Regulatory reforms and taking Price control away from Electricity regulators

 

Jaitley and Shah (Jaitley and Shah, Oct 2021, Page 30, xKDR forum) points out State Electricity Regulatory Commission (SERCs) and Central Electricity Regulatory Commission (CERC) have excessive concentration of power in terms of being executive, legislative and judiciary at the same time. Moreover, it is also tasked with the function of Tariff setting and true up determination. The central planning-based price system should not be the primary concern of any regulator. Price should be determined by market forces and any redistributive measures must be achieved through budgetary allocated vouchers without intermediating it with price system.

A major roadblock to enabling Pricing system is the institutional design of SERCs commission and CERC which are tasked with tariff fixation and regulation. The SC in one judgement during Jan’24 (Yash Mittal, January 2024, Live law article, Livelaw.in) also made it clear that the state and central govt’s role is only advisory and regulators can refuse if tariff are not market reflective. However, the selection committee of the SERCs are made by chief secretary of state government, Chairperson of CERC/CEA and chief justice of high court. Given the majority vote would decide the SERC appointment, the appointees will have limited autonomy by design. Removal power of SERC members are vague and as per the new draft bill, individual member may be removed for collective decision of the committee. This makes the political interference in the autonomy of these institutions very likely. Central planning of pricing is distortionary to begin with and this kind of institutional design make it vulnerable to deep distortions which is evident in the books of DISCOM.

I propose to narrow down the role of SERCs and CERC as below:

    1) Unburden the Tariff setting role from the SERCs/CERC domain and let the tariffs be determined using market forces. Determination of the Price should be left to DISCOMs

     2) Instead, regulatory body should regulate the DISCOMs to enforce commercial viability to shield it at least partially from government intervention in tariff setting. We propose that the SERCs/CERC should refer DISCOMs defaulting on payments to its generating companies/suppliers/lenders to NCLT for financial restructuring or bankruptcy. The power minister in 2021 has made it clear that the insolvency code will be applicable to DISCOMs (Regi and Nagulapalli, Jan 2022, Hindustan Times article). Given this, it should not be very difficult for the regulators to recommend DSCOMs to NCLT. The recommendation can be made binding on NCLT as well. Along with this, SERCs/CERC can also issue red flags to DISCOMs each year if they have operationally negative cash flow for two consecutive quarter. NCLT then can enable the sale of DISCOM asset to private players which will be a forced change of ownership of the DISCOMs. In the period of 330 days where the insolvency resolution process is completed as per Insolvency and bankruptcy code, the management of DISCOM must report to the concerned SERCs/CERC so that the essential service is not disrupted. It also can enable transfer of employees to the player acquiring the DISCOM assets along with VRS option for employees refusing to take transfer.

   3) DISCOM should be given 3 years transition period for tariff setting post which commercial viability is enforced. In this period, DISCOMs can also clean the books using the RDSS scheme. The Revamped Distribution Sector Scheme (RDSS) has an outlay of Rs. 3,03, 758 crores over 5 years. Given there is a capital outlay already for this, the fund can be used for debt restructuring and operational cash flow short fall for the intervening 3 years. Operational cash flow support requirement would be 104,091 cr per year (Tongia and Devaguptapu, 2023, CSEP) which roughly translates into the capital outlay budget of RDSS 

SERC members must be selected through a panel of High court chief justice, chief secretary of the state and an independent expert from the domain nominated by chief justice of the Supreme court. Similarly, CERC should be selected by a committee of Chief Justice of India, Cabinet secretary and an independent expert nominated by a panel of supreme court judges. The rules of termination of CERC and SERC members must be clearly established with no collective responsibility to be borne by individual members.

5) SERCs/CERC must ensure that it is regulating for the market failures as pointed by Jaitley and Shah (Jaitley and Shah, Oct 2021, Page 28 and 29, xKDR forum)1:

a) It must ensure that the area of supply where a DISCOM assumes monopoly                        in the wire network business, there is stringent regulation on monopolistic practices so that the wire network is shared with other suppliers fairly. The choice of supplier however can be a choice for the consumer. Multiple suppliers of the power to consumers can exist if in an area of supply, wires are mandatorily shared in lieu of a leasing charge paid to the DISCOM which laid the infrastructure.

b) It should operate the grid as a public good

c) It should define technical standards on Voltage uptime and frequency

 d) It can frame policy around emission taxes.

6) It should develop a research team to establish feedback loops. Jaitley and Shah (Jaitley and Shah, Oct 2021, Page 31, xKDR forum), pegs the cost of building a robust regulation team to ~Rs. 0.3 trillion of one-time cost

7) The govt. can use less distortionary DBT/vouchers for any redistributive consideration by introducing on-budget provisions instead of routing it through the price system. As per Jaitley and Shah (Jaitley and Shah, Oct 2021, Page 27, xKDR forum), the cost of such on-budget payment for the vulnerable consumers are expected to be Rs. 27,000 Cr per year which is way lower than the current DISCOM losses of ~59,000 cr in FY 22.

This  is expected to yield result by the end of FY 30 in terms of loss containment and operationally positive cash flow (Zero ACS ARR gap) and hence if a govt is weary of privatizing DISCOMs, it must at least be prepared to cede power and let the regulators be truly independent.


References:

1)    Akshay Jaitley and Ajay Shah, Oct 2021, The lowest hanging fruit on the coconut tree: India’s climate transition through the price system in the power sector, xKDR Forum  (https://papers.xkdr.org/papers/jaitlyShah2021_lowest_coconut.pdf)

1)    Yash Mittal, January 2024, State electricity commission can refuse to adopt tariff not aligned with market prices-Supreme Court, Live law article, Livelaw.in (https://www.livelaw.in/supreme-court/supreme-court-upholds-state-electricity-regulatory-commission-power-tariff-adoption-market-prices-consumer-interests-246194)

Prasanth Regy, Srikant Nagulapalli, Jan 2022, Applying the insolvency code to the power distribution sector, Hindustan Times article (https://www.hindustantimes.com/ht-insight/economy/applying-the-insolvency-code-to-the-power-distribution-sector-101641128199330.html

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