Strange approach to fixing power tariffs

The suo moto power given to electricity regulators to dictate the price has thrown up issues in three areas: information, enforcement/compliance and accountability. Does this discretion have desirable effects?

First, the background. The Tamil Nadu Electricity Regulatory Commission (TNERC) issued a suo moto order revising the tariffs that Tangedco (Tamil Nadu Generation and Distribution Corporation) and Tantransco (Tamil Nadu Transmission Corporation Limited) can charge customers for the year 2014-15. The suo moto action was taken as both utilities had failed to submit their annual revenue requirement (ARR) petition.

The power was granted to the State Electricity Regulatory Commissions (SERCs) by the Appellate Tribunal for Electricity (APTEL). The effect is that SERCs can initiate tariff proceedings and unilaterally determine tariff without the submission of ARR petition by electricity utilities.

The non-filing and delay in ARR filing and tariff revision has impaired the ability of discoms to raise tariffs, further eroding their poor financial health. However, the ramifications of this power in respect of information, electricity markets, enforcement/compliance and accountability need to be looked into.

The inadequate information at the regulator’s disposal is a major issue. This is manifested in the fact that utilities can avoid disclosing their financial and technical cost structures by not filing ARR petitions; SERCs, as a result, do not have adequate and accurate information to arrive at a reasonable tariffs. As a result, informed public participation in the regulatory tariff process is greatly reduced. The public ends up with less bargaining and negotiating power with regard to better services and reasonable tariffs.

The Electricity Act 2003 treats electricity generation, transmission and distribution entities as separate business entities, run on commercial principles. As business entities, utilities have the right to recover costs in return for services provided, as also the right to earn a fair rate of return on capital invested in the business.

Hence, they are expected to be concerned about their own financial and technical well-being. This would prompt utilities to file ARR petitions, disclosing their cost structure, to SERCs. Generation, distribution and transmission utilities would, in turn, strive to promote efficiency, economical use of resources, good performance and optimise investments.

This system is short-circuited by the fact that the regulator can exercise suo moto power to determine prices. The regulator is vulnerable to manipulation or ‘capture’. For example, the utility can develop a tacit understanding with the regulator and refrain from filing an ARR in the case of potential tariff hike, letting the latter to take up the unenviable task. It throws up questions about the tariff setting process, including ex-parte communication with utilities.

Electricity utilities are not compelled to file their tariff petition on time to address their own financial and technical problems. This effectively blunts the need to create efficient electricity markets and ensure transparency in working.

The judgment does not provide for any penalising provisions, if utilities do not file their revenue requirement on an annual basis. This enhances the incentive not to file financial statements. Further, suo moto power has the potential to limit disclosure of information. This information is needed by the public to put in place checks and balances where both regulator and utility are held accountable.

In conclusion, the tariff determination power has to be revisited and certain steps taken. A cost-benefit analysis of whether such powers can bring about long-term efficiency in the electricity market has to be done. Certain amendments and rules have to be passed to ensure compliance by utilities to file ARR petitions on time.

It does not necessarily have to be used to fix price, but it must be seen as an information disclosure tool. For instance, detailed annual reports give public and regulators access to information and possibility to analyse performance.

The Regulatory Reforms Bill 2013 must be enacted at the earliest to make regulators accountable to the legislature so that there is accountability in regulatory decision-making. Clear rules need to be framed on how the regulator will deal with a future suo moto tariff petition, when unilateral tariff determination is deemed necessary.

The writer is with the Citizen Consumer and Civic Action Group

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