infra regulatory

7/27/2019 Infra Regulatory

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Infrastructure Development and Financing

Study of Regulatory InstitutionsIn the

Infrastructure Sectors

Submitted to

Profs. Jain, Morris and Raghuram

Submitted by

Preeti Gureja

Sumit Jalan

Kunal Maini

Snigdha Singh

Venkatesh B.

Section B

August 24, 2001

Indian Institute of Management, Ahmedabad


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Table of Contents

1. Introduction.1

2. Regulatory Bodies in India.5

3. Power Sector5

Structure..5

Features6

4. CERC...8

Objective..9

Functions.9

Structure.10

Funding...11

Need for Regulation..11

Evaluation of CERC.12

Remedies.13

5. SERC...14

Objective.14

Functions.15

Structure.15

Powers of SERC.....15

Funding. 16

Activities of OERC....16


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Remedies.17

6. Ports Sector19

Structure.19

Necessity of Regulation..20

7. TAMP (Objectives).21

Scope of TAMP jurisdiction......22

Structure and Funding......23

Performance24

Problems with Tariff Mechanism.26

Remedies.26

8. Telecom Sector28

Structure.28

Features..29

Need for a telecom regulator31

9. TRAI33

Objective.33

Structure.33

Functions....33

Funding.......34

Scope of TRAIs jurisdiction35


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Evaluation...36

Recommendations..37

10. Exhibits42


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Introduction

Regulation implies a certain degree of external control. It is a process, prescribed

by laws, which controls or directs some decisions of firms in the public interest. Ideally,

in a perfectly competitive market, the market mechanism would itself ensure that the

interests of the consumer and the commercial interests of the provider of goods or

services are balanced. However, in reality, markets are imperfect. They do not function

ideally due to imperfections in information, scale economies, transaction costs etc. This is

where regulation is needed in order to substitute for that element of perfect competition

and move towards social optima that may be privately unattainable in a free private

market. The purpose of regulation is to prevent profiteering, ensure the provision of a

universal service, prevent self-destructive price competition, and protect customers,

employees, and the environment from harm or damage resulting from the inappropriate

behavior of firms.

Regulation is usually considered to be a virtue and hence desirable; this need not

always be true. In order to analyse and evaluate the structure, functions and performance

of regulatory institutions in India, it is important to first understand what sort of industry

merits regulation, and in what scenario.

Another important aspect in introducing regulation is the sequencing of regulation

in an industry. The experience of regulation in the Indian infrastructure sector has been

different from most other countries in terms of its sequencing and planning. Infrastructure

services were predominately provided through most of the 20th century in the public

sector, based on the belief that such industries enjoy natural monopolies and hence must

be under government control for public interest. There was also the implicit belief that

accountability of public utilities to Government and through Government to the

legislature was adequate to ensure transparency and efficiency. The continued provision

of infrastructure services by government monopolies, however, led to operational

inefficiencies and poor quality of services, lack of transparency and accountability,

inadequate investment and neglect of consumer interests.


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In the 90s, the need to attract additional investment in infrastructure from the

private sector, and to build quality infrastructure to remain globally competitive, and

access capital across national frontiers, compelled governments to resort increasingly to

the commercialization and privatization of infrastructure services. India was no

exception. In addition, the state of infrastructure in India, even after 40 years of

independence was very underdeveloped. Roads and Ports had severe capacity constraints,

and suffered from serious inadequacies in terms of productivity and quality; the tele-

density was around 1.9 per 100 as against a global average of 14. There was a severe

shortage of power in most parts of India. Governments realized that commercialization

and privatization of infrastructure were necessary to make them viable, to make the

delivery of projects and services more efficient, and to improve the quality of services.

The Telecom sector was opened up in 1991 with private investment being permitted in

the manufacture of telephonic equipment. Value -added services were thrown open for

private investment in 1992, and in 1994 the National Telecom Policy reiterated

Governments commitment to pursue these reforms vigorously. And now the entire

sector, including long distance telephony, which was to be the monopoly of the public

sector service provider until 2004, is open for private investment. The ports and roads

sectors were thrown open for private investment in 1996 and 1997 respectively.

At the time these sectors were opened up for private investment, however,

governments did not recognize the need to establish an independent regulatory

framework to facilitate the orderly entry of the private sector, and create a level playing

field between the new entrants and the dominant incumbents. Regulatory reforms were

thus not contemplated as part of the initial reform process. In India, infrastructure

regulation was first established in the state of Orissa through the enactment of Orissa

Electricity Regulatory Commission Act, 1996. The Telecom Regulatory Authority of

India (TRAI) was set up only as recently as 1997 through the Telecom Regulatory

Authority of India Act. The Central Electricity Regulatory Commission was established

thereafter in 1998 through the Electricity Regulatory Commission Act 1998. Thus, in

both the telecom and electricity sectors, the regulators came into being much after the

sectors were opened up for private investment. It was only in the port sector that the


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Tariff Authority for Major Ports (TAMP) was established in 1997 just when the sector

was opened up for private investment.

Clearly, the sequencing of reforms has not been correct in India. The consequence

of opening up infrastructure sectors for private investment without an independent

regulator in place to ensure the smooth entry of new players is a situation where the

licensing conditions were onerous, the incumbent public enterprise was free to create

hurdles for the new entrants and the Government had a vested interest in protecting the

public enterprise. This has resulted in innumerable problems in inter-connectivity and

revenue sharing, thus providing a rationale for the continuance of the regulator, though in

a redefined role.

To generalize, regulation becomes necessary and also potentially beneficial if an

industry has the following characteristics:

?? Incompatibility between public and private interests, i.e. the private equilibrium must

be different from the social optimum. This will come about if the industry possesses

either positive or negative externalities, which are not being adequately compensated

for. This necessitates some form of intervention and control.

??Imperfect markets: If markets are perfect, the self equilibrating mechanism willenforce the socially optimum equilibrium via the free play of market forces.

However, once imperfections are introduced either due to economies of scale, natural

monopolies, imperfect information flows etc, producers will move away from

marginal cost pricing; then a substitute is needed for the missing element of perfect

competition. This calls for regulation in that industry. For instance, in power

distribution, the high set up cost creates economies of scale, which calls for a

regulator to ensure that an imperfect market is not created.

?? Excludability of the service provided - If the industry is to be regulated using tariff,

the service it provides must be excludable so as to ensure compliance by market

players.

?? Revealed preferences - If the chosen attribute for regulation in the industry is tariffs

and rates, then regulation can succeed only if consumers reveal their preferences in


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the market clearly. Otherwise pricing will be difficult and inaccurate, and may lead to

a large amount of surplus being left with the consumer or producer, thus making

regulations via price ceilings or floors etc ineffective.

?? Degree of control - Regulation will succeed only if the regulator can impose his will

and the regulated must heed to it. This will happen if the legislation governing the

formation of the regulator gives it the teeth to regulate, i.e. if it has either judicial or

quasi judicial authorities, punitive powers, and there is no ambiguity in its role and

scope. Secondly, the regulated must not be powerful incumbents having strong

backing of the government or the law of the land, as in that case it will be difficult for

the regulator to control or direct them due to constant opposition by executive and

judiciary, e.g. TRAI and the Delhi High Court. Another prominent example is the

ports sector where the scope of TAMPs jurisdiction and its powers are not very

clearly defined.

?? Scope of regulation: the scope of the regulator can be defined in terms of different

attributes of the industry that it should be regulating, e.g. tariff, licensing, quality of

service, technology and so on. This is essential to avoid conflicts with the regulated

entities at a later stage. However, not all these attributes can be controlled in every

industry by the regulator. For example, technology to be used by the service provider

in telecom cannot be successfully regulated by TRAI while also trying to ensurecustomer welfare and quality of service, as new technologies may lead to greater

efficiency and make the consumer better off.

