The Narendra Modi government has been criticised in the last few months for not going about with reforms as enthusiastically as hoped but, in one sector, at least, expect major changes. Continuing an initiative held over from the previous regime, the NDA cabinet earlier this week, passed big changes to the Electricity Act, the main law which governs the economics of the sector.
If passed by Parliament, consumers could get the choice to buy power from companies of their choice rather than being tied to a single provider as is the case in most states. At the same time though, this could accelerate a process by which state utilities' losses deepen, imposing a heavy fiscal burden on their parent governments.
Experts that ET Magazine spoke to had mixed reactions about the changes. Surya P Sethi, a former principal advisor on power to earlier governments, hailed the reforms as 'essential for competition'. While arguing that the Act had been poorly implemented so far, he said: "I am glad this is being done now. Better late than never." Others were more circumspect.
Says Ashwini Chitnis, a senior research associate at Prayas Energy Group, a non-profit organisation looking at energy sector policy issues. "The amendments aim at making fundamental changes to the sector structure and organisation, but it is not clear how these changes will help in tackling issues such as state utility losses, rising tariffs, fuel availability problems, and poor quality of service ."
Moving Reforms Along
In the first set of reforms starting in the mid-90s, a major aim was to split existing power companies into separate parts, each focused on generating power, transmitting it, or distributing it to the end consumer. This enabled distribution companies to buy power in the open market, from generators across the country, rather than from companies owned by the state of which they were a part.
"What possibly the government wants to do is actually take that one step forward. What the reforms aim to do is replicate this freedom for the end consumer as well," says Sushanta K Chatterjee, head of regulatory affairs at the Central Electricity Regulatory Commission (CERC), the apex regulator for the power sector.
Even in the current regime, the socalled open access is allowed for larger consumers with a load of 1 MW and above. A factory in Gurgaon for instance can, in theory, at least, buy power from any provider in the country, or even from a short-term power market such as IEX at a lower rate, rather than from the default distributor which, in most cases, is owned by the state government.
But open access never really took off for one simple reason: the biggest loser in this deal — the default distributor — was also the one that controlled the wires leading to the customer. The company that controlled the pipes was entitled to a surcharge for allowing its infrastructure to be used to supply power — and while the surcharge was regulated, it was often set very high, making any open access deal financially unviable. While power sector regulators in each state were in theory independent and could set such surcharges at a level that was competitive, in many cases they did not and were heavily under the influence of the state government, which also happened to be the parent of the distribution company in question.
By separating 'carriage' and 'content' this way, the Act aims to level the playing field between an existing supplier in any area who also happens to own the pipes, and challengers who want to enter with cheaper costs and power contracts but are hampered from doing so because of the costs of building an entire network. Your local distribution company will then be only responsible for billing you for the power you used, and collecting money.
Will it Work?
Customers in Mumbai are already allowed to choose between competing suppliers such as Tata and Reliance, and the experience has hardly been trouble-free. There has been litigation around the issue and while some disputes have been resolved by the Supreme Court, others remain. Even supporters of the reforms are guarded in their assessment of how successful the latest reforms will be.
"The details of how this reform will be carried out are crucial," says Chatterjee. And while such details need not necessarily be covered in the letter of the Act itself, they remain key to the success of the reforms. One key issue is how the transition is carried out. Take the Maharashtra State Electricity Distribution Company (MSEDCL), for instance, which supplies power across Maharashtra excluding Mumbai. As Chitnis points out, MSEDCL has a range of power supply contracts with various types of power generation companies, with some of its contracts such as those based on hydropower being extremely cheap. With such sources of cheaper power, MSEDCL is able to mitigate the costs of supplying cheaper power to agricultural consumers. If new suppliers do come in, the key question is what happens to those cheaper contracts that MSEDCL has.
If passed by Parliament, consumers could get the choice to buy power from companies of their choice rather than being tied to a single provider as is the case in most states. At the same time though, this could accelerate a process by which state utilities' losses deepen, imposing a heavy fiscal burden on their parent governments.
Experts that ET Magazine spoke to had mixed reactions about the changes. Surya P Sethi, a former principal advisor on power to earlier governments, hailed the reforms as 'essential for competition'. While arguing that the Act had been poorly implemented so far, he said: "I am glad this is being done now. Better late than never." Others were more circumspect.
