Sunil JainL: Short-circuiting change

RATIONAL EXPECTATIONS

On the face of it, the fact that electricity regulators in around 19 states in the country have passed "open access" regulations that allow consumers to bypass state electricity boards (SEBs) and buy power from whoever they want, is a sign of the great progress made since the Electricity Act was passed in 2003. Indeed, at that time, the ministry of power tried to delay the reforms proposed in the Act, first by leaving the timing of the open access undefined (the original Act wanted it by 2006 for large users to begin with), and then by saying this could be done within five years""and since this change was made through an amendment in 2004, the final date for open access got pushed back to 2009. But, now, with states coming up with open access guidelines, none of this really matters.

Not quite, actually. For, while the regulations have been formulated, not a single user has actually begun to buy power from someone else, bypassing the SEB, or its replacement such as BSES or Tata Power in Delhi. The reason is simple. While formulating the rules, the regulators have fixed a surcharge (an amount to be paid to the SEB to compensate it for losing top-quality customers) which is so high that it doesn't make economic sense to switch suppliers. This is exactly what happened in Kerala over a year ago, when Indal threatened to move out due to very high power costs""it was allowed open access, but the surcharge fixed was so high that it made no sense for Indal to switch to a new supplier. In which case, a critical component of open access is the level of surcharge. Indeed, that is why the Central Electricity Regulatory Commission began working on this over 18 months ago, and came out with a paper that recommended the surcharge be fixed on the marginal-cost principle.

So, let's say an SEB buys power at an average cost of Rs 2.5 per unit, a figure that's pretty close to the actuals in most SEBs, by the way. This is the average of the various costs the SEB buys power at, some at as low as 50 paise a unit from old and depreciated plants to as much as Rs 3 per unit from the very new plants""the new plants' power is obviously the one the SEB will chose to buy last, and is the marginal cost. Now let's say the SEB has a customer, A, who consumes 10 units of power and chooses to buy power from another supplier. So, the SEB will stop buying the Rs 3 power immediately. If the SEB charges this customer Rs 4 per unit, it will lose Re 1 per unit, or Rs 10 in total. So the surcharge should ideally be Re 1 per unit, which will keep the SEB's income constant in the new scenario without consumer A. What the SEBs are asking for, instead, is that the surcharge be Rs 4 minus the average cost of Rs 2.5""in which case, the SEB will make Rs 15 once consumer A walks away, as compared to a situation in which they made only Rs 10 when consumer A was still there! (The surcharge, by the way, is to ensure the SEB has enough money to meet its social obligations such as supplying low-cost power to farmers and to households.)

Which is why, when the proposal on how the surcharge should be fixed came to the Cabinet, there was a difference in opinion on how this was to be calculated. So, the matter was finally referred to a Committee of Secretaries three months ago. Due to disagreements between the secretaries, the proposal is still pending.

Sadly, this is not the only problem area. In the pre-Electricity Act days, power tariffs were fixed on the basis of a cost-plus formula. That is, an electric utility gave its costs to the regulator and then based on a rate of return that the utility should get, the tariffs were fixed. Once the Electricity Act came in, it said tariffs should be arrived at through competitive bids""after all, telephone tariffs are not fixed by the regulator, but are a factor of demand and supply. In the Act, the ministry of power slipped in a clause saying the government would come out with a tariff policy indicating how tariffs were to be fixed. Over a year ago, the ministry set up a committee that recommended giving utilities a 14 per cent rate of return. This created a huge furore as, apart from the fact that the returns were way too high, it created an incentive for firms to pad costs in the manner Enron did.

The ministry's now come up with a new draft tariff policy which is better in the sense it says all future power requirements will have to be competitively bid for if they're private sector ones. Even here, if the private sector project is expanding capacity by under 50 per cent, it can get to use the old cost-plus formula. As for new power projects by PSUs such as NTPC, they've been given up to five years before they mandatorily have to go in for competitive bidding. And there is no time frame given for when the existing plants have to go in for competitive bidding. So, with each passing day and fresh intervention by the government, India's destiny with competition is getting pushed back that much more.

suniljain@business-standard.com