Open access to infrastructure for supplying electricity will create value. But the issue must be seen in view of the impact of competition on the poor and vulnerable sections of the society.
Associate Professor, Delhi University
The state electricity regulatory commissions have been vested with several critical roles under the Electricity Act 2003 — these include the promotion of competition
Reforms in the electricity sector the world over have typically taken three forms: one, organisational reform of the incumbent; two, the introduction of competition; and three, establishment of regulation. The three components are irreducible to each other, but are intimately connected and are found in some form in reform processes. Electricity reforms in India seem to be missing the second component.
Open access to transmission and distribution wires is key to introducing competition in this sector. These wires are recognised as an “essential facility”, access to which must be open and non-discriminatory to facilitate competition. Such national or local infrastructure monopolies (say, transmission companies for high-voltage transport and local distribution companies for low-voltage transport) merely serve as “toll roads” that facilitate transport of electricity in exchange for a “regulated fee”. The economic argument for managing such infrastructure resources in an openly accessible manner is that these resources are intermediate goods that create social value when utilised productively downstream and that such use is the primary source of social benefits.
Therefore, an important role of the regulator is to manage these resources in the manner described above. The state electricity regulatory commissions (SERCs) have been vested with several critical roles under the Electricity Act 2003. These include the promotion of competition. Section 42(2) recognises the SERCs’ role for promoting open access in a phased manner. Section 86(2) mandates the regulator to advise the state government on promoting competition, efficiency and economy in activities of the electricity.
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One of the most disappointing aspects of the reform process has been slow (actually negligible) progress in competition and open access to wires. Several SERCs have notified open access regulations besides fixing surcharge and transmission and wheeling charges (“regulated fee”). But this has hardly helped consumers come forward to use the open access facility. The magnitude of wheeling charges and surcharge has de facto made open access unviable. The regulators have done little to determine a reasonable cross-subsidy element and recover it as a wheeling surcharge from the bulk consumer.
In their defence, the regulators point out that the state load dispatch centres (SLDCs) have failed to act as independent system operators owing to pressure from state governments. Open access has been blatantly denied by SLDCs to protect the State Electricity Boards from competition.
Continued interference by the government through the issuance of opportunistic “policy” directives has resulted in legitimately mandated regulatory functions being routinely compromised, affecting the effectiveness and independence of these regulatory institutions. One of their major functions that took a hit is the introduction of competition.
Given the insufficient institutional distance between regulators and state-owned firms, especially when there are no firewalls between them, it was naïve to expect the regulators to promote competition. Being two aspects of the same entity, namely the Indian state, regulatory capture by state-owned firms is a real threat.
Creating and sustaining independent regulatory institutions require a substantial degree of political and judicial maturity. Ultimately, the state actors have to forbear from routine interference in areas that they have so far considered part of the state’s eminent domain. The line ministries have to commit to performing a mere supervisory function and steer the regulatory agency at arm’s length. For transparency and accountability of these bodies, officials manning these commissions must be truly independent and accountable to the legislature/Parliament and not to their line ministries. This will minimise the conflict of interest.
Senior Fellow, Centre for Policy Research
Markets do seem to bring short-term efficiency gains but they can also bring gaming or the exercise of market power and capacity shortfalls as investors fear price uncertainty
In the years since the passage of the Electricity Act 2003, the failure of the Indian electricity sector to create scope for competition has led to considerable hand-wringing. But much of this concern is based on an insufficiently detailed understanding of what introducing competition in the Indian electricity sector entails, and what role regulators can and should play in doing so.
To begin with, it is incorrect to assume that India is traversing some well-mapped global path of success with electricity markets. Instead, there is a diversity of market designs, as each country structures its market around domestic political constraints. And there is a diversity of outcomes. While markets do seem to bring short-term efficiency gains, they can also bring gaming or the exercise of market power (California), capacity shortfalls as investors fear price uncertainty (Norway) and other such problematic outcomes. The jury is by no means decided on the wisdom and sustainability of electricity markets.
In India, we have sought to implement a limited form of competition – open access, largely dictated by our own political constraints. The idea is to allow independent power generators “open access” to public transmission wires on payment of a fee for use of those wires and a surcharge to compensate the public utility. This will enable them to contract directly with large electricity consumers, creating competition in at least a segment of the market. These consumers will likely be more creditworthy than cash-strapped state utilities, thereby encouraging the entry of more generators to bridge our supply gap. Regulators were charged with creating the implementing regulations for this approach.
The problem, however, is that to implement this idea effectively regulators must make political choices, something they are not equipped to do. Large industrial electricity buyers who are likely to exit are also those keeping the system afloat by cross-subsidising other users such as farmers and households. If, because of open access, they were to shift their power purchases to independent private generators, the finances of the public utility would become untenable, leading to declining quality of supply to poor, but politically important, constituencies. The key point is that the political impact of open access is, therefore, directly linked to a regulatory decision on the size of the cross-subsidy surcharge. Too low, and the public utility becomes dysfunctional leading to a likely political backlash; too high, and open access is a non-starter. Most regulators have chosen the latter, or have chosen to stall on implementation of open access.
The broader problem is that it is a fiction to think that by handing political decisions off to an independent technocratic body, the sector will effectively be de-politicised. Instead, the politics are only pushed underground. Regulators are not equipped to make discretionary decisions that create winners and losers, nor are they subject to the accountability structures necessary to do so with any credibility. Instead, such decisions should be the job of the political process.
Open access has been promoted as an economic instrument. But it is as much, if not more, a political reform mechanism — a way to deal with historically entrenched electricity pricing and subsidy patterns. If it is politically unviable to cut off subsidies directly, the thinking goes, perhaps they can be choked off indirectly by simply having the subsidisers (large industry) leave the public system.
Both electricity regulators as an institution and open access as an instrument have their roots in efforts to side-step difficult politics. But asking a technocratically constituted body – the regulator – to accomplish reform by stealth – open access – is a futile endeavour. If we are to implement open access carefully, the issue has to be revisited at the political level, with due attention to the impacts on the public system, and on the poor and the vulnerable who have no other options.