OTHER PUBLICATIONS
INDIAN POWER PRODUCERS ASSOCIATION
NOVEMBER 7, 8, 2008
Legal Summit: Issues in the Power & Energy Sectors
“THE POWER SECTOR AND COMPETITION LAW”
BY S L Rao
Abstract
The power sector in India is largely government owned, tariffs are not market
determined, there is an attempt to introduce competitive bidding for new projects, and
distribution is largely in government hands. Some private operation of distribution has
had limited commercial success, given the high starting transmission, distribution and
collection losses When coupled with the difficult t payment collection t in the context of
manypoor customers, that very often the levied charges for certain consumers do not
reflect the costs, and the many thieving rich, industrial and commercial customers, puts
a burden on t the state entities to cross-subside these customers through means of high
tariffs to other customers and direct subsidies by government. They enable such below
cost sales. Since much of the reform effort is to simulate the effects of competition or to
introduce competition, Competition is expected to be implemented through the details of
independent regulation. The Competition Commission hasalimited role. We have to
innovate ways in which the ElectricityRregulatory Commissions and the Competition
Commission of India can coordinate on matters where there is such a conflict in
jurisdiction.
Table of Contents
Constitutional distribution of power ............................................................................... 2
Competition in Power ....................................................................................................... 3
Definition of Completion ................................................................................................ 3
Possible Competition Scenario: The Market Model ....................................................... 4
The Global experience .................................................................................................... 4
Competition in Generation .............................................................................................. 4
Carriage in infrastructure services .................................................................................. 5
Issues in Competition and Economic Regulation ........................................................... 5
Market Structure and Restructuring ................................................................................ 5
Generation of electricity: Competition and Regulation Issues ....................................... 5
Transmission of Electricity: Regulatory Challenge versus Managed Competition ....... 8
Distribution of Electricity ............................................................................................... 8
Preconditions for competition in electricity ................................................................... 9
Open access:.................................................................................................................... 9
Power Exchanges ............................................................................................................ 9
Other pre-requisites for competition and consumer choice ............................................ 9
Regulation and Coordination......................................................................................... 10
The role of the Regulator .............................................................................................. 10
Present status of regulation in coal sector ..................................................................... 12
International experience ................................................................................................. 12
Other Institutional Structures and Systems for Competition ..................................... 12
Need to improve Distribution & transmission efficiency ............................................. 12
Nature of Contracts ....................................................................................................... 13
Actions for Moving to Competition in Indian Electricity Sector ............................... 13
Achieving Competition ................................................................................................. 13
Rationalization of Tariffs & Need for Investment in Nuclear Power ........................... 14
Competition Act and Competition Commission ......................................................... 14
Regulating state owned enterprises ............................................................................... 15
Conclusion ....................................................................................................................... 15
Section I
Constitutional distribution of power
Under the Indian Constitutional scheme, the area of distribution of power between the
Centre and the States is enshrined in Articles 245 to Article 254. Article 245 sets out the
geographical limitations of the legislative powers of the Union and the States while
Article 2461 deals with the question of subject matter of legislation, which sets out the
matters that are to be undertaken exclusively by the Union, those that lie exclusively in
the domain of the state and those that are in the Concurrent List and may be dealt with by
both the Union and the States.
Further, to alleviate the possible conflict that may be seen in the context of the
Concurrent list, a mechanism has been provided that gives power to two legislatures. A
conflict can arise between laws passed on the same subject by the two legislatures. To
deal with this the concept of repugnancy was introduced in the form of Article 2542 of
the Indian Constitution.
1
Article 246 reads as follows:
“246.
(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with
respect to any of the matters enumerated in List 1 of the Seventh Schedule (in this Constitution, referred to
as the “Union List”).
(2) Notwithstanding anything in clause (3), Parliament, and subject to clause (1), the Legislature of any
State also, shall have power to make laws with respect to any of the matters enumerated in List III in the
Seventh Schedule (in this Constitution, referred to as the “Concurrent List”).
(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such
State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in
this Constitution, referred to as the “State List”).
(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not
included in a State, notwithstanding that such matter is a matter enumerated in the State List”.