?? Sequence of reforms: for regulation to be successful in any industry, it must be

introduced either while the industry is being opened up to private investment, e.g. the

port sector, or the structure must be in place before the entry of private players, e.g.

the insurance sector. This is related again to the degree of control element: if the

regulator is not in place initially, at a later stage it becomes difficult for him to control

the behemoth incumbents that are in place in the industry and who would try to block

the entry of new firms or best practices due to vested interests. This is where India

differs fundamentally from the regulatory experience of the UK and other developed

countries: their regulators control private enterprises, ours control public behemoths.


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However, while this holds true on a general basis, there have been some specific

differences in experiences across regulators and across industries.Regulatory Bodies in India

In this section, we have focused on the various features of the regulators in the

key infrastructural areas in India, viz. Power, Telecom and Ports. Key issues such as the

structure of the sector, the objectives, structure, funding and functions of the regulator,

and their performance so far have been studied. Remedies have also been suggested in

order to counter their failure to meet their regulatory objectives.

Power Sector

1.1 Structure of the Power I ndustry

The power industry consists of three sectors generation, transmission, and

distribution. Until now, the power utility sector has been dominated by the State. Barring

5 private sector licensees catering to the cities of Mumbai, Ahmedabad, Surat and

Calcutta, and one state of Orissa where distribution of power has been privatized,

generation and distribution throughout the country is controlled by State owned bodies.

1.1.1 Electricity Generation

In India power is generated mainly by state owned bodies, including central

utilities such as NTPC, NHPC, Nuclear Power Corporation, etc., as well as State

Electricity Boards which are state-owned utilities. A few states, such as Orissa, Haryana,

Andhra Pradesh, Uttar Pradesh and Karnataka, have corporatised their SEBs. Private

licensees such as BSES and CESC are also players in this field. They are governed by the

Electricity (Supply) Act, 1948 and the Indian Electricity Act, 1910 . Apart from these,Independent Power Projects (IPPs) are also players in this field.

The contribution of the various sectors to power generation in India is as follows:

Sector %

Central Sector 34.0%


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State Sector 58.1%

Private Sector 6.5%

Licensees 3.9%

IPPs 2.6%

Others 1.4%

1.1.2 Electricity Transmission

In the Transmission sector, a few states have unbundled transmission from

generation and corporatised the entities to induce professional management and greater

efficiency of operations. These states include Orissa, Andhra Pradesh, Haryana and Uttar

Pradesh.In all other states, transmission is still in the control of SEBs except the 5 cities

mentioned earlier, where the licensees control the transmission of power.

1.1.3 Electricity Distribution

Orissa is the only state where power distribution has been entrusted to the private

sector. Orissa has been divided into 4 zones - Wesco, Nesco, Southco and Cesco. BSES

has a 51% stake in the first 3 and AES has a 51% stake in the last, with the remaining

stake being held by Gridco. In all the other states, distribution is in the control of SEBs

except the 5 cities where licensees control the distribution of power. Exhibit I lists the

main players in the Indian Power sector.

1.2Features of the Power I ndustry

India faces severe power shortages, to the tune of 11% on average and 18%

peaking shortage (Exhibit II). This shortage has resulted from low capital investment in

the sector and inefficient operations by state controlled enterprises. The per capita

consumption of electrical power in India is still far behind that of developed countries;

Indias per capita is at 347 kWh, while that of developed countries is in the region of

more than 10,000 kWh. Unviable tariff structure has lead to precarious balance sheets of

SEBs, leading to huge losses in the revenues and reduction in the future expansion of


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capacity by SEBs. SEBs have become structural impediments, adversely affecting the

very flow of private capital that the power sector requires to meet the needs of the

country. Total installed capacity of power generation stations under different utilities was

99560 MW, on September 30, 2000. Most state electricity boards (SEBs) in India are

beset with problems of high transmission and distribution (T&D) losses, which are in the

region of 20%, which is just double of what is there in the developed countries.

Investment in transmission sector should be equal to that in generation but in India the

ratio is not 1:1, rather 1:3 in favor of generating capacity. In addition, the gap between

demand and supply has been widening over the last five years and is expected to increase

in the short term. Over the next 10 years, the minimum capacity addition needed is

estimated to be over 83,000 MW. At an average cost of US$1 million per MW, the

investment called for is US$83 billion. If the transmission and distribution investment is

taken into account, the total figure rises to US$143 billion. A majority of this amount will

have to be funded by the private sector, both domestic and foreign.

1.2.1 Economic feasibility of privatization

The power sector is one where network economies are very obvious, making the

operation of a free market illogical and prone to failure. Distribution and transmission of

power require large investments in infrastructure, and achieve large network economies.

However, in the case of power generation, it is possible for competing units to coexist

and derive economic gains. Hence, it has been the first priority of the government to

push for private investment in generation of power, and attempt only to unbundle the 3

functions and corporatise them to achieve internal efficiencies.

1.2.2 Deterrents to Investors

Privatizing only generation has a major downside. A problem faced by private

power generators is that the purchasers of power are the SEBs, most of which are in poor

financial health. This leads to demand for financial safeguards such as counter guarantees

and escrow accounts to be built into the contract, and increases the cost of financing the

project. Commercial losses of the State Electricity Boards (SEBs) have reached about Rs.

150 billion annually. This has led to the difficulty of obtaining financing from lenders for


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the private investors, which has obviously led to the slowdown of the implementation of

projects initially proposed. Apart from the direct financial cost, risk of non-payment also

reduces the bargaining power of the government while drawing up the contract, leading

to a socially non-optimal situation. Also, awarding counter-guarantees to investors

increases Indias contingent liabilities and reduces the countrys credit rating.

Entry barriers to the industry are high. Capital cost per mw capacity, varying as

per fuel, averages Rs35-50million. This implies that resource outlay on creation of power

generation capacity will be huge, and can only be met by the state or large industrial

houses. The risk of realizing payments increases the barriers to entry into the industry.

1.2.3 Returns to investors

Earnings of licensees are regulated and defensive irrespective of their efficiency

levels. Licensees are permitted to set tariffs in a manner that they earn a reasonable rate

of return on the capital employed in power related assets. Any surplus profit is either to

be refunded to the consumers or kept as reserve to cushion any future shortfall in the

profitability. Problems in the current system include a compensation system dependent on

average load factor, rather than the load factor at which that particular plant will be

operating, as well as no incentives for efficiency.

1.2.4 Policy Making And Regulatory Bodies

The Ministry of Power headed by the Union Minister of Power is the main policy

making body. The Central Electricity Authority (CEA) is responsible for planning

regulation. This is done by regulating the entry of new bulk generating units and central

clearance to all major projects of SEBs, licensees and generating companies. Setting of

safety standards and overall technical regulation is also done by CEA. Following the

enactment of the Electricity Regulatory Commission Legislation, the Central Electricity

Regulatory Commission (CERC) was set up, with the main objective of regulating the

Central power generation utilities. In addition, State Electricity Regulation Commissions

(SERC) were set up in the individual states in order to aid and advise in matters


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concerning generation, transmission, distribution and supply of electricity in the State to

the Government and to promote efficiency in the State power industries.

Central Electricity Regulatory Commission (CERC)

Objective of CERC

To address the problems faced due to inefficient functioning of the SEBs, and

other issues mentioned above, the government enacted the Electricity Regulatory

Commission Act, 1998. This required the setting up of an independent regulatory

commission in all states for rationalizing the tariff structure and to make the policy on

subsidies transparent; and also a Central Electricity Regulatory Commission to regulate

the tariff of central sector generating companies and the transmission tariff for the inter-

state sale of power.

The CERC promotes efficiency, economy and competition in bulk electricity

supply, regulates the tariff of generating companies, owned or controlled by the

Government of India, any other generating company, which have a composite scheme for

generation and sale of electricity in more than one state and the inter-state transmission of

energy, including the tariff, of transmission utilities.

Functions of CERC

The functions of the CERC, as mentioned in the Electricity Regulatory

Commissions Act, have been enumerated as follows:

?? To regulate the tariff of generating companies owned or controlled by the Central

Government as well as those owned by private investors if they have operations in

more than one state.

?? To regulate the inter-state transmission of energy including tariff of the

transmissionutilities.?? To promote competition, efficiency and economy in the activities of the electricity

industry.

