Policy watch: Is Maharashtra's power regulator acting in public interest?

‘Regulatory capture’, as Wikipedia describes it, is “a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that the regulator is charged with regulating. Regulatory capture is a form of government failure”.

There is talk that the Maharashtra Electricity Regulatory Commission (MERC) has also been a ‘victim’ of regulatory capture.  Policy Watch sent MERC a detailed email, almost a fortnight ago, but has yet to receive any response from it.

The only response so far was from V P Raja, former chairman, MERC, informing that he had “demitted office” on September 4. “Hence I have forwarded your mail to the MERC office.”

The MERC itself remained incommunicado.

The issue relates to the manner in which the regulatory authority appears to have given benefits to an emerging, but extremely powerful, solar power lobby, at the cost of conventional power generators, distributors and paying consumers. 

On July 22, the MERC passed an order for enforcement of Renewable Purchase Obligations (RPOs) in Maharashtra. It ordered 93 Obligated Entities (OE) in Maharashtra to demonstrate compliance with RPO targets for four years (from fiscal 2010-11 to 2013-14 cumulatively) by  March 31, 2014 or face requisite fines that could be as high as `13.40/unit (a rule imposed by the Central Electricity Regulatory Authority o CERC).

This is because current regulations require all states in India to ensure that 9% of their power requirements are met through renewable energy sources, of which 0.5% should come from solar.  In case, they did not purchase the required quantity, they had to purchase renewable energy certificates (RECs) from the respective renewable energy producers at prevailing market prices. The requirement was meant to ensure that all state governments support renewable energy.

So far, it looks good. But the pitch gets queered when the MERC stipulates a minimum price for the purchase of solar RECs.  The pricing was meant to be market-discovered.  Putting up a floor price would run contrary to price discovery in the market. After all, as the table alongside shows, the supply of RECs has outstripped demand, leading to a fall in prices. So, is the MERC trying to rig market prices?

Besides, the MERC has proposed that solar producers could sell their power directly to consumers under the open access rules.  That would be fine, if they, like other power distributors, had to meet the social obligation of supplying power at subsidised tariffs to economically weaker sections (EWS) and to farmers. The MERC should have instead questioned the subsidy granted to farmers and EWS which compels the state to charge higher tariffs to other consumers, industry and commercial establishments.  After all, this would have been in keeping with the provisions of the National Tariff Policy.

Instead, by allowing solar producers to sell power to commercial consumers without cross-subsidy charges, the MERC only encourages solar producers to make profit at the cost of other power distributors, who can sell power only after meeting social obligations (It was to prevent such profiteering that the state government had levied a cross-subsidy charge on private power distributors who did not have to supply power at subsidised tariffs.)

Thus, what the MERC has done is grant solar producers a triple benefit. They can earn money by selling the power they produce. They can sell their RECs at a guaranteed minimum price. And they can even sell to commercial users (who currently pay `12-14/kWh) without any cross- subsidy charge.

Policy Watch asked the MERC to explain its logic, but the officials concerned have maintained a studied silence on this issue.  So, will this be a case of regulatory capture?

Correction: Last week’s Policy Watch quoted findings from a report that was commissioned by PanIIT Alumni India, and not IIT, as was reported.

A case of ‘regulatory capture’?
The MERC has granted solar producers a triple benefit. They can earn money by selling the power they produce.

They can sell their renewable energy certificates or REC at a guaranteed minimum price. And they can even sell to commercial users (who currently pay `12-14/kWh) without any cross- subsidy charge.