Column : Open access cant fix all ills

Written by SL Rao | Updated: Nov 17 2012, 06:42am hrs
For years now there has been propaganda to push the idea of open access in electricity transmission and distribution lines if capacity is available. For a while, I also thought that this could be a major breakthrough for optimising the supply-demand balance in electricity. I recall a television discussion with the then power minister before the Electricity Act 2003 was passed. I argued for power trading as a means to bring greater equilibrium between power supply and demand. The minister wondered how there could be trading in a situation where there was such a perennially large gap between supply and demand. My response was that in a large system like Indias, there are pockets of surplus even in the midst of severe overall shortage. Trading could move these surpluses to where there was demand, and price would determine who got the supply.

I realised over time that this was an oversimplification that did not take into account the complex and untenable situation to which India, by deliberate actions, has brought its power system. Until these artificial distortions are removed, open access and the creation of electricity markets would have only a marginal influence on the supply-demand equilibrium.

First, of course, is that there must be adequate transmission capacity for power to flow from points of surplus to where there is demand. There must be some redundancy (excess capacity) in these lines. They must always be well-maintained in all parts of the country so that the national grid can work seamlessly. The double collapse in two days of the Northern Grid earlier this year proved that none of these pre-conditions existed.

In 2000, the then Central Electricity Regulatory Commission introduced an availability-based tariff to bring a commercial mechanism to control frequency in the grid that till then varied considerably. This damaged fast-moving equipment like turbines, textile machinery, etc, while it may not have bothered the nationalised generators. It also had a financial impact on private power operators and industries. This required a day-ahead forecast made for 15-minute intervals by all major users and generators of electricity they would consume or supply, respectively. While there was provision for modification, anyone who substantially violated their forecast paid heavily for it. This penalty helped stabilise the frequency in the grids. But it also became a benchmark price that state electricity boards used when they had a surge in demand. They paid the penalty, but continued to overdraw supply. This affected frequency but the penal charge prevented too much of this happening. This charge for unscheduled interchange, as it was called, became the reference price. That, of course, was never the intention.

Since then, power exchanges have come and they enable a certain amount of trading to occur. But trading has yet to proceed further than a day ahead. There is as yet no futures trading, a necessity if power trading is to become part of the power procurement planning of any distribution entity. Futures trades can help stabilise the market and inform everyone so that they can plan accordingly.

We are unlikely to progress much more than the present situation because of the distortions in our power system. Markets of all distribution enterprises in India are distorted in the following ways:

Substantial transmission and distribution losses. These are due to poor maintenance of wires and cause high technical losses. There is also considerable theft and non-payment of bills, inevitable in government-owned enterprises managed by bureaucrats who spend a few years at the head of the state electricity board before moving to some other job in government. Lack of commitment and the collusion of staff in theft combines with poor policing to result in high transmission and distribution (T&D) losses and consequent financial stress on the enterprise. These T&D losses are in most cases added to the costs that the consumers pay for.

T&D losses, therefore, amount to a the consumer cross-subsidising the inefficiency of the distribution enterprise and the collusion of its employees as well as the political leadership in the state in tolerating thefts.

State governments want to ensure that even the poorest consumer receives a certain amount of electricity, and so do important producer groups like farmers who depend on an unreliable monsoon. Governments subsidise these groups. Subsidies are to be reimbursed to the enterprise. This is often not done at all or not in full, causing losses to the enterprise, which it must recover from other consumers. Distortions to agricultural production that result from below-cost or free electricity is another consequence. The industrial and better-off consumers are charged extra for this loss.

Acceptance of the pernicious idea that the distribution enterprise must so manage its accounts so that a portion of the subsidies are recovered by higher tariffs charged to better-off consumersthe idea of cross-subsidiesis another distortion.

State regulatory commissions further distort the performance of distribution enterprises by not permitting legitimate expenses to be included for tariff determination. Instead, they are kept aside as regulatory assets which might be recovered at a future date, and are entitled to interest, which in some cases is not paid but added to the corpus of regulatory assets.

If open access is to work smoothly, none of these constraints must be imposed on the distribution enterprise. In that event, consumers could be free to choose between suppliers within or outside the state. Their moving to another supplier would not cause any loss to the enterprise in recovering the various costs whose recoveries have been postponed: T&D losses, subsidies, cross-subsidies, regulatory assets.

It is clear that any migrating consumer must be liable for these costs incurred during his tenure with supply from that enterprise. Whether it is paid by the new supplier who recovers it from the consumer or in some other way, the reimbursement to the original supplier is essential if he is not to be put to loss.

In open access, the consumer has a choice of suppliers. A migrating consumer will still use the wires of the original supplier and must pay a determined wheeling charge for the purpose. This will have to be collected by the new supplier and reimbursed to the owner of the wires. Having migrated to a new supplier, the consumer might want to ensure that any disruption in the new supply is quickly made up on the same wires by the original supplier. This is necessary if his production is not to be lost.

For the original supplier, this means he must keep a reserve of power to supply to customers who suddenly want electricity because the new supplier has let them down. Such a surplus or reserve is not possible in most distribution enterprises. If he has to divert supplies from loyal customers who have stayed, the original distributor must seek compensation from the sudden migrant consumer. The migrating consumer must, therefore, agree to give a pre-determined notice demanding restoration, and pay a standby charge so that when he suddenly demands restoration from the original supplier, the latter is able to make the supply.

All these steps call for careful negotiation, much paper work and keeping of accounts. It is unlikely that small consumers would ever want to enter into such complex arrangements.

In India, with subsidies, cross-subsidies, T&D losses, unthinking regulators who hold back expense reimbursement by creating regulatory assets, open access has a limited role as does consumer choice (even in a large market like Mumbai) where there is more than one possible supplier.

We cannot think of open access as a panacea for the evils imposed on the system by distribution enterprises, state governments and regulatory commissions. It has a limited, perhaps minor, role, in improving supply-demand balance.

The author is former director general, NCAER, and was the first chairman of CERC