?? To aid and advise the Central Government in the formulation of tariff policy

which shall be


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(i) Fair to the consumers.

(ii) Facilitate mobilization of adequate resources for the power sector.

?? To associate with the environmental regulatory agencies to develop appropriate

policies and procedures for environmental regulation of the power sector.

?? To arbitrate or adjudicate upon disputes involving generating companies or

transmission utilities.

?? To license any person for the construction, maintenance and operation of inter-

state transmission system.

Structure of CERC

The CERC consists of a Chairperson and three other Members, as well as the

Chairman of the CEA as an ex officio member. The Chairperson and the other Members

are appointed by the Central Government on the recommendation of the Selection

Committee. This selection committee is chaired by the Member of the Planning

Commission in charge of the energy sector, and among its members includes the

Secretary-in-charge of the Ministry of the Central Government dealing with the

Department of Legal Affairs, the Secretary-in-charge of the Ministry of the Central

Government dealing with Power and the Chairman of the Public Enterprises Selection

Board. The central government nominates two other members to the committee as well.

It is stated in the act that the Commission is composed so as to include persons

having adequate knowledge and experience in dealing with problems relating to

engineering, law, economics, commerce, finance or management. Another requirement

for being appointed is that the person should not have any financial or other interest that

would be likely to prejudice his functions as a Member. The Chairperson and other

Members can hold office for a term of five years, but are not eligible for reappointment.

Decisions are made by a majority of votes of the Members (including the

Member, ex officio) present and voting, and, in the event of an equality of votes, the

Chairperson or the person presiding has the right to exercise a second or casting vote.


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Funding of CERC

The salaries and allowances payable to the Secretary, officers and other

employees determined by regulations set down by the Central Government. The expenses

of the CERC including all salaries and allowances payable to the Members and the

Chairperson are charged upon the Consolidated Fund of India. The detailed usage of

funds is shown in Exhibit III.

Need for r egulation

We have evaluated the need for a regulator such as the CERC based on its stated

objectives, and whether social optima can be reached through a free market mechanism.

Tariff Regulation

The power sector represents a natural monopoly due to heavy capital investment

required and inherent network economies. If the setting of tariffs were to be left to the

free market mechanism, monopolistic pricing would take place, thus generating a

supernormal profit for the firm and a socially inefficient outcome. A monopolist would

charge tariff based on his average cost, while in the case of perfect competition, pricing is

at marginal cost. Through the intervention of a regulator, it can be ensured that a

supernormal profit to the operator is avoided and an attempt to reach an optimal state is

made.

Licensing of inter-state transmission system

Transmission and distribution involve immense network economies due to the

investment required in building cables and other infrastructure. This implies the operation

of this industry as a natural monopoly. In such a scenario, regulation of the setting up of

transmission utilities becomes essential. If the free market were to operate, the growth

stage of the industry could witness excess investment, leading to economic inefficiencies.

Hence, setting up of a licensing authority is needed.

Environmental regulations and dispute settlement

Other functions of the CERC include association with environmental agencies to

develop environmental norms for the industry. While not being an economically central


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function of the regulator, this is also justified so as to reduce negative externalities such

as pollution due to the power producers. As a dispute settlement body, the CERC is

intended to provide a politically independent forum for settlement of issues that may

arise.

Evaluation of CERC

Though the setting up of the CERC is a step in the positive direction, it does not

provide a comprehensive solution or a suggested framework for the restructuring of the

power sector. So, a comprehensive reform would still need to have a separate bill passed

in parliament and then sent for presidential approval.

With regard to subsidies, the stand is not clear. No framework has been laid in

place to rationalize or reduce subsidies. Recent studies and experiments in the country

have demonstrated the willingness and ability of customers to pay rates, which are

substantially higher than the existing tariffs, if supplied with efficient and reliable power.

The Nursery and the Rural Electrification schemes, launched by the Rajasthan State

Electricity Board (RSEB), have demonstrated that even the agricultural and rural

household segments, which are often considered to have relatively less ability to pay, are

willing to pay considerably higher rates than the existing tariffs.

One of the biggest problems faced by electricity boards at present is theft of

power, leading to excessively high T&D losses. Elimination of these losses would help in

reducing the cost of power, and utilize investments more efficiently. The CERC is silent

about measures to reduce these losses, primarily an efficient system of metering. Ideally,

a system of installation, maintenance, and reading of meters should be laid down as a step

to reducing these losses.

Private generators, when operating on return on capital basis have little incentive

for correct technology choice. Additionally, tariffs are set on the average load factor in

the state, rather than the load factor at which each plant operate on. This leads to

expensive contracts being signed with private generating companies by the government.

There are no regulations in place to correct this in the future.


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Remedies empoweri ng CERC

A constructive relationship between government and the regulator is essential for

the success of regulatory reform. Such a relationship can develop only when governments

empower the regulators so that they can hold their own. However, this is not easy, as the

bureaucracy still retains a large part of the power.

Legislation needs to provide certain essential safeguards to ensure autonomy, for

instance, a transparent selection process, clearly stated qualification and disqualification

criteria, prescribed tenure, freedom to obtain expertise and authority to incur expenditure

independent of government approval, and criteria for removal.

While the legislation for setting up the CERC does specify selection criteria, it has

been seen that most positions are occupied by bureaucrats, generally retired. Members of

the Advisory Committee include people from industry, professionals, and the academia,

but they do not seem to have powers or duties other than offering advice. Additionally,

the regulatory legislation contains provisions that restrict the scope of employment of

regulator once he demits office, and this discourages younger and competent people from

the industry and professions from accepting appointments as regulators. The post of

Chairman, CERC which has been vacant since February 2001 was reportedly offered to a

highly reputed professional in the electricity industry and was turned down.

An important requirement for autonomy is financial independence. CERCs

budget is charged to the Consolidated Fund, but this does not provide for autonomy, as

CERC has to seek governments approval for incurring expenditure on individual

activities. One of the reasons for establishing regulatory authorities outside government

was that they could draw expertise from the market, which governments cannot at civil

service salaries. However, the regulators are not free to hire staff of their choice at

salaries they command. The result is that regulatory authorities are largely manned by

staff drawn on deputation from government or the regulated public utilities. Given their

background and mind set, they lack a commitment to the regulatory cause and suffer

from a conflict of interests.


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Another issue of concern is, how to make the CERC accountable to Parliament. In

Britain, for example, procedure for Parliamentary oversight over regulatory activities has

been established over the years. The parliamentary select committee oversees the

regulatory activities, conducts inquiries involving into the regulated industry, and calls

for witnesses from regulated entities, the regulator, and consumer groups. Although the

committee has no formal powers to issue directives to a regulator or a regulated entity, its

observations are given sufficient importance: the regulator has to prepare a formal

response to their observations. In case the regulator does not agree with the views of the

committee, the reasons for not doing so have to be recorded. In short, the relationship

provides for parliamentary supremacy without undermining regulatory autonomy. In

India, a procedure for parliamentary accountability has yet to be established.

That regulatory decisions can be contested on appeal is another measure to ensure

regulators do not misuse their powers. The CERC provides for appeals against regulatory

decisions to the high courts. Some regulatory decisions have in fact been challenged in

the courts, e.g. the appeal filed by NTPC/PGCIL against the CERC's tariff orders. These

appeals remind the regulators that their decisions cannot be arbitrary.

State Electricity Regulatory Commission (SERC)

In order to study the SERCs, we have taken a case study of the Orissa Electricity

Regulatory Commission (OERC).

Objectives of OERC

The objectives of OERC are as follows:

?? To augment efficiency in the current power generation, transmission and

distribution.

?? To bring about accountability in the existing system.

?? To attract private investment in power sector.

?? To setup an independent regulatory structure.

?? To develop an economically viable power industry.


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Functions of OERC

The functions of OERC are as follows:

?? Aid and advise, in matters concerning generation, transmission, distribution and

supply of electricity in the State to the government;

?? Promote efficiency, economy and safety in the transmission, distribution and use

of electricity in the State

?? Regulate the purchase, distribution, supply and utilization of electricity, the

quality of service, the tariff and charges payable.

