The Price of Autonomy: Undermining Regulatory Commissions in India

Historically, electricity supply and tariffs have been a politically contested issue. As electricity distribution is largely within the purview of state-owned distribution companies, it is not surprising that State Governments tend to play a critical role in governing the sector. They often abate political risks by subduing electricity tariffs either through direct consumer subsidies or informally directing the accumulation of ‘regulatory assets’ –? deferral of prudent costs to be levied on electricity consumers.

Despite clear legal provisions and policies, and regulations, State Electricity Regulatory Commissions (SERCs) often fail to effectively govern the sector, even without any explicit motives. Limited autonomy and a lack of transparency in decision-making may be key factors contributing to weak regulatory governance in the power sector.

In a recent judgment by Supreme Court dated 14.10.2024, while disposing of an appeal by the Kerala government concerning the procurement of 865 MW of power by the Kerala State Electricity Board (KSEB), the Supreme Court reaffirmed the autonomy and authority of Electricity Regulatory Commissions (ERCs) in India, ruling that ERCs are not bound by directives from the state or central government issued under Section 108 of the Electricity Act, 2003. The ruling brings attention to the concerns regarding autonomy of ERCs and pervading unbalanced regulatory environment. The honourable Supreme Court has been required to intervene to reaffirm the authority of State Electricity Regulatory Commissions (SERCs) over state governments in matters concerning the determination and regulation of tariffs as well.

Many SERCs have consistently failed to adjust electricity tariffs to reflect increasing costs of procurement and supply of electricity. The cumulative regulatory assets of Discoms in India are estimated to exceed Rs 1 lakh crore. Although regulatory assets defer tariff hikes, they financially strain Discoms, leading to debt accumulation, deterring investments in operations and infrastructure, and degrading credit ratings. The fiscal distress of distribution companies can be attributed to several factors: the regulators' failure to hold distribution companies accountable, and depriving them of essential resources, both of which have a crippling impact on their sustainability and the sector’s growth. ?

Undermining of regulatory autonomy is also evident from instances wherein SERCs are cornered into approving power procurement through post-facto approvals. Recently, Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL) filed a petition with the Maharashtra Electricity Regulatory Commission (MERC) for approval of the competitive bidding process for the procurement of 1,600 MW of thermal power and 5,000 MW of solar power, as well as deviations in the Standard Bidding Documents (SBD) for the long-term procurement of 1,600 MW of thermal power after floating the tender. While MERC admonished MSEDCL [AG1]?for the practice it inadvertently granted approval despite evidence violations. Similarly, the state nodal agency for power procurement in Rajasthan – Rajasthan Urja Vikas and IT Services Ltd. (RVUKS), also invited bids for the procurement of 3,200 MW of thermal power without obtaining regulatory approval for deviations in the SBD. In most such cases, SERCs grant post-facto approval since the cost of denial is significantly high for consumers and detrimental to the sector’s health, often with little or no punitive action.

The failure of SERCs in maintaining a disciplined tariff filing process and ensuring timely tariff revisions has been a consistent concerns of many experts. Discoms across the country are notorious for not adhering to timelines for tariff filings and true-up submissions to their respective SERCs, as well as for regulatory non-compliance, leading to a lack of accountability within the regulatory domain. A notable example is the recent tariff filings by state Discoms in Rajasthan, which revealed consistent non-compliance with 24 directives[AG2]? of the Rajasthan Electricity Regulatory Commission (RERC) over the past four years on issues such as voltage-wise loss and sales computation, parallel operation charges, asset monetisation, and employee training, and others. The regulatory also didn’t practice any proactive measures towards ensuring accountability of distribution companies.

The political economy of electricity in India is complex, with access to an affordable and reliable supply of electricity being a key concern for consumers. Any rise in electricity prices significantly impacts households and businesses, making it a sensitive issue for state governments. As a result, the state has a vested interest in intervening in the sector's governance, which can lead to decisions that distort tariff structures, strain the financial health of distribution companies (Discoms), and result in operational inefficiencies and increased debt. Such interference can also hinder essential reforms, including the integration of renewable energy, reduction of losses, and promotion of competition. It is in this context that autonomy of the SERCs need to be held sacrosanct to navigate social, political, economic and technical tensions in an efficient and effective manner.

SERCs have a crucial responsibility to ensure transparency, stability, and growth in the power sector through prudent governance, making the upholding of their autonomy pivotal. The integrity of regulatory processes needs to be maintained by conducting proceedings transparently and in a participatory manner while holding relevant institutions accountable for any non-compliance. Many SERCs have entirely discontinued physical public court hearings on public matters since transitioning to online hearings during COVID-19, which is detrimental to the overall process. All records of hearings, relevant documents, and information should also be made available in an open and transparent manner to facilitate easy access and processing. Additionally, a transparent process for appointing members and the chairperson can be established, with a preference for individuals who have experience serving in other states, to minimise conflicts of interest and increase independence. The lack of fiscal and administrative independence faced by some ERCs can be addressed by through license fees or other levies, while a dedicated cadre for regulators can enhance expertise.?

The establishment of ERCs has been the cornerstone of the power sector reforms initiated by the Electricity Act of 2003, and their effective functioning directly impacts sectoral governance, growth, and consumer welfare. The accelerated energy transition and decarbonisation pathways contributes to increased sectoral uncertainty. Given the global experience, there shall be significant investment required to power transition. The role of ERCs is becoming increasingly important to navigate transition complexities in optimal and prudent manner, lest costs of inefficiencies shall have a crippling impact on India’s climate action goals and its socio-economic development.

The article is authored by Anshuman Gothwal, Co-founder and Director-Programs at the Centre for Energy, Environment, and People in Jaipur.