The Soap Opera of Power Sector Reforms

The sudden collapse of the Northern Grid should convince the people that the power sector is vital to their well-being. Indeed, the power sector today is a ticking time bomb that can very well de-stabilise the entire political system if the direction of reforms is not well thought out.

The grid collapse on the first day of the year is just a warning that the power sector is more complex than we imagine it to be. The fundamental characteristic of the power sector is that it has to function co-operatively. In order to have a stable grid, the supply into the grid must match the actual demand at each instant of time. If there is a mismatch between supply and demand, the grid becomes unstable and can sink. Currently, the grid is always on the verge of instability as the various entities involved – the central power stations and the State Electricity Boards are loath to observe grid discipline. In such a scenario, even a small disturbance can take the grid out. Otherwise, there is no reason why the entire northern grid should have sunk due to a disturbance at Panki, a relatively small power station in Kanpur.

Unfortunately, the current policy planners have little understanding of the power sector. In a recent seminar on power sector reforms in Chandigarh, organised by the Independent Power Producers Association of India, Haldea, the architect of the Draft Electricity Bill 2000 claimed that the objective of the Bill was to allow power to be traded as easily as soap. If Haldea is drafting such an important legislation, he should at least be aware that Mother Nature would not allow power to be traded like soap. We can store soap but not power.

The major objective of the Electricity Bill 2000 is that the power sector should be unbundled and competition introduced. This, according to these reformers, is the only way to ensure improved efficiencies and lower costs. This is the same ideology that has been driving power sector reforms in various parts of the world.

For all these reformers, the recent crisis of the electricity in California, the most advanced in terms of de-regulation in the United States, should be an eye opener. Recently, the Californians discovered that the free market in power is not all that it is made out to be. There have been power shortages and the power tariffs have doubled or trebled in parts of the state. Competition only ensures that everybody in the power sector – the suppliers, the transmission agencies and the distributors – make profits. And the simplest way to do so is to create a shortage. Instead of competition, you then have a sellers market and can drive up prices.

All this is in evidence in California. This summer, California faced a shortage of about 2,000 MW power and 13.5 million units of energy. This year, the interruptions in supply have been numerous causing huge losses to business. While the shortage figures are not very large by themselves, they have to be seen in the context of growing shortages. The winter has brought in similar problems with a number of emergencies already declared by the Independent System Operator as the demand has crept perilously up to the available supply. In such a scenario, the Californians are likely to face the unthinkable: blackouts in the sunny and the digital state of California.

The U.S. Secretary of Energy Bill Richardson, commenting on the above crisis, stated  “… California’s electricity market has become dysfunctional.” This from the high priest of the free market. The only saving grace for the consumer is currently there is a rate freeze in large parts of the state. Once this goes, the rates are expected to shoot up by two to thee times as it did in San Diego and Orange County where no such freeze was in existence.

Consumer groups have now filed lawsuits against the power utilities in California for rigging the market to create artificial shortages to hike their prices. The regulatory authorities have started their investigations on these charges and have just stopped short of branding the utilities as profiteers. The California Public Utilities Commission accused power generators of stonewalling investigations and described the staunch industry resistance as: “nothing more than stall tactics.”  A Santa Monica based consumer group has even proposed a ballot initiative that would allow a takeover of the multibillion-dollar electricity industry in California by the state government.

Obviously, the shenanigans in California have slowed the process of de-regulation in other states of the US. It is now clear that the promise of de-regulation – cheaper power and increased efficiencies — have not arrived. While this has slowed down the process of de-regulation in the US, it seems to have had no effect on the policy planners in this country.

Why is that de-regulation and free market has not worked in the power sector in spite of the axiomatic belief of the gung ho liberalisers that competition is the only solution to all the ills of any sector? The answer lies in what we said right at the outset. The electricity sector, unlike most other sectors of the economy, does not operate competitively. If we impose competition artificially, it can be subverted by cutting down supplies. When Central Electricity Generating Board (CEGB) in United Kingdom was being dismembered as a part of Maggie Thatcher’s reforms, its Chairman said that they had no further responsibility henceforth to keep the lights burning in U.K. Each of the entities – generators, distributors — could look after their needs; the grid was nobody’s baby.

If we look closer at the proposed reforms in the country for introducing competition and de-regulation, the dangerous nature of the reforms will be evident. The northern grid collapse was – it is being claimed — due to over-withdrawals by certain states. If we are unable to ensure grid discipline today between about 10 or 15 entities such as the State Electricity Boards and central generators (National Thermal Power Corporation, National Hydel Power Corporation, etc.) how do we think we shall be able to do so between more than100 entities that will emerge after unbundling and introducing competition? How will we ensure that all the entities are drawing or supplying power appropriately? Do we even have the machinery in place to monitor what they will do, let alone control them if need arises? If we ask such uncomfortable questions of those who are planning the reforms, we get an uncomprehending “duh?” as the answer. Ask the reformers if they have heard about what is happening in California after de-regulation and you are likely to get an equally puzzled “California who?” as the response.

Undoubtedly, the electricity sector in India is in need of reforms today. What we need to understand is that if we introduce wrong reforms, we are only likely to worsen the situation. Shri S.N.Roy, one of the pioneers in the power sector, and a former Chairman of the Central Electricity Authority, has repeatedly warned the policy planners that the entire country is facing large-scale instability due to misguided power reforms. Unfortunately, there does not anybody up there who is listening. Before we take the country down the slippery path to disaster, we need to have clear and transparent discussions about the power reforms. Instead, all that we have are stage-managed discussions and pseudo experts who think the power sector is the same as the soap sector. For this soap opera, the country will have to pay a very heavy price indeed.