?? Promote competitiveness and progressively involve the participation of the

private sector, while ensuring a fair deal for the customers;

?? Collect data and forecast on the demand for and use of electricity and to require

the licensees to collect such data and make such forecasts;

?? Issue licenses for transmission and distribution

?? Regulate the operations of the licensees

?? Fix and regulate tariff

?? Ensure fair deal to customers

Structure of OERC

The OERC commission comprises of 3 members including the chairman who are

supported by a team of 20 officers. These 3 members are typically appointed for 3-5

years and should have cleared the UPSC/Revenue examinations.

Powers of OERC

The following are the powers that have been vested in OERC:

?? Issue/revoke licenses/to approve/modify/reject tariff change proposal.

?? Set technical standards and standards for consumer protection.

?? Arbitrate between operators.

?? Issue enforceable orders.

?? Review its decision wherever necessary.


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Funding of OERC

The Power Finance Corporation (PFC) has decided to provide financial assistance

to states reforming their power sector. Under the scheme, the corporation will provide 80

per cent of the funding requirements of the state governments while the balance would

have to be provided either by the state governments or other sources. States have to

establish and operationalise the SERC for availing the funding facility.

Orissa Electricity Reform Act, 1995 stated that the expenses of OREC on account

of salaries of its members and other work related administrative expenses would be

charged to the Consolidated Funds of the State.

The budgetary provisions for the year 1998-99 in respect of major heads vis--vis

the expenditure made during the year under report are as given in Exhibit IV. The

Commission is not designed to collect any revenue and therefore, the entire resources

were limited to the budgetary grant charged to the Consolidated Fund of the State.

Activities of the OERC

Few Important activities undertaken by OERC ever since its inception are as under:1

1. Issued order on retail electricity tariff for all types of consumers of Orissa

effective from 01.04.97.

2. Conducted proceedings and issued orders giving consent to set up captive power

plants.

3. Conducted proceedings on selected consumer complaints.

4. Approved planning and security standards, power supply planning and security

standards, operating standards and power supply operating standards.

5. Approved overall performance standards for distribution licensees.

6. Issue of a consumer rights statement and standards of service.

7. Issued order on retail electricity tariff effective from 01.12.98.

8. Issued order on bulk electricity tariff effective from 01.12.98.

9. Licenses issued to 4 Zonal Distribution Companies.

1http://www.orierc.org/activities.htm


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Remedies

The OERC is of the opinion that several other activities should have been

conducted in order to enable it to achieve its objectives. The OERC feels that it shouldhave formulated a tariff policy that would reflect marginal cost pricing and the extent of

incentive to the operator and implemented it. This tariff policy would have lesser

categories in order to rationalize it and would be linked to performance and efficiency. It

also feels that it should have enforced demand side management and initiated a program

in order to reduce T&D loss, which is a main problem plaguing the Indian power sector.

The OERC also plans to formulate perspective plans for promotion of generation,

transmission and supply of electricity. These measures would certainly help the OERC a

long way in satisfying its objectives.

OERC must also undertake further activities in order to enforce its role as a regulator in

the power sector. These are as follows:

1. The central government has to take effective steps to set up the wholesale power

market, create an electricity pool and enforce market-like competitive pressures.

2. The initiatives to complete the missing links in the reform chain at the central level

fortunately can be taken without any further legislative measures. These can be

achieved by government-initiated measures and through regulation by central

electricity regulatory commission. The components of this initiative would be as

follows:

1. CERC can also issue rules/regulations for states' transmission lines, whenever

central electricity passes through these lines. CERC regulations can thus create a

national transmission grid.

2. It is well recognized that reforms cannot be meaningful unless competition andprivatization are initiated. The center must, therefore, break up its generating

CPSUs into smaller companies and introduce measures to enable competition

amongst these companies. These could also later be selectively privatized for

generating more resources for further investment and for reducing fiscal deficit

pressures on the central government.


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3. Massive investments are required for creation of an effective national grid since

this would require the setting up of a national load dispatch center and many more

inter-state and inter-regional transmission lines.

4. It also needs to be ensured that breaking up and restructuring of the central

electricity sector does not increase the taxation liability of the sector. On the other

hand, major fiscal concessions need to be given to the broken up generation,

transmission and distribution entities at the central and state level.

5. Between the government of India and CERC we must finalize a time-bound

schedule for finalization of the central reform plan and for implementing it.


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Ports Sector

Structure of the I ndian Port I ndustry

The Indian port industry is a major component of Indias infrastructure due to its

strategic role in imports and exports. During the first 25 years of independence, aggregateport traffic grew from 20 million tons in 1950 to 67 million ton in 1975, with typical

cargo consisting of items such as iron ore, petroleum and crude oil. Cargo volumes were

flat until 1990, reflecting a closed economy where import-substitution policies limited

commercial interchange with the outside world. With the Government policy in the 90s

of import export liberalization, Indian ports are no longer considered stand-alone

entities handling cargo, but are viewed as critical elements in the entire logistical chain of

cargo movement from origin to destination. India today is dependent on its national ports

system to ensure sustainable economic growth through expanding export trade and timely

availability of imports for local industrial inputs. While accounting for almost 95 percent

of the country's foreign trade in terms of volume and 75 percent in terms of value, the

annual tonnage of India's sea born commerce is moderate at present compared to some of

Asia's other economies such as China, Singapore and Japan. The need of the Indian

economy and the projected future increments in annual cargo volumes to be handled by

Indian ports would put the country on par with its regional competitors.

India has 12 major ports, viz. Calcutta, Chennai, Haldia, Kochi, Jawaharlal Nehru

Port Trust, Kandla, Mormugao, Mumbai, New Mangalore, Paradip, Tuticorin, and

Vishakapatnam. There are 150 minor/intermediate ports along India's 6000-kilometer

coastline. In India, the major ports are placed under the union list of the constitution, and

are administered under the Indian Ports (IP) Act, 1908 and the Major Port Trust (MPT)

Act, 1963 by the Indian Government. Under the MPT Act, the major ports are governed

by a board of trustees appointed by the Government of India. The powers of the trustees

are limited and they are bound by directions on policy matters and orders from the

Government of India. Major ports are empowered to receive loans from government,

obtain loans in the open market and charge rates and fees for the services rendered. Port

authorities are required to receive prior Government of India approval for annual budgets

and the scale of rates. Port authorities must submit annual administrative reports, and

annual accounts are subject to audit by the Comptroller and Auditor General (CAG) of


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India. Minor ports are placed in the concurrent list of the constitution and are

administered under the IP Act, 1908. The Act defines the jurisdiction of central and state

governments over ports. Minor ports have generally been less regulated than major ports.

To some extent this has been attributable to the low profile of minor ports in state affairs

and the prevalence of private industrial marine terminals. But, more recently, some states

have taken steps to formalize maritime administration under their jurisdiction; for

example, the Gujarat Maritime Board (GMB) has been formed. Normally, minor port

boards are entrusted with the formulation of water front development policies and plans,

regulating and overseeing the management of state ports and enforcing environmental

protection standards.

Necessity of Regul ation

Till the 90s, there was a strong belief that port infrastructure services could only

be provided by natural monopolies as they alone enjoyed economies of scale.

Consequently, the service providers had the opportunity to set prices without providing

commensurate value for money. There was also the belief in India that only the public

sector could provide port infrastructure services efficiently and that the entry of the

private sector should be restricted, if not altogether prevented. As a result, government

was both the service provider and policy maker in various sectors such as electricity,

telecom, ports, water, etc. In the absence of competition, operational inefficiencies, poor

quality of services, and inefficient allocation of resources were common in the provision

of infrastructure services. Specifically, in the case of ports, Freight Costs, measured as a

percentage of Imports (C.I.F) stood at about 10.3% in 1999, while the world average was

about 5.24%. Many of the Indian Ports were also being operated beyond capacity as

shown in Exhibit V. In addition, the average ship turnaround time at Indian ports was

approximately seven days whereas the comparable figure for Singapore was six to eight

hours. In terms of cargo handling, the number of containers handled per ship per hourranges between seven to fifteen at most Indian ports. The comparable figure for Colombo

is around 25 and that for Singapore is approximately 30.