2
Article 254. Reads”
The conceptual basis for the Concurrent List lies however, as envisaged by the Joint
Select Committee on Indian Constitutional reforms, in the possibility of the requirement
of the enactment of legislation providing for mischiefs arising in the provincial sphere,
which extends, or is likely to extend, beyond the boundaries of a single province. This
has been the rationale in fact for instances wherein entries have been moved from the
State List to the Concurrent List
Under the current constitutional scheme, the subject of ‘Electricity‘, is a part of the
Concurrent List; this was probably because at the time the Constitution came into force,
the technology for sending electricity over long distances in a national grid did not exist.
Ideally, it would be desirable to have electricity in the central list but functioning through
state level entities. However, even as the subject of electricity was not removed from the
concurrent list, the Electricity Act 2003 has chosen to legislate in a roundabout way on
matters within state jurisdiction. This can be seen in the:
I.
II.
III.
IV.
Flexible definition of ‘captive generation’,
Rules to be laid down that would be followed by state regulatory commissions,
The creation of a national forum of Chairmen of Regulatory Commissions of
which the Chairman would be the Chairman of CERC,
Determination of surcharge for open access to be on principles laid down by
CERC.
It can thus be said that the Union can legislate on electricity and the said legislation shall
prevail over that of the State. However recent experiences with coalition governments in
which state level political parties have significant influence, make it very unlikely that
any central government will exercise such powers to override the state legislation. In such
a situation there lies a greater responsibility on the Central Electricity Regulatory
Commission (CERC), which is provided co-ordination power under the Electricity Act
2003 to avoid conflicts and inconsistencies over the country.
Section 2
Competition in Power
Definition of Completion
In a modern scenario, energy regulators are enjoined to promote competition. In this
context it therefore necessary to define what is meant here by competition, the extent to
which it is possible or can be simulated and the stages through which the sector will pass
(1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law
made by Parliament which Parliament is competent to enact, or to any provision of an existing law with
respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause
(2), the law made by Parliament, whether passed before or after the law made by the Legislature of such
State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State
shall, to the extent of the repugnancy, be void.
(2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the
Concurrent List contains any provision is repugnant to the provisions of an earlier law made by Parliament
or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if
it has been reserved for the consideration of the President extending beyond the State
before competition is largely established. In this context let us examine the possible
scenario for electricity as we move to competitive markets.
Possible Competition Scenario: The Market Model
Understanding this model requires us to answer a number of questions. However, the
ideal way would be for the Regulator to determine answers to all these questions in
transparent consultation, keeping in mind the fact that there will have to be a developing
scenario as the context changes from all power sold on long-term contracts to one where
there is trading and more reliance on spot markets.
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
Will there be contracts, and what will be their duration of contracts
Will they be based on competitive bidding or on formal power purchase
agreements?
Will there be power pools, will they be state wide, regional or national, what will
be the nature of transactions in the pool (spot, firm/infirm, etc)
What will be the role of power exchanges in relation to the pools?
The nature of incentives for new generation capacity; (will there be capacity
payments).
What will be the determinants of market price and the nature and extent of
regulatory intervention?
Who will do transmission (congestion) planning and dispatch, state or market,
Regulator or the central transmission utility and others operating the Grid?
What is to be the extent of regulatory intervention?
The Global experience
Global experience with mandatory and optional pools and the situation of India suggest
that the optional pools will be more suitable for India. In the former, all generators are
required to sell to and all suppliers of electricity are required to buy from the same
market. The optional pool allows bilateral agreements between generators and suppliers
and enables new capacity creation with certainty from bilateral contracts. However,
Regulators might have to insist that all buyers and sellers participate in the pool at least to
a minimum extent in order to make the pool effective. Regulators must also ask for all
contracts to be initially cleared and after experience, filed with them.
Competition in Generation
Competition gives consumers the opportunity to choose between suppliers, compels
competitors to improve efficiency and may bring down prices. Price is the signal that
helps to balance demand and supply and stimulate new capacity creation. If price is not
freely determined in response to supply and demand, distortions are likely in the
structures of production, consumption and markets.
