I'm powerless, sorry

Two broad points emerge from the Central Electricity Regulatory Commission’s (CERC’s) order last week on the matter of whether Gridco should be allowed to make profits of over 300 per cent on electricity sales (Rational Expectations, March 27), and neither of them is of any great comfort for the country’s electricity-using population.

Since the CERC itself has regulated that trading margins cannot exceed 4 paise per unit (which is around 1.5-2 per cent of the cost of power), the issue was whether the CERC’s writ ran over the sale—while the CERC’s jurisdiction is limited to inter-state sales, Gridco argued its sales were within Orissa.

Though the CERC rejected the petition citing complex judgements on when a sale is a sale within the state and when not, it agreed with most points made by the petitioner. So, the order reads: “[i]t is undoubtedly true that intention of Gridco was to transfer electricity outside the State of Orissa”; “it is obvious Gridco has charged very heavy trading margins ... We only hope that the (Orissa Regulatory) Commission will ... (fix) the trading margin for the power traded by Gridco.” The piece de resistance: Gridco’s “licence does not authorise Gridco to sell power to an electricity trader” (an electricity trader is prevented from trading with another trader as this can artificially ramp up prices). Had the CERC used its own argument to rule that other traders like PTC couldn’t buy Gridco’s power, that would have stopped Gridco’s huge profits, which CERC itself is concerned about!

What is one to make of the ruling? One, if an inter-state power trader called ‘A’ wants to avoid getting caught in the CERC’s jurisdiction, all he has to do is to set up a related company, say ‘B’. A can now buy power for Rs 2 per unit, sell it to B within the state at Rs 3.5 (hoping the state regulator lets it go, as he has in the case of Gridco), and then B can sell it back to A outside the state with the CERC-stipulated margin for Rs 3.54! The ruling also makes it clear the CERC’s powers to regulate are clearly constricted.

This is especially important in another area, that of “open access”, or the provision that allows users to bypass the state electricity boards (SEBs) or their legal heirs, the distribution companies like BSES and NDPL in Delhi.

Let’s say Business Standard (BS) wants to use open access to buy power from a lower-cost hydro power supplier in Himachal Pradesh, instead of BSES. If BSES buys power at Rs 3 and sells it to BS at Rs 4.50, it loses Rs 1.50 (minus the transmission and wheeling costs of 30 paise or so) once BS moves away. This Rs 1.20 is the open access surcharge—put it higher, and BS will not find it lucrative enough to move away from BSES.

Right now, all state electricity regulatory commissions (SERCs) have set such high open access charges that no one can move away. So, earlier this year, the government came out with a tariff policy which prescribed the formula to fix the surcharge—in the case of Rajasthan for instance, while the current surcharge ranges between Rs 1.55 and Rs 1.79, this will fall to Rs 1.20 if the tariff policy formula is used. Apart from the CERC’s limited writ, it doesn’t help that the Forum of Regulators, which has all state regulators as members and is chaired by the CERC chief, has told the government a uniform formula is a bad idea! In which case, it’s unlikely the CERC will be pushing the SERCs to come up with meaningful surcharges. Andhra Pradesh came out with its surcharge after the tariff policy, but even this does not follow what is suggested.

The reason why SERCs are doing this, of course, is that they believe their primary duty is to protect power producers and not consumers, and the view is that once users like BS move away, the SEB or its legal heirs will get badly hit. An analysis by the World Bank for three states, however, shows this is completely unfounded. Rajasthan, for instance, is likely to have a 24 per cent peaking power deficit by 2008 (it’ll be 28 per cent in UP)—while this works out to a gap of 1,300 MW of power, the customers who can use open access by that period have a much lower demand of 620 MW (by 2008-09, consumers who use more than 1 MW of power are entitled to open access).

Indeed, the Bank finds that, in situations other than one in which all the power vacated by BS-type users is sold at hugely discounted prices to farmers, open access will by and large be cash-neutral for the SEBs. This is also intuitively obvious since, apart from agriculture, all users pay more than the costs of purchase, and the surcharge takes care of the T&D losses of 35-40 per cent in most SEBs.

The pitiable progress on open access, of course, also makes the new ultra mega power policy a lot more dicey. While it was always going to be difficult to find bankers to fund a project whose annual revenue stream of Rs 5,000 crore (for a 4,000 MW plant selling at Rs 1.80 a unit) depends upon all users paying, the fallback plan was to allow this power to be sold through open access—the seven plants being planned, together, add up to around a fifth of the country’s current power capacity! You can’t have large new power plants without open access, and you can’t have that with weak power regulators.