Pradip Baijal: Reformers have to act

If the power regulator learnt some lessons from the telecom one, the country could end up saving at least Rs 80,000 crore a year.

I have worked extensively in both the power and telecom sectors, and recently came across an article 'A Tale of Two Sectors: What can Indian Telecom Firms Teach the Power Industry About Reforms', which links both sectors in terms of regulatory experience (http://knowledge.wharton.upenn.edu). It says, "The road to better infrastructure has been a bumpy one so far: while sectors like telecom have boomed and transformed the business landscape seemingly overnight, others, such as energy, have been highly visible failures. According to Boston Consulting Group experts and faculty at Wharton, the failure of power sector reforms and the success of the telecom industry underscores the importance of foreign investment and competition in India's infrastructure upgrade."

What is the state of our power sector and reforms? I have done some back-of-the-envelope calculations with one of my erstwhile colleagues in the power sector who, like me, recently moved to the telecom sector, and have compared tariff levels resulting from large and new inter-state coal pit-head projects, and between good and bad regulation (see table). I am convinced that present-day regulations (as per the Electricity Act 2003) lend immense powers to regulators to become the cause of the change and introduce efficiency measures, including more competition and open access in the network. If they do not do this, of course, the results will be disastrous.

The table clearly shows that if competition and efficiency improvement programmes (through innovative ideas including privatisation and incentivisation) are not put in place by the regulators, the entire enabling provisions of the Act including open access will be negated and consumers will never benefit.

We generate 800 billion units of power per year, including captive power. Various experts, taking different interpretations of the data in the table, would perhaps argue that the lack of reforms is leading to a loss of between Rs 80,000 crore and Rs 200,000 crore to the consumer/economy every year. I do not want to argue with experts on these calculations and would accept the figure of loss to the consumers and gain to the goons and mafia in the electricity network at a minimum of Rs 80,000 crore per year, a huge figure indeed. Additionally, adequate generation capacity is not being put up since distribution companies, due to a lack of appropriate reforms, cannot sell the incremental generation from new capacities.

Compare this with the telecom sector. Call rates from mobiles have gone down 32 times since the initiation of reforms ten years back and targets have been overshot by three times. The performance of the civil aviation sector is equally remarkable. I clearly recall the public sector monopoly and pre-reform days when the air-tariff from Delhi to Trivandrum used to be much higher than the competition-determined tariff to London.

The cost of a thermal power plant was Rs 1 crore/megawatt (MW) in the mid-1980s. The power reforms of 1991 only privatised generation, leaving state utilities to buy power from these private power plants. The tariff was to be calculated by the Central Electricity Authority on the basis of a cost-plus formula. Doubts about state utilities' capacity to pay were set to rest by a payment guarantee by the state government, backed by a counter-guarantee of the central government. The cost-plus dispensation and the guarantee regime led certified costs to go up to Rs 5 crore/MW. Later, and naturally, the entire scheme collapsed without achieving much and the price of thermal plants crashed to about Rs 2 crore/MW in late 1990s.

This is a typical problem with cost-plus schemes and regulation. They lead to costs getting heavily padded by operators and the corresponding tariffs exploit consumers. It may be recalled that there was explosive growth in the telecom and civil aviation sectors only after the regulator/government moved away from cost-plus tariff regulation to competition regulation. The regulator and government also moved to lower levies and technology/operator-agnostic level-playing field regulation.

The growth in both sectors was so huge that despite a fall in their share, public sector operators also grew at much higher rates than in the non-reform days. Unless a similar level-playing field is enforced in the power sector and public-private partnership encouraged in the network, incremental investments will not take place. Despite power reforms, we continue to stagnate with around 10 per cent private share in the network. At last, the government has moved to mandatory competitive price-bidding generation in the power sector in 2006, showing great results as were evident in some bids. Central generating units like NTPC and NHPC have been given five years before they also necessarily get into the competitive arena. Regulation cannot disturb level-playing conditions in a network. There has been growth in civil aviation and telecom as regulations insisted on level-playing field conditions.

The central government has done everything it could. It passed a comprehensive legislation and has notified competitive tariff bidding. It has also prescribed a 20 per cent margin over the cost of generation both ways between different consumer classes to be achieved in five years, thus making transparent open access regulations a very simple exercise for central and state regulators. But it appears that the central power regulator still blames state control over distribution for non-implementation of open access "" a very necessary ingredient for power reforms, clearly prescribed in the 2003 Act. To my understanding, he has not used his vast powers given in the Act under the alibi of the state's control over distribution.

There can be nothing farther from the truth since the central government controls 100 per cent of transmission (and particularly, the power to dispatch power to different states) and 40 per cent of generation. Recognising that the electricity network is a unified network, the central regulator, under the Act has also been notified as the Chairman of the (central and state regulators') Forum of Indian Regulators (FOIR). It is simple for the central regulator to issue regulations with default provisions if the states do not follow open access and increase competition. It can also draw a five-year plan of reducing network subsidies to plus/minus 20 per cent and enforce it by controlling the dispatch of 40 per cent generation and by numerous other means empowering him in the Act. He cannot wait in perpetuity for a governmental signal, including, unfortunately, one from each state government.

Unless supply in the grid increases, captive generation will keep increasing and the lack of open access will ensure this network is a broken one, as is happening now. Grid stations have 134,000 MW generation capacities and captive power plants, an additional 20,000 MW. On top of this, power plants with less than 1 MW capacity, which are not counted, have mushroomed and are estimated to add up to another 25,000-40,000 MW. It is time the power regulator started exercising his vast powers in integrating the broken network for public good by enforcing open access and level-playing field competition.

Parliament and the central government have done their jobs, by laboriously bestowing upon the central regulator large powers to act in the public good. If he chooses not to act, consumers lose more than Rs 80,000 crore and the country loses out on growth. The gainers are only the numerous mafia in the power network.

The author is a former chairman of the TRAI. He can be reached at baijalp@gmail.com