ENERGISING THE POWER SECTOR

E.C. Thomas*

---

Reforms in the power sector are gaining momentum and moving towards alleviating the concerns of consumers. Some recent policy initiatives by the Centre have given a strong impetus to the process of reforms.

The Electricity Bill – 2003 passed by Parliament promises to usher in sweeping changes. The Bill seeks to provide a legal framework for enabling reforms and restructuring of the power sector. It simplifies administrative procedures by integrating the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity Regulatory Commissions Act, 1998 into a single Act. The Bill has become an Act now after the Presidential assent and notification by the Ministry of Power on June 10, 2003.

The Electricity Act, 2003 is based on the principles of promoting competition, protecting consumers’ interests and providing power to all, according to the Union Power Secretary, Shri R.V. Shahi.

The salient features of the Act are - delicensing of generation, liberalization in captive power policy, open access to transmission and distribution network, stringent penalties for power theft, transparent subsidy management, constitution of an Appellate Tribunal and thrust on rural electrification.

Despite the delay – its provisions were widely discussed, including by a Parliamentary Standing Committee- the final enactment of the new legislation is one of the defining moments in the power sector. The preamble to the Bill says it all. It will consolidate the laws relating to generation, transmission, distribution, trading and use of electricity; take all measures that are conducive for the development of the sector, including rationalization of electricity tariff, ensuring transparent policies regarding subsidies, address environment concerns and empower the existing power sector regulators and create new ones. In consultation with the States and the regulator, the Centre can formulate and execute a new nationwide policy based on optimal utilization of resources. Adequate steps will be taken to encourage conservation and the use of non-conventional sources of energy.

Theft of power and transmission and distribution losses are to be countered more meaningfully, the former by compelling the State Governments to frame tough anti-theft legislation of their own and the latter through a scheme of incentives under the accelerated power development programme.

The new legislation can usher in paradigm shifts in the power sector. Competition will be possible not just in generation, but also in every facet of the sector including distribution. Moreover, private sector investment will be facilitated by greater transparency that will come about.

Provisions

The conceptual framework underlying the new legislation is that the electricity system in India must be opened to competition. Competition is said to be possible only in generation and supply since transmission and distribution on wires are regarded as natural monopolies and not economical when duplicated. The Act will permit free entry into generation, unless there are safety and environmental considerations. Captive generation is to be freely permitted, not only for captive use in the promoter’s own plants, but also for the use of a group of industries. Thus new capacities in generation can be supplied to members of such groups. This introduces the idea of trading in bulk electricity.

The open access in transmission from the outset to facilitate a bulk sale from generator to customer will end the problems of the single buyer model. Technology changes will pay a major role, particularly the real time meters for monitoring and measuring the bi-directional energy transfers.

The Bill’s emphasis on a national policy for stand alone systems (including those based on renewal energy) for rural areas and national policy on electrification and local distribution in the rural areas are the much awaited innovative measures. To help rural areas grow not only economically but socially too, the Bill provides opportunities for industry to electrify the rural areas without obtaining any license. Also, in course of time, competition would be encouraged by subsidizing access, not tariffs, and asking for the lowest bid in these areas.

The implication of opening electricity to competition is that the State Electricity Boards(SEBs) may lose some of their best customers. The State Governments will be compelled to improve the SEBs’ financial viability by permitting tariffs to the presently subsidized customers to cover more costs and the SEBs must improve their efficiencies. Already, there is hardly a State Government that does not charge some tariff, even if below costs, to the farmers. In some States, thefts and T & D losses have started falling. The plant load factor (PLF) in some State-owned generating stations now compare favourably with the best in India. State governments not taking corrective measures will find that competition will make losses of the SEBs an even greater portion of their revenue deficits. As with other industries, the breaking of monopoly power will benefit the consumer and the economy.

Grey Areas

Despite its justifiable and welcome sweep, the new legislation, it is feared, may not go far enough in addressing the pressing and multi-faceted concerns of all the stakeholders. For instance, it does not compel the States to introduce time-bound reform of their electricity boards. Nor is it clear as to how far the competitive forces that are to be unleashed will be wide-ranging enough to promote commercial efficiency and ultimately benefit the consumers. However, scepticism of any kind is rooted more in the legacy of the power sector.

The Electricity Act 2003 might be the single most important development and the focal point of all policy initiatives, but other recent initiatives are also important. Specifically in the third week of March last, the Centre and 24 States pushed through a massive programme of scrutinising the outstanding dues of the State Electricity Boards (SEBs) aggregating to about Rs. 374 billion. This move has far-reaching consequences: almost immediately it improves the finances of the SEBs, while Central public sector units which have supplied the power can dramatically step up their investment avenues and create new capacities. However, though providing a breather, such a financial reengineering will be successful only if backed by other moves to promote efficiencies.

The subsidy regime, including the supply of free power, has been a serious bottleneck to the reform agenda. Fortunately, there is a growing realization that vast segments of consumers, across all categories, are willing to pay for what it costs to supply but will not pay for the loss on account of theft and inefficiencies.

Tariffs

Power tariffs in India have only moved upwards, largely because of the cost plus tariffs of monopolies ridden with huge inefficiencies and T & D losses. This must be reversed. The energy component accounts for over 80 per cent of consumer tariff and if this segment is exposed to competition, consumers will benefit from tariff reductions and improvements in supply. Competition is the best guarantee for consumers.

The international experience on open access in the power sector has been very encouraging. During the last decade, electricity prices in the UK fell by over 30 per cent. Similar trends have been witnessed in the European countries and the US. Several developing nations across the world have either introduced or are in the process of introducing competition in the supply of electricity.

Open access would encourage private investors to produce more power and sell it directly to consumers. This can begin with bulk consumers and can be gradually extended upto the household level. A surcharge on open access could fund the existing cross-subsidies for the farm sector. Over time, these cross-subsidies could be substituted by transparent subsidies from the budget, with electricity duties being adjusted suitably.

Now the law enables distribution licencees to set up their own power plants to meet the demand for power. Currently, distribution companies have to depend on the transmission company for power supply. The law also allows new entrants into the distribution business. If they set up new infrastructure to meet demand, not only will transmission and distribution losses be lower, but will also put pressure on the incumbent distributor to improve services. In addition, there will always be additional pressure on any distribution company as the new law imposes a fine on the company, if power connections are not granted after a stipulated time frame.

While this would be reassuring to the consumer, it needs to be seen as to how many companies come in. Consumers should not expect overnight miracles, as even in the telecom sector it took a few years before the fruits of competition could be enjoyed. While the spirit of the new legislation is well understood, loopholes will surface when it is being implemented. A strong regulator with a good understanding of issues will be crucial in ensuring a smooth transition to the new regime. Even under the new regime, it has to be proactive and protect both consumer and investor because competition can be a double-edged sword which can wipe out investors in no time.

Realizing the importance of the power sector, many of the State Governments have undertaken crucial reforms and signed MoUs with the Centre to access funds under the Accelerated Power Development and Reform Programme. They are thus committed to restructuring their State Electricity Boards and helping them turn the corner. Containing transmission and distribution losses, detecting and stamping out theft and providing budgetary support for any subsidies that the boards have to bear are some of the features of the reform programme that the States have embarked on.

The Electricity Act, which took a long time to get through Parliament so that the Centre could build a consensus, should also enable the States to speed up reforms. If the State want to avoid privatisation of transmission or distribution, the only way forward is to curtail line losses and ensure 100 per cent billing of all supplies so that the SEBs increase their revenue and power generation.

*Senior Freelance Writer