During the 90s, India's economic growth has been estimated at about 6 and 6.5

percent. It is the objective of the Indian Government to accelerate this growth to 7.5

percent per year by 2000 with further increases to 8.5 percent by 2005. The sustainability


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of such economic growth will require continuing high expansion of export trade. If this

growth occurs, total exports should reach US $ 66 billion by 2000 and US $ 115 billion

by 2005. As the economy expands the volume of annual imports will also increase

significantly. The Confederation of Indian Industries (CII) has estimated that total

foreign trade at domestic ports will reach 450 millions tons early in the next millennium

(Exhibit VI).

These factors, in addition to the inefficiencies have led to an increasing demand

for privatization of the Indian Ports. However, even after the commercialization of

infrastructure services, the market structure in infrastructure services tends to retain a

monopolistic element in most countries. For instance, in UK, at the time of privatization

of electricity industry (1989/90), the market share of National Power and Power Gen, the

power generation companies in UK, was almost 78 percent. Besides, as governments and

their agencies continue to be providers of infrastructure services, and as they themselves

had to be regulated, there was a need for a mechanism outside governments, with

adequate expertise and flexibility to regulate all players, ensure efficiencies and protect

consumer interests. These concerns have promoted the growth of Independent Regulation

and TAMP (The Tariff Authority for Major Ports) was set up to regulate the tariff

structure in the Indian Ports.

Objectives and Guideli nes of TAMP

TAMP was established in 1997 as a distinct body under the umbrella of MoST to

regulate port tariffs independently from the Port Trusts. TAMPs guidelines, adopted in

Chennai is February 1998, state that TAMPs overall objective shall be to move towards

competitive pricing. TAMP has the responsibility for setting the tariffs of the major orts.

It can also set tariffs for private licensors operating at a major port, where TAMPs tariff

rulings will take precedence over charges outlined in a contract between a Port Trust and

a private operator. TAMP is also supposed to promote rationalization of the tariff system,applying uniform principles at ports to develop cost-based prices. An example of

TAMPs jurisdiction is the ruling issued by it on tariffs to be charged by the Nhava Sheva

International Container Terminal, which is being established by P&O Australia at

Jawaharlal Nehru where it allowed the operator to have a tariff ceiling based on container

handling charges currently levied at Jawaharlal Nehru. The structure of TAMP is quite


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different from that seen in other port reform examples. For instance, in Singapore, when

the Port of Singapore Authority was restructured in 1997, the regulatory and commercial

functions were bifurcated and the regulatory functions were vested in a Maritime and

Port Authority (MPA). But the MPA however, had no tariff setting functions. TAMP on

the other hand is only a tariff setting authority and has no other regulatory functions.

Ideally, therefore, the objectives of TAMP must be extended to make it the sole regulator

exercising all regulatory functions including tariff setting if necessary in the port sector.

However, the Cornell Group, in its final report to the MoST, reported that while TAMP

must strengthen its role as a tariff regulator, it must not be involved in the privatization

process of formulation of bidding documents, conducting the tender process and

negotiation of terms with successful bidder.

Scope of TAMP s ju ri sdiction

Firstly, TAMPs role is restricted to tariff setting and not to the other port

activities including the privatization process. TAMP has been established under the MPT

Act, and therefore its purview on tariff issues is limited to the major ports covered by the

Act. The government recently made Ennore port a major port under the provisions of the

Indian Ports Act. Because it will not be a trust, however, Ennore will not fall under the

MPT Act, nor under TAMPs authority. For this reason, Haldia and Jawaharlal Nehru,

which will become corporatised port trusts, may not come under TAMPs jurisdiction. A

research team set up by the Asia Development Bank therefore felt that the Indian Ports

Act of 1908 should be amended to extend TAMP jurisdiction over major ports to which

MPT Act will be inapplicable after corporatisation2. However, according to the study, the

privatization process, including the formulation of bidding documents, conducting tender

process, negotiation of terms with successful bidder should be conducted by an agency

other than TAMP. It also suggested that, in order to streamline the regulatory framework

for the port sector, regulatory agencies should be set up at the state level and TAMPshould coordinate with them on tariff regulation, conservancy and productivity issues.

Further, unlike TRAI, which has the power to call for information and conduct an enquiry

into the working of any service provider, TAMP (as well as CERC) do not possess this

2 Panel wants corporatised ports brought under TAMP, Jyoti Mukul, The Financial Express, Dec 6, 1999


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authority. It also does not have the authority to levy fines for non-compliance or violation

of its orders. In addition, the Government retains the power to alter the rates approved by

TAMP. The government can supersede TAMP if it (1) is unable to perform or

persistently defaults in the performance of duty, (2) has exceeded or abused its powers, or

(3) has failed to comply with the directions of the government. However, TAMP has to

be given a reasonable opportunity before it can be superseded. It is interesting to note that

such provisions do not exist in the case of legislation governing TRAI and CERC.

Organizational Structure and Funding of TAMP

TAMP is primarily constituted by 3 commissioners, with backgrounds in Ports,

Finance and Economics, who are removed and appointed by the Central Government.

Unlike many other regulatory agencies, court approval is not required to remove the

commissioners from their offices. In addition, the selection procedure of the

chairperson/members of TAMP is not transparent. The criteria for such selection are laid

out and the central government is the sole authority that selects the chairperson/members.

There is no time limit for filling up any existing vacancies in TAMP. The

chairperson/members of TAMP have not been debarred from taking up any employment

after the completion of their tenure at TAMP. Thus, TAMP is still largely under Central

Government control. This would be a hindrance to the smooth functioning of the

regulatory body. We can contrast this with the rigorous selection procedures that are

employed abroad for infrastructure regulators. In Argentina, for example, 5 of the 6

directors of the Commission Nacional de Telecomunicaciones (CNT) are selected by an

independent private recruitment company after screening more than 125 professionals.

The sixth director is proposed by the provinces. As a result, regulatory performance has

improved dramatically. Standards and processes for issuing licenses-which had been

delayed for nearly 3 years-were clearly laid down, and customer concerns were

effectively addressed in that country. In addition, TAMP receives all its funding from theCentral Government through MoST. It has no powers to levy fees on major ports, private

operators in major ports, and port users in these ports for financing its expenses. This

makes it all the more vulnerable to Central Government. One other view propounds the

case for a regulator to collect revenues from the regulated companies, with provisions for


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scrutiny of the regulators budgets through legislature and the auditors given to ensure

accountability.

Perf ormance of TAMP

In order to evaluate the performance of TAMP as a tariff regulator, we must take

a look at the tariff structure in the port sector before and after 1997, when the regulator

was founded. Ports usually derive revenue from cargo traffic and ship traffic. Revenue

from cargo traffic includes (1) wharfage/ landing fees, cargo-related charges, (2) crane

hire charges, (3) rentals from warehouses, (4) demurrage charges, and (5) charges for

providing rail and other transport for cargo movement and providing water facilities to

visit ships, etc. Revenue from ship traffic deals with (1) port dues, (2) pilotage, (3) berth

hire, (4) survey and measuring fees, and (5) ship repairs in dock areas. Major ports have

had operating surplus for the last few years. These are very high and, therefore, not

sustainable; ports do not provide for depreciation and user costs of the capital. Their

financial costs are minimal due to the absence of borrowed funds and port authorities are

not required to pay any dividends and taxes. Further, substantial amounts of revenue

earned by the ports are also, on account of income from demurrage on cargo, stored for a

long time at the port premises.

Till 1997, the port charges and dues for various services used to be fixed under

Section 52 of the MPT Act, 1963 by the port management with the approval of the

central government. Port dues and pilotage fees are levied under the IP Act. The rates are

prescribed in the scale of rates published by the respective ports. This section has been

deleted under the PLA, 1997, which created TAMP. The tariff structure of ports was

varied and complicated. The scale of rates was ad hoc and, in many cases, not based on

rational principles. The nomenclature for various services differed from port to port.

