|
Vol.
XXVIII No. 42
October 17,
|
Draft
National Power Policy And
CERCs
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 lions 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 Friedmans 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.
