Electricity Regulation in India

By: Dr Ramrao Mundhe
The Indian electricity sector, despite strings of reforms during the last one and half decades, is still struggling to close the gap between demand and supply. Power sector targets set for the last three five year plans were not achieved. Providing electricity to much of the consumers, households and industries, at competitive rates with a good quality of service thus still remains a challenge.
Energy

Electricity comes under concurrent list of the Indian Constitution, with reforms and regulation falling under state territory. However, uneven distribution of electricity sources across states induced interstate trading of electricity. This required establishment of electricity grids at regional and national level for transmission of electricity between states or regions.

Article 4 Fig 1

Electricity reforms have their roots in the Electricity (Supply) Act 1948. At the beginning of the reform period and during the much of India’s history the sector was a government monopoly. So, all the three segments of the sector namely generation, transmission and distribution were under government control. Also state collection of tariffs was significantly low as non-payment of tariffs and theft was rampant. The sector has always been politically sensitive and much of the inefficiencies were driven by flawed government interventions. Tariffs were decided by the government, which in most cases did not cover the costs of the utilities. Due to cross-subsidisation some consumer sections like industries were forced to pay high tariffs and at times these tariffs were simply unviable.

Reforms introduced under the Electricity Act 2003

  • Electricity Rules, June 2005 (amended in October 2005)
  • Tariff Policy, January 2006
  • National Electricity Plan, August 2007
  • Tariff based procurement of power notified 2005 (amended in September 2007)
  • Tariff based competitive bidding for transmission services
  • Ultra mega power projects

It is only after 1991 economic reforms that private sector was encouraged to participate. Generation was the first segment opened up for private sector. Soon private sector’s interest in the generation faded as other two segments were still inefficient. Reform process was then directed towards transmission and distribution segments.

Unbundling of utilities was envisaged to separate the three segments (generation, transmission and distribution) and introduce competition. Both the regulatory acts in 1998 and 2003 brought legislature to this effect. The reforms were at their peak when a comprehensive Electricity Act 2003 was introduced. Only 8 states have so far unbundled the segments. Out of remaining states some of them did not unbundle and others, mostly small north and north-eastern states, were exempted from it. However, unbundling of utilities could not achieve much as many other problems like political interference, tariff anomalies and all problems of differential tariffs to cross-subsidise were not addressed.

Another problem with the sector has been subsidies, which were introduced to maintain socio-economic balance, for example, rural consumers have been cross-subsidised through urban consumers and industries. The subsidies have been one of the main reasons for the inefficiencies in the sector. Though the intention behind subsidies was good, but they were improperly implemented and targeted.

 

Regulatory reforms

State Electricity Boards (SEBs) were created under the provision of Electricity (Supply) Act 1948, with states given the responsibility to regulate the sector. However, it was later realised that interstate transmission was necessary to keep a balance between deficit states and states with excess. So, in mid-1960s regional electricity boards (REBs) were set up and REBs were given statutory status in 1991. At the same time electricity sector was opened to independent power producers (IPPs) in generation – IPPs include foreign investment.

Electricity Regulatory Commission (ERC) Act, 1998 was introduced with the aim of establishing independent regulatory agencies in the sector viz. Central Electricity Regulatory Commission (CERC) and state electricity regulatory commissions (SERCs). While the Act had provisions for independent regulatory agencies, it did not have provision for appellate tribunal, which meant any dispute was to be dealt in the High Court.

M S Ahluwalia committee submitted its report on the settlement of SEB dues in 2001 a year after its formation in 2000. The committees was to look into issues related to SEBs inability to support power purchase and resulting difficulties faced by electricity suppliers. The Committee introduced resettlement scheme to help SEBs to ensure credible payment of dues to suppliers. Later the Central Government as a measure to help SEBs recover from their bad financial state came up with a scheme to write off half of the debt and to convert other into bonds. However, this scheme served as disincentive to those SEBs which were performing well. Accelerated Power Development Programme (APDP) was launched in 2000-01 and was renamed in 2002-03 as Accelerated Power Development and Reforms Programme (APDRP) with objectives of increasing financial viability of SEBs and increase investment in distribution sector, reducing aggregate technical and commercial (AT&C) losses, etc.

The Electricity Act 2003 was a landmark in regulatory reforms in the sector. The Act replaced the Electricity (Supply) Act 1948 and the ERC Act 1998. The crux of the Act was to improve the legislature governing all aspects of the sector by consolidating laws relating to generation, transmission, distribution, trading and even use of electricity. Other provisions were to promote competition, constitute Central Electricity Authority (CEA) and regulatory commissions and establish appellate tribunal.