Competition requires multiple suppliers and many consumers. If only one supplier
provides a product or service, whether because of government sanctioned monopoly or
for reasons of ‘natural monopoly’, there can be no competition. Similarly, if there were to
be only one buyer, he would be able to dominate the suppliers for supply and on price.
What the experience of independent regulation suggests is that transparent and
consultative regulation could simulate the effects of competition and prevent or minimize
the ill effects of monopoly.
Carriage in infrastructure services
Carriage in this domain usually a natural monopoly, whether it be gas pipelines or
railway lines, roads, ports, airports, telephone lines or electricity transmission and
distribution lines. In this context the Electricity Act, 2003 provides for parallel electricity
wires. While investors would be careful in laying them they would do so if their business
model shows a profit opportunity. But from the point of view of viability it may be said
that the opportunity for competition in electricity is greater between generators and
suppliers; and not as much for transmission and distribution networks.
Section 3
Issues in Competition and Economic Regulation
Market Structure and Restructuring
It would be helpful to examine the issues of competition and regulation in power sector
keeping in mind the economic structure of the various activities involved in the sector.
The generally accepted framework in this context is to view the electricity supply
industry as vertical related set of activities - generation, transmission, supply to high
voltage needing consumers (bulk buyers) and distribution (to low voltage needing
consumers) the last two being independent as such.
At present the industry is dominated by vertically integrated State Electricity Boards who
generate, transmit, supply and distribute. The need for restructuring electricity industry to
separate these activities (unbundling) has been felt to bring about the accountability in
each segment of the industry and to go for potential privatization of activities so
separated.
However, the international experience indicates that the issues of competition and
regulation are not simplified merely by simple restructuring of the sector and in many
countries the where the debate on regulation is still quite vigorously pursued.We discuss
the issues of competition and regulation together in context of each of the activities
below.
Generation of electricity: Competition and Regulation Issues
Economics of generation of electricity poses fewer difficulties in having competitive
market structure. The Electricity Act, 2003 has created more liberal environment for
entry of new players from private sector to enter generation business, as the clearances
required relate to some technical standards. Additionally, regulations for captive
generation and generation have also been liberalized giving access to use of transmission
facilities.
Given that there is huge demand supply gap in generation would these major changes
introduced through the Act lead to development of competitive market structure in
generation segment of this industry? The question is very important if the supply of
electricity and economic efficiency have to be increased in the industry. The development
of competitive markets in generation would depend on following factors:
I.
II.
III.
IV.
Freedom to price the electricity sold to SEBs and other consumers
Existence of a trading system to facilitate buying and selling of electricity
Freedom to transmit electricity inter and intrastate at reasonable costs
Entry of private enterprises in generation
Markets for corporate control for private generating companies
The first condition of freedom to price is not provided in the Act, given that section 62 of
says that, “Appropriate commission shall determine the tariff in accordance with the
provisions of this Act for supply of electricity by a generating company to a distribution
licensee.”
The Act provides for creation of Central Transmission Utility and State Transmission
Utilities to co-ordinate the transmission of electricity inter state and intrastate. This would
involve technical arrangements like creation and management of National and State Load
Dispatch Centres to facilitate wheeling of electricity. The Central Electricity Regulation
Commission (CERC) created by the Electricity Act, 1998 is authorized to lay down the
guidelines for all the electricity tariffs including the transmission charges. However, the
working of the system is still evolving. The incentive structure for the owner managers of
the Load Dispatch Centers has to be clarified, and it may well be that they would be
expected to work on no profit-no loss basis.
In addition to coordinating the Dispatch Centers regulating the transmission tariffs is
going to pose challenge of the availability of required information and providing enough
incentives to attract the investment in transmission grids. While, normally the
transmission costs are borne by the distribution companies, however given little choice in
transmission activities, the competition in generation business might get affected if the
interstate or intrastate transmission tariffs turn out to be hurdles for the distribution
companies in sourcing their electricity requirements.
