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From technocracy to democracy?

The power sector is emerging as the most stubborn infrastructural obstacle to India’s growth and development. The overall story remains one of power shortages and poor service, with cost to both households and industry. Investment shortfalls, poor technical performance, and high levels of theft, it is increasingly agreed, are symptoms of an underlying malady — a governance failure at the heart of the electricity sector.

A governance agenda for electricity requires attention to the relatively new institution of independent regulatory agencies. Regulatory agencies were introduced in Indian electricity through the back door in Orissa and these quickly spread to become the national standard. The rapid spread of regulation as a significant new form of economic governance has been accompanied by remarkably little debate and empirical scrutiny. Regulatory institutions are reportedly proliferating across the economic landscape, from electricity and telecoms to water, ports, airports, health, education and even real estate. Given this trend, a realistic look at how regulators operate in practice, and with what effect, is required.

To some, regulators are saviours who will wrest the sector away from self-dealing politicians. To others, regulators are simply a cover for business as usual, while keeping international investors and donors happy. Based on a recently published detailed study of three electricity regulators — Delhi, Andhra Pradesh and Karnataka — we find, unsurprisingly, that the story lies somewhere in between these extremes.

The bottom line is that regulators have brought about moderate, and, in some cases, significant improvements in performance, primarily by exposing the functioning of utilities to the light of day through a steadily evolving process of scrutiny. This is no small achievement. However, they have fallen short of changing the deeper framework of incentives. To do so would require reshaping regulators from technocratic decision-makers to facilitators of greater democratic accountability. This larger story is supported by three themes that emerge from our study.

First, new regulators are constrained in acting as active stewards of electricity reform. Bold reform decisions require credibility to manage difficult political trade-offs. For example, governments may seek upfront tariff hikes to rationalise historical price distortions in an effort to attract investors as part of a privatisation-oriented reform, attracting resistance from a sceptical public. Some version of this broad story unfolded in all the three States — Delhi, Karnataka and Andhra Pradesh. New regulators do not have the necessary credibility with which to negotiate this political minefield.

Governments can compound credibility problems by undercutting regulators by issuing parallel, often conflicting, directives, as it happened in Karnataka. In all the three States, political control over selection of regulators continues, despite procedural safeguards. Difficulties in attracting competent staff force reliance on employees of the regulated utility itself to staff regulators, or heavy dependence on consultants, which can undermine further capacity building efforts. Only in Andhra Pradesh has the regulator managed to judiciously blend in-house capacity with external support. Early government signals of support through regulator selection, promotion of competent staff, and backing for regulators to other government departments are needed if regulators are not to be crippled at birth. Moreover, the problem of staff capacity needs a systematic solution, through promotion of regulatory agencies as a viable and rewarding long-term career trajectory.

Second, an entrenched timidity and self-censorship has limited regulatory effectiveness. For example, across the three regulators, the core task of scrutinising and approving investment programmes is guided by an arm’s-length scrutiny rather than higher level questioning about the prudence and priority of investment. Regulators justifiably fear being dubbed micro-managers, given the legitimate need for system upgrade to improve efficiency, and in some cases, blatant pressure from the government to limit scrutiny. Yet, since investment is paid for through tariffs, regulatory credibility requires that each paisa of tariff increase is prudently justified. This is particularly so in India, where there is very limited appetite for tariff increases.

For large investments, while regulators insist on projecting a technical façade, in practice they constantly negotiate political pressures. In Andhra Pradesh, for example, instead of disallowing outright a politically favoured but unwise investment scheme, the regulator chose to scale it back to a pilot scheme, thereby forcing a test of prudence while avoiding outright rejection. In Karnataka, the regulator set up an expert committee to evaluate a large transmission project. Ironically, even though the committee only scaled back the rate of investment, the utility challenged it and won a decision from the Appellate Tribunal for Electricity on grounds of excess interference in the utility affairs. This decision typifies the tension inherent in the entire regulatory project — between hands-off guidance and scrutiny required to ensure prudence. If this decision remains a judicial precedent, the regulators’ wings will forever remain clipped.

Regulatory circumspection also extends to the exercise of authority. While each regulator produces lists of directives, these are not closely tracked and utilities are seldom brought to book for non-compliance. The absence of unambiguous procedural guidelines combined with the need to negotiate politics means that the regulatory approach is highly discretionary and varied.

Nonetheless, this circumspect and individualistic approach to regulation has brought about some positive improvements. In Andhra Pradesh, the degree of scrutiny of new power plants has improved; in Karnataka and Andhra Pradesh, data gaps in farmer consumption of electricity have been plugged; and in Delhi, sky-high investment plans were brought down to reasonable levels. However, without a more proactive and less idiosyncratic approach, regulators will remain limited in their effectiveness. Electricity regulators need to develop and defend norms of practice that include a more detailed scrutiny, proactive data collection, and a willingness to ask larger questions about achieving sectoral improvement.

Third, regulators fall well short of serving as a new mechanism of democratic accountability for the sector. While there have been gains in transparency through regulation, regulators are currently far from this ideal. They view participation as perfunctory more than useful and implement procedures only unevenly. For example, none of the three regulators had an organised index of available documents. Public hearings are one-way affairs rather than opportunities for interaction. Most problematic, stakeholders do not have confidence that their opinions carry weight. In one case in Andhra Pradesh, the regulator issued an 80-page order within a day of a hearing, suggesting that public input was minimally incorporated. For their part, competent stakeholder groups are few and not growing in number. Regulators have taken little interest in stimulating public engagement, with the notable exception of Karnataka.

Yet, a “stakeholder approach” to regulation could greatly help solve the twin problems of government interference and criticisms of the regulatory overreach discussed above. Since regulators have to regularly make judgment calls, the ability to both stave off government interference and balance scrutiny against flexibility rests on regulatory credibility. An approach that rests not on technical detachment but on proactive engagement with all stakeholders would greatly help build this credibility.

To do so will first require a shift in regulators’ mindset to embrace a stakeholder approach to regulation. Once this is achieved, regulators must strengthen implementation of the consultative processes that are currently strong only on paper. Finally, aided by governments, they will need to proactively encourage broad stakeholder engagement and capacity building, with particular attention to disadvantaged groups. One method may be to transform themselves into arenas where the most entrenched political problems in the sector — farmer subsidies, distribution of costs and benefits of electricity markets, transitioning to lower cross subsidies while protecting the poor — can be democratically worked out through public deliberations on a regulatory forum.

Electricity regulators have already performed a signal service, less through their intended role as independent implementers of technical knowledge and more through their role as agents of transparency. However, the electricity regulators have now reached a turning point. Continuing along their current path, they risk subsiding into the morass of business as usual, content with effecting marginal improvements, and having their independence truncated at every opportunity. With the application of institutional imagination as described here, regulators could become agents of transformation. Indeed, the ironic solution to de-politicising the electricity sector may well be to re-create regulatory bodies as a parallel and more explicitly political space for the exercise of democracy.

The stakes are greater than electricity alone. The lesson from electricity for other sectors contemplating regulatory agencies is that the achievement of political independence through fiat is a fiction. Effective and democratically accountable regulatory institutions have to be painstakingly constructed if they are to be useful.

(Navroz K. Dubash is Associate Professor, Centre for the Study of Law and Governance, Jawaharlal Nehru University. Narasimha Rao is doctoral student, Stanford University, and formerly visiting lecturer, Indian Institute of Management, B angalore.)

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