Draft National Power Policy And

CERC’s Competition Policy

Prabir Purkayastha

THE Draft National Electricity Policy has been introduced by the UPA government without first reviewing the Electricity Act as was committed in the Common Minimum Programme (CMP). Without this review, the Policy will only perpetuate the problems of the electricity sector and worsen the current scenario of high cost and poor quality power.

The aims and objectives of the Draft Policy, namely access to electricity, availability of power, supply of power at reasonable rates, etc, are unexceptionable; the problems are in the instruments chosen for achieving the above. The Policy expects all this to be met by the single instrument of competition: open access and multiple licensees for distribution, coupled with no license for generation. To complement this, the Central Electricity Regulatory Commission (CERC) has also floated a Consultation Paper, again talking of a competition policy. Market and competition will ensure, in this view, both efficiency and investments, contrary evidence from international scene notwithstanding.

Before we go into the details of these documents, the key question we need to address is not merely the availability of electricity but its availability at a reasonable price. If there is a condition of scarcity, competition does not work to reduce price; instead, competition for a scarce commodity acts to raise its price. The competition then becomes competition amongst consumers and not amongst suppliers. This is the reason why when there was a shortfall, the price of electricity went up in California in the summer of 2000: prices temporarily soared from the standard $30 per megawatt hour to over $1,000! Deregulation and competition of this kind proved very expensive for consumers in California, and someone made a great deal of money at their expense. Consumers were promised that deregulation would get them 20 per cent smaller bills as a result of 'efficiency savings'. In fact bills went up by 379 per cent since 1996 before bringing back strong state intervention and the demise of the market in 2000! There is now mounting evidence of collusion and withholding that created the scarcity itself, making it clear that competition in electricity is neither easy to create nor maintain, even when a surplus capacity may exist in the grid. The experience of competition in other markets such as UK, as we will discuss later, has also not been useful in bringing down the prices of electricity.

MULTIPLE LICENSEES IN DISTRIBUTION

If the key mechanism for bringing down the cost of electricity and improving efficiency is thought to be competition, competition not only in generation but also in distribution, the government needs to answer the following questions:

• How is it that no developed country has attempted multiple licenses for distribution? How can duplicating LT and HT distribution lines lead to either a more efficient or lower cost electricity system?

• How can cherry picking be avoided in such a system? Already, the telecom case shows that duplication of landline systems has resulted in cherry picking by the private licensees; they have supplied virtually no village telephones and have concentrated on the well-off users; the long-term trends are that the private operators would pick off the cream of the consumers leaving only the low-end consumers with BSNL. How can we prevent this from also happening with multiple licensees in the electricity sector?

• If we allow multiple licensees and the inevitable cherry picking, there is no way we can continue with the current telescopic tariff structure of lower rates for lower slabs of users. All segments of consumers will have to pay the same rates as otherwise the licensees will concentrate only on the well-off consumers. How, in that case, will government protect the poorer segments of consumers?

• How will we succeed in providing rural households with electricity? It is clear that under a competitive regime, the rural areas will become unattractive as the capital costs are higher and the returns lower. Even in the US, only the intervention of the state led to rural electrification. Markets and competition will not lead to rural electrification; this is the historical experience of developing countries.

OPEN ACCESS

The Electricity Act has talked of mandatory provision of open access. Open access presumably has to be provided by any entity that has a transmission system. Currently, apart from Power Grid, the entities that have transmission systems are either the SEBs or the Transmission companies spun out of the SEBs. If open access has to be provided, then the transmission system has to be drastically augmented. Without a surplus capacity, open access has no meaning as the transmission system has no ability to cater to any additional wheeling then it is being done currently. The US and European experience also shows a dramatic rise in amounts of electricity transmitted under open access, leading to saturation of the transmission system and even collapse of the grid. Grid collapses have become more frequent, with dramatic collapses in Europe and the US only last year. In India, open access is being talked off quite casually, without any attempt to identify the necessary augmentation of the transmission system that will have to be paid for by the states and the state electricity boards. If the primary reason for the dismantling of the SEBs is poor financial health, how the states can pay for this augmentation is not clear. 