Although the Act allows relatively simplified procedure about setting up new power
generation plants, the private enterprises will set up the generation plants only if the
thorny issue of tariff fixation is solved satisfactorily. The earlier efforts of governments to
build confidence of investor owned plants through Power Purchase Agreements (PPAs)
has met with only limited success. Most PPAs that were signed got into difficulties
despite escrow account guarantees from respective governments, with governments
seeking to renege on PPA commitments for political exigencies.3
3
The Dhabol Power project in Maharashtra is only one of the examples of how state governments and SEB
can adversely impact the development of markets in electricity supply industry. Very often a weak
institutional and legislative framework coupled with electorally motivated decision making can wreck
havoc, the commitment of state governments across the nation is hardly encouraging on this front.
Therefore, it is difficult to visualize more private players entering the power generation
sector unless meaningful contracts enforceable with fewer complications are offered by
the SEBs, the main buyers from the private power producers.
However, the capacity of SEBs to do so is severally restricted given the fact that their
present financial position is bad and their revenue generation is contingent upon
government reimbursing and/or reducing the subsidies. And given that state governments
who on one hand are already financially burdened, and are additionally unlikely to
antagonize the farmers and other consumers by reducing the subsidies in short term and
their own financial condition is not good, so we may well be forced to conclude that
competition in generation segment of the electricity industry is unlikely to develop in
short term even though the Act has facilitated the same.
A significant issue competition in generation sector is related to transferability of
property rights through mergers and takeovers. This is an important dimension of
managing competition in any sector. The competition commission is bound to face the
cases about takeover by or of generating companies. The issues would be likely effect on
the market players post mergers and takeovers. In case the M&A involves another
regulated utility the cross subsidization or separation of the regulated segments will pose
additional challenge both for Competition Commission and Regulatory Commission. The
jurisdiction of both commissions must be clearly established lest it would lead to more
litigation.
The CERC, and not the Competition Commission has been vested with powers to
adjudicate in case of disputes involving generating companies or transmission licensee
with regard to tariffs of generating companies owned and controlled by the central
government and inter state transmission. The SERCs can do so for intra state disputes
between generating companies and licensees in the state. However, the issues related
competition among generating companies or other anticompetitive behaviour having
impact on competitive working of the generating companies are not touched. It would be
reasonable to assume that Competition Commission will have to monitor the level of
competition in the sector. As such the Electricity Act, 2003 and CERC Act both envisage
that an important function of the CERC and SERCs would be to promote competition in
the electricity sector. But as things stand now, the duties of regulatory and competition
authorities are likely to overlap in this regard. It might perhaps be better to keep the
competition issues in electricity sector within purview of the electricity regulation.
As such there is much broader suggestion that let there be an apex regulatory body for
entire energy sector rather than separate Regulator for each sector. It is quite reasonable
to assume with passage of time and sensible restructuring and increasing role of private
players in energy markets in future, the economics of related network industries like gas
and electricity distribution would lead to convergence of these industries. Hence,
foresight demands that competition policy for network industries, particularly, gas (LPG,
CNG) and electricity, is widely debated rather looking at it in piecemeal manner as is
happening at present.
Transmission of Electricity: Regulatory Challenge versus Managed Competition
Transmission of electricity is a natural monopoly; therefore, market competition is
unlikely to develop in this segment, thus necessitating the economic regulation to secure
the economic efficiency in this activity. However, it is possible to exert the market
pressure also on such natural monopolies indirectly if it is privately held as a licensee.
For example, consider a licensee in charge transmission lines at national level, the
ownership of that should be with all licensee distribution companies (who could be
private or public) using the transmission grids for wheeling of their energy. While there
will have to be general obligations on all the parties involved to ensure continuity and
quality of supply, there would be incentive for the holding companies to ensure that the
transmission company operates efficiently as any inefficiency in the transmission would
have to be borne by the competing distribution companies4. This option should be
considered as compared to the present provisions in the Electricity Act, 20003, which
provides for only regulated pricing mechanism for transmission activity.
Distribution of Electricity
In India so far the data is not separately available for generation although in some states
the after unbundling the activities the generation companies have been created. However,
it will take time before we get reliable estimates of the actual cost of generation alone.
