Cross-subsidy cut key to open access rollout

Written by Noor Mohammad | Noor Mohammad | New Delhi | Updated: Oct 14 2013, 14:33pm hrs
Retail electricity consumers with less than 1 mw demand may emerge as the biggest beneficiaries of the Open Access (OA) policy if the Centre's plan to separate power supply from network ownership in power distribution business fructifies. For the policy to succeed, it is also crucial that a roadmap is laid out for the phase-out of the existing practice of creamy consumers, who pay higher tariffs, subsidising electricity supply to the agriculture sector, according to industry watchers.

The OA policy is meant to facilitate power trading and encourage competition in the distribution business.

The power ministry is planning to amend the Electricity Act, 2003 to introduce the proposed changes in the existing power distribution business model, which has proved to be a hurdle in implementing OA provisions that allow consumers to source electricity from suppliers other than the local discom by paying wheeling charges. The ministry is likely to start consultations with states on this soon.

While the Act mandates implementation of OA for bulk consumers (those with more than 1 mw demand) from January 2009, state electricity regulatory commissions (SERCs) have the power to frame regulations to extend this facility to other consumers whose demand may be less than 1 mw.

Analysts assert that benefits of the OP policy may not be realised fully unless cross -subsidy is phased out. The plan to separate wire and power supply business is a very progressive agenda. But to ensure its implementation, a time-table should be set for elimination of cross subsidy, said VP Raja, former chairman, Maharashtra Electricity Regulator Commission. Agriculture water-pumps account for as much as 27-30% of total electricity consumption in agriculture-rich states like Maharashtra, Punjab and Haryana.

Most states still charge unrealistically low electricity tariff from agriculture pumpset owners. If, because of open access, industrial consumers shift to independent private generators, state-owned discoms' finances would become untenable, leading to declining quality of supply to the poor, but politically important, agriculture sector, said Pramod Deo, former chairman, Central Electricity Regulatory Commission.

Kameswara Rao, leader, energy utilities and mining, PWC, too agreed with Deo's assessment. The loss of cross-subsidy reduces discoms' ability to finance poor consumers. This is an unfortunate situation as large consumers can still avoid payment of cross-subsidy by setting up captive plants. A more economically efficient option would be to encourage open access with a lower level of cross-subsidy surcharge which places them better than captives and yet earns them some cross-subsidy, Rao said.

Raja added: The Centre needs to provide some sweeteners to help state governments in progressive reduction of cross-subsidy as the latter cannot do this on its own.

Rao said: There is no legal limitation in implementing open access for consumers with less than 1 mw, but the phasing plan for introduction of open access below 1 mw has to be announced by the regulators. The mandatory provision is for more than 1 mw, and it is optional below that.

Originally, there was no time-frame for implementing open access even for bulk consumers either. It was left for SERCs to decide the timing. But later it was realised some regulators might not show due urgency in implementing the provision if no deadline was set for them. Hence the Act was amended in 2004 to stipulate the January 2009 deadline for implementation of OP for bulk consumers.

While SERCs regulate electricity tariff charged by discoms from non-open access consumers, they do not have any role in determination of tariff for open access consumers. That means open access consumers will have to negotiate electricity price with suppliers. The regulator will, however, continue to determine wheeling charges and cross-subsidy surcharge. Discoms are exempt from universal service obligations in respect of bulk consumers when complying with the mandatory OA policy.