The narrative of independent regulators
Those following important policy developments recently will notice numerous announcements proposing new “independent” regulators. Beginning with Securities and Exchange Board of India (SEBI) in the early 1990s, and TRAI in the late 90s, a number of independent regulators have been set up. These include the Central and State Electricity Regulatory Commissions (CERC and SERCs respectively), the Competition Commission of India (CCI), the Insurance and Development Regulatory Authority of India (IRDA), the Pension Fund Regulatory and Development Authority (PFRDA), the Airport Economic Regulatory Authority (AERA), the Petroleum and Natural Gas Regulatory Board (PNGRB) and the Tariff Authority for Major Ports (TAMP).
Recently, there have been proposals for a biotechnology regulator, a real estate regulator, a coal regulator, and even a roads regulator. In the financial sector, the report of the Financial Sector Legislative Reforms Commission (FSLRC) recommends an overhaul of the financial sector regulatory architecture by merging some existing regulators, and creating new ones. The most often talked about rationale for the creation of independent regulators is to ensure greater competition in a given sector, and to create a level playing field for different entities competing in that sector. This fairly regulated competitive market, it is argued, will be of greater benefit to consumers than the existing regime.
While this article does not seek to contest this above-mentioned premise of promoting competition, we need to examine whether the laws and processes creating these independent regulators actually create “independent” regulators who also remain accountable to Parliament. Since many of these regulators create appellate tribunals, or provide for appeals to High Courts and the Supreme Court, this article also discusses the implications of this regulatory sprawl on the existing judicial system. Lastly, the rationale for the creation of independent regulators needs to be debated carefully before more and more regulators are established. I argue that the long-term implications for the establishment of such a large number of sectoral regulators are something lawyers, policy experts and administrators need to examine carefully.
Independence and performance
Independence of regulators from the government is desirable to enable them to perform without political interference. This is especially important in India where the state is a major market participant in many economic sectors. However, not all regulators are equally independent, since the laws establishing them do not follow a uniform standard. Additionally, these laws rarely have the right mix of independence and accountability; a lot of these issues arguably stem from poor legislative design.
To be truly independent from the government, not only must the regulator be an independent statutory authority, it must also be financially and administratively independent from the government. The executive cannot be allowed to either interfere, or arm-twist the regulator to do its bidding. More importantly, since the onus of meeting the regulator’s objectives lies with the regulator, the government cannot be allowed to have unbridled discretion in how the regulator hires and manages personnel, and uses its finances.
For example, in 1999, TRAI, after holding extensive consultations issued its first Tariff Order (TO), a landmark for infrastructure regulatory agencies in India as it attempted to set tariffs to reflect costs more closely. After an uproar in Parliament, and opposition from other quarters, the Department of Telecommunications sent TRAI a 3-line note directing it to put its order on new phone rates on hold. TRAI refused. In response,
“[T]he government issued two gazetted notifications … The first related to salaries, allowances and conditions of service of TRAI officials. Here, instead of setting rules for the chairman of TRAI, it made different rules depending on if he were a retired judge of the Supreme Court, a retired chief justice of a high court or if he were a serving judge. It also cut down on the allowances for foreign travel [of TRAI], ostensibly in the wake of a recent Comptroller and Auditor General report.”
(Sourced from here)
Laws establishing regulators must therefore, be drafted to protect against such instances. At the same time, there must also be mechanisms to ensure regulators remain accountable to Parliament. The Comptroller
and Auditor General (CAG) for example, set up an institute in Jaipur to train officers in environmental audits. As a constitutional authority, the CAG is arguably responsible for auditing the government’s expenditure. While environmental audit may be desirable in itself, it is debatable whether such audits come within the CAG’s existing mandate.
The report of the Financial Sector Legislative Reforms Commission (FSLRC) recommends physical, legal and administrative separation of the regulator from the government, implying that regulators must have independent infrastructure, personnel. With regard to financial independence, the FSRLC recommends independent sourcing of finances from sources such as fees.
With regard to strengthening accountability, it recommends that regulators (a) be given clear, precise regulatory objectives,
(b) explain their regulatory actions to the general public, and regulatory changes be made after prior consultation with the public, and
(c) report to Parliament on how they fared on pursuing their regulatory objectives, and the outcomes achieved.
