audit of regulators electricity sector as example introduction how the regulator ‘regulates’ the...

Audit of Regulators

electricity sector as example

Introduction

How the regulator ‘regulates’ the sector

Auditing standard for ‘audit of regulator’

Example of ‘performance audit’ of a regulator

Powers under ‘DPC Act’ for audit of regulator

Introduction - Electricity sector in India- Regulators Service to be delivered or commodity; concurrent

1970s and 1980s – farmers, industry

Early 1990s – industry, affluent urban class

Financial situation of Electricity Boards

No further funding- World Bank- Arms Length

1993 Orissa – of all the States, why Orissa the first?

1998 Central Electricity Regulatory Commission Act

Other states – 2003 Electricity Act

Maharashtra – Dabhol (Enron)- transparency , litigation

How a regulator regulates electricity Sector

GENCO -1 GENCO-2 GENCO-3

TRANSCO

DISCO 1 DISCO 2 DISCO 3 DISCO 4


Generation Companies – (long term 15 to 20 years)1 Competitive bidding Unit cost of power (MW- MWh)

2 Cost of setting of specified capacity of plant (1000 MW)

3 Fuel – Security of supply of fuel, cost of fuel

4 Operating costs – operating capacity ambience temp

5 other inputs – manpower, spares; Maintenance Cost

6 Demand variation 7 Cost of borrowing (rate of return)inflation, FE variation etc 8 Service conditions – penalties

Finally agreed uptake of power – fixed and variable payments


Transmission Company – (medium term)1 Natural monopoly – utility already exists- run commercially

2 Bidders for expansion and operation

3 Capital investment for expansion, replacement of assets

4 Cost of borrowing (return on investment)

5 Cost of operation and maintenance

6 Conditions of supply – transmission security - penalties

7 Factor for performance – transmission losses

8 Efficiency gains as a profit incentive to the firm

Agreed payments to the firm – fixed and variable payments


Distribution Companies – (medium term)1 Bidders for expansion and operation (even existing PSU)

2 Capital investment for expansion, replacement of assets

3 Cost of borrowing (return on investment)

4 Cost of operation and maintenance

5Supply Conditions- distribution security- N minus 1 power connections, complaints penalties

6 Factor for performance – distribution losses

7 Efficiency gains as a profit incentive to the firm

Tariff, billing, collection (remit & get paid) – payment to firms

Subsidy of the Government through regulator

Auditing Standard for Audit of Regulator

• INTOSAI Guidelines on Best Practice for the Audit of Economic Regulation is grouped under

• ISSAI 5200-5299 Guidelines on Privatization• Specific Standard for the purpose is ISSAI 5230 • It identifies 4 areas of regulator to be examined

Business of Regulation Supply of Services

Price of Service Developing Competition

ISSAI 5230 Audit of Regulator

They form the Audit Objectives for Audit of a Regulator

1.To what extent the Regulatory Body is equipped for “Business of Regulation”

2.How efficiently it enabled “Supply of Services”

3.How efficient it was in regulating the “Price of Service”

4.How efficient it was in “Developing Competition”

Case Study

Electricity Sector Regulatory Body

Sultanate of Oman

AO 1 to what extent the body is equipped for the Business of Regulation a. Regulatory framework

The context in which the regulator is

operating

Is it autonomous, semi-independent

b.Objectives, functions and power

Its objectives, functions and

powers within the framework

Power given to the body and the legal basis to

exercise those powers, decision making process,

information systems and internal control systems c.Impartiality and integrity

What rules and procedures have been

established to ensure that regulatory

functions are carried out impartially

Both the consumers and the suppliers have

to perceive that body is impartial

d.Technical competence

What steps taken to ensure that if has sufficiently competent staff,

access to expert advice to enable it to carry out its functions with

adequate knowledge of the regulated suppliers and the markets

within which they operate

What is the mix between external consultancy and in-house expertise

e. Information needs

Whether the regulator is able to obtain

sufficient reliable information about suppliers

to enable it to carry out its functions

efficiently and effectively

How does the regulator ensure that

information that flow is accurate (penalty),

how is the data validated. -would lead to

over /underestimation of costsf. Accountability and consultation

What steps the regulator has taken to assist

public and parliament scrutiny of its

decisions and actions including consultative

arrangements with interested parties having

due regard to the need to protect

commercial confidentiality where this can be

shown to be in the public interest

It is accountable to whom? Government,

Parliament or only public? How its

accountability is ensured> who scrutinizes

its decisions? To whom does it report to?

What is the cost benefit of the regulatory

body itself?

