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All Wired Up

Posted On : Jun-04-2009 | seen (741) times | Article Word Count : 745 |

Reform in the electricity sector worldwide has typically taken three forms: organisational reform of the incumbent, the introduction of competition, and the establishment of regulation.
These three components are irreducible to each other, but are intimately connected. It is technically possible to engage in institutional reform that does not include all three elements, but generally all three are found in some form in the reform processes. Empirical literature reveals that it is the competitive and regulatory environment that shapes the incentives of the electricity utilities. Open Access to transmission and distribution wires is key for introduction of competition in the electricity sector.

The economics of Open Access is as follows. The business of transporting electricity (ie, the ownership of wires in a grid) seems, for the most part, to be a ‘natural monopoly’ par exellence. Consequently, it is best left to a public or regulated private monopoly. Such local or national monopolies (say, transmission companies for high voltage transport and local distribution companies for low voltage transport) need merely serve as ‘toll roads’ that facilitate the transport of electricity in exchange for a regulated fee.

These entities neither buy nor sell electricity. The business of buying electricity from generators and selling it to consumers is done by electricity traders or distribution companies acting as traders. They compete with each other (a) to buy electricity from a number of generators, and (b) to sell electricity to consumers. The electricity they buy is transported, first on the high-tension grid in exchange for a fee paid to the transmission monopoly, and then on the local low-tension grid in exchange for a fee paid to the local distribution monopoly.

From an economic point of view, this is an excellent arrangement as the wholesale electricity market has many buyers and sellers, and the retail market also allows a number of competing retailers. Being set in a competitive market, prices can accurately reflect scarcities as and when they arise. Abnormal profits in the generation business can be competed away by free entry; at present, the prospect of facing a monopsonistic state owned monolith is a formidable barrier to entry.

In the late 1990s, when eight states (namely Orissa, Haryana, Andhra Pradesh, Karnataka, Uttar Pradesh, Rajasthan, Delhi and Madhya Pradesh) enacted their electricity reform laws, they borrowed heavily from the UK model, but excluded the elements of Open Access and competition that constituted the rationale for restructuring. The Electricity Act of 2003 that replaced all the existing laws had Open Access as one of its important provisions.

One of the most disappointing aspects of the reform process has been the slow (actually negligible) tangible progress on competition and Open Access to wires in the sector. This is an area where significant responsibility may be placed on state electricity regulators, who should have been more proactive in “encouraging” introduction of Open Access and third party sales to break the monopoly of the state-owned utilities. Although in India, several State Electricity Regulatory Commissions (SERCs) have notified the Open Access regulations besides fixing surcharge, transmission and wheeling charges, it has hardly helped consumers to come forward to avail of the Open Access facility.

There may be compelling reasons such as cross subsidy surcharge, transmission charges etc, which disincentivise the consumers to go in for Open Access. The magnitude of wheeling charges and cross subsidy surcharges has de facto made Open Access unviable as shown in Table 2.

Moreover, the current state of the distribution system, which often operates at low frequencies, limits the operation of Open Access. While upgrading is essential, it may be delayed to postpone competition.

Table 1 provides the status of implementation of Open Access: other than Gujarat, most of the states have very little electricity contracted through a competitive mode. Moreover, it is mostly the captive power plants that have applied for Open Access and competition at the level of the utility is yet to be achieved. At an all India level, less than 1% (only 1394 MW) of electricity is transacted through Open Access. Similarly electricity trade is also very limited.

Until the Electricity Act 2003, provisions are implemented in spirit, which allow for multiple players in power supply, competition would still be far. Once distribution is freed up, the risk of investing in generation would also come down, as power producers would no longer be obliged to sell their power exclusively to bankrupt State Electricity Boards (SEBs). Investment in power would hinge no longer on the ability of bankrupt SEBs to pay for what they buy but on the demand for power in the economy.

Article Source : http://www.articleseen.com/Article_All Wired Up_940.aspx

Author Resource :
Payal Malik, is associate professor Delhi University, and advisor Indicus Analytics, An Economic Research Firm. Payal received her M.Phil. and MA in Economics from the Delhi School of Economics. She also has a Master of Business Administration from the University of Cincinnati, Ohio. She has made presentations and lectured the Indian Economic Service trainees at the Institute of Economic Growth

Keywords : competitive market, consumers, Economic Research Firm, Indian Economic Service,

Category : Business : Marketing

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