Editorial: Regulatory lessons

The dispute between the Delhi Electricity Regulatory Commission (DERC) and two Anil Ambani-managed companies (BRPL and BYPL) that supply electricity to large sections of the capital, is important for several reasons. At the heart of the matter are contracts worth Rs 1,233 crore that BRPL and BYPL entered into with group company Reliance Energy Limited (REL) in 2004-05. Under the rules, once the regulator approves these costs, he has to fix electricity tariffs in such a manner as to guarantee BRPL and BYPL a 14 per cent return on the investment that they have made. That is, had the regulator approved the entire costs, power tariffs for customers in Delhi would have risen significantly.

 

DERC, however, examined the matter and disallowed Rs 533 crore of expenses (more than 40 per cent of the total), arguing that REL had overcharged BRPL/BYPL by virtue of the fact that it was a group company. From the viewpoint of the expenses allowed by DERC, the mark-up was in fact well over 70 per cent (Rs 533 crore extra on an allowed cost of Rs 700 crore)—which is an extraordinary performance, if true. BRPL/BYPL later submitted papers to show that they had in fact invited competitive bids which, it so happened, were won by group firm REL; DERC, in turn, filed an affidavit in which it said these papers appear ‘not genuine’—in other words, they were forgeries. If that is indeed the case, it becomes a criminal offence. DERC also said that both firms had ample opportunity to show these papers at the time the original DERC order was given, but were not able to do so then.

How the matter finally plays out will be watched with interest by those living in the capital, since it will affect power tariffs in the city, but the matter is more important than that. For starters, there is the issue of whether the companies are in the wrong, or whether the regulator got it completely wrong; given that the allegations made are of a very strong nature, this is an important issue. But more than that, certain regulatory principles will also get settled. Most people now accept that the principle of competitive bidding is essential for projects above a certain size. But what is also true is that requests for bids can and do often get written up in such a way as to favour certain companies — so, one issue that will come up as a result of this dispute is whether related-party transactions should be allowed at all. A second is whether the regulator has the power to disallow some parts of these expenses while benchmarking with other companies — in this case, the DERC used VAT receipts submitted by REL to calculate its costs to procure/produce the equipment required by its group concerns and then said the profit margins for it were excessive in relation to industry margins.

India is not a country that takes naturally to private enterprise replacing state-owned entities. All privatization cases need, therefore, to demonstrate that there has been an improvement in performance, for the public good. That becomes impossible if firms do not show an improvement in performance, submit inflated bills, forge documents or indulge in other shady practices. Without pre-judging the REL case, it is time India’s private sector tsars took note of the nature of the high-stakes game.