Electricity regulators need more autonomy. Court rulings not enough, amend Electricity Act

Independent regulators were established in the hope that decision-making would be depoliticised. The ambiguities of the Electricity Act make this difficult.

26 February 2025
The Print

The independence of regulators has long been a concern in India, with regulatory bodies often facing political and bureaucratic pressures that undermine their autonomy. This issue is particularly evident in the electricity sector, where state electricity regulatory commissions (SERCs) frequently encounter government interference in tariff-setting, power purchase agreements (PPAs), and subsidy allocations. Two recent judgments—one by the Supreme Court in September 2024 and one by the Karnataka High Court in December 2024—have sought to correct this. While the two decisions cover disparate subjects—one is concerned with the approval of PPAs, the other with rules on open access—both raise a familiar concern, that of the state impinging on the functional domain of the regulator. Court rulings help uphold regulatory autonomy, but real change will come only when the Electricity Act is carefully structured to ensure genuine independence for regulators.

Decisions of the Court

In May 2023, the Kerala State Electricity Regulatory Commission (KSERC) did not approve some Power Purchase Agreements (PPAs), as it had found deficiencies in the tendering process. The power to regulate tariffs is one of the many functions assigned to state regulators, and the court argued that KSERC was well within its right to not approve the PPAs. The state government influenced the Commission’s functioning by issuing a policy directive under Section 108 of the Electricity Act. In September last year, a three-judge bench of the Supreme Court, comprising the chief justice, held that electricity regulators are not bound to follow directives issued by the government when they interfere with their own statutory duties.

In the Karnataka case, it was the Union Government that usurped the regulator’s authority. The Green Energy Open Access Rules 2022, enacted by the Union Government, were made under power derived from residual provisions in the Electricity Act. The Karnataka High Court struck down the rules on the grounds that the government lacked the authority to enact them. The high court reasoned that under the scheme of the Act, it was the state electricity regulators who were tasked with the specific legislative power to enact regulations on open access. It observed that the law requires that an independent and impartial body deal with the charges that can be levied in the matter of open access.

Independent regulation of the electricity sector

Independent regulators were established in the hope that decision-making would be depoliticised. To this end, the Union government enacted the Electricity Regulatory Commissions Act in 1998. The Electricity Act of 2003 continued with the same approach. As a consequence, each state now has a regulator that is independent of the state government.

However, there is a gap between formal recognition of independence and regulatory practice. In the electricity sector in India, even the formal balance is tilted in favour of the state. The federal structure of electricity governance also implies that states are differently situated in their commitment to the independent regulator model.

The ambiguities of the Electricity Act further make this difficult. For example, as discussed earlier, Section 108 allows the State Government to issue policy directives to the ERC, but these directives are not necessarily binding and must be related to public interest issues. The Standing Committee (2002), while reviewing the Electricity Bill had acknowledged that the power to issue policy directives lacked a system of checks and balances.

The Committee recommended amending the clause to reduce the discretion of the government in issuing directives to the regulator. The amendments suggested by the Committee were not included in the law and as a consequence, state governments have not hesitated to use the provision to compromise regulatory autonomy. The Shunglu Committee report (2011) documented that some state governments issued directions to the regulator on specific aspects of tariff setting, and have gone so far as to prevent an ERC from issuing a tariff order.

Similarly, the Union Government resorted to using residual powers to make rules on open access, a subject matter entrusted specifically to state regulators. Residual powers under an Act refer to the authority granted to the government to make rules on matters not explicitly detailed in the legislation. However, their use should align with the Act’s objectives and not override legislative intent. Excessive use of this residual power can undermine the legislative intent and disrupt the balance of power between different levels of government. The court acknowledged that the government, in usurping the power to make rules on open access, was substantively amending the design of the Electricity Act itself.

We need to amend the Act

The court decisions need to be appreciated in the larger context of electricity governance in the country where ERCs have failed to consolidate their role on par with the mandate contemplated under the Act. While they have become central to decision-making, state governments continue to enjoy outsized influence in matters of policy and are notorious for repeatedly interfering in regulatory functioning. The court decisions interpreting the letter of the Electricity Act, have for once struck the balance right.

However, real change will happen only when the Electricity Act is amended to eliminate vague provisions and ensure clear, enforceable regulatory principles. A well-structured law will strengthen regulatory independence and accountability, fostering a more stable and efficient electricity sector.

This article is co-authored with Chitrakshi Jain.

Budget 2025 wakes up to Regulation Raj. 3 key points to watch out for

If the idea that regulatory reform is critical has been accepted, the next step lies in arriving at a consensus on what constitutes meaningful regulatory reform.

