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Long delayed power reforms

By Prem Shankar Jha

In June Parliament enacted laws that could spell the beginning of the end of the mess that is the power sector. In a nutshell, the Electricity Act 2003 lays both power generation and power distribution wide open to entry by the private sector. In power generation any individual, group or association of individuals, whether incorporated or unincoporated, will be allowed to generate power and sell it to whoever wants to buy from them. No prior permission and no technical evaluation will be needed. At the distribution end, the Act allows unrestricted trading in power.

The State and Central governments, which will continue to own the transmission lines at least in the foreseeable future, will be obliged to ensure non-discriminatory, equal access to the lines for all buyers and sellers.

The entire system will be overseen by Central and State electricity regulatory commissions, which will set the parameters of pricing and resolve disputes between suppliers and purchasers of electricity. Appeals against their decisions will be settled expeditiously by an Appellate Tribunal, and not the civil courts, where they now get bogged down for years.

The new Act, which has been three years in the making and has been drawn up after receiving over 200 submissions and holding 40 conferences, has galvanised potential private investors in the power sector. The immediate reason is its generous provisions for captive power generation. The Act reaffirms the right of industry and trade associations to generate captive power for their own use. Where it breaks new ground is in giving these power producers the unfettered right to set up as large a plant as they wish, and to sell the surplus power to a distribution company such as a State Electricity Board, a private trader, or directly to another consumer. In effect this means that captive power plants no longer need to be seen as a form of insurance against the failure of the State power supply and can become stepping stones for the generators to become electricity supply companies, using their own and their associates' demand for power as a minimum guarantee of offtake.

Captive power plants account for more than 20,000 MW of installed capacity in the country today and have so far been used rather inefficiently. Optimising their use, will allow them to add another 15,000 MW of generation and co-generation capacity. If all goes well, this will meet much of the rise in demand in the next few years and prevent the present power shortage from getting more acute. It will also give the Central and State governments the time to sort out the innumerable problems, both of interpretation of the new law and of transition from the present State monopoly system to the new open access system of power generation and distribution. Most people in the power sector expect that this process will take eight to nine years to complete.

Despite the excitement it has generated, there remains an uneasy suspicion that the new Act will not resolve the most critical failure of the power sector in the past 15 years. That is the rank inability of the State electricity boards to stop recover dues from the consumers. Today 40 per cent of the power generated is stolen. In Delhi, this figure rises to 52 per cent.

The other problem is the subsidies doled out to agriculture. In principle subsidisation can be defended, but only so long as the subsidised price is also allowed to rise with the overall cost of power generation. Otherwise the burden of cross subsidies on the most affluent buyers of electricity becomes unbearable.

The first is a failure of management, the second of political will. Together they have created a situation in which the Maharashtra Government was forced to renege on an admittedly one-sided power purchase agreement with Enron.

This led to the abandonment of each and every single private power project in the country, Indian and foreign. The privatisation of distribution can at least partly cure the first malaise. The second is to be left to the regulatory commissions to deal with when they fix tariffs.

This is where the Act is least satisfactory. To shield tariff fixation from populist pressures, the regulatory commissions need to be as independent as the Supreme Court or the Election Commission is today. But the Act allows the Government to retain vast residual powers. Power pricing will therefore continue to be politicised and private investors will continue to shun this sector.

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