Transcript Need for New Paradigm in Electricity Regulation

Energy Conclave – 2010, IIT Kanpur
International Symposium on
New Paradigms for Energy Policy and Regulation
8th January 2010
Need for New Paradigm in
Electricity Regulation
Ajay Pandey
Professor, IIM Ahmedabad
http://www.iitk.ac.in/reg
Historical Overview of
Regulations in the Sector
• In the late 19th and early 20th century, the sector was in private
hands without regulations.
• Faced with difficulty in mobilizing capital, the firm demanded
monopoly rights with regulation.
• Post second world war, the sector was nationalized in most
countries with US being prominent exception where regulation took
care of “natural monopoly” issue.
• Economic regulations till 1960s in the sector (and in other sectors)
were essentially “cost-of-service” regulations.
• Starting in 1960s, the disadvantage of “cost-of-service” regulations
were widely recognized such as padding up of costs, lack of
incentive for efficiency, information asymmetry and regulatory
capture.
• Move since then has been towards incentive regulations wherever
feasible.
Reforms in the Sector
• Since 1970s, the reforms in the sector are based on the recognition
of the following:
– Competition is feasible in generation and supply even if “wires”
remain natural monopoly
– Public sector ownership leads to loss of efficiency
– Private sector regulated monopolies also lack the incentives for
efficiency and consumers do not gain from incentive regulations.
• Reforms = Competition in generation (and Supply)
A Quick Review of Reforms in
India: Legal
• Major Driver was EA 2003 to attract investment and to
allow competition
• Generation delicensed
• Independent Regulations and Regulators
• Open Access allowed under regulatory guidance and facilitated
through separation of LDCs
• Transmission separated for open access
• Liberal definition of and open access to captive generation
• Reduction in Cross-subsidization envisaged, subsidies to be paid by
the state government
• Anti-theft provisions and special courts
• Trading allowed and development of markets under regulatory
guidance envisaged
A Quick Review of Reforms: Policy
and Regulatory
• Generation
• Competitive procurement mandated
• Risk reduction for generation investments and scale
economies through UMPP
• Electricity exchanges started and trading increased
• Transmission
• Open Access of Transmission system allowed
• Transmission pricing being reviewed
• Distribution
• Open access allowed for qualified consumers
• Privatization and distribution franchisee models
experimented
• Extent of cross-subsidization mostly coming down
Broader Issues facing the
Sector
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•
Distribution remains financially unviable in most states
Pace of loss reduction and reforms uneven across states
Despite interest in adding generation capacity from the private sector,
energy shortages continue and price of traded electricity remains higher
than LRMC
• Quality of supply for most consumers served by state-owned entities
remains poor
• States are unwilling to– Accept independent regulations
– Stop influencing consumer tariff
– Let go the SEB/ successor entities
– Allow generation for exports without payoffs
– Enforce anti-theft measures and 100% metering
– Pay for the costs of all of the above
• In short, while some competition has begun to emerge in generation,
distribution is still relatively unaffected and inefficiencies remain
What should be the regulatory
objectives in the sector?
• Development of a competitive national wholesale market to
optimally use energy sources and to promote competition in
generation- Wholesale Market Design.
• To prevent gaming in the wholesale market- Market Rules and
Surveillance.
• Investment in and Operation of Transmission and Distribution
network to promote quality of supply and competition upstream and
downstream- Open Access and Rule-based system operation.
• Competition in supply through open access or separation of DNO
from supply- Consumer choice and economic tariffs
Regulatory Challenges Ahead
• While MYT and incentive-based regulatory approaches have worked
for private sector (Delhi) and even for distribution franchisee model
(Bhiwandi), their effect on State-owned utilities has been mixed and
marginal.
• Distribution losses need to come down faster than the actual
experience so far.
• Quality of power and access remain an issue for want of
investments in the sector.
• In the absence of financial viability of discoms, the investment in
transmission and distribution at the state level remains dependent
on central assistance and funding support.
• Competition envisaged through open access should take shape and
not remain on paper
• Promoting efficiency and protecting consumer interest (that of
paying consumers) including prevention of gaming opportunities for
private sector players in the market
Obstacles in Effective
Regulation of the Sector in India
•
•
•
•
•
Shortages make the regulations difficult as they have to reconcile conflicting
objectives of promoting investments and keeping tariffs (and/or traded
power) in wholesale market under control.
The sector, because of less than perfect physical control on all players
connected to the grid, is prone to free rider problem and players can easily
create negatively externality for others.
Traditional regulatory mechanisms either rely on monetary incentives and
disincentives or non-monetary punitive measures where responsibility can
be assigned. As purely economic regulators, the ERCs have no recourse to
the latter instrument.
With state-owned enterprises exhibiting non-commercial orientation and
responsibility at the operational level diffused with widespread problems,
effectiveness of traditional regulation is expected to be limited.
Economic regulators can only handle state-owned utilities effectively when
state is neutral in the sector. Here, the sector is dominated by such entities.
What is different in our context?
• Constitutionally and historically, states are important stakeholders.
• State governments have been involved in all aspects of the sector
on non-commercial basis and state-owned utilities also behave in a
similar fashion.
• Electricity, though a private good, has been converted over time in
public good due to state ownership of utilities.
• Public or consumers do not demand quality and reliable supply for
historical reasons.
• Such demand in any case is not disputable as long as state is
supplying electricity besides free-rider problem.
• Extensive theft and low tariff for some segments leads to lack of
investment and need for rationing.
• Rationing as a consequence is based on discretion which is
politically expedient and is dictated by pork-barrel politics.
What is the current strategy on
distribution side?
• Essentially, there are four elements but all of them are aimed at
tightening the budget constraint:
– Fiscal incentives and disincentives for loss reduction such as
tariffs (MYT) based on reducing loss trajectory and APDRP
– Payment security for power purchased or overdrawn
– Open access to qualified buyers to induce competition
– Reduce cross-subsidies
• While fiscal incentives and disincentives do work for a
commercial
entity or private economic agent, their effect on state-owned
utilities
is uncertain and can result in cutting down on
investments and resorting to rationing as has been the case in
the past.
What are the options?
• Separate DNO from supply with DNO privatized. Supply can be
competitive and state utilities can supply-likely to be opposed and
likely to have the same fate as open access with separation of STU
and SLDC on paper!
• Continue with tightening the budget constraint- will result in slow
pace of reforms as has been the case with mixed response across
states and consumers continuing to suffer due to lack on
investments!
• Incorporate access, quality and reliability of supply in regulatory
framework along with tightening the budget constraint through
current strategy.
Access, Quality and Reliability
in Regulatory Framework
• Inadequate investment and rationing allows relaxing budget
constraint at the cost of consumers.
• The only way to prevent pork-barrel politics in the sector is to raise
expectations of the consumers in terms of access, quality and
reliability of supply.
• This can not be done immediately but surely path can laid out and
the tariffs can be inversely related to these parameters just as they
are for loss.
• Legally, it is provided for in the EA 2003 and does not require legal
changes.
• It would require institutional mechanisms for monitoring and verifying
and these parameters besides better mechanisms for consumer
complaints and grievance on these parameters.