The Hindu : Business : Consumer involvement, a must

Online edition of India's National Newspaper
Monday, Apr 26, 2004

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Business

Consumer involvement, a must

Fortunately, the institutional mechanisms emerging in the new electricity regime to protect consumer interests signal a window of opportunity, says Narasimha Rao D.

THE DRAFT National Electricity Policy (NEP) states that all consumers have a right to get uninterrupted twenty-four hours of quality power that reflect efficient costs. Is this significant? Legally, no. An executive policy directive is not enforceable in court like a fundamental right. Most likely this is policy rhetoric that will carry little potency on the ground. But, symbolically, it is noteworthy. Indian electricity service providers have always operated in an unreachable black box, the workings of which hide many skeletons and misconceptions that consumers will find eye opening, if they knew about them. Fortunately, the institutional mechanisms emerging in the new electricity regime to protect consumer interests signal a window of opportunity. But the new regime also poses threats to many consumers. If history is an indication, reforms will be pushed without much analysis of impacts, winners and losers. Consumer groups must exploit these new avenues to bring accountability of decision makers and service providers directly to them.

What are the present provisions for protecting consumer interests? To start with, the Electricity Act notified last year (the Act), provides for a Central Advisory Committee and State Advisory committees, which will consist of 31 members each with representations from various sectors, including consumer groups. These will advise their respective governments on policy making. Second, state regulators are entrusted with overseeing distribution utilities' service provision. The Act stipulates that regulators have the authority to suspend the licences of distribution licensees that persistently supply poor quality or interrupted power. Every state regulator will have a consumer grievance division, and an Ombudsman. Every distribution licensee should also have a consumer grievance redressal forum. Third, the Act also contains several mechanisms to define utilities' obligation to serve, and performance standards. The Central Electricity Authority, according to the draft NEP, will be responsible for developing a Reliability Index (RI), to be implemented in all cities and towns. The regulator will be responsible for enforcing these standards.

These are healthy first steps. Starting with the last, performance standards are vital, and the initiatives are laudable. But they must be enforceable. So far, licence revocation seems to be the only threat for non-performance. This is too stringent to be useful or invoked. Similarly, the institution of ombudsmen and grievance redressal fora is also necessary, and should be utilised. But larger issues pertaining to power adequacy and affordability cannot be addressed through complaints or performance standards.

Affordability factor

With regard to affordability, the regulator plays an important role. The regulator is supposed to regulate retail tariffs, and develop loss reduction targets for distribution operation. He has also to approve generator tariffs employing competitive bidding. However, regulators are constrained by bounds of their mandate, which often run contrary to the interests of consumers. For example, regulators, pursuant to the Act, are required to set tariffs to eliminate cross subsidies. Yet, even utilities do not know the cost to serve individual consumers to identify the extent of cross subsidies in the first place. It is entirely conceivable that regulators will hike tariffs for consumers paying below-average costs, even if they actually may pay what they cost to the system.

With privatised distribution utilities, many forces, such as the World Bank, are pushing for direct negotiation between government and investors, bypassing the regulator, in order to reduce regulatory uncertainty. In one State's draft privatisation strategy, the investor was allowed to revise tariffs without regulatory approval or public consultation.

It is a well-known fact that private, regulated utilities will pad up costs as far as they can, since they earn regulated returns. The same problem exists even where regulators exercise full control over private utilities, such as in Maharashtra, because they suffer from inadequate expertise and information asymmetry to challenge their rate filings. Both conditions run the risk of higher pushing up tariffs.

Poor consumer representation

Thus, there is need for deeper involvement and analysis in the policy making process to influence all factors that will eventually translate into affordable, uninterrupted power. Currently, consumer groups are poorly represented in the policy sphere, with industry being the most influential group. The composition of entities consulted by the N.K. Singh Task Force for Investment and Reforms that advised the Union Ministry of Power in drafting the National Electricity and Tariff policies provides some insight. State-owned entities involved in the power sector dominated this list, including State utilities, State and Central regulators, state governments, centrally owned generating companies, and regional electricity boards. The rest included four private utilities, seven financial institutions, five consultants, three industry groups, a number of power experts and two consumer advocate groups. This is insufficient. Consumer representation in the policy space must expand. Only then can consumer intervention transition from being reactive to proactive.

The need is stronger now when future policies are being formulated without utilities and policy makers themselves having analysed consumer impacts. The case of cross subsidies is one of them. With this imperative, along with the flexibility afforded for utility privatisation, this can lead to a segmentation of consumers: utilities have a strong incentive to carve out urban (lucrative) zones for privatisation, which can easily meet the targets for tariff rationalisation and financial viability. This will leave most consumers, particularly rural, still attached to the further emaciated State-owned utilities. The outcome for them could very well be higher tariffs and more power cuts.

Unfortunately, governance reforms of State-owned utilities are largely neglected in the new electricity regime. The hope is that performance targets and risks of losing valuable customers to competition will spur them to shape up. With soft budget constraints, and a legacy of organisational inefficiencies and corruption, this hardly seems sufficient. This must be supplemented by direct interventions from consumers to enforce transparency and demand accountability from State-owned utilities. To successfully intervene, consumes will need organised representation, through local elected councils, and NGOs, as well as technical expertise and guidance.

Lack of information

In order to facilitate this, foremost is the need for increased awareness and understanding. The complexity and opacity of the power sector have bred a culture of disgruntled complacency (power cuts are inevitable), or politicisation of demands from those who can afford political access, both of which are sustained by lack of information and transparency. Lack of information in the public sphere is a known malaise of the public sector. In the power sector, this has enabled policymakers and service providers to avoid scrutiny. Consumers must utilise legal methods such as the Right to Information Act, and lobby for policies specific to the power sector that require utilities to make available information related to system operation and decision making, and company finances.

There is growing recognition that the reform of sectors dominated by government must have as a cornerstone active citizens' participation and grassroots initiatives to demand accountability and performance and influence policy. This is seen in municipal administration, in the water sector, in public health, and in education.

The institutional hierarchy governing power sector reforms is telling — Central government policy guiding State governments and State-owned regulators, who are guiding State-owned utilities. The ongoing reforms in the power sector pursuant to the Act are the most formative and far-reaching in history. Central-level policies are being finalised over the next few months, but State-level policies, particularly those governing distribution, are only just beginning. Never has there been a more compelling need for the involvement of consumers.

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