One India policy

Most people are familiar with the One India policy in telecom which aims at having a uniform tariff level for all calls, irrespective of the distance. The Appellate Tribunal for Electricity has brought in this concept for the power sector now, which could have very interesting consequences. The Grid Corporation of Orissa (Gridco) was buying power in the state at around Rs 1.1 per unit and sold it to the Power Trading Corporation (PTC) at around Rs 4.7 per unit. PTC in turn sold it to other users after adding its trading margin fixed at a maximum of four paise per unit by the Central Electricity Regulatory Commission (CERC). The petitioners argued that the CERC ceiling of four paise per unit on inter-state trading of electricity should apply to Gridco’s sales as well. Second, if Gridco was to charge a lower tariff for consumers in the state and a higher one for outsiders, it amounted to discrimination. For example, if other states were to follow this path with their produce (Punjab with its wheat, for instance), the very concept of a national market would disappear. The Appellate Tribunal accepted this argument, and has now asked the CERC to assess how much Gridco overcharged consumers in the rest of the country and to figure out a way of refunding this.

While this means a sizeable refund for state electricity boards, or their successor entities, the question is what impact this will have on the supply and generation of electricity in the country. Many argue that this judgement will kill the nascent trading business, and that investors will not set up power plants for trading purposes since superlative profits will no longer be available. Much of this is simply not true. For one, as the telecom experience shows, regulated markets can also do very well. Obviously, free market pricing is the best, but in a situation of limited supply and low consumer choice, there is little escape from such regulation.

Till some time back, the telecom regulator had fixed a ceiling on mobile and long-distance tariffs, but the market continued to grow exponentially and tariffs remained below this ceiling for so long that the regulator finally allowed forbearance on tariffs. If, on the other hand, the market is not regulated (either for power producers or for traders), it is almost certain tariffs will get jacked up in times of shortage, and that is precisely what India is going through right now. It is possible to argue the four paise margin fixed by the CERC is too low, but that is a different matter unrelated to the free-for-all that Gridco was indulging in. And, as the tribunal has pointed out, in such a situation, shortages are likely to be created by suppliers themselves. In this case, while Gridco said it was merely disposing of surplus power, the tribunal said this was not possible since around 80 per cent of rural households in Orissa were not electrified even today.

Second, there is no bar even today on investors setting up what are called “merchant power plants”—the tariffs here are not regulated and the ceiling here will obviously be what the market can bear. Such freedom, however, is not allowed to power plants which have a long-term power purchase agreement (PPA). This is because the PPA guarantees the investors a certain rate of return anyway. So investors can either go for a merchant power plant where returns can be very high but are not guaranteed, or go for one where returns are lower but guaranteed. It is, however, unfair to expect consumers to guarantee a minimum return (by way of tariffs) for these plants and then allow them to hike rates depending upon supply shortages. The judgement is a significant step forward in protecting consumer rights.