A K Bhattacharya: When markets don't work

RAISINA HILL

In a supply shortage scenario, normal market behaviour needs to be regulated.

The Central Electricity Regulatory Commission (CERC), the apex authority that regulates the country's power sector, is facing a peculiar problem. The number of state electricity boards that are getting into the business of selling power to other states is on the rise.

This in itself is not a problem. In fact, it confirms the emergence of a dynamic market for power trading, where, for instance, a state electricity board of a southern state can now use the national power grid to sell its power to its counterpart in a far-flung state in northern India.

The problem, therefore, does not arise from their selling power to other state electricity boards, but from the fact that many of these boards are not surplus with power. So, why do these boards sell electricity to other states if they do not have surplus power? The answer is simple: the price at which they can sell their power to other states is much more than the tariff they can charge the consumers in their own state. The difference in the two tariffs is substantial and is a huge incentive for these boards to sell their power to another board. In fact, many of the state electricity boards are now finding that the proceeds from power trading is now an important revenue stream and is a useful tool for improving the bottom line.

The way it operates is a pointer to the manner in which power sector reforms have moved in this country and are constantly throwing up fresh problems. For instance, the state of Jharkhand may suddenly face a spurt in demand for power. So, the Jharkhand state electricity board chairperson gets an explicit order from his political bosses that whatever be the cost, the state must not suffer from any sharp deterioration in the power supply situation. What does the Jharkhand SEB do? It gets in touch with the Orissa state electricity board and asks for more power. And the Orissa board agrees to sell its power to Jharkhand at a price that is almost double of what it charges its own consumers.

The consequence of all this is also something that should not cause any undue concern. While the Orissa board will show higher income and improved profit, the Jharkhand board's higher cost of power purchase will affect its financial performance. This will naturally put pressure on the Jharkhand board and the state administration to invest more in creating power generation capacity, improve capacity utilisation and reduce losses on account of transmission and distribution.

But there is another aspect of this trend, which has prompted the power regulator to raise an alarm. This is the consumer angle in a scenario where a state electricity board, encouraged by profit motive, sells more power to other states at higher tariff, even though it might mean starving its own consumers within the state. Consider a scenario in which you do not get supply of your milk on a festival morning or your newspaper on the day after the union Budget, because the milk vendor has sold your quota of milk to somebody else or the newspaper hawker has sold your copy of the newspaper to another person. And all because the vendor realised that demand had suddenly shot up that day and that by selling the milk and the newspaper to a new customer, he would get more money than what he would have earned otherwise.

In a situation where there are supply bottlenecks, such behaviour from distributors needs to be monitored by regulators. CERC, obviously, is exercised over this trend. The regulator is acutely conscious of the fact that power consumers still do not enjoy the freedom to choose their power distributors. There is "open access" for consumers of over 1 mw capacity. But even the use of such "open access" facility has been very limited. Only half a dozen such bulk consumers have so far exercised their choice of distributors.

Not surprisingly, therefore, CERC has convened a meeting of all state-level regulators to discuss the implications of the new trend and evolve a mechanism by which consumers are protected. The more durable and long-term solution, of course, is to enforce "open access" for all consumers and ensuring that distributors do not create any roadblocks to customers' exercising their choice of the entity from which they would like to draw power.