Periodic revisions of rates were done on an ad hoc basis to balance the operating revenue

and expenditure, and this compounded many difficulties. The absence of updatedrevisions of rates (after incorporating all revisions made periodically) resulted in

difficulties in making an easy reference to the tariff structure for the purpose of working

out dues.


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Post its creation in 1997, TAMP, in its Chennai workshop (1998), deliberated on

the tariff issue and indicated a set of guidelines for tariff regulation in major ports. These

included the following.

1) Port pricing would be based presently on cost-plus basis, with an assured RoR

(rate of return).

2) Notification of uniform rates for different ports would be avoided.

3) Application of a differential tariff structure, using the marginal cost principle, in

the case of captive facilities, mono commodity berths, and bulk cargo facilities.

4) Tariff charge would be used for improving the efficiency of port operations.

5) Tariff proposals would be initiated by the port trusts, or by private operators, bulk

operators, representative bodies of different user groups, directly or through port

trusts, or suo moto by TAMP.

6) Consultation with other ports while determining the tariff would be adopted.

7) There would be speaking orders by TAMP during tariff fixation.

8) Tariff revision would be applicable for every two years.

Since its inception, TAMP has issued tariff-related orders in more than 50 cases. Section

19 of the TBR, 1998 states that TAMP may delegate all or any of its powers in respect of

processing a case or a proposal to the chairman and/or a member or to two members. At

present, TAMP consists of two part-time members. The chairman, under the delegated

power under Section 19(1) of the TBR, 1998, processes various cases and proposals.

Often, approvals of TAMP for some cases or proposals were taken through circulation

(under Section 11, TBR, 1998). From the perusal of a few orders of TAMP, the following

has been found.

1) An RoR of 18% of the cost is being allowed, while adopting the cost-plus

approach for tariff fixation (with 12% as profit, 3% as replacement costs, and 3%

as upgradation and modernization requirements).

2) Within a price cap, variation of charges is allowed in the case of private operators.

This is not permitted in the case of major ports.

3) Tariff notification is for specific services only and not for the entire package of

services. Thus, there are numerous notifications within a same port.


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4) In certain ports, efficiency parameters have been introduced while fixing the

charges.

5) The scale of rates is being revised every two years. On valid grounds, it can be

revised prior to that period.

6) In a lease tariff case, TAMP has fixed the tariff for berth for lease without prior

approval of the lease case by the government (lease case of M/s Oswal Chemicals

and Fertilizers Ltd at the Paradip Port in 1999).

Problems with the cur rent tar if f setting mechani sm

Under the current tariff setting mechanism of TAMP, the following problems

were identified;

1) Under the cost-plus approach, the RoR is allowed on a rate base. It is, however,

not clear as to how the rate base can be established when the accounting practices

are not uniform and when there are no laid-down procedures.

2) Ports provide a variety of services, and the port users avail these services

separately or as a whole depending on their operations. The calculation of the cost

of each service, if it is made under the cost-plus approach, could be a formidable

task and could lead to a variety of rates to be fixed.

3) By covering the cost in providing a return, how does TAMP guard theinefficiencies that creep in, and ensure that consumer interests are protected?

Remedies for TAMP

In order to improve its performance as a tariff setter, the following remedies have been

suggested for implementation by TAMP:

1) Performance based tariff must be applied by TAMP in order to improve the

performance measures of the Indian Ports, such as turnaround time andaverage number of containers handled per ship.

2) TAMP must develop a marginal cost pricing scheme in order to increase

competition in the port sector.

3) TAMP rulings can presently be easily overruled by the Government. The body

must be made as independent of the Central Government as possible.


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4) TAMP also does not have any major powers over the other ports in

comparison to the major ports due to the MPT Act. It has been suggested that

the MPT Act be amended in order to include the newly corporatised ports into

its regime. This is a first step in including all ports in order to make the tariff

structure more uniform across the board.

5) Another question that must be addressed is whether there must be separate

regulatory agencies created across different states in order to regulate the

minor ports in a structure similar to the power sector.


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Telecom Sector

Structur e of the I ndian Telecom Sector

In order to understand the current status of the Telecom policy and regulation in India, we

must look at the key players in the telecom sector in India. The Indian telecom sector,

like most other infrastructure sectors is controlled by the State. The Department of

Telecommunications (DoT), reporting to the Ministry of Communications (MoC) is the

key body for policy issues and regulation, apart from being a basic service provider in

rest of country. Mahanagar Telephone Nigam Ltd (MTNL) is the operator in Mumbai and

Delhi circles. By an act of Parliament, the Telecom Regulatory Authority of India (TRAI)

was formed to be the regulatory agency. The key players in the sector are

o Ministry of Communications - All the operations of this sector come under the

purview of MoC. It is responsible for all major policy changes, planning,

supervision, spectrum control etc.

o Department of Telecommunications - DoT was formed in 1985 when the

Department of Posts and Telecommunications was separated into Department of

Posts and Department of Telecommunications. Till 1986, it was the only telecom

service provider in India. It played a role beyond service provider by acting as a

policy maker, planner, developer as well as an implementation body. In spite of

being profitable, non-corporate entity status ensured that it did not have to pay

taxes. DoT depends on GoI for its expansion plans and funding. Its pivotal role in

the Indian telecom sector has got diluted after formation of TRAI.

o Telecom Regulatory Authority of India - TRAI, was founded to act as an

independent regulatory body supervising telecom development in India. This

became important, as DoT was a regulator as well a player. Founded by an act of

Parliament, the main functions of the body was to finalize toll rates and settledisputes between players. An independent regulator is critical as the sector

witnesses competition.

o Mahanagar Telephone Nigam Ltd (MTNL) - It was founded in 1986 when the

Mumbai and Delhi circles were transferred from DoT. MTNL provides basic


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telecom services in these two cities. Till recently, it enjoyed a monopoly position,

which got diluted after the entry of the private sector in these two cities.

o Videsh Sanchar Nigam Ltd (VSNL) - It enjoys a monopoly position in

international access to India. All incoming/outgoing calls to the country are routed

through VSNL's gateways. This monopoly has been accorded to VSNL till 2004.

o Bharat Sanchar Nigam Ltd.(BSNL): It is the premier telecom service provider of

India, and a PSU under the DoT. BSNL has presence throughout the length and

breadth of India. The main functions of BSNL include planning, engineering,

installation, maintenance, management and operation of voice and non-voice

telecommunications services all over the country.

The other entities in the sector under the control of MoC are the two public sectortelecom equipment manufacturers, namely Indian Telephone Industries Ltd (ITI) and

Hindustan Teleprinters Ltd (HTL). Telecommunications Consultants India Ltd (TCIL),

another PSU was founded in 1978 to undertake consultancy services in telecom.

Features of the Indian Telecom I ndustry

Although the Indian telecom network set up by the GoI is among the top 20

networks in the world in terms of size, the availability of telecom services to citizens,

measured in terms of tele-density or number of direct exchange lines (DEL) per hundredpeople, is amongst the lowest in the world. India operates a network comprising 23,527

exchanges with 19.1 mn. working connections as on Nov 98. Indias tele-density of 2

fixed lines per 100 persons is less than China (4.5) and the world average is about 10.

Tele-density in developed countries is about 45 per 100. Cellular penetration in India is

0.1%, compared to 1.1% in China and 2% in Malaysia.

Private Participation in Telecom Sector

The need for large investments to ensure the rapid growth and higher penetration of

telecom services led the GoI to open up the sector for private participation. While the

telecom equipment sector was opened up in 1991, the value added services sector was

opened to the private sector in July 1992. The value added services include Cellular

Mobile Telephone, Radio Paging, Electronic Mail, Voice Mail and Data Services.


