Powering competition through open access

October 23, 2020 4:45 AM

To make state commissions free of political influence by state governments, vest oversight of these with Aptel or CERC

The cost of supply at higher voltage levels is substantially lower than that for consumers connected at lower voltages.

By SL Rao

The Electricity Act of 2003 introduced competition in the power sector. Demand-side competition was introduced through open access to enable consumers with above 1,000 kW consumption to source power from a supplier of their choice. Upstream competition was enabled through de-licencing of power generation and through introduction of power markets. Almost 16 years after, competition, especially on the demand-side, is almost non-existent. We continue to struggle with downstream operational and financial inefficiencies, reflected in bad loans and NPAs as well. Power distribution continues to be monopolistic. Now, almost every entity in the power value chain is adversely impacted. So, the questions that come to one’s mind are: Why has open access not taken off despite being legislated? What is ailing demand-side competition?

The idea behind open access to large industrial consumers to choose supplier directly from among the generators, or through an intermediary such as a trading licensee or the power exchange, was to create a competitive environment that prompted state discoms, who enjoy monopoly, to get competitive and build much-needed operational and financial efficiencies.

In 2011, the power exchanges operationalised open access for retail consumers above 1,000 kW. Looking at the last nine years, it can be easily inferred that open access has not been allowed to find traction. First and foremost, open access granted is partial and not full. The industries opting to procure power through open access have to continue to pay the fixed and contract demand charges to the utilities and thus cannot fully leave the grid connection. Second, only about 1% of our total annual electricity consumption of about 1,400 billion units is currently sourced through open access. Almost 30% of India’s annual electricity consumption is on account of commercial and industrial consumers. Clearly, open access has not been that ‘open’ and competition has been dissuaded through distorted tariffs, irrationally high charges as well as various non-tariff barriers.

The power sector needs to be freed from political influence and imperatives to enable free and fair competition. Lack of free and fair competition in power supply has led to cascading inefficiencies. State governments continue to operate inefficient generation, adopt distorted tariffs and pass the inefficiencies to the end-consumer, making the entire power sector value chain unsustainable.

The state electricity regulatory commissions, positioned as quasi-judiciary bodies, are meant to balance the interests of the stakeholders with the rights of consumers and also undertake dispute adjudication within the boundaries of their respective states. Unfortunately, the regulator has been operating as the extended arm of the state government, hand-in-glove with state discoms. Most state regulators have retired bureaucrats occupying key positions, while judiciary positions are kept vacant deliberately. Ensuring autonomy and independence of the regulator is a prerequisite to fair competition, protecting the interests of consumers, and building a free and fair level playing field.

Setting power tariff is one of the key functions of the regulators. In almost all states, tariffs are based on average costs and not on the cost of service at a given voltage level. Similarly, subsidies and cross-subsidies are pursued blatantly to please residential and agricultural consumers, the biggest chunk of the electorate. According to the latest PFC report, AT&C losses were 22% and the average cost of supply- average revenue realised (ACS-ARR) gap was Rs 0.52 per unit at the end of FY19. Discoms owe more than Rs 1.2 trillion to gencos and have about Rs 3.5 trillion of cumulative debt.

The Electricity Act must be relooked to allow for review of the functions of the state commissions to ensure that tariff, competition and consumer/investor interests are well balanced. Such review powers could either be vested with the Aptel or the CERC. This is critical given the concurrent nature of the sector. To build a vibrant demand-side competition, the policy vacuum at the national level needs to be addressed, while ensuring implementation at the state level.

The cross-subsidy surcharge and additional surcharge recovered from industrial consumers opting for open access must be rationalised. High level of surcharge in several states jeopardises the commercial viability of open access. To prevent this, the ministry of power issued the Tariff Policy in 2016, calling for limiting cross-subsidy surcharge to 20% of retail electricity tariff and the NITI Aayog reiterated this in 2019. However, several states such as West Bengal, Karnataka and Rajasthan continue to have cross-subsidy surcharges higher than 20% of the retail electricity tariffs. The National Tariff Policy also allows for an additional surcharge to open access consumers in case the discom is able to demonstrate that its power purchase commitments have been, and continue to remain, stranded due to migration of consumers under open access. In the absence of any prescribed methodology for computation of this additional charge, SERCs have been following varied approaches, resulting in large charge variations across states.

A significant proportion of distribution networks are connected at low voltage while the open access consumers are typically connected at 11 kV and above. The cost of supply at higher voltage levels is substantially lower than that for consumers connected at lower voltages. However, several states levy a single wheeling charge on all open access consumers, resulting in reduced commercial viability at higher voltage levels.

The additional eligibility conditions imposed by certain states also act as a deterrent to building healthy competition. These conditions vary from state to state, such as requirement to obtain standing clearance or no-objection certificate from the utility that has an inherent bias towards disallowing or delaying competition. These need to be resolved.

(This concludes the two-part series.)

(Author is Member, Advisory Board, Competition Commission of India, and former chairperson, Central Electricity Regulatory Commission)

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