very different, the regulatory regimes of developed countries may not suit the developing nations, though pointers can be taken. Taking the case of the power sector, UDAI S. MEHTA says that India could consider a centralised supervisory body and that it must think through all options before hurrying to create different regulators for various aspects of the energy sector and at diverse levels.

The power sector is in the news what with the country facing a severe shortage of electricity. With Plan targets for capacity expansion missed, the Government has decided to build Ultra Mega Power Projects involving the private sector. This and the unbundling of State Electricity Boards are set to change the dynamics of the power sector. In this milieu, a guiding, regulatory hand is crucial.

In its absence, the transition could be from inefficient public ownership to profit gouging private monopolies. The regulatory mechanism thus needs to be strong, independent and effective and one that promotes competition between public and private entities.

Independent Regulation

When the United Progressive Alliance Government took office, three years ago, it promised to promote competition in all sectors, especially power, and have professionally-run regulatory institutions. The importance of quality of regulation for the development of competitive markets appeared to have been realised.

World-wide regulatory agencies are being set up for various utilities, including electricity, but their effectiveness is also being debated extensively, particularly in the context of developing economies.

Independent regulation is a relatively recent phenomenon, particularly in developing countries, including India. The basic premise of independent regulation is that specialised agencies that are independent of influence from stakeholders can make rational decisions and achieve the policy objectives of growth, investment and effective service delivery at efficient prices.

Independent regulation is supposed to create an enabling and consistent environment to facilitate healthy competition. It demands transparency and active participation by all the stakeholders concerned.

Independent regulation essentially follows a consultative approach of decision-making. Regulatory decisions are supposedly to strike a balance amongst conflicting priorities/interests of the various stakeholders. Therefore, the quality of representations from the stakeholders and the capacity of regulators become crucial determinants of effectiveness.

Given that political intervention is a reality, it is best to channel it productively. The findings of Parliamentary commissions and bodies should be made public; indeed, these could be effective in introducing some checks into the processes. Thus, the current thinking is to make all regulators directly accountable to Parliament, taking them out of the control of the line ministries.

Regulatory Information

The regulatory effectiveness in tariff determination and improving the efficiency of delivery depend on the quality of the information available about various aspects of the industry not only with the regulator but also in public domain, particularly the stakeholders. Civil society groups and consumer organisations can be a major balancing force, and need to be nurtured through funding and capacity building.

Overall, the information availability on the industry and on its regulation are not uniform across the country. This makes it very difficult to analyse the performance of the industry and regulators across time and space. This has significant implication for practice of regulation, be it tariff determination or performance monitoring.

One Size Does Not Fit All

Developing countries milieu is different from developed nations and therefore customisation of the regulatory approach is necessary, that is, the mode, style and intensity of application would have to be different to accommodate the particular socio-economic and institutional characteristics of developing countries. In countries facing severe problem of poverty and unemployment, the priority of the government may be to provide basic necessities to people. Such developing countries may adopt market reforms under external pressure but they may not be the priority.

Further, some of the problems in developing economies are unique to the context. Therefore, being guided by, and blindly adopting, the regulatory structure of the developed economies may not be helpful. Rather, learning from the varied experiences of developing economies would be the better approach to address peculiar challenges that regulators are often faced with.

Thus, the Prime Minister has asked the Planning Commission to develop a policy paper for power regulation by looking at the best approaches world-wide. The country may not be able to adopt the best practices, but can tailor them to its socio-political context.

In reforming the electricity markets and regulation, India is at the learning stage. The unbundled utilities are struggling to cope with the changed institutional framework and face challenges of adapting to the idea of private enterprise in a regulated environment. The biggest challenge for the sector is cutting down the high transmission and distribution losses, as paying consumers end up subsidising those who do not.

Central Regulatory Regimes

The setting up of the Forum of Electricity Regulators is a commendable step but it needs more clarity in terms of its agenda, as it has not been able to make even a dent on the T&D losses or even promote effective competition. Thus, there is a need for collaboration among regulators to find solutions to these vexed problems. Perhaps, having a central regulatory regime rather than one for each State will help achieve coherent action.

The advantages of having a single oversight regime is that there will be economies of scale in the regulatory function itself. The pool of knowledge generated is better used. It facilitates uniform decision-making.

There are important linkages between electricity regulation and other energy sector regulators such for crude oil/gas and coal. It may be more useful to have an integrated energy regulator, than many for different sub-sectors. The Planning Commission is also veering to this view.

It would be beneficial for a developing country like India, to consider having a centralised regulatory regime and to think through all the available options before hurrying to create different regulators for different aspects of the energy sector, and at different levels.

(The author, an Assistant Policy Analyst at CUTS Centre for Competition, Investment and Economic Regulation, can be reached at usm@cuts.org.)

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