None the less it may noted of the total cost of supply of electricity generally the cost of
generation of electricity constitutes around 60-65%, about 10% is the transmission cost
and remaining 25% or so is accounted for by the distribution. Hence, the effective
competition can substantially improve the efficiency in the generation segment and result
in lower cost of electricity supply, the same is true also of the distribution companies,
which are presently state monopolies in most parts of India. The issues of competition
and regulation in the distribution segment are discussed below:
I.
Regulation of tariffs
II.
Scope of competition for retail investors
III.
Privatization of distribution companies
The distribution companies would normally be local monopolies in regional areas. It is
difficult to say what should be the optimum size of distribution companies. The important
issue is to expose the distribution companies to pressures of markets, namely to decisions
of both consumers and investors, which requires a long term systematic programme
where by the SEBs are restructured and privatized and the SERC and state governments
implement the Open Access provisions made in the Electricity Act, 2003. Only when this
is achieved one may envisage any role for the competition commission.
However, as things stand today the SERCs are expected to regulate the prices of
electricity supply to final consumers and also to foster competition. The success on tariff
determination and getting it implemented for different consumer groups has been quite
4
Although it may be bold to venture into thinking that the unbundling of State Electricity Boards (SEBs)
will be followed up with disinvestments of distributing entities and open access for consumers would
become reality in foreseeable future, given that the current financial position of the SEBs, privatization is
an inevitable consequence.
limited. The regulated entities are state owned and managed, it has therefore, been
observed that effective regulation is yet to be found. Just conceived institution of
independent regulation might be miscarried if the tendency of government to
accommodate retiring bureaucrats is not arrested at the earliest. It should be re
emphasized that Regulators have to work at arm’s length relation with the government
and have to suitable for the job.
Also so far the Regulators have been concentrating more on tariff determination, but the
acceptance of the same, particularly, in case of heavily subsidized agricultural sector, has
been less. This has rendered much of the regulatory exercise so far, particularly, at state
levels of little consequence in terms of either enhancing efficiency or improving the
availability by creating better atmosphere for the investors to enter the generation.
Privatization of distribution has had only limited application, and hence assessment of
regulatory process in states on enabling competition is not yet possible. So it is quite
early to pass judgment on the effectiveness of regulation.
Subsidies pose the greatest political hurdle in creation of real competition in the
distribution segment. Unless the public as well as private distribution companies are freed
from bearing the burden of subsidies, it is unthinkable how the privatization of these
entities is possible. If this is done, economically and technically it is feasible to introduce
the competition in distribution segment.
Section 4
Preconditions for competition in electricity
Open access:
An essential requirement for competition is that goods and services can move freely from
any supplier to any customer. In the context of electricity this requires open access to the
transmission and distribution networks and no restrictions on who to sell to or buy from.
However, the transition from monopoly to competition will take place in stages. The
Electricity Act 2003 provides for a surcharge for open access to non-captive networks.
This surcharge is capable of being used to thwart open access.
Power Exchanges
A power exchange becomes necessary when there is a day ahead spot market for every
hour slot for the next day since it enables a financials market to develop which can allow
hedging through trading in futures and options.
Other pre-requisites for competition and consumer choice
Other prerequisites of competition (which include open access, separation of carriage
from content, independent system operator, regulated wheeling charges, trading
arrangements, settlement mechanism, efficient transmission arrangements, time of day
metering, regulatory capacity) to which the following must be added:
Adequate transmission and distribution capacity
Clearly open access requires that there is capacity available on the lines, and additionally
some redundant capacity must also exist so that it can take power that might flow because
capacity is inadequate on another route.
Competition in shortage conditions
Competition is said to be possible when there is adequate generation capacity and
additional reserve capacity to meet sudden peak demands. However, open access can be
introduced even in conditions of shortage but :
i.
There must be good market information with generators and customers about
demand, supply, prices, etc.
ii.
There must be no restrictions except contractual ones on suppliers and
customers to move their business to others.
iii.
Prices must be market determined prices, not imposed by governments. When
there are subsidies and cross-subsidies the price signals create distortions in
the demand-supply situation. SERC’s are allowed by the Act to levy a
surcharge on wheeling charges towards cross-subsidies. Such a surcharge
must be tolerable for the customer and it would be sensible to have it capped
to ensure that it does not reach levels that deter open access.
iv.
