Ensuring competitive neutrality of networks

Written by Rajesh Kumar | Updated: Dec 2 2009, 03:27am hrs
An objective of electricity reforms is to promote fair competition in the market. Drawing a lesson from the reform experiences of network utilities like telecom, gas and water globally, the Electricity Act, 2003 and National Electricity Policy, 2005 envisaged independent infrastructure companies in the power sector to promote competition in both wholesale and retail markets. But in the absence of regulatory initiatives, the working of infrastructure companies, like transmission utilities and load dispatch centres, was not independent and transparent. This has limited investment and competition in the sector. Steps are needed to ensure competitive neutrality of infrastructure companies so that a common carrier is accessible to all generators and consumers.

In mature electricity markets like the UK and the US, infrastructure facilities are controlled by independent system operators (ISOs). They have reasonable independence in operation to ensure competitive neutrality. ISOs allow all generating companies and consumers to wheel energy after paying the user charges and they give no preferential treatment to any player. In California, even household consumers can select their supplier.

In India, the Petroleum & Natural Gas Regulatory Board (PNGRB) has declared oil & gas pipelines as a common carrier and steps have been taken to ensure competitive neutrality in the business. Any operator in the market may use the network after paying the user-charges. Similarly, in the telecom sector, common ground infrastructure is mainly owned and operated by independent agencies and all operators can have a fair access to each others networks. All operators give other operators access to their network. Until recently, BSNL was not doing so, but has changed its policy. But in the electricity sector, independence of infrastructure utilities remains very poor.

Sharing a common infrastructure saves the cost of duplicating the network business. This benefits all market players, including consumers. So, it is argued that common infrastructure should be developed and operated in collaboration and cooperation. But it may also limit competition if the common carrier operator is not an independent entity in the supply chain. So, regulation has to ensure that competition is not restricted by the non-competitive actions of a network operator.

The purpose of unbundling state electricity boards (SEBs) was to separate the competitive segments from the non-competitive functions of the industry. The transmission & distribution (T&D) network, including load dispatch, is designated as a common carrier for generating and distribution companies.

For example, section 38(2)d and section 39(2)d of the Act requires central transmission utility and state transmission utility to allow generating companies and consumers to use the system by paying the charge. It asks such utility to provide non-discriminatory open access to its transmission system for use by any licencee or generating company on payment of the transmission charges . Similarly, clause 5.3.7 of the National Electricity Policy states that the spirit of the provisions of the Act is to ensure independent system operation through NLDC, RLDCs and SLDCs. In the same process, almost all regulatory commissions have ensured open access regulations requiring fair open access. However, open access is available only on paper, not in practice.

The public ownership of utilities and poor governance are the key reasons for the slack competitive neutrality in the sector. Most power utilities, including transmission companies, are publicly owned at the state level. The same management (state power department) controls the generation and T&D business. Decisions on access, output, sale, purchase and price of power are discriminatory towards other competitors, especially private players. Unless effective regulatory actions are initiated, this preferential treatment would continue among incumbent utilities.

Development of independent and common infrastructure facilities in the distribution business has deteriorated. The Act allows parallel licencing in the distribution business so that end-users may have a choice in selecting their supplier. However, there is no progress on this issue. Competition in the distribution business is possible only when the segment is separated from the retail supply business. Even findings of studies conducted by the government task force (May 2009) and forum of regulators have noted the need to ensure independence of the transmission utilities to promote competition.

Developing adequate common infrastructure and ensuring independence of the system operators are the key drivers of competition in the sector.

However, the tendency of incumbent utilities to retain their monopolistic hold by creating artificial barriers to market access has hobbled competition. Under the pressure of state governments and state distribution companies, transmission companies and load dispatch centres are not functioning independently.

So, state electricity regulatory commissions should take proactive measures to ensure the independence of infrastructure utilities so that healthy competition is promoted throughout the sector.

The writer is an assistant policy analyst at CUTS International