National Electricity Policy 2005 came into existence to specifically reach out to 44 per cent of India’s population that still lacks access to electricity and to provide rural India access to electricity at a reasonable rate. The policy aimed at meeting the existing gap between demand and supply by 2012. Protecting consumer interest and improving per capita availability were also objectives of the Policy.

 

Current issues

Issues related to open access, short term pricing and trading margins will have wide implications on the performance of the sector not only now but in the future as well. These are briefly discussed in the following section to enable understanding of what the issues entail.

Issues related to open access

The Electricity Act 2003 defines ‘open access’ as the non discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the appropriate commission. Thus the Electricity Act 2003 mandates open access for consumers with the purpose of ushering in efficiencies through competition. Open access allows consumers to purchase electricity directly from the generation company or traders or distributors, which induces choice as the consumers can choose their supplier. Thus, on the one hand in the absence of open access, bulk of the consumers cannot choose their suppliers and are forced to buy power from SEBs and on the other hand, suppliers cannot choose their customers if they do not have access to the transmission lines or distribution system or associated facilities.

Customers are finding it hard to make use of open access due to a high level of cross-subsidy surcharges. The cross-subsidy surcharge is the amount paid by a customer to existing supplier while migrating to new supplier. There are inherent costs that existing supplier has to bear if a customer switches to another supplier.  However, the surcharge often turns out to be very high, preventing customers from switching their supplier. It is very crucial that the surcharge needs to be rationalised or lowered so that consumers can benefit from open access. It is important to note the meaning of customer here; under regulatory provisions to be eligible to access electricity from open access customers should have potential demand/capacity to consume more than 1 megawatt. That means big or bulk customers like railways, traders and distribution licensee generally are eligible for open access.

The Central Government has been asking SERCs to introduce regulations to facilitate open access to improve competition. Yet, around 50 per cent of the SERCs have not introduced regulations regarding open access. In fact, many of them are reluctant to provide open access, stating that surplus power will be needed for peak time shortages and in reality there is not enough spare capacity to make open access work.

 

Short term pricing/tariffs

Although most of the electricity is generally traded on long term contract basis, some percentage of the electricity generation (varies with state to state) is traded in the short term market. This market is mainly for filling the gap between demand and supply by transmitting electricity from surplus states to deficit states. Most electricity for short term market comes from coal based and hydro plants. According to a CERC’s discussion paper electricity generated in the short term market typically costs Rs. 4 or less per unit, however short term trading price for the electricity typically range from Rs. 6 to 8 per unit.

Thus, high prices in short term market have been a cause of concern for many states, especially when deficit states rely on short term market to meet their peak time shortages. States like Punjab spent 30 percent of their cost to obtain 13 percent of electricity in 2008-09 (CERC, 2008).

Main reasons behind such prices are increasing shortages of electricity and rising fuel cost. While surplus states have found it increasingly profitable to trade in short term market, it led to at times cuts in the electricity supply to consumers within the state. On the other hand, deficit states are facing financial difficulties to cope with their peak time power shortages, which in many cases result in high electricity tariffs for consumers in these states.

 

Trading margins

Establishing power exchanges, the open access and inter-state trading regulations have helped facilitating power trading in the country (CERC, 2008). This attracted private sector investment. The government issued around 40 trading licences in 2004 to private entities to trade in electricity. Later observing that many private sector units were charging as high as 9 to 10 paisa a unit to consumers, the CERC imposed a 4 paisa cap on trading margins in 2006. According to the latest data from CERC (till May 2009) only 30 percent of the total licensees were active in the sector.

Recently many private players are surrendering their licences to CERC claiming that reduced trading margin cap has made the sector economically unviable as over time costs have increased sharply. Traders have challenged the CERC’s 4 paisa cap on trading margins in the Supreme Court on economic grounds in 2006 and the matter is still pending. However, with reducing private sector interest in electricity trading government would find it hard to cope with the widening electricity deficit in many states.

 

Conclusion

So far achievements of the regulatory reforms to encourage private participation, promote competition, incentivise state owned utilities to improve their performance, etc. have been mixed. Inconsistency in policy changes has made the power sector highly risky for huge investments that it requires, therefore making it less attractive for private investment. That means even during the eleventh five year plan it is not likely that the planned target will be achieved.

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