Despite power being one of the critical focus areas for India, increasing complexity in power regulation coupled with ambiguous interpretation of current laws is enhancing clashes between various stakeholders. by Anchal Gupta
The privatisation of British Gas under Margaret Thatcher’s privatisation drive in 1986 as a single entity provided critical lessons for the most far reaching privatisation in UK history – of its power sector – which till 1990 was a monopoly called the Central Electricity Generating Board (CEGB). The CEGB bled under massive over staffing and using much costlier domestic fuel. To promote competition and avoid financial collapse, CEGB was broken up into 4 separate entities taking over generation, transmission and distribution. British Energy was carved out of one of the 4 in 1996 which became world’s most productive electricity generator by 1997. By 1997 also, power tariffs went down 20% in real terms compared to pre-privatisation era. Coupled to that, tax payers had huge indirect dividends when the government imposed a large “windfall” tax on utilities in 1997. Overall performance improved, with dis-connections down 95% within 5 years.
Cut back to 2010, and India’s attempts at privatization and a level playing field for competition and efficiency in its power sector have created a seething cauldron of clashes and regulatory battles with the power and prestige of the regulators themselves at stake. India, with a total capacity of around 160,000 MW, loses 35% to T&D inefficiencies. It bleeds with power shortages during peak season reaching 13% with states like UP going up to 18-20%. India recently lowered its 11th Five Year Plan target of 78000 MW capacity addition to 62000 MW while China is adding 100,000 MW capacity every year. The landmark Electricity Act 2003, which opened up power generation and distribution to private hands and created independent regulatory boards for every state, currently has its provisions under the hammer as turf wars between various factions escalate.
The Central Electricity Regulatory Commission (CERC), created in 1998, the central power regulator entitled to set tariffs, monitor and control mechanisms for generation and T&D saw itself on a new pitch when commodity exchange MCX moved the Bombay High Court for a stay on a January notification by CERC that all exchanges who intend to have power derivatives trading must get registered with the regulator. MCX’s own patron, the Forward Markets Commission (FMC) put weight behind the former and publicly opposed the notification. But, the CERC might just have an ace up its sleeve. The Electricity Act 2003 sweeps aside all other Acts and gives CERC overriding authority on power markets including derivatives. MCX’s poses its own line of reasoning starting with the fact that forward markets fall outside the mandate of the CERC, owing to the Foreign Contract Regulation Act of 1952. The motive steeped in real profits behind MCX’s move is that if it gets a stay on the notification, it can renew existing contracts at much higher prices.
That’s another thing that power derivatives to start trading on Indian exchanges will take a lot of time. According to Satish Kumar, power analyst at Anand Rathi Investments, “Power derivatives is something that will take some years to take place in India because the underlying framework still doesn’t exist. The physical demand and supply constraints and the T&D infrastructure needs to develop to a great extent before power derivatives can be effective in India. As far as exchanges like MCX registering with CERC is concerned, CERC has overriding powers when it comes to power sector and exchanges will have to comply with CERC norms in the long run.”
The privatisation of British Gas under Margaret Thatcher’s privatisation drive in 1986 as a single entity provided critical lessons for the most far reaching privatisation in UK history – of its power sector – which till 1990 was a monopoly called the Central Electricity Generating Board (CEGB). The CEGB bled under massive over staffing and using much costlier domestic fuel. To promote competition and avoid financial collapse, CEGB was broken up into 4 separate entities taking over generation, transmission and distribution. British Energy was carved out of one of the 4 in 1996 which became world’s most productive electricity generator by 1997. By 1997 also, power tariffs went down 20% in real terms compared to pre-privatisation era. Coupled to that, tax payers had huge indirect dividends when the government imposed a large “windfall” tax on utilities in 1997. Overall performance improved, with dis-connections down 95% within 5 years.
Cut back to 2010, and India’s attempts at privatization and a level playing field for competition and efficiency in its power sector have created a seething cauldron of clashes and regulatory battles with the power and prestige of the regulators themselves at stake. India, with a total capacity of around 160,000 MW, loses 35% to T&D inefficiencies. It bleeds with power shortages during peak season reaching 13% with states like UP going up to 18-20%. India recently lowered its 11th Five Year Plan target of 78000 MW capacity addition to 62000 MW while China is adding 100,000 MW capacity every year. The landmark Electricity Act 2003, which opened up power generation and distribution to private hands and created independent regulatory boards for every state, currently has its provisions under the hammer as turf wars between various factions escalate.
The Central Electricity Regulatory Commission (CERC), created in 1998, the central power regulator entitled to set tariffs, monitor and control mechanisms for generation and T&D saw itself on a new pitch when commodity exchange MCX moved the Bombay High Court for a stay on a January notification by CERC that all exchanges who intend to have power derivatives trading must get registered with the regulator. MCX’s own patron, the Forward Markets Commission (FMC) put weight behind the former and publicly opposed the notification. But, the CERC might just have an ace up its sleeve. The Electricity Act 2003 sweeps aside all other Acts and gives CERC overriding authority on power markets including derivatives. MCX’s poses its own line of reasoning starting with the fact that forward markets fall outside the mandate of the CERC, owing to the Foreign Contract Regulation Act of 1952. The motive steeped in real profits behind MCX’s move is that if it gets a stay on the notification, it can renew existing contracts at much higher prices.
That’s another thing that power derivatives to start trading on Indian exchanges will take a lot of time. According to Satish Kumar, power analyst at Anand Rathi Investments, “Power derivatives is something that will take some years to take place in India because the underlying framework still doesn’t exist. The physical demand and supply constraints and the T&D infrastructure needs to develop to a great extent before power derivatives can be effective in India. As far as exchanges like MCX registering with CERC is concerned, CERC has overriding powers when it comes to power sector and exchanges will have to comply with CERC norms in the long run.”
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and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Prof. Rajita Chaudhuri's Website
domain-b.com : IIPM ranked ahead of IIMs
Arindam Chaudhuri's Portfolio - he is at his candid best by Society Magazine
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