Independent tribunals or some other appellate mechanisms are usually created to entertain appeals or disputes from orders of regulators. SEBI has SAT, the CCI has COMPAT, TRAI has TDSAT, the CERC and SERCs have the Appellate Tribunal on Electricity (APTEL), IRDAs appellate forum is SAT, appeals from PNGRB go to APTEL, and so on. While tribunals perform an adjudicatory function, and are thus not as prone to interference from the executive as the regulators, their relationship with the executive also needs to be looked into.
One such example is the use of APTEL’s use of its suo moto powers. In November 2011, APTEL passed an order exercising its suo moto powers, directing all SERCs to revise electricity tariffs regularly. Under the Electricity Act, 2003, all SERCs are mandated to revise electricity tariffs regularly on the basis of documentation provided to them by state electricity utilities. This was however not being done by most SERCs, and electricity utilities continued to suffer losses as tariffs remained low compared to the cost of producing and supplying electricity.
Significantly, APTEL exercised this suo moto power on the basis of a letter from the Ministry of Power complaining that most state distribution utilities had failed to file annual tariff revisions in time, and as a result, tariff revision has not taken place for a number of years in many states. It also stated that SERCs have not revised tariffs suo moto, and as a result, state distribution utilities are in poor health. While the final order was not an improper exercise of APTEL’s power, this instance can be construed as one where the central government was attempting to regulate the functioning of SERCs (over which it otherwise has no jurisdiction) by writing to APTEL.
The increasing specialization in the administration of justice through the establishment of sector specific tribunals also has repercussions for the broader system of administration of justice. As most legislations establishing these tribunals provide for appeals to the Supreme Court, such laws usually insist that the chairpersons or members of the tribunal, or both be (a) retired Supreme Court judges, (b) serving Supreme Court judges, (c) High Court chief justices, or (d) judges who have served in High Courts for a particular length of time. This arguably creates a high level of expertise in the dispensation of justice in these tribunals.
However, there is no mechanism by which members serving in such tribunals can be re-inducted (if not past the age of superannuation) into the mainstream judiciary. This arguably creates a situation where technical expertise in specific sectors is not channelized back into the mainstream judiciary. The creation of such a two-way process may become imperative in the long run if the increasing tribunalization of justice persists. The present system of promotion and induction into the judiciary emphasizes experience in practicing law or administering justice in different courts and on varied subjects. If tribunals are becoming an important part of the judicial landscape, it is only logical that experience as members of such tribunals also be given weight while considering appointments to the higher judiciary. This would also create a virtuous cycle where good judges would consider serving on tribunals for a period of time before returning to their service in the higher judiciary.
Rationale for independent regulation
The last, but perhaps the most significant issue remains the rationale for creating independent regulators. While in some cases there is a need for independent regulation, in some other cases the need for an independent regulator is less easily justifiable. The recent road regulator being proposed is one such example. The need for a regulator has been felt within the sector due to the large number of stalled road projects throughout the country. It was felt that the regulator should deal with “tariff setting, toll policy and modifications, compliance of service levels (for commuters), address public concerns.” The government being one of the parties to such contracts cannot be the proper entity to mediate such disputes.
None of these functions i.e. ensuring competition, fair-play, and consumer protection however those are that are usually entrusted to an independent regulator. In other words, the re-negotiation of contracts, regulations regarding toll collection, and other aspects of highway construction are not functions that need to be entrusted to a regulator in the usual course of events. These are not activities, the performance of which enhances fair competition within the sector. The resolution if these issues may make the development of roads more efficient, but these functions are not those assigned to independent regulators. An official from the Planning Commission has stated that, “In case of roads, everything is decided in the contract itself, and be it the toll rates, other tariff. So, what do we need a regulator for?” Some commentators are justifying the need for such a regulator since the executive has failed to resolve these issues in an efficient and impartial manner.
We therefore need to carefully examine at what point the creation of an independent regulator is in effect an abdication of an essential state function. Many such state functions are questions of policy. They require political negotiation and decision-making. In essence they are policy issues, not regulatory ones. The state cannot abdicate such functions and hand them over to an unaccountable, unelected regulator because it has been unable to perform these functions effectively.
While there are no easy answers to these issues, they do need careful deliberation. There is therefore a necessity for ensuring that while attempts to promote competition within the economy are encouraged, the creation of new regulators and their linkages to the rest of the legal system are thought through.