Long regulatory rigmarole

Two actions have been taken by the Ministry of Water and Power of late, causing quite some stir among the stakeholders. First, Nepra has been put under direct administrative relationship if not control of MoWP in place of the Cabinet division, which may not be as consequential as is being perceived by the public. Second, a summary has been moved to CCI (Council of Common Interest) to reduce the powers of Nepra and some associated changes. While the first step of administrative reporting appears to be catering more to psychological needs of the power ministry bosses, the second step is of more serious concerns and consequences. We would like to take a stock of the proposed changes in a non-partisan manner and undertake an objective and cool analysis. The following proposals have been made: some of the proposals are meant to remove barriers to entry and initiation of the market process, and bringing an element of planning into the system, which perhaps everyone would support. The other proposals are more or less aimed at reducing the role and power of NEPRA, which may be contentious requiring more consultation and expert input for bringing some balance.
1. Doing away with generation licensing requirement
2. Introduction of Market Operator and Electricity trading.
3. Development of a National Electricity Plan and Tariff Policy
4. Appellate Tribunals to hear appeals against NEPRA determinations and orders
5. Curtailment of NEPRA jurisdiction on certain aspects of transmission and distribution companies.
6. Authority to determine Tariff components and not the total tariff
7. Doing away with provincial representation in Nepra Board
8. Ministerial guidance or directives to be binding on Nepra
Doing away with generation licensing
The amendment proposes complete doing away with the generation licensing irrespective of the size of the facility. The Electricity Act 2003 of India also has similar provisions. They continue to have this provision in the law. Had they been facing difficulty or adverse consequences, they might have repealed the provision. Many people argued that this is a time waster and a barrier to entry. For large scale power generation, licensing may be desirable and a necessity, for it may have bearing on reliability, safety and other public interest issues. However, for smaller power plants, say under 5MW, whether in utility sector or in captive generation, licensing may be done away with, as it would eliminate unnecessary expenditure of time and resources. Unfortunately, however, it may cause some reduction in the revenue of the licensing authorities. Complete de-licensing of rural electricity generation and distribution is also called for. There are many waste-to-electricity producers, micro-hydel power plant owners and others, who are operating under a legal vacuum and are victim of blackmailing of utility staff and other government agencies. SMEs operating in electrical sector may not be equipped technically and financially, to bear the load of licensing process, fee and paper work. This step should be taken in this perspective and not in the context of curtailing power of the regulatory agencies.
Introduction of market operator and electricity trading
This marks the advent of wholesale open market activity as opposed to regulation where tariff and prices are determined and fixed by the regulator like Nepra and Ogra. Electricity markets normally operate like a stock exchange or any commodity exchange where spot prices are determined through matching buyer and seller offerings. This appears to be a good beginning, although there are many a slip between the cup and the lip. Electricity or energy markets are evolving in many developing countries, while in the developed countries, it is the norm. There is no regulation on generation in these countries. Next door India also has two or more electric exchanges where electricity is bought and sold for the next day delivery. Perhaps 10 % of electricity generated has to be sold by law on these exchanges. Eventually, in Pakistan similar provisions would have to be made. Initially, regulators may also be given the additional function of controlling the Market Operators. Eventually, when the role of open market increases, a Market Commission may have to be made and NEPRA may be a part of that commission, representing or dealing with a smaller sector. However, Hanooz Dilli doorr ast.
Electricity policy, plan and tariff policy
This is a new addition to the Act. Existing power policy is in fact a tariff policy. Electricity Policy may be developed separately ala India. The main issue is electricity plan. NTDC used to make a projection that may be akin to a Plan. Currently, there is no official Electricity Plan that may be binding on the project approving institutions. The plan would provide a common tool to PPIB, Nepra, CPPA, NTDC, distribution companies and the government. In that such a provision should be welcome. Strangely, Nepra's role in the preparation of this plan has been provided. Perhaps it is a compensation for removal of Nepra's non-tariff jurisdiction on transmission and distribution companies. Thus, this is an attempt to formalise decision making which has remained more or less informal and arbitrary.
Electricity plan would be for five years and may be amended. In a way, this is a reinstitution of the erstwhile Five-Year Plans, which became out of fashion for more than a decade now. It won't be easy to make a reasonable plan and still more difficult to follow. Planning Commission has tried to do it in the past under the ADB assistance, but failed. They have revived the project under a different framework. JICA under MoWP project has developed some projections. Earlier, Canadian consultants used to advice NTDC on it. Varying projections have always been there in the system. This time, there is a provision in the Act itself which may bring some formalism into the process.
Appellate tribunals
The amendment proposes a full-fledged tribunal with a Chairman and two members which would hear appeal against NEPRA determinations and orders. The tribunal would be competent to modify or annul Nepra orders. This may be taken to be a big affront by the regulatory body, but such tribunals are not unusual.
Currently, there is a provision of review process; if a party is aggrieved by Nepra (regulator), under which the relevant party including ministries can file a review petition with the regulator, and by drawing the attention of the regulator to new facts and figures, may try to get a modified decision from the regulator. Then why an Appellate tribunal; there are several reasons in favour of the tribunal .First, appellate tribunals are common in other sectors such as in case of tax, service matters in Pakistan and many other countries. Review petitions in current practice are heard and adjudicated by the same persons in Nepra due to the paucity of human resource. Appellate tribunals offer an opportunity of non-involved persons and experts to examine the contested cases and announce their judgement. To avoid unnecessary costs, there can be one tribunal for both electricity and petroleum sector including coal. This is not unique. Appellate tribunals are working quite satisfactorily in India for quite some time now.
