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Report | February 2012

Open Access: A Red Letter day

Kameswara Rao offers a status sheet of the system.

About 10 years ago, the prospects of consumer choice in supply of power seemed really bright. Non-discriminatory open access (OA) and deregulation retail supply of electricity were hot topics of consultations preceding the enactment of the Electricity Act 2003. The expectation was that competition from entry of new suppliers would bring new investment, improve quality of supply, and reduce tariffs for all consumers. The subsidised consumers, primarily residential (as agricultural consumers are largely covered by direct govt subsidy), would face an initial tariff hike as they move to a cost-reflective level, but that was to be softened by spreading it over a transition period and funded by cross-subsidy surcharge. Over the years, these hopes receded as regulators were slow to implement and soon tariff and non-tariff barriers set in. A few states, however, did make serious attempts at reforms – Gujarat and Maharashtra on open access, and MP and to a lesser extent Andhra Pradesh on cross-subsidies reduction.

The benefit of these reforms is real, but hard to sustain when others have avoided it, and so some reversal is now seen in these states too. The Electricity Act, 2003 is clear on the provisions, and added clarity came through subsequent amendments in 2004 and 2007. The SERCs under Section 42 had to introduce mandatory open access and retail choice to all consumers with a load over 1 MW. For such consumers, Section 86 provided that regulators would determine only wheeling charges and surcharge thereon. The consumers would be free, under Section 49, to enter into an agreement for supply or purchase of electricity from any person on tariff and terms they mutually agreed. The letter of the power ministry, containing the opinion provided by the Ministry of Law and Justice, on the subject of implementation of OA affirms that all consumers above 1 MW load are deemed to be open access. Importantly, it opines that the regulator has no jurisdiction in setting tariffs for such consumers.

The intent of providing OA to retail consumers is to offer qualifying consumers a choice, that is, a credible alternate supplier should be present, and the choice should be voluntary. Thus a consumer choosing to continue with their existing supplier will not be considered as an OA consumer, even as it has the right to become one at any time with due notice. This position on OA is well accepted, but the extension of the argument to an entire consumer category appears debatable. The debatable point relates to the opinion that regulators cannot continue to regulate the tariff for power supply to any consumer of 1 MW and above. This means discoms will be free to set any tariff for such OA consumers -­ higher or lower than currently regulated rates. This poses a significant threat for industrial consumers, who do not have the option of migrating to an alternate supplier, primarily as there are not sufficient alternate suppliers, most independent generators are tied under long-term PPAs with discoms.

The availability of a choice in this situation is illusory. Regulators could step in to address market dominance but the scope of Section 60 is inadequate to meaningfully redress these consumers. On the other hand, state governments can step in to levy higher electricity duty to compensate for the loss from cross-subsidy surcharge. This would then nullify all these reforms, leaving no path ahead, unless we start with all stakeholders taking a more balanced and coordinated approach. It may also be argued that the opinion that regulators can no longer determine tariffs for consumers 1 MW and above is not fully substantiated. The aim of Section 49 is to take out of regulatory purview any qualifying supply arrangement as to which two parties have freely contracted. This doesn't prevent the regulator from continuing to provide a schedule of tariffs for consumers, including those who chose to stay with their current licensees. In fact, this will be procedurally required anyway as regulators need revenue forecasts to determine the licensees’ Annual Revenue Requirement and cross-subsidy available for distribution.

Regulators have to make up considerable lost ground in implementation of OA. The prominent one would be to address viability of licensees and cross-subsidies, irrespective of the numbers that might apply for OA. On technical matters, they need to review wheeling and transmission charges, issue regulations for scheduling and settlement, evolve a mechanism for imbalance pricing, etc. Guidance from the power ministry has come at the right time. Industry suffers high energy costs due to tariffs higher than cost-to-serve and back up facilities, relative to global competition. This is especially important for large energy-intensive companies. By contracting with suppliers on OA, industrial consumers can better align themselves to rise and fall in global fuel prices, and stay aligned with their competition.

The author is Executive Director and Leader Energy, Utilities, and Mining Practice – PwC India. Views are personal.
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