KSEB OFFICERS ASSOCIATION

The basic approach of this legislation the "Electricity Act:2003", is "to encourage competition" and "power trading" which is nothing but an attempt to privatise the power sector as a whole. The various attempts being made by the Power Ministry (Government) is to achieve this goal forgetting the experience we had from "Enron" and the International experience including that of California.

The broad characteristics of the comments of Ministry of Power (MoP) are in the following lines.

The Act is evolved through a process that started in 1993 and was enacted after a national consensus is arrived at.

Most of the provisions of EA 2003 were already implemented in various states through state legislations.

At the same time MoP seeks to distance EA 2003 from the consequences of these very reforms that started in the early 90’s and pretends that the new Act is a panacea for all the present ills of the sector – which are actually a direct consequence of the very same reforms.

Not withstanding the apprehensions raised in the memorandum, the Act will provide for a conducive atmosphere for the development of the sector by invoking the magic wand of ‘competition’.

Based on the by now infamous arguments for neo liberal policies of globalization MoP seeks to disapprove all the amendments suggested in the memorandum.

Thus the underlying tone of MoP’s response is one of hiding the real issues under the carpet and thereby to fool the Indian populace. We would like to remind the MoP that the human resources available on NCCOEEE side are more qualified, experienced and equipped than that what MoP owns. What we lack is the huge support of financial as well as other resources of multilateral lending agencies coupled with the political power exerted by speculative capital – which is naturally the strength of MoP. MoP must also take note of the situation that almost all the professionals working in the sector has come out against these reforms and the initiatives of MoP at one stage or the other. The comments of MoP can only be seen as an agglomerative rejection of the aspirations of the vast majority of common people of India. However we are not surprised at the die-hard response from MoP, which is actually headed by none other than a person who is fresh from the boardroom of Reliance, who are known for much dirtier tricks, behind the curtain.

Our specific response to various comments offered by MoP are as under.

MoP has kept mum on the following issues raised in the memorandum and thus it is assumed that the ministry is in full agreement with our views in those areas.

The new Act separates rural India from Urban in the matter of power supply.

Private players were guaranteed very high return on equity, higher depreciation rates, higher O&M costs, full reimbursement of Income tax treating it as a pass through item in tariff, treating exchange rate variations as pass through etc. resulting in high cost of power. CPSU’s also exploited the situation and thus raised cost of power supply and expedited the process of SEBs becoming sick.

Power requirement in the country has been inflated purposely, creating a panic situation so as to allow more and more concessions to private players.

Fuel policy has been changed in favour of hydrocarbons resulting in huge hike in cost of power.

Private players who came into field failed to fulfill their contract and hence power shortages become a continuing process.

Profits in the power sector should be capped based on the Bank rate fixed by RBI (lending rate of Reserve Bank of India to Commercial Banks) and should not be an arbitrary figure like 16%. The Act should be amended and this figure should be a part of the Act as it was in the 1948 Act.

Cross-subsidies should continue in the tariff formulation subject to an upper limit beyond which it will have to be direct subsidy from the Government.

Comments of MoP

1.There has been a consensus for reforms in power sector. Nine States had enacted State reforms Act prior to EA 2003. Most of the States have setup State Electricity Regulatory commissions (SERCs) before enactment of EA 2003.

While it is true that there is consensus for reforms in power sector, it is equally true that there was divergence of opinion on conception, perception and consequently the model for reforms. So there was great resistance in MoP thrusting a ‘one size fits all’ model in the name of reforms. Most of the big and important states are yet to adhere to these dictates. Even in the few states were various funding agencies succeeded, through pressure tactics, in enacting state level legislations, the progress has been abysmally poor. Before extending this flawed model all over the country, a stock taking is the need of the hour.

As regards state regulatory commissions, it is well known that their formation was forced through arm-twisting tactics adopted by MoP through MoU’s, tripartite agreements, APDRP incentives etc., at times even undermining the federal authority of State Governments. Even after its formation various state governments are at logger heads with it’s functioning.

Efforts for portraying the process depicted above, as a consensus building exercise deserves derisive rejection.

2.The private companies in Delhi have started showing improvement in efficiencies by way of reduction in losses. There has been no privatization of distribution in Andhra Pradesh.

There are obvious reasons for MoP to remain silent on Orissa ‘success’. Similar is the case with ‘efficiency improvements’ in maintaining interruption free power supply in our capital city! Similarly the studied silence on the burden it put on the State Exchequer shows smack dishonesty. The loss level in Delhi today is the highest in the country and it is ridiculous that MoP has to harp on a miniscule ‘improvement’ in loss level to project the success as a model for whole of India.