COMPETITION IN GENERATION

The other question is can competition in generation in electricity bring down the cost of electricity to the consumers? The UK example is quoted widely in this context as proof of competition bringing down the price of electricity in UK. The facts here are quite different from that stated. The cost of electricity in UK was high as they had a protected fuel policy based on expensive British coal. Once the decision was taken to go in for imported fuel, and with the discovery of North Sea Gas, the cost of generation dropped significantly. British coal, which once supplied 70 million tonnes per year in 1990 for power generation in UK, has now dropped to 18 million tonnes. If we take the cost to the consumer, yes, the cost to the consumer of electricity has dropped in the UK, but this is entirely due to lower fuel costs. Further, studies (John Bower: Price Impact of Horizontal Mergers, in Modelling Prices in Competitive Electricity Markets, ed., Derek W Bunn, Wiley Finance) have shown that the cost of electricity to the consumer was well above that of the cost of generation, and mean annual pool prices rose by 40 per cent after so-called competition was introduced in UK. The electricity companies made windfall profits from the sharp drop in fuel prices and only a part of the savings was passed on to the consumer, with the electricity companies keeping the lion’s share. In fact, the pool prices were almost twice that of the marginal cost of power in 1998-99 after starting in 1990-91 at about 20 per cent higher than the marginal cost. The outcry after this let to some change in the regulatory policies and the departure of the regulator, Stephen Littlechild, who was one of Milton Friedman’s protégés.

While competition is being propagated as the model to be followed, the UK case brings out that after almost two decades of restructuring of CEGB, the original integrated generating, transmission and distribution electricity company, the monopolies have become even stronger. Instead of the vertically integrated monopolies in electricity as we had then, we now have transmission companies that own both gas and transmission systems, distribution companies that provided gas, power and water, mergers have taken place between distribution and generating companies, etc. The end result, as it is becoming visible now is the formation of much bigger monopolies albeit of a different mix than the ones that existed originally. 

Instead of trying to create a mythical market in power, the government needs to focus on two aspects of the electricity system:

• Reduction of losses in the system through partnership with the SEB employees: workers and engineers. If there is a political will and an attempt to build this partnership, the losses in the system can come down to the pre-reform days. The current losses in Delhi have risen from about 25 per cent in 1993 to about 50 per cent today, with or without privatisation. Going back to the pre-reform figures are not difficult if there is a will to implement a reform scheme whose focus is different from the current one.

• Brining down the cost of generation. Currently, the costs of electricity have risen from about Rs 1.00 per unit ten years back to about Rs 3.00 per unit today. It is easy to bring down the costs if we standardise our generating plants and place orders of a number of such units together. Instead of which, we are currently discriminating against our equipment manufacturers, as we discuss below.

DISCRIMINATING AGAINST EQUIPMENT MANUFACTURERS

Currently, there are some disturbing trends in the market for power generating equipment. In the recent open tenders, Indian equipment manufacturers such as BHEL are losing to foreign suppliers. The recent tenders for Sipat, Barh and Yamunanagar are dangerous portents, where BHEL has either been disqualified for not having technology for supercritical boilers or being priced out to cheaper Chinese or Korean equipment. Here, not having a plan for importing or developing technology supercritical boilers before opening out the market, as well as no import duties on finished equipment, both are responsible for BHEL losing out. The current duty structure is a completely inverted one as semi-finished or raw materials are taxed but finished goods are not. Thus there are no import duties for power plants above a certain size. It penalises the manufacturers of equipment if they have to pay high duties for intermediate or primary raw materials while the finished goods comes without any duties. Instead of helping indigenous manufacture, we are now entering a phase where our industry has to face competition from foreign companies that the government wants to help. Unless such anomalies are corrected, Indian power equipment manufacturing companies face completely unequal battle.

NEED FOR REVIEWING THE ELECTRICITY ACT

The so-called power trading and commodification of power will lead to only speculation on the patterns of California. Electricity trade is enormously difficult, as not only must all supplies and consumption stay in balance all the time but each transmission corridor also has fixed capacities. Attempts to trade electricity can result in unscrupulous cornering of electricity, sweetheart deals between generators and distributors, using transmission capacity as a mechanism for arbitrage (Enron used this extensively during the California crisis) and so on. An attempt to create a free market in power is physically not possible; instead we can only create regulatory markets for power, which are inherently capable of gross manipulation.

The India electricity sector faces a crisis on many fronts. Unless we take a holistic view of the sector, we are going to see only the well-off sections receive power and the prices rise. It will adversely impact both agriculture and industry. It is therefore imperative that the government initiates the promised review of the Electricity Act while holding Draft National Electricity Policy in abeyance.