Vertically Integrated Companies: Vertically integrated companies are seen in
the area of electricity supply as well as in oil and gas. These companies get the
fuel (coal or gas or oil) from their own mines or fields, transport them,
generate power and transmit, distribute and supply it to their consumers or sell
it through their retail outlets in the case of oil. Vertical integration is
antithetical to competition though it might have some advantages in better
efficiency and lower cost. It may however be noted that vertical integration
can be beneficial to producers given the possibility of production and
transaction economies coming into play, yet the benefit is not passed onto the
consumer.
Section 5
Regulation and Coordination
The role of the Regulator
The role of the Regulator would be primarily to ensure fair competition, that in the
absence of competitive bidding, proper norms are followed and that adequate generation
capacity has been bid for. In the case of purchases through a Pool or Exchange, the
Regulator must ensure there is no rigging of the power exchange and that competition is
fair and free so that small players are not at any disadvantage.
Enabling competition or regulating monopoly
The Regulator is required to simulate the effects of competition requires appropriate
legislation and the creation of the necessary institutional framework and procedures. This
may include the imposition of obligations and duties on generating, transmission,
distribution and supply companies, establishing national and regional coordination of the
operation of the wires, establishing independent load dispatch centres, mechanisms for
licensing various monopolistic or quasi monopolistic activities and truly independent
Some progress in this direction has come about because of the ABT and the recent
government decision to separate SLDC’s from state transmission entities.
There have been severe barriers to entry into generation due to bureaucratic red tape and
environmentalists, from who many clearances are required. Similar is the case in other
parts of the energy sector. These barriers to entry make it difficult for an essential
condition for competition, namely ease of entry, from being met. The Regulator presently
plays a marginal role in most of these clearances, which needs to have a greater ambit,
possibly one where the Regulator could be given a coordinating role with the other
regulatory agencies and not only put time limits for each clearance but listen to objections
in open hearings.
Coordination
This requires that Regulators also involve themselves in resolving the bureaucratic issues
that result in such entry barriers. The Electricity Act 2003 (Section 66) attempts to
provide for some coordination between the Central and State Commissions through two
institutional mechanisms. One is a coordination forum consisting of the Chairperson and
Members of CERC, Chairman CEA, and representatives of generating companies and
transmission licensees engaged in interstate transmission of electricity and the second, a
Forum of Regulators consisting of the chairpersons of the CERC and the SERCs
Another method that provides coordination and consistency in approach is that the Act
gives the Central Commission the responsibility of laying down regulations and rules on
the specified matters.5
On the other hand, there is no statutory provision for coordination beyond electricity even
with regard to usage of materials for power generation, given that these fall under
different Ministries at the Centre, which may mean that fuel prices and power prices may
often bear no direct co-relation.
5
These would include subjects such as grid codes; rates, charges and terms and conditions in respect of
intervening transmission facilities; payment of transmission charges and a surcharge for providing nondiscriminatory open access; reduction and elimination of surcharge and cross-subsidies; determination of
the proportion of revenues from other business to be utilized for reducing transmission and wheeling
charges; duties of electricity traders; standards of performance of licensee or class of licensees; details to be
furnished by licensee or generating company for determining tariff in respect of generation, transmission
and distribution. It may also be noted that the CERC has also the power to specify principles and
methodologies for the determination of the tariff applicable to generating companies and transmission
licensees.
Present status of regulation in coal sector
The Coal Ministry presently regulates coal. Nearly 70% of electricity capacity in India is
based on the use of coal resources and nearly 75% of the coal consumed is for power
generation. The sector is a monopoly of central government owned enterprises, and
supply, price and quality are subject to decisions by the government owned companies
with the final approval of the concerned Ministry. Despite various proposals, there is at
present no regulatory body for coal has been established, and electricity thermal
generating sector, which is one of the principal user of coal is unable to participate in the
decisions on prices, quality and even supply.
Section 6
International experience
The following summary of the international experience of United Kingdom, Argentina,
Australia, California and Brazil, in creating wholesale markets for electricity suggests
that there has been no uniform experience either in process or time taken. What is clear
however is that market practices have to be designed to suit the context, and that the
regulatory regime must adapt to the context thereof. The conclusions may be summarized
as follows:
i.
ii.
iii.
iv.
