Electricity Act, 2003: the issues clogging progress on implementation

Written by N K Singh | Updated: Dec 23 2004, 05:30am hrs
Notwithstanding power reforms in the last decade and significant improvements, success continues to elude us. The competitiveness of Indian industry relies significantly on reducing the high cost and increasing the reliability of electricity supply. Nearly 61% of Indian manufacturing firms own generator sets, compared with 20% in Malaysia, 27% in China and 17% in Brazil. Indias blended real cost of power is 74% higher than Malaysia and 39% higher than China.

Electricity problems wipe out 9% of value added production, consumers suffer daily power interruptions and a single substation failure can bring down an entire regional network, affecting millions of people.

Base load power shortage hovered between 8-11% over the 1990s. The gap between demand and supply increased steadily from 5.9% in 1998-99 to 9.1% in 2002-03, but dropped to 7.1% in 2003-04. Shortages of peak power, 20.5% in 1992-93, also came down to 11.2% by 2003-04. However, demand estimates are inflated by the low cost of power for agricultural users, as well as the zero (de facto) price of stolen power. The ministry of power estimates that an additional 1,00,000 mw of generation capacity would be needed to provide power for all by 2012.

This may be somewhat of an exaggeration, since this assumes no reduction in demand as pricing regimes, hopefully, begin to reflect the true cost of supply. Adding this capacity will require Rs 9 trillion of investment, not including the costs of restructuring state utilities and taking care of past liabilities, as well as working capital, during the transition period. These are large sums and will not become available till the unfinished agenda of power sector reforms is completed.

While state-led power sector development was effective in increasing installed capacity and extending the network to many previously uncovered rural areas, government provisioning of electricity has not proved to be a sustainable enterprise. Government ownership without competition did not create incentives for efficient generation, or maintenance. Policy-makers often used low-cost electricity to gain electoral support, severely crippling state finances and Union government utilities ability to cover costs.

Market signals were effectively muted.

The 1990s saw a shift towards corporatisation of the power sector by restructuring of monolithic SEBs, including encouragement to the private sector and developing regulator oversight. The initial phase of the reforms focused on attracting private investment in generation, through fast-track projects based on counter-guarantees by government. While paying little attention to the principal source of risk, namely, the distribution sector. The endemic weaknesses lay in distribution, particularly reduction of transmission and distribution losses.

The Electricity Act, 2003, represents a major initiative in stipulating a more radical restructuring of the sector, as well as a much larger role for private players. The six key challenges relating to its implementation centre around the following issues:

Devising a sensible policy on rates: Whereas the micro-details of rate structure is the responsibility of regulators, the Act expects the government to issue broad guidelines. An Electricity Policy has also to be notified. Both remain in the domain of discussion. Issues pertaining to making rates increasingly reflect market principles, in a sector where the market is yet to be developed. In view of the disequillibrium between demand and supply, as well as market infirmities, this needs reconciliation. Whereas a cost-plus calculation which guarantees a rate of return is unsustainable in the long run, necessitating a normative approach based on benchmarking, a satisfactory transitional path needs to be evolved to ensure predictability.

The issue of surcharge repeatedly comes up for discussion. Embedded is the issue of cross-subsidy. The sector already has a considerable one, with both manufacturers and consumers paying more to subsidise agriculture. A time-path, with a sunset clause on subsidy management, needs wider consensus. Subsidies would need to be better targeted and the liability borne by the state government, rather than the utility itself. This is not easy if subsidies are large, given the concerns on state finances.

There is a related question of sensible energy pricing, since over-exploitation of groundwater, where hydrology does not suggest adequate recharging, requires deeper analysis on cropping patterns, in consonance with sustainability and changing consumer preferences.

Issues relating to the open access prescribed under the Act and the transition path also need deliberation. An immediate adoption of the open-access principle would generate competitive pressures on SEBs which, while desirable in accelerating the pace of change, could create difficulties for state-owned utilities. There is a need for transparency on an agreed roadmap.

The issue of regulatory autonomy has several dimensions. Several state governments have yet to complete the appointment of regulators or to issue orders on rates. This needs expeditious conclusion. Harmonisation of diverse regulatory rulings and the need for symmetry in the action of various regulators, while recognizing state-specific problems, deserve closer consideration. The central regulator functions as a quasi-judicial entity, but dispute resolution seems either outside his ambit, or preference. Hopefully, there would be early appointment of an appellate tribunal with dispute resolution functions, because the tendency for disputes to linger indefinitely is a serious discouragement to potential investors.

Finally, the issue of public investment and public-private partnership. This involves both, adequacy of resources and cost of transitional financing. Innovative ideas for new public investment by utilising our large foreign exchanges reserves have been under discussion. Apart from the economics of the proposal itself, there is need to ensure increased public investment does not put power reforms on a back burner. Indeed, one needs to do both: increase investment in power and the pace of power reforms.

In the long run, sustained increase in agricultural income and enhanced competitiveness of Indias manufacturing sector is critically dependent on availability of affordable power. These challenges need to be addressed and conflicting issues harmonised. Given the federal nature of our polity, political and institutional mechanisms for sustaining political consensus would be central to this effort. Only then can the slogan of Power for All move from rhetoric to reality.