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Licenses for cellular and radio paging services were granted to two operators in each

circle on an exclusive basis. For other services, companies registered in India were

permitted to operate under license on a non-exclusive basis. Subsequently, the basic

services sector was also opened up to private participation. The National Telecom Policy

was announced in May 1994, which indicated the intention of the GoI to allow the private

sector in basic services. At present, most of the operators are unable to meet their license

fee obligations. They are facing a major financial crunch, as they are unable to borrow in

the domestic market or raise resources from foreign investors who are losing interest in

these ventures. The industry has been representing to the GoI for bailout measures. The

high license fee commitment, coupled with low revenue generation, has the potential of

turning most of the players sick. A revenue sharing arrangement, instead of license fee

obligations, has been suggested as a way out. The GoI has taken fresh policy initiatives to

revive the beleaguered telecom sector. A new telecom policy was announced in March

1999, which introduced a revenue sharing arrangement for new entrants in the sector, but

not for the existing players. The policy makers continued to make efforts to find a way

for existing operators to switch from a license fee regime to a revenue sharing regime,

without inviting a spate of lawsuits.

Fresh Policy Initiatives

In July 1999, the Union Cabinet approved a package for the telecom sector, allowing

existing licensees in all telecom services, basic, cellular, paging and other value added

services, to migrate to revenue sharing, under NTP-99, with effect from August 1, 1999.

The salient features of the package are

o Existing operators in basic, cellular, paging and other value added services are

permitted to migrate to revenue sharing regime from August 1, 1999.

o Revenue sharing proportion will be decided by TRAI. Till TRAIs

recommendations, an interim figure of 15% of gross revenue will have to be paid.

o The operators have to pay 35% of their license fee arrears till the cut-off date

(July 31, 1999) as a precondition to migration.

o Reschedulement of payment will be allowed.


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The Indian telecom market is likely to go through tough times over the next 3-5 years

during which operators will find it difficult to grow their business and create value. One

of the key factors is likely to be a limited and price-sensitive customer base, wherein the

small, under penetrated market makes it difficult to cherry-pick. At the same time, the

services need to be priced below a threshold level to be affordable for the mass market.

Secondly, it is a highly competitive operator market. The regulatory regime encourages

and fosters competition as is evidenced by intense activity in certain sectors. The

incumbents, i.e., MTNL, VSNL and BSNL, still continue to dominate the market at

present and may continue to do so in the future. Thirdly, the funding situation will be

tough, since infrastructure rollout and network build-up are unlikely to be met from

internal accruals. And external fund raising is constrained by meltdown of the stock

markets and other priorities of likely investors. Fourthly, Indian telecom regulatory

policy has tended to be inconsistent detracting from the investment climate. It was also

mentioned that several areas still lack clear regulation and forthcoming regulation in

these areas is bound to impact existing players and would have reason to be wary.

In other deregulated markets, incumbents have been able to maintain their hold in wire-

line services, while attackers have succeeded in the new services like wireless and data.

Need for a Telecom Regulator

The need for a regulator like TRAI in the telecom sector can be assessed by analyzing the

stated functions of the body in the context of the nature of the industry:

o Telecom in India was a government monopoly till 1991, when telecom equipment

was privatized, and 1992, when private investments were allowed in basic

services as well. As new firms entered the industry, it was essential to have a

regulator in place to ensure a level playing field for new entrants and for

incumbents like MTNL. This role could be fulfilled only by a body that has

advisory as well as regulatory powers, which could recommend reform measures

to the Government in case of any discrepancy. In the absence of such a regulator,

free entry of private players may lead to situations where licensing conditions


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become onerous, the incumbent public enterprises create hurdles for the new

entrants and the Government has a vested interest in protecting the incumbent

public enterprise. This would result in problems in inter-connectivity and revenue

sharing.

o Most sub sectors of telecom, e.g. telecom equipment, gateway, backbone etc often

end up being approximations of natural monopolies. This leads to a sub-optimal

situation for both the consumer and the society due to pricing being average cost

based instead of marginal cost based as in a perfectly competitive situation. To

avoid this, an external agent is required to fix prices keeping in mind the

willingness and ability to pay of the consumer, as well as the cost structure and

efficiency of the service provider. Hence a regulator is needed to set tariffs,

particularly inert-state tariffs, and interconnect charges.

o In a competitive market with a large number of buyers and sellers, quality of

service is ensured by the free play of market forces as each seller is substitutable

and hence competes on quality (or price, depending on consumer preferences,

after assuring a minimum acceptable quality). However, telecom is strictly not a

competitive market, for example VSNL is still the sole gateway to India for

international calls going in or out. In such a situation an external quality check

becomes essential by an impartial agency that has legislated powers to

recommend action against any service provider who is not adhering to quality

norms. Thus, TRAI monitors the quality of service and inspects the equipment

used in the network and recommends the type of equipment to be used by the

service providers, so as to protect the interest of the consumers of

telecommunication service.


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Telecom Regulatory Author ity of I ndia (TRAI )

Objective of TRAI

TRAI was formed by the TRAI Act in 1997 in order to regulate telecommunication

services.

Structure of TRAI

TRAI is composed of the following office bearers:

a. Chairperson, members have 5-year terms.

b. They cannot accept commercial offices for 2 years after leaving TRAI.

c. Central govt. has power to remove any person

d. Issues to be decided by majority vote.

e. Composition:

Chairperson => judge of SC, or Supreme Justice of a HC.

2-6 members appointed by Central Govt. => specialists in telecommunication,

industry, finance, accountancy, law, management or consumer affairs

If member in govt. service, then must be of rank of Secretary/Additional

Secretary.

Functions of TRAI

The primary functions of TRAI are to:

a. Recommend the need and timing for introduction of new service provider;

b. Recommend the terms and conditions of licence to a service provider;

c. Ensure technical compatibility and effective inter-connection between different

service providers;

d. Regulate arrangement amongst service providers of sharing their revenue derived

from providing telecommunication services;

e. Ensure compliance of terms and conditions of licence;

f. Recommend revocation of licence for non-compliance of terms and conditions of

licence;

g. Lay down and ensure the time period for providing local and long distance circuits of

telecommunication between different service providers;


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h. Facilitate competition and promote efficiency in the operation of telecommunication

services so as to facilitate growth in such services;

i. Protect the interest of the consumers of telecommunication service;

j. Monitor the quality of service and conduct the periodical survey of such provided by

the service providers;

k. Inspect the equipment used in the network and recommend the type of equipment to

be used by the service providers;

l. Maintain register of interconnect agreements and of all such other matters as may be

provided in the regulations;

m. Keep register maintained under clause (l) open for inspection to any member of

public on payment of such fee and compliance of such other requirements as may be

provided in the regulations;

n. Settle disputes between service providers;

o. Render advice to the Central Government in the matters relating to the development

of telecommunication technology and any other matter reliable to telecommunication

industry in general;

p. Levy fees and other charges at such rates and in respect of such services as may be

determined by regulations;

q. Ensure effective compliance of universal service obligations;

Funding of TRAI

The primary sources of funding for TRAI include the following:

a. The Central Government may, after due appropriation made by Parliament by law

in this behalf, make to the Authority grants of such sums of money as are required

to pay salaries and allowances payable to the Chairperson and the members and

the administrative expenses including the salaries, allowances and pension

payable to or in respect of officers and other employees of the Authority.

b. There shall be constituted a Fund to be called the Telecom Regulatory Authority

of India General Fund and there shall be credited thereto all grants, fees and

chargers received by the Authority under this Act; and all sums received by the


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Authority from such other sources as may be decided upon by the Central

Government.

c. The Fund shall be applied for meeting the salaries and allowances payable to the

Chairperson and members and the administrative expenses including the salaries,

allowances and pension payable to or in respect of officers and other employees

of the Authority; and the expenses on objects and for purposes authorized by the

Act.

Scope of TRAI s ju ri sdiction/power

The 18 powers laid down by the Act gave the TRAI four broad roles: a recommendatory

role (on urgent matters of telecom reform), a dispute-settlement role, a tariff-setting role,

and as an advisory body for the government with respect to licensing. Regarding

licensing, the TRAI would advise the government on new service providers, terms and

conditions of the licences to be issued, and on revoking licences.