The Print
1 February 2025

The 2025-26 Budget reflects how regulatory reform is at the heart of economic progress. The journey of policy thinking on regulation reflects a maturation of India’s policy landscape. This evolution marks a step forward toward ensuring that regulatory frameworks serve their intended purpose without imposing undue burdens on businesses and investors. Now that the Economic Survey and Budget Speech have acknowledged its importance, we have to walk the distance on the actual reform. The emphasis on regulatory reform aligns with the broader themes of the Economic Survey released on 31 January. The Survey highlighted that outdated rules and bureaucratic red tape are a major drag on productivity, stifling innovation and discouraging investment, and India’s economic growth will be best served by deregulation.

The Budget has announced the mechanisms that can bring the idea in the Economic Survey to life. The first is a high-level committee for regulatory reforms. The committee will be tasked with the review of all non-financial sector regulations and submit a report within a year. A parallel mechanism under the Financial Stability and Development Council (FSDC) will evaluate the impact of financial sector regulations and subsidiary instructions. Together, these moves signal the first step toward a re-evaluation of India’s regulatory architecture. India responded to the license raj through the 1991 liberalisation reforms. The Budget signals that it is now waking up to the “regulatory raj” that often places excessive compliance burdens on regulated entities and to the unintended consequences of its frameworks.

Regulatory reform becomes mainstream

The notion that policy decisions and executive actions by the government in areas ranging from education to water, oil and gas to manufacturing have disproportionate impacts were well understood by the 1980s. It was also widely understood that the footprint of government needs to become lower in areas where it creates unnecessary friction and rent-seeking avenues. This, in some ways, was the genesis of the liberalisation agenda in 1991.

The 1991 reforms created another institutional structure called the “regulator”. Regulatory agencies have come to dominate various sectors ranging from finance and airports to telecom and electricity. Over time, the evidence of the difficulties of the functioning of these institutions began to mount. Similarly, sectors that did not have a separate regulator but were managed by the parent ministry or department, continued to languish under outdated regulations and poorly thought-out executive actions. However, there wasn’t yet a full-blown consensus on how regulatory actions—by a regulator or a ministry—can impede economic outcomes.

The first large-scale attempt at systematic regulatory reform was made by the Financial Sector Legislative Reforms Commission (FSLRC) in 2013. At the time, even the ideas of reviewing regulatory actions, mandating a cost-benefit analysis before regulations were issued, and placing constraints on regulatory authorities were seen as heretical. The FSLRC’s recommendations sought to introduce a structured approach to regulation, ensuring that oversight did not become an impediment to innovation and economic growth. The idea that one needs regulatory reform has gradually gained mainstream acceptance.

Aspects of regulatory reform

If the idea that regulatory reform is critical has been accepted, the next step lies in arriving at a consensus on what constitutes meaningful regulatory reform. The work over the past ten years offers three solutions.

The first is the structure and composition of the regulator—who the members are, how they are appointed, the powers and responsibilities they wield, their budgets, and the balance between their independence and accountability. A well-designed regulator must be autonomous enough to act without undue political interference, while maintaining accountability to the public and legislative bodies.

The second aspect concerns the checks and balances on regulators’ legislative and executive mandates. Regulatory bodies often function as quasi-legislative authorities, drafting and implementing rules that have a significant impact on economic activity. The legislation must require regulators to conduct rigorous impact assessments before promulgating regulations. Impact assessments require an understanding of the root cause of the problem, and due consideration of whether a regulatory intervention is even desired. Further, stakeholders should be given adequate time to respond to proposed regulations, and their feedback should be genuinely considered. On the executive side, actions such as licensing and inspections must adhere to due process, ensuring that regulatory authorities do not act arbitrarily or disproportionately.

The third aspect relates to the separation of executive and adjudicatory functions within regulatory bodies. A regulator that simultaneously drafts rules, enforces compliance, and adjudicates disputes risks becoming judge, jury, and executioner—an arrangement that undermines fair play. Proper mechanisms must be established to separate these functions, allowing for independent adjudication and meaningful avenues for appeal. Ensuring such separation enhances trust in regulatory institutions and prevents conflicts of interest.

The current Budget statements have implicitly acknowledged the intellectual and policy foundations laid by scholars, practitioners, and policymakers who advocated for regulatory reform in an era when such ideas were considered radical.

The committees established under the Budget must go beyond merely assessing existing regulations; they should critically evaluate the structural design that shapes regulatory behaviour. For example, what is required is not only a review of SEBI regulations, but a rethinking of the legislative, executive and adjudication processes, that get encoded in the SEBI Act. Without addressing the underlying legal framework, reforms risk tackling symptoms rather than causes.