Claims for stranded assets as a result of creating wholesale markets (as might
happen in India by the winding up or major changes in long term power purchase
agreements that have ‘take or pay’ clauses with mandatory payment of fixed
charges) have been honoured in Australia, California and Brazil but not in the
United Kingdom and Argentina.
Argentina has discontinued existing power purchase agreements at the time of
deregulation while Brazil continued them.
The transition period to competitive markets varied from around one year in the
United Kingdom, to nine years in Argentina. In the case of the others even after
eleven years in Australia, six years in California and nine years in Brazil (and the
process is still ongoing).
Pool participation has been held to be mandatory in Australia, California and
Brazil, while in the context of the United Kingdom it was held to be mandatory
initially but later deemed to be optional. In the Argentina however, while it was
deemed to be optional but simultaneously, bilateral contracts were also permitted.
It may at the same time be noted that while distinct capacity payments were not
provided in pool transactions in United Kingdom, Australia and Brazil, yet the
same were provided for in the context of Argentina and California.
Section7
Other Institutional Structures and Systems for Competition
Need to improve Distribution & transmission efficiency
Distribution has to improve in efficiency, and in the Indian context privatization has been
shown to be more able to achieve this objective. This is however undermined by the
conditions under government ownership of distribution of accumulated losses and
substantial unfunded provident fund dues, ‘free’ or subsidized power, thefts and other
inefficiencies, and over staffing that is difficult to reduce.
Ideally the transmission system in a competitive situation must be operated independently
by a non-commercial entity, while load despatch must also be a non-commercial and
independent function. This is however, not the case with the central and state
transmission utilities (in most cases) being the owners of the transmission networks in
inter and intra state transmission and also responsible for the load despatch centers, even
as the separation of the same is being contemplated.
Nature of Contracts
Competition or competitive results could apply to all types of contracts, however longterm contracts will obviously continue to constitute the dominant part of all electricity
that is generated and sold. But the same can be contracted for in competition. Once
contracted for, the buyer has to pay for it. He, therefore, owns it and must be free to use it
or sell it wherever he can for the best price he can get and the profits or losses on such
transactions must belong to the seller who has contracted earlier for the power and need
not be shared with the original supplier.
I.
Price of unused surplus: The price at which the unused surplus is sold will in any case
be subject to the prices permitted by the Regulator in the State into which the
electricity is sold.
Influence on spot sales. The price will be limited by what the Regulator in the State of
purchase will allow, however there needs to be no other limit placed on spot prices.
Surcharge for open access: Presently a surcharge for open access is being levied and
the same is proposed to be phased out over a five-year period; It may be useful to link
the same to a cross-subsidy which could also be eliminated simultaneously, with the
surcharge
II.
III.
Section 8
Actions for Moving to Competition in Indian Electricity Sector
Achieving Competition
While the need for the introduction of completion in the Electricity sector cannot be
denied, the question remains as to the process by which this may be achieved.
Enumerated below are some of the possible mechanisms through which the same may be
achieved:
I.
II.
III.
IV.
V.
SEB’s must be made to buy power through competitive bidding.
There must be a payment security mechanism in place especially for sales to
SEBs, both for IPPs and other suppliers.
PPAs may require some changes and these must be accomplished through
discussions perhaps under the auspices of the Regulatory Commissions
The allocation mechanism of the central government must be dismantled and the
power must enter the market in competitive transactions.
The state transmission utilities must be separated from generation and
distribution.
VI.
VII.
VIII.
IX.
X.
Similarly the state load despatch centres must become independent and neutral
and not tied to the state transmission utility..
The national power pool as well as state/regional/zonal pools must be established.
Wholesale power procurement even through PPA’s must be based on competitive
bids.
The barriers to entry in respect of the private players must be removed / reduced
Adoption of time of day tariffs, to even out demand and supply.
