The paradox of Nepal’s famed hydropower potential is not lost on either the common man or the seasoned practitioner. Harnessing the nation’s water resources for energy, both for domestic and export consumption, remains the cornerstone of our nation’s aspirations for economic development and prosperity. How it is that we have succeeded in exploiting a mere two percent of our hydropower potential in more than a hundred years since the first hydropower project was commissioned remains an enigma.

Depending upon who you ask, you are likely to hear one of the following answers: integrated water resource planning is non-existent; political uncertainty has resulted in poor and incomplete policy development and achievement; there is a lack of good governance practices; sector participants and government bodies are burdened by a lack of clarity as to their obligations; there is overwhelming domination by a state-owned monopoly utility that is encouraged to perpetuate its economic dominance, resulting in an uneven playing field for would-be market entrants and high prices for poor customer service. 

The long and winding road

The good news is that Nepal recently took a bold step that will address most, if not all of these problems. On September 4, 2017, the Government of Nepal (GoN) passed the Electricity Regulatory Commission Act (ERC Act), after nearly two decades since the idea was first mooted in the Hydropower Policy 2001.

It will be enforced starting from December 3 of this year. The Act will radically change the delivery of electricity services, if effectively implemented. Although not without its flaws, the former Energy Ministers, Mr Mahendra Shahi and Mr Janardhan Sharma, and the Ministry of Energy deserve credit for their dogged determination to champion the bill at a time when Parliament’s legislative agenda was already crowded by numerous federalisation bills. 

Creating new institutions is not a solution to solving age-old problems, and the establishment of an electricity sector regulator will not be a panacea for the sector’s ills. The advent of this institution was long overdue.

For several years Nepal has had regulators for the banking, telecom, stock exchange, civil aviation and insurance sectors. With increased private sector participation and the formation of Nepal Electricity Authority (NEA) and GoN-owned generation and transmission companies, the creation of an independent regulator is timely.

Globally, countries from Albania to Zambia (with a few notable exceptions) have established electricity sector regulators. Strong regulation produces positive outcomes for consumers and companies.

These include more investment, improved technical efficiency and quality of service, cost efficiency and expanded rural electrification.   

Regulation is the imposition of government-established controls on a public service provider. The bedrock of good regulation is to strike a balance between the interests of three principal stakeholders: service providers, consumers and the government. Service providers work and invest to provide consumer services. Consumers seek access to reasonably safe, affordable and predictable services. The government defines policy objectives to support public service needs. 

The electricity sector regulator will be a referee that uses regulations and directives to create a level playing field for all sector participants. Like a good referee, the regulator should be impartial, ensuring players play by the rules and settling disputes between them. More specifically, Nepal’s ERC will set prices for power purchase agreements and consumer tariffs in a transparent and participatory manner, ensure financial viability of the sector, promote energy efficiency and competition and provide policy advice to the Ministry of Energy. 

Win-win situation

It is natural for existing stakeholders to be suspicious of new institutions established to change the rules of the game (technical, substantive, and procedural). Consequently, establishing a new government body is fraught with perils, for if poorly managed, a new administrative body may simply pile on new problems rather than solve the ones it was created to address.

The Investment Board and the National Reconstruction Authority are recent examples of institutions established with the best of intentions that failed to deliver hoped for results. It is in the interest of all stakeholders to ensure the ERC is successful and all stakeholders must collectively collaborate for its success and sustainability. 

Consumers will benefit from an institution that is built to approve and enforce reliability and service standards, redress grievances, and remedy instances where violations of approved standards are found. NEA will benefit from a tariff regime that will ensure its ability to cover the costs of its services as well as to cast off political pressures to sign Power Purchase Agreements (PPA).

Going forward, the approval of PPAs and PPA prices will be a legal obligation of the ERC, thereby allowing NEA to focus on its core business rather than manage political stakeholders and brokers.

Independent power producers (IPP) will be worried about the creation of yet another approval window, perceived as just another opportunity for rent seeking and coercion. However, the IPP community will also benefit if the regulator is allowed to carry out its legally defined tasks.

The ERC will ensure a level playing field for all sector participants by eliminating the inherent conflicts of interest due to NEA’s role as a purchaser and producer. A transparent and participatory process to determine a tariff will foster competition rather than nepotism.

Additionally, the ERC can ensure investors earn a fair rate of return and establish a sustainable market design that will welcome private sector participation.

Learning from experience 

As Edmund Burke famously said, those who do not learn from history are doomed to repeat it.  The preponderance of evidence in the field of regulation demonstrates that an economic regulator that is not independent, adequately resourced, and free from political interference is doomed to fail.

It is essential for the ERC to have commissioners with strong qualifications, relevant experience, and unassailable integrity. Unfortunately, the Act has fallen short on this point, as it prescribes qualifications that eliminate the possibility of having professionals engaged in the sector.

Young transitional democracies such as ours inherently have weak governance structures. This results in fragile institutions. Rather than institutions driving the individual, the personality of a leader drives the institution. This is further compounded by a penchant for politicians to reward patronage over performance.

A huge part of the Regulator’s success depends on the credibility, calibre and integrity of its commissioners. That is why it is so critical for politicians to desist from their natural tendency to appoint sycophants. Only those persons with integrity and requisite qualification should be appointed.

Not built in a day 

It will take some time to set Nepal’s electricity sector on the right course. And, it should be said that regulators are not cure-alls. Precedence in other jurisdictions clearly demonstrates that it takes five to 10 years before a regulator can be effective in delivering its mandate.

It becomes our collective responsibility to ensure the regulator is effective and successful because we are all beneficiaries of that outcome. If this institution fails, it will be a collective loss and yet another reason why we fail to realise our potential. 

- Joshi is a partner at VRock and Company