Let there be light

It’s early days yet, but there seems to have been some progress on the power reforms front.

The chairman of the Central Electricity Regulatory Commission (CERC), Ashok Basu, has asked the state regulators to prepare, within the next three months, their roadmaps for enhancing competition in the sector by allowing large buyers—those who consume more than 1 MW of power—access to more than one supplier.

Indeed, at a recent open house meeting on the subject, Mr Basu was quite brusque with state regulators who professed helplessness at not being able to move faster. When one regulator gave elaborate arguments on why the state governments wouldn’t agree, Mr Basu cut in and said the states should be asked for their views later!

Another said he could not fix the wheeling charges that alternative suppliers would have to pay to transport their power over existing power distribution lines, since the SEBs were not forthcoming with the required information on costs.

The CERC chief advised him to set a final date for receiving the information, and to issue appropriate orders, even without the information, after the expiry of this deadline.

The crux of the SEBs’ arguments against open access, of course, is that if this is allowed, their best customers will move away. Since they obviously overcharge these customers, their ability to cross-subsidise the others will decline.

They also argue that if free market pricing is allowed, power prices may actually skyrocket. Both arguments are unfounded. To take the second first, the proposal on open access applies only to new power capacity, and in fact unequivocally states that existing power agreements will remain as they are.

As for the other argument, that the SEBs’ profits will nosedive once their best (and overcharged) customers move to cheaper competitors, the SEBs are to be partly compensated for this by a surcharge. They will also be paid a wheeling charge for allowing the new supplier to use their power lines.

In any case, the real world questions relate to the price and source of power in a scenario where electricity demand is constantly rising. Let’s assume a case where the cost of power is Rs 2 for the SEB, and it charges large customers Rs 4 per unit, and so makes a profit of Rs 2 per unit.

Naturally, it will lose this Rs 2 per unit (less the surcharge and wheeling charges) if the customer goes to another supplier. But if there is new demand for power, the SEB has to set up a new power plant that can deliver power, say, at Rs 2.5 per unit.

Factor in some 40–50 per cent T&D losses, and the effective cost of this power is around Rs 4–5 a unit. Now, if the average sale price realised from all users is around Rs 3 a unit (and that’s on the high side), the SEB could lose up to Rs 2 per unit of the new power produced!

In which case, the argument against open access boils down to one of allowing SEB losses to mount in the years to come. It’s also useful to keep in mind that when open access was allowed in the UK—even to consumers at the household level—over the period of a decade prices fell by 40 per cent in real terms.

In contrast, power reforms without introducing competition, as in the case of India, have only resulted in increasing electricity prices.