Saving Regulations from non-regulators

In recent times, a curious coalition has taken shape—comprising economists, industrial consumers, select independent power producers (IPPs), and now even the All-India Discoms' Association—collectively championing causes ranging from “deregulation” to “cost-reflective tariffs.” While these demands may appear reform-oriented on the surface, closer scrutiny reveals that they threaten to undermine the very regulatory framework designed to safeguard consumer interests and ensure long-term equilibrium in the power sector.

The Trojan Horse of Deregulation

Deregulation, in itself, is not a flawed concept. When thoughtfully designed and effectively supervised, markets can drive efficiency, innovation, and consumer choice. However, in the Indian power sector, the push for deregulation is occurring in a vacuum—disconnected from ground realities. Critical structural weaknesses remain unaddressed: the power market still lacks depth, with less than 8% of electricity traded through exchanges; market concentration persists; legacy PPAs dominate; financial governance within discoms remains fragile; and there is a glaring absence of demand-side participation mechanisms such as Demand Response. Without confronting these foundational gaps, deregulation risks becoming a pathway to disorder rather than reform.

Economists often push deregulation as a one-size-fits-all solution, citing textbook models that ignore ground realities of distribution losses, theft, and governance failure. The problem is not regulation—it’s the quality and enforcement of it.

C&I Consumers: Want Power, Not Responsibility

Large commercial and industrial (C&I) consumers, understandably frustrated with bearing the weight of cross-subsidies, have been strong advocates for open access and market-driven pricing. However, these demands often ignore the foundational social contract of the electricity sector. Lifeline and agricultural consumers depend heavily on subsidies and cross-subsidization to ensure basic access to electricity. The excessive burden placed on the C&I segment is not merely a result of this support structure, but is largely driven by persistent inefficiencies, leakages, and in some cases, corruption within discom operations—costs that are routinely transferred to paying consumers while safeguarding the poor consumers. In this context, a wholesale withdrawal of cross-subsidies from C&I consumers, without credible alternative revenue mechanisms, threatens to destabilize the universal service commitment and undermine equitable access to power.

Moreover, many C&I players, exploit arbitrage between power exchanges, banking arrangements (green washing by banking during solar hours and withdrawal fossils power during non-solar hours), and behind-the-meter generation—while crying foul at regulatory oversight. The irony: they want the freedom of a market without accepting the obligations of one.

IPPs and the Myth of Market Merit

A segment of independent power producers (IPPs), particularly those operating outside the safety net of long-term power purchase agreements (PPAs), increasingly portray the existing regulatory framework as a barrier to “free market play.” Their advocacy is less about driving systemic efficiency and more about carving out profitable niches in real-time markets or securing capacity payments without accountability.

What often goes unmentioned is whether these generators are cost-competitive or if their assets deliver genuine operational efficiency. Instead, they mask their inefficiencies under the banner of market reform—seeking to capitalize on price volatility, exploit regulatory gaps in grid operations, and benefit from policy concessions such as waivers on ISTS charges. These waivers, intended to promote renewable energy, are now being leveraged by some IPPs—including non-renewable hybrid and merchant generators—to arbitrage across markets without corresponding obligations to grid discipline or long-term system adequacy. Such practices distort price signals, undermine planned capacity development, and pose new challenges for maintaining grid reliability.

Discoms: Passing the Buck Through "Cost Reflective" Tariffs

The latest—and perhaps most troubling—development is the aggressive push by Discom associations for so-called “cost-reflective tariffs.” While the term may appear technically sound within a regulated framework, it is increasingly being misused as a blanket justification to pass all incurred costs—regardless of prudence, efficiency, or legitimacy—onto consumers. This narrative dangerously conflates costs, which are inherently historic, auditable, and subject to prudence checks, with tariffs, which are intended to be prospective, normative, and anchored in efficiency benchmarks. Regulatory tariff-setting was never meant to be a cost-plus accounting exercise; it is a tool to drive performance, discipline, and accountability. By promoting indiscriminate cost pass-throughs of in-efficiencies and corruption, this approach risks turning the regulator into a passive accountant of utility claims, instead of a gatekeeper of consumer interest. It effectively opens the door for systemic transfer of inefficiencies—technical losses, commercial leakages, procurement delays, and even corruption—into retail tariffs. The result is a regressive cost burden, disproportionately borne by lifeline and small domestic consumers who lack voice and choice. Far from being reformative, this shift amounts to regulatory abdication. True reform must lie in strengthening normative regulation, enforcing accountability, and rewarding prudent cost management—not in legitimizing inefficiency under the garb of cost reflectiveness.

What Is at Stake?

Regulation exists not merely to fix tariffs, but to:
- Ensure universal access and equity,
- Prevent abuse of monopoly or dominant market positions,
- Facilitate investment in long-term capacity and innovation,
- Maintain grid discipline and long-term reliability,
- Disallow imprudent costs and reward performance.

The current multi-front attack on regulation, under the garb of reform, risks dismantling these foundational safeguards. Without careful regulatory oversight, “market-based” mechanisms may simply turn into rent-seeking platforms.

Are Regulators above Board?

 Despite playing a critical role in safeguarding consumer interests and ensuring orderly sectoral growth, India’s power regulators face several systemic shortcomings that need urgent redressal. Many regulatory commissions continue to struggle with capacity constraints, both in terms of domain expertise and analytical tools, limiting their ability to rigorously assess complex cost structures, market behavior, and technical submissions. Delays in tariff determination, often extending well beyond prescribed timelines, lead to uncertainty and retrospective adjustments that harm both utilities and consumers. In several states, regulators have shown a reluctance to disallow imprudent costs, undermining the principle of efficiency-based regulation. There is also a noticeable gap in enforcement of compliance, with many orders—particularly those related to performance standards, renewable obligations, and open access—remaining unimplemented. Additionally, regulators are often perceived as lacking independence, especially where appointments and tenure are influenced by the executive, raising concerns about institutional autonomy. Addressing these challenges—through professional strengthening, timely decision-making, greater transparency, and reinforced independence—is essential to restore regulatory credibility and align the sector with its long-term sustainability goals.

The Way Forward: Reform *with* Regulation

While deregulation has the potential to enhance efficiency and attract investment, a fully deregulated power sector in India may compromise equity and universal access. Given India’s current stage of development, a balanced approach that blends market principles with social safeguards is more appropriate. Notably, the Electricity Act already embodies this hybrid model, allowing for both regulated tariffs and market-based pricing mechanisms 

We need reforms, yes. But not reforms without any accountability.

- Strengthen regulatory capacity, not diminish it.
- Modernize tariffs, but with performance benchmarking , efficiency filters and gains sharing.
- Empower regulators, not bypass them through political or economic lobbying.
- Encourage markets, but with well-defined guardrails and consumer protections.
- Penalize inefficiencies, not reward them through tariff pass-throughs.

Conclusion

Electricity regulation in India is not perfect, but it is indispensable. It is under siege not because it has failed, but because it stands in the way of vested interests extracting unearned gains. If we are not careful, we may save the sector from regulators only to surrender it to non-regulators—who bear no responsibility for equity, access, or long-term system stability.

It is time to stop and ask: Are we reforming the system or just redistributing the risks to the most vulnerable?