Judgement on DISCOMS: High Time Regulators Introspected

The Delhi High Court’s quashing of the AAP government-ordered CAG audit of DISCOMS was constitutional.

• Delhi High Court quashes AAP government’s order on grounds that institutions like DERC are already in place for determining tariffs.
  
• Judgement showcases flaws in the actions of the Delhi government, CAG and DERC but refrains from pulling them up directly.
  
• Rules flouted by the LG, CM and the CAG since the DISCOMS were not provided with an opportunity to voice their concerns against the audit.
  
• Judgement presents an opportunity for the executive to reform regulatory bodies by making them independent and accountable.
  

The Delhi High Court order quashing the AAP government’s decision to order a CAG audit of the Delhi distribution companies (DISCOMs) validates Noble laureate and economist Douglass North’s work on the key role of institutions in economic development.

The court held that the purported failure of one institution (Delhi Electricity Regulatory Commission) could not be set right by asking another institution (CAG) to do the former’s work. Good institutions facilitate economic growth; reforms of dysfunctional institutions should be a priority.

The Regulators’ Proximity to the Executive

India has improved it’s ranking in the World Bank’s ease of doing business surveys, moving up from its last year’s rank of 142 to 130 this year. This improvement in ranking is commendable but not enough to excite investors, global or even local. Predictable, fair and transparent decision-making, particularly by regulatory bodies would go a long way to assuage investors that their investments would not be at risk from arbitrary or capricious state action.

However, honourable exceptions aside, Indian regulators have not been able to keep their relation with the political executive at arm’s length. It’s a vicious circle whereby some of them oblige the executive, with posts in regulatory bodies emerging as post-retirement sinecures for senior bureaucrats.

Neither subservience nor their tendency to pass off their personal whims as steps for growth of the industry serves public interest. As a result, accessibility, cost and quality of goods and services get sacrificed at the altar of political expediency.

The Delhi Govt Didn’t Follow Rules

The high court disallowed the audit decision on procedural aspects and substantive grounds. Procedurally, the provisions of section 20 of the CAG Act had not been followed. On substantive grounds, the high court reasoned that though the CAG could, in theory, audit non-government entities, in this case the law had set up specialised institutions (DERC and the Appellate Tribunal) for the same purpose. No public purpose would be served even if the CAG were to uncover any padding of accounts; the same information could not be used for any purpose. As the court said, “the determination of tariff is the sole domain of DERC... and the report of the CAG of audit of DISCOMs has no place in the Regulatory Regime.”

The judgement, which does not contradict the Supreme Court’s order allowing CAG’s audit of telecom companies exposes, as some commentators have said, serious flaws in the thinking and actions of the Delhi government, DERC and CAG, but refrains from pulling them up directly. The Delhi government and CAG violated the statutory provisions when they went ahead with the audit – the law is clear that the CAG and the government should have agreed on the purposes, terms and conditions of the audit before asking the DISCOMs for their views. But in this case the decision to audit was agreed upon, with the determination of the purpose or terms and conditions being left for later. This meant that the DISCOMs were denied ‘reasonable opportunity’ to make their argument against the decision to go ahead with the audit. Clearly, neither the LG, the CM, nor the CAG followed the provisions of law in letter and spirit.

Lessons From The Judgement

Lest the Delhi government ‘undertake another misguided exercise... after giving reasonable opportunity’, the court said that such an exercise ‘may ultimately not serve any purpose’ since legally, it would not be in public interest. The court’s reasoning, applied across institutions, will go a long way in restoring the balance in the country’s governance arrangements, along with the restrictions that the Constitution has imposed. While circumstances and requirements change, and the Constitution is a living document subject to change, its guiding principles cannot be violated.

The DERC does not seem to have covered itself in glory either. The court makes it clear that under the law, it is the duty of the DERC to fix tariffs based on the actual expenditures etc. In fact, as the judgement says, DISCOMS cannot spend any money “without the approval of the DERC”. The regulator must equip itself to ensure that public interest is upheld through the efficient functioning of the DISCOMS.

DERC is free to, and has in fact, been hiring expert bodies to scrutinise DISCOMS’ balance sheets, annual revenue requirements (ARR), investment proposals, etc. Instead of exercising its impedence, under political pressure, it asked the Delhi government for a CAG audit of DISCOMs, though legally the government has no jurisdiction. By alleging that DISCOMS have been inflating their books, DERC has declared itself incompetent, without realising that they were doing so.

The judgement presents an opportunity for the executive to reform the system of regulatory bodies by making them independent and accountable; towards this, merit-based recruitment seems like a good starting point.

(The writer, a former Principal Secretary, to the Government of Delhi, is Director, South Asian Institute for Strategic Affairs.)