Curtailment of Nepra jurisdiction on certain aspects of transmission and distribution companies
This is the most debatable and contentious issue and has drawn criticism over shadowing the good parts of the Act. Nepra's powers have been curtailed in the following ways:
1. The word 'Prescribe' has been substituted by 'Specify'. That is wherever Nepra used to prescribe, it would specify. Lawyers would be better able to explain the difference. Prescribing appears to have more powerful implications than specify. A deliberate effort has been made by drafters for this substitution. There may be some objectives behind it or could be a simple effort at belittling Nepra.
2. Transmission and distribution activities have been removed from Nepra domain in non-tariff terms. Under the existing Act, Nepra has a lot of say and jurisdiction on T&D companies such as preparation and submission of investment plans and others. Since, T&D companies are government owned unlike generation IPPs which are mostly private, this appears to be an attempt to get an unhindered and exclusive control on the T&D companies. This amendment may be useful only till the time privatisation of T&D companies does not take place. Once privatisation takes place, who would compel private companies to undertake serious investment planning and action. Thus it appears that privatisation is not under active consideration of the drafters or has not been thought through with any enthusiasm to regain exclusive control.
Authority to determine tariff components and not the total tariff
This may be considered the most important and crucial and perhaps divisive and contentious one. There is a public hue and cry on putting Nepra under direct administrative control of MoWP which may only be vexing personally to the management of Nepra. However, real curtailment is embedded in the tariff domain. Under the proposed amendment, Nepra would determine tariff components only and not the total tariff. Does it mean that government would determine the total tariff by adding subsidy or surcharges? There are pros and cons. The provision would instill arbitrariness in the system and may reduce investor confidence. The advantage is that government may be able to include policy preferences and objectives in the tariff system. More thought and debate should be organised to finalise on this under a committee as proposed by Nepra.
Doing away with provincial representation in Nepra Board
The professional and expertise requirements of the Members are very demanding. I am not sure how the dual requirement of merit and provincial representation are met. Do provincial governments organise a transparent process to select a nominee. There is no such process as I know about it. I am sure merit is compromised. And then, how do such representatives respond to dual loyalty. I am not sure if provinces have benefited from such a provision. The proposal of doing away with the provincial representation of one each from every province is a step in the right direction. However, quota requirement could be included, one member each from provinces, to maintain a sense of provincial participation.
Issue of guidance issued by the controlling ministry
Ministries make policy and regulators and others operate within that framework. Sometimes this distinction is blurred. A government makes the policy in energy sector and is finally responsible for all good or bad. It has to provide the resources and has to face the public. Sometimes it may feel that the regulator is impinging on its role or the regulators' decisions are creating problems in the government functions and sometimes reverse may be true. There are many models. Some models give a high role to the regulator and some give more role to externally developed government policies. In the current regime, MoWP has reason to feel that its Discos are being controlled by the regulator to the extent that it is tantamount to management. MoWP intends to build some safeguards in this respect to improve efficient working of companies owned and managed by it.
Regulatory function is a quasi-judicial function. Investors, consumers and stakeholders should be confident that their interests and rights would e fairly protected and a balance would be maintained amongst opposing requirements. If investors suspect that the government or other powerful parties may pressurise the regulator to get unfair treatment for them undermining the others, they would feel higher risk and would either refuse to come in or would require higher returns compatible with this regulatory risk, which would be of no benefit.
Regulator is supreme in an autonomously working system unaided by government subsidies and support and where many private sector buyers and sellers deal with each other. Naturally, that requires a powerful and independent umpire. In the current system, there is a lot of government support and subsidies, and government-controlled actors among buyers and sellers. Naturally, government would like to have more say in regulatory domain as it is the government which has to face the brunt and consequences of the regulatory action. Unfortunately, there is no formal mechanism for consultation or adjudication between government and the regulator which created difficulties in the relationship between the ministry and Nepra. Public hearing is the only consultation mechanism which is unilaterally controlled by Nepra. In other countries such as India, there is a Regulatory Advisory Committee (RAC) which provides a mechanism of consultation among government, buyers and sellers, consumers and the regulator. Unfortunately, even the proposed amendments do not include RACs. More on it later. Appellate tribunals would play some consultation and adjudication role, hopefully.
This perhaps is the most delicate and controversial subject. While Ministerial Directive politely put as guidance may sometimes be necessary on policy issues, it can compromise the independent functioning and image of the regulator. It may also open the ways for corruption and nepotism, etc. Let us see what OECD guidelines on regulators say on this subject:
Where legislation empowers the Minister to direct an independent regulator, the limits of the powers to direct the regulator should be clearly set out. The legislation should be clear about what can be directed and when. Any directions made by the ministers or politicians should be documented and published (OECD: Principles for the governance of regulators, 2013).
Thus Ministries guidance may not be a taboo, but the guidance provision may not to be a cart-blanche for interference on a daily basis and limitations should be built into such provisions. Spelling out such limitations may not be easy, and would require consultations under expert guidance. OECD assistance can be obtained through the good offices of USAID or others.
(The writer has recently been a member of the Planning Commission)