While it is well known that distribution sector in AP has not been privatized, it is also known that reforms were in full throttle there. The bitter experience of the reforms has already resulted in a popular backlash and the State Government has already retracted from tariff rationalization and is calling for review of PPAs with IPPs in the lines suggested in the memorandum

3.Higher tariff to industrial consumers is making Indian industry non-competitive. The high tariff is a direct consequence of ever increasing cross subsidies.

While it is agreed that rates for industrial consumers in the productive sector should be fixed in such a way as to keep them competitive, owing to a multiple of reasons, the way out is certainly not to eliminate cross subsidies. To offer low tariff to industrial consumers the cost of electricity has to be low, for which the flawed IPP policy and Liquid fuel policy has to be reverted as already pointed out. More over the terms and conditions of tariff is to be changed suitably to eliminate the exorbitant profiteering, and the policy of unbundling the EBs are to be done away with.

4.The technical as well as the commercial losses of the SEB’s were mounting and thus there was a general consensus that the prevalent business model of power utilities and the existing monopoly structure can no longer be sustained and even the state governments were unable to bridge the ever-increasing losses. The Act was evolved through extensive consultations and resulting consensus which was a long drawn out process.

First of all we would like to point out that there was ever any consensus over these issues as far as various stakeholders are concerned. Reforms in the power sector were one of the major contentious issues in the political spectrum – starting from ‘Enron’. The opposition to these were demonstrated in the violent agitations in Andhra Pradesh, Rajasthan, Haryana, Kerala etc. and the Nation wide and state level agitations by employees in the power sector. The people through their verdict in the recent elections to state assemblies as well as Lok Sabha has expressed strong discontent towards the new business model pushed by MoP.

As has been pointed out by various studies, the mounting losses of SEB’s were more of a direct consequence of ever increasing cost of power generated by IPP’s and CPSU’s, which were unreasonably so high that, the resulting burden could not obviously be passed on to the end consumer. There has been an over 3-fold increase in the cost of power generated by IPP’s and CPSU’s as can be seen from the planning commission report, after introducing neo-liberal policies in power sector.

The new business model adopted by certain states and which is insisted in the Act has not shown any improvements so far and has only worsened the situation for most. AT&C losses have not come down while the burden of state governments has increased many fold. At one stage even Sri. Chandrababu Naidu, the then CM of AP was forced to call for central assistance to tide over the situation.

5.Nowhere privatization is mentioned in the objectives of the Act.

This is a typical effort often adopted by the MoP as well as the WB, IMF, ADB trio, to befool ordinary uninformed citizens. After ensuring the inclusion of sufficient provisions in the Act for enabling conditions (which is really a misfit in the present situation) that is possible through privatization in the capitalist economy before it is reaching monopoly stage, the MoP is now quoting the objectives of the Act, which was originally drafted by MoP itself with an intention to cleverly mask the real objectives. Unbundling of EBs into different companies, allowing open access, provision for multiple players in the same area for same functions, allowing trading separating from distribution work etc., are incorporated into the act for privatising the Power Industry.

6.Rationalization of electricity tariff along with transparent policies regarding subsidies adequately takes care of the concern for reasonable tariffs.

Rationalization of tariffs has already been put in the cold storage by a number of states owing to its obvious implications. It is widely recognized that the already impoverished state governments would not be able to burden itself with additional subsidies to keep the tariffs reasonable. One wonders whether MoP has done some homework and quantified the possible out flow from state exchequer before making such a comment. It can also be presumed that the M.O.P is lacking in awareness of the social realities.

7.Universal service obligation has been provided in the provisions of the Act.

Agreed. But then what is the mechanism? Is it an attempt of eyewash?

8.Tariff fixation by independent regulatory commissions has been adopted by a number of states even before the EA 2003 (and so Act has made nothing new)

The formation of State regulatory commissions was earlier at the discretion of State Governments. Also the State Governments enjoyed constitutional powers even for constituting a commission whose role could be as fixed by the government concerned. Whereas the EA 2003 has changed the entire situation and now the formation of commission and conferring overarching powers to the commission are mandatory.

The experience of the regulator era was not at all satisfactory as has been pointed out by various experts and as could be seen from the outcry from public which calls for a review of the system.

9.The terms and conditions of the employees shall not be less favorable than those applicable to them presently as per section 133 of the Act.

Agreed. But what about the experience of employees in Orissa and Delhi, where also similar assurances and provisions were there?

10.Eight states had unbundled their SEB’s even prior to EA 2003 (thus restoration of unbundled entities is not in its purview).

