Trading or profiteering?

The last thing you want to do is to sound like a communist and use words like trading and profiteering in the same breath, but what’s happening in the power sector can be described in no other way. And that’s why, in January, the Central Electricity Regulatory Commission (CERC) passed an order to try and curb this. The order has, however, been challenged in the Appellate Tribunal for Electricity by some power traders like the Power Trading Corporation (PTC)—Adani Exports, which is also in the power trading business, has gone further and challenged it in the Gujarat High Court as ultra vires.

Now it is obvious no one can be against power trading since that is how energy flows from power-surplus states to power-deficit ones, and that is also how states which set up power plants, like Himachal Pradesh, will earn money. The problem, however, is that some traders and states are making a real killing in the bargain—some states are even buying low-cost power from central power plants and exporting this at a huge profit to power-deficit states. Since the power is being sold at one price locally and at a huge premium outside the state, the pan-Indian market is also being destroyed. Imagine the consequences if each state did this with its produce.

Just to give you an idea of what we’re talking of, the CERC order says the trading margin cannot be more than 4 paise per unit of power, which, given the purchase price of power, works out to 1.5-2 per cent. While the PTC has a study by Crisil that says a 3 per cent margin is what will cover all risks, Adani Exports Limited has earned trading margins as high as Rs 1.25 on electricity it bought for Rs 2.66!

According to the CERC’s order, in 2004-05, nearly 90 per cent of the trading was done at margins of 5 paise or less. In the first half of 2005-06, however, less than a third of the trading took place at sub-5 paise margins. During this period, the weighted average trading margin rose from 6 paise to 10 paise.

Even worse is the profiteering by state government arms such as the West Bengal State Electricity Board (WBSEB) and the Grid Corporation of Orissa (Gridco), while performing what, for all intents and purposes, are trading functions. According to the tariff order of the West Bengal Electricity Regulatory Commission (WBERC), for instance, the WBSEB said it needed a total of around 13.7 billion units of power for final consumption (that is, without accounting for T&D losses) in 2005-06, and of this 3.7 billion units were meant for trading and export. To meet this demand, the state planned to buy 6.6 billion units of power at around Rs 1.66 per unit from central government-owned power plants —the rest was bought from different sources, including power stations within the state. Between July and December, however, Adani Exports’ records show, the WBSEB sold it 360 million units at prices above Rs 2.45 per unit (the highest was Rs 3.93); another 894 million units were sold to the Power Trading Corporation (between October and December) at Rs 3.16 per unit. In other words, had the state not overdrawn low-cost power, this could have gone to another state and lowered costs there.

The WBERC’s comment on this practice also shows the regulator doesn’t really frown upon it. “Drawal of committed power supply (from central power stations) and exporting the quantity in excess of own requirement to outside region is beneficial to consumers provided price of such export is reasonably higher than the import cost.”

The case of Orissa, the Orissa Electricity Regulatory Commission’s (OERC’s) tariff order for 2005-06 shows, is not too different. Gridco projected an energy demand of 16 billion units of power, of which 3.3 billion were for exports—of the supplies, 4.4 billion were to be bought from central government-owned power plants at Rs 1.7 per unit. Since the state has very old and hydro-power plants (the cost of power from Machakund is as low as 17.18 paise per unit), the average cost for all power is Rs 1.1 per unit.

The OERC order shows, perhaps due to this low cost of purchase, Gridco proposes to sell electricity to the local power distribution companies at Rs 1.3 a unit. In the case of exports, however, the order says Gridco hopes to realise Rs 726 crore by selling the power at a much higher Rs 2.2 a unit. The Power Trading Corporation’s website, however, tells you that for October-December 2005, Gridco sold the PTC 0.5 billion units at rates varying from Rs 3.37 to Rs 3.92! Current prices could be even higher—The Times of India had a news report a few days ago saying Delhi planned to buy power at Rs 4.7 a unit from the “east”.

While the CERC order will, once it gets implemented, put an end to the profiteering of traders like the PTC and Adani, surely the super-normal profits made by the Gridcos and WBSEBs also need to be regulated? The problem is that since the sales to the PTC, Adani et al. are taking place within the boundaries of the state, these are being portrayed as intra-state sales and therefore outside the purview of the CERC regulations that apply only to inter-state transactions.

Those who argue for a free market—higher profits will result in more power generation and therefore lower profits—would do well to remember that in infrastructure sectors there is no real competition and so all markets are regulated. When the regulation ceased, as in the case of mobile phone tariffs, it did so only after competition had forced tariffs below the regulated ones.