SAFIR Core Course Infrastructure Regulation & Reforms

1. SAFIR Core CourseInfrastructure Regulation & Reforms Administrative Staff College of India Hyderabad, INDIA Overview of Infrastructure Regulation 27 February to 2 March 2012 Usha Ramachandra

2. Session Overview • Regulation – conceptual underpinnings • Some Economic Concepts for Regulators • Regulatory methodologies • Regulatory Processes

3. Conceptual Underpinnings & Rationale

4. What is Regulation? • A diverse set of instruments by which government or organisations to which the government has delegated powers, set requirements on enterprise and citizens • Regulations include laws, formal & informal orders & rules issued by regulatory bodies

5. Infrastructure: Rationale for Economic Regulation • Historically, for reasons of technology, economic development etc. utilities such as electricity, telecom, natural gas, cable T.V., water supply etc. were considered natural monopolies. • A natural monopoly is when technology and capital costs imply that one firm can provide a good or service at less expense than two or more firms. • Economies of Scale • Economies of Scope

6. Infrastructure Reforms • U.K./ South America • Sale of Infrastructure Assets • Many other parts of the world • Private sector participation • Accompanied by Restructuring: • unbundling of potentially competitive segments (introduction of markets) • Monopoly segments such as networks

7. Competition in Infrastructure • Competition in the market vs Competition for the market • How does it work for Infrastructure? • Concession agreements • Licensing • Competitive Bidding • Regulatory oversight of competitive segments for • Abuse of market power • Adherence to performance standards • Consumer grievance redressal

8. Economic Regulation • Interventions to address problems of market failure • Monopoly abuse • Dominant firms • Equity & other non-market objectives like universal service • Interventions to simulate competitive outcomes in non-competitive markets

9. Transition in Regulation • Old Style Regulation: Regulatory functions were vested with the Government • New Style Regulation: Regulatory functions vested with special regulatory agencies • Consultation • Transparency • Fair prices • Appropriate quality of service • Customer protection – grievance redressal mechanisms

10. Regulatory Framework • Separation of following functions • Policy making • Policy Directives • Regulation • Dispute Resolution • Appellate Tribunals • Courts • Competition Commission • Ownership/ Management

11. Objectives and Goals

12. Objectives and Goals of Regulation • Fostering a financially viable and sustainable industry • Attracting capital (private capital in many countries) • Improving the efficiency of utility service • Creating an environment beneficial for the consumers • Expanding the supply network for universal access (electricity, telephone/ communication etc.)

13. Characteristics of Regulation that Inspire Confidence • Independence from utility • Independence from excessive political interference • Clear and comprehensive regulatory law • Complete and standard accounting requirements • Openness of regulatory procedures, records & decision-making to public review • Continuous meaningful interaction between regulatory body, public & those with particular interest in regulatory decision • Adequate resources both for regulation and enforcement • Stability of Regulation Policies

14. Regulatory Practices: Pitfalls to Avoid • Political Regulatory Capture • Commercial regulatory capture • Insufficient Accountability • “Drowning” in consumer complaint resolution • Fragmentation of regulatory functions

15. Checks & Balances in Regulatory Design • Basic question of who regulates the regulator • Appellate Tribunals/ Courts (India) • Competition Commission/ Parliament Select Committees (UK) • Anti-Trust / Courts (US)

16. Regulatory Decisions • Not a policy decision • Not an administrative decision • Has elements of judicial function • Balances stakeholders interests • Time-bound period to make decisions • Can be appealed Court/ Tribunals

17. Regulatory Methodologies

18. Regulation methodologies • Cost based • Rate of Return Regulation • Performance/ Incentive based • Price Caps • Revenue Caps • Benchmarking or Yardstick Regulation • Hybrid Options

19. Regulatory Processes

20. Regulatory Transition Performance based Regulation Government Regulation Rate of Return Regulation Old Style Regulation vs New Style Regulation

21. Stakeholder Participation • Crucial to regulatory reform • Regulatory design mandates stakeholder participation • Procedure laid down in Act and Commission regulations

22. Filing of Proposals for Tariff revision Notification in the News Papers Receipt of objections Public hearings by the Commission Petition for review Commission Decision Petition for Judicial review Notification of Tariffs Regulatory Process – e.g Tariff setting

23. Engaging the Public • Consultation • Soliciting inputs • Public Hearings • Consultation papers • Stakeholder meetings • Consumer Education • Media • NGOs • Local Governments

24. Infrastructure Regulation In India

25. Regulatory Scenario in India • State provision of services synonymous with state ownership • Current approach of corporatisation, private sector participation, PPPs combined with extensive regulation • Transformation towards independent regulation and law of contract

26. Regulatory Scenario in India – (2) • Autonomous sector regulators with very little inter-regulatory coordination – like Administrative Ministries • Integration with Competition Law/ Policy

27. Regulatory Scenario in India – (3) • Electricity • CERC/ SERCs – Regulators • APTEL • Telecom • TRAI (notified Broadcasting) • TDSAT • Ports – Tariff Authority for Major Ports • Airports • AERB • Natural Gas • PNGRB • APTEL (additional Bench) • Posts/ Coal - on the cards

28. Petroleum & Natural Gas • Legislation enacted in 2006 • PNGRB notified in 2008 • PNGRB toll regulate • Refining • Processing • Storage • Transportation • Distribution and • Marketing of petroleum products • DG Hydrocarbons licenses and regulated exploration and optimal exploitation of hydrocarbons • Controversy over city gas distribution networks

29. Airport Economic Regulatory Authority of India • AERA is economic regulator of airports • AAI is operator of airports (other than PPP airports) • DGCA regulates safety and technical aspects

30. Airport Economic Regulatory Authority to regulate • Tariff for aeronautical services taking into consideration • Capex and timely investment • Quality of Service provided • Cost of improving efficiency • Economic and viable operation of major airports • Concession agreement • (differential tariffs for different airports) • Development Fees for major airports • Passenger service fees • Monitor performance standards • Tariffs for five years at a time

31. TRAI • Regulate telecom and internet service operators • Tariff setting and interconnection for cable operators

32. TAMP • Tariff Authority for Major Ports • Has sole function of tariff setting • Investors and users have no recourse to an independent regulator on other matters such as • Dispute resolution • Performance standards • Consumer protection and competition

33. No regulator as yet for: • Roads • NHAI acts as the regulator as well as operator • Railways • Railways act as operator and regulator • Posts • Proposal exists

34. Competition Commission • Set up under the Competition Act 2002 • To maintain competition – transition from MRTP • Investigates • Prohibition of Anti-competitive agreements • Prohibition of Abuse of dominance • Regulation of Combinations • Interface of sector regulators and competition commission yet to evolve

35. Coal Regulator • Is a coal regulator required? • Current Market structure • Restriction on entry • Exit not clearly defined – ensuring optimal mining techniques – mine closure provisions very loose • Dominant firm • Pass through of coal prices in power tariffs

36. Media Regulator • Draft Broadcasting Bill? • Currently TRAI has jurisdiction but do we need another regulator? • Issues involved: • Vertical restrictions • Cross media ownership rules

37. Thank you