Power equations

Foreigners can be forgiven for wondering at the wonder that is India. One of the first sectors that the government sought to reform was the power sector, way back in 1993.

But the entire effort, which was quite huge, bombed because the government tried to pump up generating capacity without reforming transmission and distribution. The Maharashtra State Electricity Board's agreement with Enron was a perfect testimony to that. Everyone got into a jam.

The problem was eventually diagnosed correctly and amends made via the new Electricity Bill of 2003, which allowed independent power producers (IPPs) to sell to whomsoever they liked""retail consumers, trading companies like Power Trading Corporation or bulk consumers""and not be tied down to a particular electricity board.

The results appear to have been dramatic. Financial closures have been achieved for nearly 5,000 MW of additional generating capacity""in nine months. In the previous 10 years, the private sector had added only 7,000 MW.

The latest closure has been in respect of the Mangalore Power Company's 1,000 MW project in Karnataka, the twelfth this calendar year. The target for private sector additions to capacity for the Tenth Plan is only 7,121 MW. So we are almost there, and may well surpass the target by a handsome margin.

Indeed, by the end of the Plan, it should surprise no one if total private sector capacity is around 20,000 MW. What next?

The government needs to seize the opportunity that it now has to fix the emerging market for electricity. The key, as is now well established, lies in a highly competitive market that is also well regulated.

India has done well in the last few years to introduce competition in many industries""and then it has botched things up by not allowing it to be free and fair.

The telecommunications sector is a shining example of this. This must be avoided in the power sector, where there are state and central regulators and who between them have a pretty sorry record so far. In some states, the government simply ignores the regulator!

The first step therefore has to be de-politicising electricity, which in turn requires genuinely independent power regulators, not ex-bureaucrats seeking to please the political class by, in the final analysis, conniving to stifle competition.

It is also necessary to learn from the mistakes of others. Should a trading pool emerge""and, given the nature of the business, it will ""care has to be taken that the pool itself is properly managed. International experience shows that this is easier said than done. To quote out of context, the price of cheap and efficient power is eternal vigilance.

The fundamental problem, it has been seen internationally, is lack of transparency on the part of the major players, be they the producers or the traders. Indeed, the two usually get together to gyp the customer. Also, as in any form of trading, attention tends to be firmly focused on maximising short-term profits and this can interfere hugely with the market in the long run.

In sum, all this adds up to the need to make procedures flexible by not tying the hands of the regulator through an excess of legal provisions seeking to cope with as many contingencies as possible.