Mr Subrahmaniam, in a concept paper called 'Road map-towards a competitive electricity market in India,' said that in the Indian context, where, with the exception of a few licensees, there are vertically integrated electricity boards, generation would have to be separated from the transmission network. "This will have to be done irrespective of the current ownership structure of the utilities, private or public. If it is not done, integrated utilities will have considerable market power to distort the efficient operation of the market," he added.

Mr Subrahmaniam said that the commercial arrangements for paying generators and charging customers would have to be designed taking into account the complex physical arrangement for committing and dispatching generators.

Simultaneously, trading mechanisms would have to be developed which could include pooling arrangements or a range of derivative products on pool price.

The Merc chairman said that the original pooling and settlement agreement in the United Kingdom (UK) to which all generators, distributors and other retailers were signatory, ran into more than 700 pages and addressesed issues such as central despatch, price determination formulae for sale and purchase transactions and settlement systems to account for the trade.

Mr Subrahmaniam said that the pool system is expected to bring down costs because of increased competition, sales to consumers either through a pool or by distributors and said that the process is normally based on contracts.

These contracts, which could be entered into directly by consumers, could be long term or short term, depending upon the perception of the consumer about the movement of the prices.

Mr Subrahmaniam stressed on the need for tariff rationalisation for the implementation of the electricity market in India. "So if the market is to be implemented, subsidy has to be given by the government either to the distributor or to the consumer directly. This means that the subsidies involved should be explicit," he added.

Furthermore, he said that the problem here is not only the ability of the government to pay subsidy but also one of accurate estimation of the subsidy required. The government would have to carry out "structural changes to transfer the subsidies from ratepayers to tax payers by making provisions in the government budget." Mr Subrahmaniam also emphasised on the need for the government and the regulators to work in unison to find out acceptable solutions and above all gauge public opinion resulting from the public process. Moreover, issues such as open access to transmission lines, loading of technical losses on generation costs, adequacy of transmission infrastructure, capacity building for supply business, demand side management, the power purchase agreement route and escrow agreements would have to be looked into detail.

"A lot of restraint will have to be shown while implementing the concept of power markets in India as we definitely would not like to commit the mistake that we did while opening the generation sector without trying to solve the underlying problem of the viability of the distribution sector," Mr Subrahmaniam said.