Power equations
Business Standard / New Delhi October 8, 2004
Foreigners can be forgiven for wondering at the wonder
that is India. One of the first sectors that the
government sought to reform was the power sector, way
back in 1993.
But the entire effort, which was quite huge, bombed
because the government tried to pump up generating
capacity without reforming transmission and
distribution. The Maharashtra State Electricity
Board’s agreement with Enron was a perfect testimony
to that. Everyone got into a jam.
The problem was eventually diagnosed correctly and
amends made via the new Electricity Bill of 2003,
which allowed independent power producers (IPPs) to
sell to whomsoever they liked—retail consumers,
trading companies like Power Trading Corporation or
bulk consumers—and not be tied down to a particular
electricity board.
The results appear to have been dramatic. Financial
closures have been achieved for nearly 5,000 MW of
additional generating capacity—in nine months. In the
previous 10 years, the private sector had added only
7,000 MW.
The latest closure has been in respect of the
Mangalore Power Company’s 1,000 MW project in
Karnataka, the twelfth this calendar year. The target
for private sector additions to capacity for the Tenth
Plan is only 7,121 MW. So we are almost there, and may
well surpass the target by a handsome margin.
Indeed, by the end of the Plan, it should surprise no
one if total private sector capacity is around 20,000
MW. What next?
The government needs to seize the opportunity that it
now has to fix the emerging market for electricity.
The key, as is now well established, lies in a highly
competitive market that is also well regulated.
India has done well in the last few years to introduce
competition in many industries—and then it has botched
things up by not allowing it to be free and fair.
The telecommunications sector is a shining example of
this. This must be avoided in the power sector, where
there are state and central regulators and who between
them have a pretty sorry record so far. In some
states, the government simply ignores the regulator!
The first step therefore has to be de-politicising
electricity, which in turn requires genuinely
independent power regulators, not ex-bureaucrats
seeking to please the political class by, in the final
analysis, conniving to stifle competition.
It is also necessary to learn from the mistakes of
others. Should a trading pool emerge—and, given the
nature of the business, it will —care has to be taken
that the pool itself is properly managed.
International experience shows that this is easier
said than done. To quote out of context, the price of
cheap and efficient power is eternal vigilance.
The fundamental problem, it has been seen
internationally, is lack of transparency on the part
of the major players, be they the producers or the
traders. Indeed, the two usually get together to gyp
the customer. Also, as in any form of trading,
attention tends to be firmly focused on maximising
short-term profits and this can interfere hugely with
the market in the long run.
In sum, all this adds up to the need to make
procedures flexible by not tying the hands of the
regulator through an excess of legal provisions
seeking to cope with as many contingencies as
possible.
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