Proposed electricity tariff policy hurts public good

Recent headlines about IL&FS sinking are yet another signal that all is not well when it comes to investments in India’s electricity sector. The latest proposal to amend the tariff policy is set to worsen the situation. Non-performing assets are plaguing the power sector, as many private, thermal power producers are unable to find buyers for the power they produce. At the same time, distribution companies are reneging on long-term contracts due to aggravating financial pressures. Already committed to long-term contracts with power producers, they are now also obligated to buy additional, often relatively expensive renewable energy.

These indications point to a fundamental mismatch: the infrastructure to supply power grossly exceeds the current economic demand for it. For supply to meet demand efficiently, the role of a well-functioning market and competition is paramount. This is amply acknowledged in the Electricity Act, which was designed with the purpose of deregulating the power sector and infusing competition into it. It is this competition, the essence of Electricity Act, 2003, which will be at stake if the latest amendment to the tariff policy, proposed by the Ministry of Power, is passed.

The provision on competitive bidding in the proposed amendment could have dire consequences for the public. It suggests that power stations owned by the government at either the central or state level need not go through competitive bidding in order to be commissioned. Only new projects by private developers would be subject to competition.

Essentially, privately-owned power plants would need to prove their mettle through a bidding process, while State-owned plants would simply need to find a distribution company willing to contract with them, at a tariff set by the relevant regulator. Arguably, the latter method could more easily lend itself to enduring friendships between the right set of people, rather than ensuring that the most economic deal is struck.

For instance, to meet Bengaluru’s peak electricity demand of, say, 1000 MW, BESCOM decides to contract with power plants. There are three power plants of 500 MW capacity each contending for the contracts, of which two are privately owned plants selling at Rs 3.50/KWh and Rs 3/KWh, and a third centrally-owned NTPC plant charging Rs 4.00 per KWh. If all plants competed on equal terms, NTPC would either be edged out of the race, or put under pressure to reduce costs.

If the new provision is passed, however, with the Karnataka Electricity Regulatory Commission’s approval, NTPC could just as well contract with BESCOM, and put the less expensive private plant charging Rs 3.50/KWh out of business. In the end, the consumer would pay significantly more than she needs to — the difference of 50 paise for every unit of electricity consumed. Given that the public sector owns more than 50% of the total installed capacity, the potential loss to the public could run into hundreds or even thousands of crores.

Bias against private sector

During the last decade, the private sector has championed generation growth in India, with more than 45% of India’s installed capacity being privately owned today. The private sector has thus been particularly instrumental in rescuing the country from the chronic power deficits it suffered for decades, and it has done so under a competitive regime. In this context, the bias against private producers is puzzling. The Association of Power Producers was quick to respond, saying that the proposed amendments contain “a very regressive provision for protecting central-sector generating stations from competition — a discriminatory and anti-consumer provision.”

It has been demonstrated time and again, all over the world, that competition is quintessential to ensure the lowest cost to the consumer. Regulation of the sort that the proposed tariff policy would encourage is an arrangement where an independent entity sets the tariff by accounting for the costs incurred and a pre-set rate of return. This kind of regulation removes the incentive for the regulated entity, in this case the State-owned power producers, to improve their performance or technological capabilities as they will be guaranteed a certain revenue regardless.

Such regulation should be applied only in cases where competition is not feasible. That is, either when there are too few participants in the market or when the entity in question is a natural monopoly. Neither of these factors apply to generation capacity in a market as large and diverse as India. In fact, if anything, competition should flourish in India, as already amply demonstrated during the last decade.

In fact, even the Central Electricity Regulatory Commission has made its opinion clear in favour of competition. Therefore, it is bewildering that the proposed amendments by the Ministry of Power are so unambiguously antagonistic to the spirit of the Electricity Act, let alone the Tariff Policy’s own broader vision.

It is worth noting however, that the amendment does not mandate regulation. This means that regulatory commissions at the state or central level could still choose to allow contracts be passed only through competitive bidding, within their jurisdictions. Nevertheless, if the amendment is passed, the choice to subject a government-owned power station to competition or not would fall on the individual regulators in a jurisdiction.

It is hard to see reason in allowing regulators to take actions that are unjustifiable to begin with. Public good cannot and should not be left to the benevolence of individuals who happen to be appointed regulators. Policies and laws exist to set the right institutions in place, to provide checks and balances on the whims of individuals. What should be done is clear. By withdrawing the provision to exempt State-owned power stations from competitive bidding, we must level the playing field once again, and expect nothing short of the highest levels of performance from our public sector organisations. Let us, as an informed public, not become passive victims of someone else’s decision.

(The writer is a post-doctoral fellow in the Science, Technology and Public Policy programme at Harvard University’s Belfer Centre for Science and International Affairs)