Says Ashwini Chitnis, a senior research associate at Prayas Energy Group, a non-profit organisation looking at energy sector policy issues. "The amendments aim at making fundamental changes to the sector structure and organisation, but it is not clear how these changes will help in tackling issues such as state utility losses, rising tariffs, fuel availability problems, and poor quality of service ."
Moving Reforms Along
In the first set of reforms starting in the mid-90s, a major aim was to split existing power companies into separate parts, each focused on generating power, transmitting it, or distributing it to the end consumer. This enabled distribution companies to buy power in the open market, from generators across the country, rather than from companies owned by the state of which they were a part.
"What possibly the government wants to do is actually take that one step forward. What the reforms aim to do is replicate this freedom for the end consumer as well," says Sushanta K Chatterjee, head of regulatory affairs at the Central Electricity Regulatory Commission (CERC), the apex regulator for the power sector.
Even in the current regime, the socalled open access is allowed for larger consumers with a load of 1 MW and above. A factory in Gurgaon for instance can, in theory, at least, buy power from any provider in the country, or even from a short-term power market such as IEX at a lower rate, rather than from the default distributor which, in most cases, is owned by the state government.
But open access never really took off for one simple reason: the biggest loser in this deal — the default distributor — was also the one that controlled the wires leading to the customer. The company that controlled the pipes was entitled to a surcharge for allowing its infrastructure to be used to supply power — and while the surcharge was regulated, it was often set very high, making any open access deal financially unviable. While power sector regulators in each state were in theory independent and could set such surcharges at a level that was competitive, in many cases they did not and were heavily under the influence of the state government, which also happened to be the parent of the distribution company in question.
But even apart from the surcharges, the state government had effective control over the transmission infrastructure within the state boundaries and could simply block any flow of power to an open access buyer from the seller. "A big problem was that the state-owned incumbent blocked access to market to competitors — through influence over the network operator as also state regulators imposing very high cross-subsidy surcharge and additional surcharge on open access — both being owned by the state government," says Amit Kapur, partner with J Sagar Associates, a law firm.
What the new reforms aim to do is to take the physical wire network and move that into a separate company for a given region or area (say, south Delhi or north Mumbai). Within a given area, multiple distribution companies would be licenced to operate and offer power to consumers, with all of them having the right to supply power to a given consumer, while paying a set, common fee to the company which now owns the wires.By separating 'carriage' and 'content' this way, the Act aims to level the playing field between an existing supplier in any area who also happens to own the pipes, and challengers who want to enter with cheaper costs and power contracts but are hampered from doing so because of the costs of building an entire network. Your local distribution company will then be only responsible for billing you for the power you used, and collecting money.
Will it Work?
Customers in Mumbai are already allowed to choose between competing suppliers such as Tata and Reliance, and the experience has hardly been trouble-free. There has been litigation around the issue and while some disputes have been resolved by the Supreme Court, others remain. Even supporters of the reforms are guarded in their assessment of how successful the latest reforms will be.
"The details of how this reform will be carried out are crucial," says Chatterjee. And while such details need not necessarily be covered in the letter of the Act itself, they remain key to the success of the reforms. One key issue is how the transition is carried out. Take the Maharashtra State Electricity Distribution Company (MSEDCL), for instance, which supplies power across Maharashtra excluding Mumbai. As Chitnis points out, MSEDCL has a range of power supply contracts with various types of power generation companies, with some of its contracts such as those based on hydropower being extremely cheap. With such sources of cheaper power, MSEDCL is able to mitigate the costs of supplying cheaper power to agricultural consumers. If new suppliers do come in, the key question is what happens to those cheaper contracts that MSEDCL has.
Given that it will just be one among a number of suppliers, it will hardly need all that power that it has contracted to buy from generation companies. If those power contracts are to be reallocated to new discoms, will the cheaper power that MSEDCL has, be included as well? The bigger problem is one of new entrants looking to cherry-pick the best consumers from the incumbent. If this does happen, the incumbent state utility will be left with poorer, less lucrative consumers, while at the same time losing high-paying consumers to competing (and possibly more efficient) private sector utilities.
And if, as in the case of MSEDCL, its cheapest sources of power are partly reallocated to the new entrants, it faces a double whammy — watching its average revenue from customers drop (as high-paying customers leave), and see its average cost of power purchase rise, as cheaper fuel sources are allocated to new entrants.