Power regulatory reforms
GOVERNING POWER — A New Institution of Governance — The Experience with Independent Regulation of Electricity. S. L. Rao; TERI Press, Darbari Seth Block, Habitat Place, Lodhi Road, New Delhi-110003. Rs. 580.
UNTIL THE 1970s most countries viewed the electric utility industry as a vertically integrated natural monopoly because of economies of scale in generation and the need for avoiding duplication of facilities in transmission and distribution. All countries preferred either a public monopoly or a private monopoly subject to price and service regulations. The monopoly status enabled these countries to supply electricity at reasonable prices and to achieve universal coverage.
Supply reform models
By the mid-1970s it was realised that some electricity markets could support more than one firm, and the dynamic efficiency gains by opening up segments of the industry to competition might exceed the alleged benefits of monopoly. This book documents the international experience regarding different reform models relating to electricity supply and their relevance to India.
India's experience in operating the vertically integrated statutory monopoly since 1948, while partially successful in achieving coverage, revealed many drawbacks — persistent excess demands, technical inefficiencies, poor quality of power and huge financial losses to State Electricity Boards (SEBs). Recognising the need for attracting private investment in the power sector and to improve efficiency in electricity supply, the Government of India initiated reforms in 1992.
In 1998 the Electricity Regulatory Commissions Act was passed to facilitate the establishment of the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERCs). The Electricity Act, 2003 provides the legal framework for the operation of India's electricity supply system in a competitive environment.
The Indian model
The book focusses on the design and functioning of the CERC and the SERCs as new institutions of governance. Rao notes that an independent regulatory agency can handle complex matters, react to new circumstances more quickly and better equipped for dealing with political or controversial decisions. He lists the following characteristics of such an agency — autonomy, accountability, popular participation, efficiency, predictability, transparency and judicial control.
Rao's evaluation of the functioning of the CERC and the SERCs reveals that these new institutions have not been effective in achieving the goals of economic efficiency, promoting competition, attracting desired levels of private investment and improving the financial viability of the SEBs.
Based on a survey conducted by Prayas Energy Group in 2003, he reports that many states have not given the full powers under the Act to the commissions.
The composition of the commissions is heavily biased in favour of IAS officers and retired staff members of SEBs. Most staff members are on deputation and their professional skills are limited.
He attributes the weakness of the commitment to handing over of government powers to the CERC and the SERCs and the subsequent rocky relationships between many state governments and the SERCs to the imposition of the idea of independent regulatory commissions from outside.
Cost benefit analysis
Rao is concerned about the poor quality of information about capital and operating costs, transmission and distribution (T&D) losses and projected demands given by the SEBs to the SERCs. The existing cost data of the SEBs conceal both technical and allocative inefficiencies.
Further, the estimates of subsidies for agriculture and domestic categories are based on the differences between the unit cost for the system as a whole and the average revenue realisation for the particular category.
As the unit costs of serving the two categories are far above the unit cost for the system as a whole, the subsidy estimates are biased downward. Hence, the estimates of cross subsidies are also biased.
With private entry and market orientation it is necessary to use current economic costs rather than historical costs and carry out a disaggregated normative cost analysis. This type of costing exercise will help in evolving a rational tariff, measurement of subsidies and cross subsidies in existing tariff and cost benefit analysis of trade-offs among policy options.
Recommendations
As electricity is a basic need, government has an obligation to provide electricity to poor households and users in rural and remote areas at reasonable prices. In the new system of governance, state governments can achieve equity and rural development goals by identifying the customer categories deserving subsidy, prescribing the extent of subsidy to each category and releasing the subsidies to the service providers on the basis of performance norms.
The timing of and the extent of tariff revisions should be left to the SERCs. This policy will help in achieving the social goals in a transparent manner and reduce the political uncertainty.
This book reflects the author's rich experience as a professional manager, renowned applied economist and the first chairman of the CERC. It contains valuable information about the structure and the functions of independent regulatory agencies in India and abroad. The last chapter identifies directions for change to achieve the expectations from the regulatory agencies.
U. SANKAR
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