Friday August 19, 2022

Reforming the regulators

June 10, 2019

Regulatory bodies are formed to determine rules and regulations in the context of authority bestowed by legislation either by an elected parliament or an equivalent source of power. Regulatory bodies implement laws made by legislative institutions by making and enforcing regulations. They have quasi-legislative, executive and judicial functions. Economic regulatory bodies such as Ogra and Nepra have to establish rules of the business between a variety of stakeholders – energy producers/generators, transmission/pipeline companies and distribution companies, the government and its agencies and consumers of various categories and sectors. The most important and visible are licensing and tariff-awarding functions.

A regulator's job is not easy. As Professor Malcolm Sparrow, a regulatory scholar, said: "Regulators, under unprecedented pressure, face a range of demands, often contradictory in nature...”

To be fair, our energy regulators (Nepra/Ogra) have performed their functions well and have assisted in inducting investors in the energy sector with a measure of harmony and feeling of justice among the stakeholders. There is always something which has not or could not have been done or could have been done better. There is controversy about awarding excessive concessions and unduly high upfront tariff resulting in a high cost of electricity. Ogra has been accused of being too tight on companies – driving some to insolvency – and of not looking after many unattended sectoral issue. In the following, we will propose and discuss some reform measures which would enable the regulators improve their performance. Some of the measures may be in the control of legislators themselves and some may require action by the government.

Consultation and transparency, as discussed earlier, provide legitimacy and acceptability to the regulatory decisions and determinations. Public hearings are a major instrument of consultations. It is observed that there are opposing trends; in Islamabad, there is a lack of public participation in public hearings and in Karachi, the participation is so heavy that adequate consultation cannot take place due to the overwhelming crowd. A mid-way has to be found to attract better and higher participation of stakeholders and their representatives.

One of the consultation instruments often used and mandated by governments (OECD code) is of Regulatory Advisory Committees (RACs). Advisory committees draw from the nomination of stakeholder bodies like trade and business and consumer associations and professional bodies, distinguished citizens and professionals like lawyers, engineers , economists and accountants etc. Regulatory bodies’ members and chairpersons are ex-officio members. Governments often nominate former members, chairpersons and secretaries. In India also, apart from the OECD countries, there are advisory committees at federal and provincial/state levels. It may be advisable to establish such a system in our regulatory processes (both at Nepra and Ogra). It has to be a purely advisory body meant for consultation and advice on policy issues. It provides a window of contact with stakeholders. RACs do not interfere in individual cases and no executive authority is vested in it. There is always a risk that the system may be used for peddling individual interests.

In the new Electric Power Legislation, the institution of an apellate tribunal has been introduced. ATs are expected to hear applicants not satisfied with the determinations of the regulator. This would avoid unnecessary and long-drawn legal proceedings. This has to be broadened to include the petroleum sector as well. No progress has been made towards establishment of the tribunal. Steps should be taken towards its implementation after introducing the proposed changes.

The Ministry of Energy has been formed by merging the electricity and petroleum ministries – the rationale being that the two subjects are interdependent and interrelated requiring frequent consultations. Under the same argument, there is a case for merging Nepra and Ogra into an integrated body. This is also in keeping with many other countries, although not in South Asia. The counter-argument is that it may disturb the operations of the two bodies and that a merger does not necessarily improve consultations as the merger of the two ministries has indicated. And that the commonality is in tariff functions, but technical functions require a background in different technologies. Nevertheless, some instrument of coordination may have to be developed by the two regulatory bodies for creating effective consultations among themselves. Aloofness, although a distinct characteristic of the bureaucracy, should be avoided if the merger is to be discouraged and prevented. Stakeholders are concerned about this lack of consultation and coordination.

The position of chairperson Nepra has been vacant for more than six months. Suitable candidates could not be found as determined by the selection committee. The new legislation mandates a maximum age limit of 60 years. It has been found that neither the salary nor the emoluments are good enough to attract suitable persons, nor are the age limitations adequate. People in the peak of their careers in their fifties may not be ready to leave their present jobs. Besides the characteristics required in the job are better found in older persons. For the same reason, the upper age limit in the judiciary is 65 years. Amazingly, the Ogra chairperson’s age requirement remains the same as it was at 65 years. It is good to know that the present government has already moved papers to extend the age limit to 65 years.

Similarly, there are issues in the appointment of members also. In Nepra, members should represent one province each; four provinces, four members. As a result, the chief ministers of the provinces practically nominate the members, compromising merit. Under an alternative scheme of things, there may be a domicile requirement under competitive induction. For strange reasons, there is no provincial representation requirement in Ogra and members are recruited under a competitive process. Provincial rights issues are more paramount; gas is owned by provinces. In federations, there is a requirement for representing and looking after provincial interests. In Canada, India and Australia, there is adequate protection and the electricity function is controlled by provinces – including regulation. In India, it is the same but petroleum is administered by the federal government. In Pakistan, the CCI looks after provincial interests. Thus there is a need for reforms, introducing a competitive induction process under domicile condition.

A regulatory body has to be independent, even of the government (even though it is created through a legislative or governmental process), in order to be able to make the right and just determinations which have a bearing on the ability of various stakeholders to undertake their functions. In an economic environment where many government-owned companies may have a significant share and where subsidies are provided by the government, it appears that some role of government has to be there will-nilly. Under the IMF agreement, Nepra will have more powers and independence. This can be a double-edged sword. Accountability must follow and accompany these new powers and independence. A process of self-appraisel of performance and external review may have to be added for both Nepra and Ogra.

It is clear that the New Electricity Legislation-2018 introduced by the previous government did not undergo much thought and consideration. A new legislation dealing with both the regulators and bringing uniformity and dealing with the issues raised in the as well as including other proposals may be prepared and approved by the present legislature.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s EnergyIssues: Success and Challenges’.