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It's wired to trip

Creating an elaborate regulatory structure has failed to prevent the widespread loot in the electricity sector, writes Gajendra Haldea.

india Updated: May 21, 2011 16:56 IST
Gajendra Haldea

The Central and State Electricity Regulatory Commissions were set up under the Electricity Act 2003 with the objective of protecting the consumers, introducing competition and facilitating the orderly growth of the power sector. They have singularly failed in achieving any of these objectives. Prices have shot through the roof, competition is conspicuous by its absence and the endemic power shortages have only increased. Losses of utilities have risen sharply to about R60,000 crore per annum (over 1% of GDP), signalling a widespread sickness across the sector. The power sector in India seems more fragile than ever before.

The regulators seem to have been captured by entrenched interests which include a new breed of traders and merchant power producers who are being allowed to sell large volumes of electricity at prices unknown to the civilised world. Their bulk prices range between an average of Rs5-6 per unit and the only buyers are the state-owned utilities. After accounting for transmission losses and other expenses, the cost of supply to consumers exceeds Rs8 per unit. Yet they supply to bulk consumers at regulated tariffs of about R4 per unit even though the law does not allow the regulators to fix tariffs for bulk consumers who are expected to buy at market prices, as is also the practice in the developed world. However, the regulators have been subsidising the bulk consumers at the taxpayers expense. Predictably, the losses of utilities have mounted rapidly.

Why is the power sector lagging behind when virtually all other sectors of the economy seem to be faring much better? The short answer is the monopoly in supply of electricity to consumers who must only buy from their area distribution company. Though the Electricity Act gives consumers the right to buy from competing suppliers while continuing to use the network of their distribution company — just as the voice from an Airtel or Vodaphone telephone can reach you through your BSNL land-line — the monopoly utilities and regulators have virtually conspired to keep competition at bay. In London, for example, a household can choose from among 12 competing suppliers of electricity, all of whom use the existing distribution network for their supply. Thanks to the regulators, this still appears a pipedream for India, despite the mandatory provisions of law and a lag of two decades compared to the UK.

The monopoly in distribution of electricity has been difficult to challenge. It benefits thousands of utility employees who lord it over their captive consumers — the same way your telephone linesman did when he represented a monopoly. The local politicians benefit too as they share this patronage. Then there is the large-scale pilferage of electricity, running into several thousand crores of rupees, which creates a huge vested interest. In addition, there are lucrative contracts to be awarded for the expansion and operation of this system. All this adds up to quite a heady mix for those in control. Understandably, they wouldn’t want to let go of their monopoly.

The State Electricity Regulatory Commissions (SERCs) were expected to clear all this mess by introducing competition, but none of them have risen to the occasion. They simply eat out of the hands of the utilities and the entrenched interests. They also seem to lack the will and the professional skills to walk the change. For they are usually retired bureaucrats upon whom these sinecures are bestowed for services rendered.

The Central Electricity Regulatory Commission (CERC) has outdone the SERCs. Its statutory duty is to protect the consumers of one state from exploitation by suppliers and traders of other states. Acting quite the opposite, the Commission has virtually legitimised the inter-state sale of electricity at prices often exceeding three times the production cost — all in the name of trading, which is evidently unlawful, and also anti-social if the interest of society is the yardstick.

The CERC has a duty to fix the trading margin for inter-state trade of electricity so that the consumers of importing states are not exploited. Though it fixed a margin of 4 paise0 per unit, it allowed traders to subvert this arrangement with impunity. Traders can evade this regulated margin by buying at unregulated prices within one state and then selling in another state through another inter-state trader who will only charge the regulated margin. Thus CERC pretends that it is enforcing an inter-state trading margin of 4 paise even though a preceding transaction in the same chain may have extracted a profit of R3 per unit. This loophole has been created by none other than the CERC. The trading regulations earlier prohibited a sale from one trader to another, obviously aimed against manipulation of prices. But the CERC amended this rule to allow trader-to-trader sales, thus facilitating unchecked rent seeking. A regulator that has virtually enabled profiteering of over R50,000 crore over the past three years can hardly carry conviction as an institution that has consumer interests at heart.

The regulatory commissions have failed so miserably because of two fundamental reasons: (a) a selection process that enables the appointment of favourites, howsoever incompetent and lacking in commitment, and (b) lack of accountability — the regulators are neither accountable to the government nor to the respective legislatures.

The unchecked loot that is going on in the electricity sector militates against any notion of economic regulation and good governance. Though India has created the most elaborate regulatory structure for electricity, it is nevertheless facing a regulatory capture. Whichever way you look at it, the matter is far too serious to be left to the regulators. It deserves attention at the highest levels in the government.

Gajendra Haldea drafted the Electricity Act, 2003. The views expressed by the author are personal.