AO 2 How efficiently it enabled supply of services

a. Security of supply

Examine the arrangements which the regulator has put in place to ensure that suppliers provide at least the basic statutory services and that the consumers are compensated if failure of supply occur

Within the safety , environmental issues which are absolute, what is the performance of companies to provide the basic (expected) service and what is compensation in case of shortfall

b. Consumer access

Examine how the regulator has sought to secure consumer access to services and whether suppliers are prevented from discriminating unfairly between different groups of consumers

Any instances of lack of access to supply

c. Supplying vulnerable consumers

Examine how the regulator monitors whether suppliers comply with their statutory duties to provide access to vulnerable groups

Low cost scheme for those who cant afford, subsidy or cross subsidy

d. Service standards

What the regulator has done to establish minimum standards of service for customers to monitor the performance of suppliers and to secure improvement when there is shortfall

Service to the prescribed level and quality BenchmarkingIs it a licence condition

e. Dealing with customer complaints

Whether the regulator have set up a well publicized procedures to enable consumers (clients) complaints to be satisfactorily addressed

System of registering and addressing complaintsWhat about complaints from distribution companies against transmission and generation companiesCustomers/companies against distribution companies. Factoring agents

f. Environmental issues

How the regulator is discharging responsibilities it may have for checking that suppliers are meeting any obligations for the protection of the environment

Prior to construction of the plant Decommissioning , Emission standards , Damage to flora and fauna, Health of employees, Health of public

AO 3 How efficient it was in regulating the “Price of Service”

a. Controlling prices

Whether the regulator has implemented (or suggested) a well designed and transparent pricing regime in line with regulatory objectives

How do we know that amounts collected by distribution company’s is the maximum collectable revenue at the given tariffs and permissible distribution losses

b. Linking price to quality

Whether the regulator has sought to ensure that the price consumers are required to pay is matched by the quality of service

What was the promised flow supply and actual flow, what is the voltage, extent of interruption Mechanism to identify unnecessary costs and how to cut them without effecting service quality

c. Encouraging supplier efficiency

Whether regulator sought to encourage suppliers to reduce their costs and improve their efficiency

What measure were implemented to make companies improve operational efficiencyenergy audit (equipment and configuration)To what extent it resulted reduction in per unit cost

d. Suppliers financing costs

In setting the price controls whether the regulator examined the likely cost of suppliers raising capital (debt and equity) having regard to factors such as sources of finance, taxes on profit and interest in suppliers balance sheets

Does the regulator scrutinize the suppliers investment planIf suppliers are enjoying high returns, this may indicate weak competition

e. Investment

Whether the regulator is monitoring supplier investment, suppliers are fulfilling any investment requirements and undertakings and the investment is having the desired beneficial effects on consumers

What is the purpose for which return on investment and depreciation is allowed?Agreed level of investment and expansion, investment is well targeted and effective any penalties for not fulfilling it

AO 4 How efficient it was in “Developing Competition”

a. Reducing

monopoly and

market domination

Whether the regulator has the objective

of promoting competition in order to

reduce the monopoly and market

domination

Creating conditions

conducive to new entrants

Extent to which market was

liberalized

b. Promoting

consumer choice

What the regulator has done to assess

whether consumers have the scope to

change supplier; consumer has the

relevant information to make such

choice and effective arrangements are

there for consumers who want to

change

How can the consumer be

given choice in choosing an

alternative distributor

c. Combating anti-

competitive

practices

Whether the regulator seeks to identify

and deal promptly with alleged anti-

competitive practices

Mechanism to find it and

deal with it

Any instance and final

outcome

DPC ActSec-13 Sec-14 Sec-15

Audit of all expenditure

Audit of bodies, authorities substantially financed

specific purpose Grants loans to a body or authority

Sec- 16Sec-17

Audit of all receipts payable into consolidated fund

Audit of accounts of stores and stock

Sec-18 Sec-19 Sec-20

Authority to inspect any office, to ask for any records

Audit of Companies and Corporations

Audit of body or authority not entrusted under any law

• Section 20 (1) provides for audit of certain

bodies not covered under Section 19 or any

other law to be entrusted to C&AG by the

President/Governor (in consultation with

C&AG). Such audit is conducted within the

terms and conditions agreed upon between

C&AG and the concerned Government.

Chapter 8 Rule 79 of the regulations explains the expression ‘body’ or ‘authority’. It is a person or body exercising power or command vested in it by virtue of the Constitution or any law made by the legislature. The expression body means an aggregate of persons, whether incorporated, unincorporated, and includes institution or organisation set up as an autonomous organisation under a specific statute or as a society registered under Societies Registration Act 1860 or Indian Trusts Act, 1882 or any other statute, voluntary organisation, or non-government organisation, urban or rural local self Government institution, cooperative society or club etc.

• Section 20(2) provides for C&AG to propose

to President/Governor for audit of any such

entity, if C&AG is of opinion that such audit is

necessary in public interest because of

substantial investments in it or advances

made to that made to that body.

• Section 20(3) says such audit shall not be

entrusted to C&AG except where

President/Governor is satisfied that it is

expedient to do in public interest and after

giving a reasonable opportunity to the entity

to make representations on the proposal to

conduct of audit of that entity.

There can be several entities that do not fall under 14, 15 & 19. Section 20 providing for all other types of entities (structures of governance that could not be anticipated, to come up)

Substantial ‘investment or advances made’ would also mean ‘substantial powers’ given to regulator that have financial impact on the customers/citizens/environment/propriety

Arguments of Government, regulators and Planning Commission

Is there a need for performance Audit of Regulators in India?

Planning Commission Documents Regulators are coming up several sectors Roads, Ports, Airports, Railways, Coal, Posts A Ministry of Regulation under with DOPT A number of studies that indicate capture of

electricity regulators by different stakeholders Who would provide assurance to the Legislature

that regulators are doing a good job or not?