Gains from competition in power distribution
The Financial Express, March 24, 2010
By Rajesh Kumar
The Electricity Act, 2003, and National Electricity Policy, 2005, envisage the provision of open access to transmission & distribution networks to create healthy competition and ensure efficient use of energy. However, most state electricity regulatory commissions have not taken any step to implement open access. They point to several roadblocks in the way of its implementation: inadequate transmission capacity, non-desirability of duplication of distribution networks, poor metering technology, retail markets that are yet to attain maturity and so on.
However, Mumbai presents a marked and refreshing case as a result of sincere efforts by the regulator, consumers/CSOs and some distribution companies in the suburbs of the city. As a result, even small consumer households can now switch electricity suppliers if these are not satisfied with the existing quality of service or tariff.
The Mumbai experience reveals that it is quite feasible to promote workable competition in the distribution sector without losing the economies of scale inherent in wire business even with the existing level of metering tsechnology and infrastructure. It has also been argued that the Mumbai model of competition in the distribution segment can easily be replicated in Delhi and then extended to other states.
The important milestone of this success was the landmark judgement of the Supreme Court in June 2008, paving the way for Tata Power to supply power to retail consumers being served by Reliance Infrastructure under the provisions of the Electricity Act, 2003. The court observed that supply could be provided through the distribution infrastructure installed and operated by Reliance Infrastructure.
The court’s order bore fruit only after October 2009 when the Maharashtra Electricity Regulatory Commission passed detailed guidelines specifying essential modalities relating to the submission of applications for switch over, metering, reading, billing, complaints redressal, etc. The guidelines made the overall process transparent and accountable and thus, consumer-friendly. Such modalities emerged following consultations with various stakeholders such as Crisil Infrastructure Advisory, Mumbai Grahak Panchayat and Prayas.
While making it clear that there is no need for a consumer to take a no-objection certificate (NOC) from the existing supplier before switching, the regulations stressed the need to pay all pending dues. The facilitation of switching over breathed new life into competition. Since its inception, Reliance Infrastructure was the only distribution licensee participant in the suburbs of Mumbai. For a long time, Reliance consumers have been demanding access to supply from Tata Power, given the lower tariffs of the latter relative to the former—for example, Rs 1.30 versus Rs 1.72 per unit for less than 100 Kwh of consumption.
Opportunities for switching over, coupled with price differences, have motivated 50,000 consumer households as well as some bulk consumers such as Mumbai International Airport Limited to move from Reliance to Tata Power. This is a potent example of how competition can boost consumer choice and welfare.
Cuts International, a think-tank working on competition issues in electricity as well as other utilities, has pointed to the easy replicability of this model in Delhi, citing various reasons. First, like Mumbai, the distribution business in Delhi has been privatised, providing reasonably good scope for competition. Second, the prolonged legal battle in Mumbai—over seven-eight years—has resulted in the fleshing out of clear modalities that can be adapted without too much change to facilitate open access in Delhi. Third, like in Mumbai, most consumption in Delhi is metered, making accurate calculation of energy losses possible.
However, some experts have expressed doubts about such replicability. First, there are no significant differences in power purchase costs across utilities in Delhi as most of these draw energy from common sources. However, significant differences across companies in terms of percentage of distribution loss might actually make the suggested replication economically beneficial—NDPL owned by Tata exhibits the lowest level of losses while Yamuna Power and Rajdhani exhibit different levels despite being owned and operated by Reliance.
Moreover, facilitation of switching might not only be beneficial from the point of view of tariffs, but also quality of service. This provides the rationale for the promotion of competition even if prices potentially on offer by competing suppliers are not very different.
As long as geographical monopolies in power supply exist, any talk about promotion of competition in the electricity sector will remain empty and bereft of significance for the aam aadmi. The Mumbai model offers a strong ray of hope and its replication in major urban centres would mark the coming of age of competition in the power sector.
The writer is an assistant policy analyst at CUTS Centre for Competition, Investment & Economic Regulation and may be contacted at rk2@cuts.org. These are his personal views.