Each of these four roles has been severely limited by the courts. A clear exposition of this

is found in the case of the MTNL-TRAI dispute over the entry of the former into cellular

services.

Role I -- recommending reforms: In early 1998, TRAI objected to MTNL's entry into

cellular services, citing two factors: first, that private sector bidders for these services had

not been told when bidding that it would enter the fray, and second, that it may cross-

subsidize cellular services costs with basic services revenue. MTNL and DoT attacked

the recommendations in the Delhi High Court, saying that the government did not need

them before it came out with a policy. The high court ruled that while the TRAI does

have a recommendatory role, the government needn't accept its suggestions.

Role II -- settling disputes: On the issue of MTNL's entry into cellular services, DoT

appealed to the Delhi High Court, saying matters between a licensor and licensee were

not of concern to the regulator. The court ruled that the TRAI could only settle disputes

amongst service providers, but had no jurisdiction in disputes between licensor and


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licensee. This eliminated TRAI out of any dispute-settling role in disputes between DoT

and private sector service providers.

Role III -- tariff-setting: The dispute between MTNL-TRAI over the "poor man's

cellphone service" that MTNL started in New Delhi led to a severe attack on the

regulator's scope. Section 11(2) of the TRAI Act says it has the right to notify tariffs. The

TRAI had, therefore, issued a general order saying that any proposed levy should be

reported to it at least five days before implementation, and the TRAI, based on its own

judgment, could intervene during that five-day period or thereafter. When MTNL

introduced the service at rates much lower than private sector rivals, the TRAI objected

on the grounds of cross-subsidization (where revenue from the basic services would fund

losses in the cellular service), and served notice on the MTNL chairman. MTNL took the

case to the High Court and pleaded that TRAI did not have the authority to direct that it

be informed about the proposed tariff in advance, that it could fix a ceiling and a floor

rate but in between service providers should be free to do what they like, and, on a much

broader note, that the TRAI had no authority to adjudicate on revenue-sharing at all. Of

course, this has been followed by high-decibel legal arguments on revenue sharing in

cases of interconnectivity between fixed lines and cellular phones. The TRAI had

designated a certain percentage of revenues for this. MTNL has made itself party to a

case on that subject in the high court, and has got the TRAI package stalled.

Role IV -- advice on licensing: This went out the window when DoT argued that TRAI

did not have any right to decide whether it should license MTNL to enter cellular services

or not. DoT, itself is a big telecom player, refuses to let go of its licensing role, and taking

advantage of the way the law was worded, managed to stop TRAI in its tracks.

Evaluation of TRAI s Perf ormanceTRAI was set up, albeit later than it should have been, with the purpose of regulating the

telecom sector, settling disputes between players and/or customers, setting tariffs for inter

and intra state traffic, and licensing. It was meant to be an all powerful body that would

regulate and control all players in the sector. However, a closer examination reveals that

TRAI has to a large extent failed to meet its objectives. Although it has been remarkably


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successful in some respects, yet in others it has underperformed, thus failing to alleviate

the state of the Indian infrastructure sector. Why did these failures arise?

?? Too much scope: TRAI was given a very wide regulatory role in terms of its scope of

jurisdiction- it was to regulate tariffs, licenses, quality of service, dispute settlement,

technology and so on. What this effectively meant was that it was also expected to

regulate such attributes of the industry in which it actually had no expertise.

Moreover, such a blanket approach also tended to ignore the fact that not all attributes

of every industry can be regulated, or need to be regulated. For example, technology

need not be a concern of the regulator, while price setting at absolute levels as

opposed to a band may not be imposable. These failings were observed in TRAI.

?? No real power: although TRAI was given a lot of powers on paper, it actually had

very limited authority on its regulated entities, and its powers have often been

challenged in courts of law due to the ambiguity of the TRAI act and unclear scope of

its authority. The TRAI-MTNL standoff on the latters foray into cellular gives a

clear exposition of how TRAI really is a paper tiger: a regulator with no teeth.

?? Formed too late: just like the electricity commissions in India, TRAI also suffered due

to incorrect sequencing of reforms, as a result of which it was not in place when a

level playing field was needed the most. Hence it suffered not only because it failedto create the right structure from scratch, but also because this meant it had to regulate

incumbent behemoths that were well entrenched in the industry instead of small and

medium sized players only.

Recommendations

A number of developing countries are demonopolising their telecommunications. Indian

telecommunications have traditionally been a government department. The policy-maker,

the operator and licenser (wherever a national telecom law permits licensing) were allone and the same. In the countries of the west, like in UK, before demonopolisation was

started, telecommunications were separated from the posts, constituted into a state-owned

corporation and then privatized before subjecting it to competition, if necessary by

enacting a special law. In the developed countries, by now in all the 15 countries of the

European Economic Community (EEC), this process has been completed. Each one of


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the countries has created a powerful statutory telecommunications regulator who is

independent of every operator. In the US, the Federal Communication Commission

(FCC) has been the regulator since 1934. In Australia there was a separate telecom

regulator but that too has been extinguished and replaced by the Australian Consumer

and Competition Commission. This short survey establishes that prior to

demonopolisation two conditions are essential; separation of licensing from all operations

and the creation of an independent (of all operators) statutory Telecom Regulatory

Authority (TRA).

The government is considering a proposal to constitute a single regulatory authority for

the telecom, information technology (IT) and broadcasting sectors along the lines of the

Federal Communications Commission in the US. The suggestion is that the new authority

would oversee both the Telecom Regulatory Authority of India (TRAI) as well as the

proposed Broadcasting Authority of India (BAI). Prefacing it with the observation that

the suggestions have been made in the light of the increasing convergence of the telecom,

IT and broadcasting sectors, the proposal has been forwarded by the Prime Minister's

Office.

The proposal also suggested that the TRAI be given powers to decide all technical and

tariff issues of telecommunications as well as broadcasting and also have purview over

spectrum allocation. Regulation of bandwidth and its allocation is currently handled by

the Wireless Planning Commission under the department of telecommunications (DoT).

This proposal has its pros and cons. Wed suggest the following approach to the situation:

o Scope of regulations- any regulator in the telecom sector should not be given

control over all aspects of regulation as that might hamper an objective evaluation

of proposals across sectors. More importantly, not all attributes in the telecom

sector need to be regulated- infact, not all of them can. Let us consider the

following attributes:


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a. Pricing: while a regulator must stipulate and control tariff rates so as to

avoid monopolistic pricing, yet experience of the regulator shows that it

would be more feasible to fix a floor price and a ceiling price and allow

private operators to fix up the rates on a competitive basis within that

range. Private operators have a better understanding of their costing, and

hence can price their services in that range competitively. This will help

avoid stand offs like MTNLs cellular service case.

b. Quality of service: given that the regulators primary purpose is to

promote social welfare and protect consumer interests, quality of service

becomes an important attribute that must be regulated. Specifically,

consumer needs should be assessed on a regular basis via close

cooperation with consumer councils, and service standards must be

maintained and checked via checking equipment, service and so on.

c. Technology: it seems impractical and unnecessary to allow the regulator to

dictate technomoly standards to the operators. This is clearly visible in the

case of the introduction of WiLL by MTNL, which did not use the till then

oft adopted GSM technology. The private operator has a better

understanding of the technology to be used as well as what is better suited

for him in terms of economies with existing applications/ technologies that

he may already have. As long as no minimum service standard is violated,

and as long as costing remains within the acceptable price range,

technology should not be a concern for the regulator.

d. Spectrum management: The regulator should also take a minimal role

focusing on spectrum management, redistribution & interconnection,

letting market forces take care of all other requirements.

o Funding of the regulator: there must be assured and independent funding for all

expenses of the regulator. If this is not so, many decisions of the regulator may

get constrained due to its dependence on the system, thus introducing scope for

abuse and manipulation. One way to bring about this independence is via a levy

on all licensed public telephone operators (PTOs). In the EEC 0.08 per cent of the


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for communications may propose a panel of names and declare

infra regulatory

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