Policy: A regulatory “Capture of Sorts”

The draft Bhutan Electricity Domestic Policy is a blow to Bhutan Electricity Authority’s autonomy. It goes to show that the BEA is pretty much a state apparatus, almost inseparable from it and under its constant influence.

Consequently, any semblance of insulation – that many thought came along with the enactment of the Electricity Act 2001 and the subsequent formation of the BEA – between the process of electricity tariff determination and the heavy hands of politics appears to be buckling under political pressure.

One of the reasons recently cited by the National Assembly as a justification for amending the Electricity Act 2001 was that it has “too much” of the BEA. Well, the wisdom of such a design lies in the fact that a strong, independent regulatory body that regulates critical public services such as electricity and how it is priced is critical so that the outcome of any decision by the body is free of political bias and conflict of interest.

The formation of the BEA and its regulations are a successful outcome of a critical power sector reform that was realised a decade ago. The government of today and the future should therefore support and strengthen it, not weaken it, so that it achieves its regulatory objectives.

The BEA’s formation – even if it was meant to simply gratify the donors – articulates well with the overall vision that our power sector must seek.

But if the BEA is to follow a policy guideline of the ministry of economic affairs, what is the use of having an autonomous BEA in the first place? The legal entity loses its statutory meaning as granted by the Electricity Act 2001 if such a scenario is to become a reality.

This would be a regressive step in our pursuit of a power sector that allows itself to juggle affordability issues with concerns of sustainability compounded by increased investment requirement to meet demand growth of a growing Bhutan.

According to the Act, the BEA is supposed to be an autonomous body, granting it the independence to regulate the power sector, ensuring every stakeholder in the power sector gets a fair shot while at the same time protecting electricity consumers from monopolistic abuse.

More importantly, the BEA was established to address the issue of conflict of interest with the erstwhile Department of Power, a government department, being the operator, policy maker and regulator and to reconcile conflicting commercial, social and policy objectives.

The BEA is authorised by law to draw up regulations, a regulatory prerogative that allows it to regulate and meet the objectives as laid out in the Electricity Act 2001. The Act sets the basis for BEA’s authority over tariff determination by defining tariff setting as one of its core functions.

The Tariff Determination Regulation 2007 is one such outcome of the important legislation. It is a regulation that sets out the guiding principles for determining electricity tariffs that licensees in the power sector providing various services must abide by. It is a major policy measure that has worked well so far in meeting the regulatory objectives.

Unfortunately, the draft domestic tariff policy is not only doubling things up but makes dangerous encroachment into BEA’s regulatory autonomy.

This is clearly a result of the only weakness in the Electricity Act: the greater ministerial influence that allows the minister to set general policies on tariff determination of licensees.

Given the fact that such impingements could damage the BEA’s ability to play its regulatory role as an effective arbiter of the balance between profit and public interests through regulatory decisions that reflect such aspirations, the Electricity Act 2001 needs to be amended in order to remove such influence.

Perhaps that is the only way to protect the BEA’s autonomy and prevent the potential politiciation of domestic electricity tariff determination – a popular political tool elsewhere that is now finding a resting place in our own backyard.

Even if the draft policy is to be considered based on its own merit, it falls short of meeting the aspirations of the Electricity Act 2001. The draft policy is replete with contradictions.

It touts a gearing of 70:30 for future investments but rigorously asserts a cost-plus model. It emphasises efficient business operation but proffers a subsidy mechanism that runs the risk of over-subsidisation that could not only result in wastage of an invaluable energy resource but also overtly discriminates urban and rural poor.

Further, its suggestion of separate WACCs for each consumer category could still potentially result in cross-subsidisation since the only to go about it is through subjective allocations.

The argument that a consolidated WACC means cross-subsidisation needs to be properly studied since the liability of a company is not necessarily tethered to specific assets. Outstanding debts could generally be refinanced irrespective of any specific investment.

The argument that the “additional” subsidy will achieve the goals of curbing rural-urban migration or reducing fossil fuel consumption or conserving the environment is a moot point in the absence of evidence that support them.

Legally, effecting such a change would go against the BEA’s tariff regulation 2007, which means the only way to realise it is through the due process following a thorough evaluation of all implications of such an amendment.

Winding up, the draft policy may be an ominous sign that an imminent regulatory “capture” is looming large.

A draft policy that solely addresses subsidy and levies to meet the government’s socio-economic objectives would be more tenable. Electricity tariff determination should be the sole prerogative of the BEA and should remain so.

The need of the hour is a strong, truly autonomous BEA that has a tariff determination regulation that is not only fair and just but also free of political influence and conflict of interest.

Contributed by 

Dorji Tshering

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