Strengthening the regulatory network

Submitted by VK Gupta on Wed, 04/12/2013 - 11:44am

Strengthening the regulatory network

Though there are many positives to take away from reforms in the power sector, a major goal, of making electricity tariff affordable to the consumer, is nowhere near

In the early to late-1990s, the Indian power sector was in a state of despair. It was also during this period that India started out on the path of liberalising the economy with the goal to achieving a growth rate above the historic three per cent. To fuel economic growth, India needed another important ingredient — electricity.

In the backdrop of the Enron fiasco, there was no new investment in this sector. The State electricity boards were facing a cash crunch. It was during 1997-98 that the country was poised to introduce reforms in the power sector and began its journey with the enactment of the Electricity Regulatory Commissions Act. The primary objectives of the power sector reforms and the Electricity Regulatory Commissions Act were to make the electricity sector free from governmental control by giving the regulators autonomy in deciding tariffs and undertaking activities to reduce transmission and commercial losses. This has widely come to be known as the second phase of reforms.

The reforms were in line with the Orissa reforms. The basic idea was to unbundle electricity function of generation, transmission and distribution under State electricity boards into separate entities with the aim of identifying problems in the distribution sector and bringing investments into the generation sector. This unbundling was to be supported by bringing the entire electricity business under an independent agency with little or no controls of governments, and close to complete autonomy. The independent agency was given vast powers like determining the electricity tariff. Electricity generation and supply to consumers were to take place in a transparent manner under public scrutiny. To ensure that the stated goals of reforms were achieved, it was necessary to unburden the financially starved distributors. So, the government of India introduced incentivised schemes of composited loans/grants for accelerated power developments.

Today, we are in the 15th year since the enactment of the Regulatory Commissions Act. Now we have 27 regulators at State and Central levels overseeing the electricity business in their respective jurisdictions. The electricity business has grown from a mere 0.78 lakh MW to more than 2.50 lakh MW. The per capita consumption of electricity has grown from 400 kWh to nearly 1,000 kWh. The sector saw 40,000 MW capacity added in captive power. The regulators now have 92 per cent geographical reach of the country and about 20 crore consumers in all categories — from public works to agriculture, to domestic to industries.

The question to ask now is: have we been successful in our mission to serve consumers in ensuring reliable supply of electricity at an affordable price and at the same time attract desired investments by setting up regulators and granting autonomy?

Examining losses

Though there are many positives to take away from the reforms, one of the major goals — affordable electricity price to the consumers — does not seem anywhere near realisation. Analysis shows that one of the major impediments to not being able to reduce the cost to the consumers is technical losses in the system. These losses, which were about 22 per cent in 1995, have now gone up to 27 per cent. Some States are even reporting losses as high as 65 per cent with most States reporting losses in the range of 40 per cent. The losses in a few States in southern India however are in the range of 15 per cent. To understand the issue of technical losses from the supply side means that around 25 per cent of the energy produced is not being utilised by consumers in most parts of the country. The global standard for these losses is at most 10 per cent. These losses indirectly show up in a consumer’s bills as an additional tariff burden. Hence, increased costs.

Regulators and objectives

The very objective of setting up a regulatory framework was for someone to keep tabs on all the activities related to electricity business including efficiency. But looking at the state of matters it appears that the regulators are approving the tariff hike proposals without reviewing the previous year’s increase. The irony is that out of 85 distribution companies, very few are reporting profits despite a hefty hike in tariff, which in some cases has been as high as 40 per cent in some States. The regulators’ silence on this issue is astonishing.

The other objective of the regulators was to promote a power market. However, despite having two exchanges to take care of surplus power during real time and close to 50 traders, the power market has been confined to selling it to distribution utilities and in return collecting trading margins. In a properly functioning market, there is liquidity and volatility. The price varies with demand. In order that there is a market that functions properly, the consumer should be made to buy from the market and the regulator should do away with fixing tariffs annually. It doesn’t just end here.


The cross-subsidy is an issue in every business and market. The cross-subsidy does not allow price discovery. Price discovery is very much a necessity for a well-functioning market. When the reforms were initiated, the goal was to phase out all activities that lead to cross-subsidy. But the opposite appears to be happening. What is being done in every State is only increasing cross-subsidy, which is stalling open access market.

The burgeoning losses of distribution of electricity is worse than what it was prior to the enactment of the regulatory regime. During my tenure, one of my priorities was to reduce these losses. To achieve this, I had embarked on technology improvement as a high priority activity with increased impetus on information technology.

I had specifically asked for expert advice to the government sector so that the electricity sector and consumers could reap the benefits of reforms. I am of the opinion that for distribution sector to become technically and commercially viable, we need to work towards making every distribution network, at least in urban and non-rural areas, a profitmaking centre.

Now, there are some changes on the cards to the Electricity Act 2003. What is needed today is a strengthening of the regulatory system. The first step is the appointment of regulators. A regulator should be a person with proven capability and experience. Any omissions and commissions in his appointment is unhealthy for the sector as his decision directly impacts the consumer.

It is my observation that under the current regulatory framework, most decisions are altered or amended by the Appellate Tribunal for Electricity. Thus, the regulatory forums have become a bevy of legal courses. This does not serve the purpose of reforms. The regulators appointed should be unbiased, with experience in the sector. They should be imparted proper training. It should be laid out very clearly that regulation is not a post-retirement activity. Reforms must run in a businesslike manner, with the completion of their social objectives. Rate-payers are entitled to this.

(Suresh Prabhu was formerly Union Minister for Power.)