Independent Energy Regulation in a Developing Economy : Stakeholder Perspectives and Legal Interpretations

This book is an introduction to the challenges of independent regulation, a new governance institution introduced in developing economies in the wake of liberalization, to perform the role of a surrogate for competitive markets. It examines, in the Indian context, regulatory interpretation of key provisions of energy laws and regulatory statutes, as manifest in the adjudicatory orders of India’s petroleum and electricity regulators. The objective is to assess regulatory interpretations for consistency with the stated objectives of independent regulation. Comparing regulatory interpretation of energy laws with those of the higher judiciary, this study highlights the divergent perspectives of regulators and the higher judiciary on the role of independent regulation in a liberalized economy. In the process, this research attempts to gauge, not only the extent of regulatory expertise and independence in India’s energy space, but crucially, the Indian government's commitment to independence of regulators. The book also offers a glimpse of the operation of checks and balances in a relatively new institution situated outside the scope of the conventional Madisonian framework. Framed against the backdrop of extant regulatory theories, this book is of interest to regulators, policy makers, utility executives, students of law, economics and regulatory studies as well as lawyers interpreting regulators’ remit and role in a liberalized economy. Acknowledgements 6 Contents 7 About the Authors 10 Abbreviations 11 1 Introduction 13 1.1 Part A 13 1.1.1 Why Regulate? 13 1.1.2 The Era of Neoliberalism 15 1.2 Part B 19 1.2.1 Electricity Regulation in India 19 1.2.2 Contracting Power Purchase Through Competitive Bidding 22 1.2.3 Role of India’s Electricity Regulators 25 1.3 Chapter Scheme 26 References 28 2 Theories of Regulation 29 2.1 Public Interest Theory 29 2.1.1 The Imperative of Universal Supply Argument 30 2.1.2 The Political Imperative Argument 31 2.1.3 The Natural Monopoly Argument 32 2.2 Capture/Private Interest Theory of Regulation 32 2.2.1 Stigler’s Interest Group Theory 33 2.2.2 Posner’s Disguised Taxation Theory 33 2.2.3 Bureaucratic Theory of Regulation 33 2.3 Institutional Economics and Transaction Cost Theories 34 2.3.1 Williamson’s Bounded Rationality Theory 35 2.4 Part 3—Theories of Independent Regulation 35 2.4.1 Credible Commitments, Expert Regulators, Rule-Based Regulation and Time-Consistent Contracts 35 References 38 3 Sanctity of Contracts and the Hold-Up Problem 40 3.1 CGPL 45 3.2 Force Majeure 46 3.3 Essar 60 3.4 Analysis 65 3.5 Chronology of Cases Relating to Sanctity of Contracts 69 3.5.1 Adani Power Mundra Limited (APMuL) 69 3.5.2 Coastal Gujarat Power Limited (CGPL) 70 3.5.3 Essar 70 References 70 4 Credible Commitments 71 4.1 Hinduja National Power Corporation Limited 71 4.2 Analysis 76 4.3 Chronology in Hinduja National Power Corporation Limited 78 5 Interpreting/Implying Terms into Contracts 79 5.1 Nabha Power Limited Versus Punjab State Power Corporation Limited 80 5.1.1 Reddendo Singula Singulis 80 5.2 Punjab State Electricity Regulatory Commission (PSERC) 81 5.3 APTEL 82 5.3.1 Issue 1: Denial of Washing Related Costs 83 5.3.2 Issue 2: Consideration of Incorrect GCV of Coal 83 5.3.3 Issue 3: Denial of Road Transportation Cost 84 5.3.4 Issue 4: Non-payment of Capacity Charges 84 5.3.5 Issue 5: Non-payment of Third-Party Analysis Charges, Liaising Charges and Transit and Handling Losses 84 5.4 Supreme Court 85 5.5 Analysis 87 5.6 Chronology—Nabha Power Limited 88 5.7 Implying Terms into a Contract—APMuL Versus GUVNL 88 5.7.1 GUVNL Versus APMuL 88 5.8 Gujarat Electricity Regulatory Commission (GERC) 90 5.9 APTEL 91 5.10 Supreme Court 91 5.11 The Sequel 93 5.12 Analysis 94 5.13 Chronology in GUVNL Versus APMuL 96 5.14 Nabha Power Ltd Versus State of Punjab—Heat Rate Degradation 97 5.15 Punjab State Electricity Regulatory Commission (PSERC) 98 5.16 APTEL 100 5.17 Analysis 101 5.18 Chronology in Nabha Power Limited Heat Rate Dispute 102 References 102 6 Market-Making in Electric Supply 103 6.1 Introduction 103 6.2 The Sisyphean Journey Towards Consumer Choice 105 6.3 Regulatory Missteps 109 6.4 APTEL’s Volte-Face 110 6.5 The Supreme Court Opens up a Labyrinth 111 6.6 The Sequel 113 6.6.1 Prometheus Unbound 113 6.7 Summary: Untangling Retail Competition 115 6.8 Analysis 122 6.9 Chronology of Cases Relating to Mumbai’s Retail Distribution 123 References 123 7 Regulatory Legitimacy and Turf Wars 124 7.1 Indraprastha Gas Versus Petroleum Regulator 125 7.2 Section Analysis 129 7.3 Chronology in PNGRB’s Turf Dispute 131 7.4 ‘Rogue’ Regulators 131 7.5 Section Analysis 135 7.5.1 Expropriation by the Government 136 7.6 Chapter Analysis 137 8 Summary, Findings, Conclusions and Policy Implications 139 8.1 Sanctity of Contracts 142 8.2 Implying Terms into a Contract 144 8.3 Regulator as Market Maker 145 8.4 Turf Wars 146 8.5 ‘Rogue’ Regulator 147 8.6 Conclusions and Policy Implications 148 8.7 India’s Regulatory Experience—Theory and Reality 150 8.8 Public Interest Theory of Regulation 156 8.9 Competition for the Market 157 8.9.1 Competition in the Market 158 References 160