Rationalization of Tariffs & Need for Investment in Nuclear Power
While the Central Government is currently proposing to amend legislations to allow for
private participation in the nuclear energy sector, however that may be insufficient. For,
the government will have to look at power tariff reform, keeping in mind that nuclear
power plants have high initial cost but low running cost and longer life. In addition to
strengthening open access mechanism, there is also a need to ensure tariff reform and
legislation on the area of the financial responsibility for nuclear power plant liabilities,
given that while currently the state bears responsibility, however private investors will
baulk at unlimited third-party liability.
Section 9
Competition Act and Competition Commission
In the Indian context the Competition Act,6 2002 has been replaced the Monopolies and
Restrictive Trade Practices Act and the Competition Commission has been set up as the
regulatory body in this respect.
Under the Electricity Regulatory Commissions Act 1998, the electricity regulatory
commissions were to promote competition. However, there was a lack of clarity as to the
nature of competition envisaged and a lack of adequate powers to the Commissions to
achieve it.
While, the Electricity Act 2003 does not require the electricity regulatory commissions
to specifically promote competition along with efficiency and economy unlike the earlier
regime, however the electricity regulatory commissions do have some responsibilities for
promoting competition in the Electricity Act 2003, with respect to companies entering
into positions of market domination and determination of tariffs
However given that the Electricity Act 2003 does not provide the achieving competition
as one of the objects of the electricity regulatory commissions, it would appear that the
Competition Commission will be the arbiter of whether a particular situation must be
held to contravene the requirements of competition.
6
The object of the Competition Act may be enumerated as follows
“The Commission shall, while determining whether an agreement has an appreciable effect on competition
have due regard to all or any of the following factors, namely: creation of barriers to new entrants in the
market; driving existing competitors out of the market; foreclosure of competition by hindering entry into
the market; accrual of benefits to consumers; improvements in production or distribution of goods or
provision of services; promotion of technical, scientific and economic development by means of production
or distribution of goods or provision of services”.
Section 10
Regulating state owned enterprises
Experience has shown in other countries and in India that regulating state-owned
enterprises by independent regulatory commissions is not as straightforward or effective
as regulating privately owned enterprises. This has been the experience in India in
electricity both at central and state levels. The enterprise response has typically been of
challenge, non-compliance and defiance.
Thus in its early years all orders of the CERC were challenged by the centrally owned
undertakings concerned, in many cases up to the Supreme Court. (The courts upheld all
of them). In many states, the undertakings did not implement tariff orders and were
backed by the state governments. The state is often concerned with the profitability of the
enterprises that it owns and of the impact of the Electricity Regulatory Commission
orders on voters. For both reasons, it tends to support or even to ask its companies to defy
the Regulator.
At the same time the presence of the State domination in the energy sector will remain for
many years. In such a scenario the Regulator will be regulating an energy sector with
dominant state presence and with private operators as well in limited numbers. Therefore
Regulator must have the independence to treat them alike..
Conclusion
In energy sector, the most significant changes have been introduced in the power sector.
There has been a sustained attempt at designing an appropriate policy to create
competitive markets in the electricity supply chain. However, the complexity of the
sector and political significance thereof has made it difficult to proceed for most of the
states to meaningfully restructure the markets in electricity supply. A great deal of
commitment and detailed discussion is needed on the issues of competition and
regulation of this key sector of economy.
However, in the context of India, given the politically sensitive nature of the domain of
electricity supply, it may often take time for effective policies to evolve in network
industries, particularly in the context of the restructuring and transfer of ownership. The
transition phase from public to private sector can be difficult and politically hazardous
but the evidence of agency costs in the present system is substantial. In the India context
the demand for electricity is likely to continue rising rapidly over the coming decades.
This would require huge investments in the bulk transmission and requires close coordination between the national grid and state electricity boards. Moreover the tariff
structure will have to evolve to meet the challenges of the new regime.
The present legislative framework has proposed major changes in the way electricity
markets could be reformed. However, any effective change will take time and painstaking
efforts will be required ensure the creation of competitive markets.
The issues of regulation and competition policy are extremely complex in the energy
sector. Any piecemeal approach to policy formulation or implementation would delay the
development of competitive markets in energy sector. It may also be noted that currently
a cohesive view of competition in the entire energy sector is yet to develop in India even
as some significant regulatory reforms have been launched in the power sector.