The experiences of these were not encouraging; people as well as employees call for reversal; policy makers in the central government call for a review. Thus the demands for stalling unbundling and to restore the SEB’s already unbundled are in perfect harmony with the emerging situation.

11.Section 172(a) provides for flexibility to state government regarding time frame in reorganizing the SEB.

What is needed is not mere flexibility in time frame, but flexibility in deciding the optimum industry structure suitable for the state – in consonance with the true spirit of the federal structure of the country as envisaged in the constitution., without the exertion of any illicit pressure from the Centre as experienced now.

12.Thirteen states has asked time for reorganization of SEB’s, which was granted (thus commitment in NCMP is met)

In true sense with the NCMP, the reorganization of SEB’s are to be stalled until a fruitful review of the Act is undertaken in consultation with all stake holders.

13.The basic scheme of EA 2003 is to provide a liberal and progressive framework for the power industry so as to promote competition, which would lead to reduction in costs in medium and long term and would benefit consumers. Delicensing generation, introduction of trading, multiple licensees in distribution, open access etc. are introduced with this intention. Thus the dominant role suggested (in the memorandum) for CEA is not acceptable. Independent regulators should do the role of navigators (only) until markets are fully established.

Even renowned economists have noted that many characteristics of electricity industry exhibit monopolistic tendencies. A single player or a small group will be able to exert market power in such situations. Creating a perfect market and there by competition will only remain as a mirage in such conditions. It is an established theory in classical economics that, in a developing country, in sectors that show monopolistic characteristics, the private capital shall never be allowed a dominant role. Thus the model that, allows a dominant role for private capital by withdrawing all state controls, in the name of introducing competition, is destined to fail. The experiences in power sector elsewhere provide ample material proof to this established theory.

14.The Act in section 2(8) defines a captive generative plant as a power plant setup by any person to generate electricity primarily for his own use. The concerns expressed (on misuse of provisions to escape from the responsibility towards payment of surcharge in lieu of cross subsidy) will be addressed through clarifications.

This is a typical attempt of MoP in befooling the political leadership as well as the uninformed public. The later part of section 2(8) reads like this "and includes a power plant set up by any co-operative society or association of persons for generating electricity for use of members of such co-operative society or association". It is this part of the section which has drawn flak from industry experts and even from ex-regulatory commission Chairman of State. What is needed is not a clarification by MoP, but an amendment to delete the objectionable portion, which even MoP has found it difficult in defending.

15.The Act does not mandate privatization of any segment of electricity sector. The concerned Government is free to adopt appropriate business model for development of its resources.

In the prevailing scenario where central government lure the state with ‘carrot and stick’ and the combination of international funding agencies dictating states to abide by the interests of private capital, one wonders whether the states are that free.

16. Open access has been provided in the Act with the objective of promoting competition among the generators. This is valid even in situation of shortage because competition is likely to induce generators to reduce the cost of supply.

Is the ministry trying to rewrite and distort economic principles and theorize on market behaviors?

On the question of open access on transmission lines we would like to know whether the government would have dared for suggesting the same in a scenario where only private transmission lines where in place. For example in the case of automobile industry the country wide service stations of a particular company are considered as its network to provide reliability. Can one suggest providing open access for say, Hyundai in the service network of say, Maruti for the sake of competition? In the case of power industry open access only means masked privatization of public assets.

17.The existing PPAs are contractual obligation. Therefore, it would not be advisable to provide for reopening of all such contracts.

Should the nation be so obliged to the profit motive private capital that have tried and even today trying to loot our people?

18.It would be unfair to restrict this (trading) activity to only public entities.

Unfair to whom? Reliance?

By any means restricting trading to public entities cannot be seen as an unfair act towards the people of India.

19.The distribution network of the second licensee will tend to be costlier. The incumbent distribution licensee will have the advantage of access to cheaper power from old plants. The PPA’s could not be reworked, as it is contractual obligation. Cherry picking would not be there, since a paying consumer who deserts the incumbent licensee is bound to pay surcharges. Regulatory commissions have powers to give directions (without teeth) to a licensee (including trader) if he abuses its dominant position….etc.

Even ex-regulators have pointed out that multiple licencees in the same area will lead to cherry-picking.

Any how, by these, MoP is suggesting that it does not expect any meaningful competition to take place in the sector. The expectation is true and is based on a sound understanding of the industry. Due to these and for a host of other reasons market for power is bound to be imperfect. But the very fundamental concept behind EA 2003 is that perfect market is possible in the sector. Without a perfect market it would be suicidal to give a chance for the private capital to dominate the sector. When the ministry who has piloted the bill itself is not in a position to believe in perfect market, then there is a strong case to scrap the Act itself. This can only save the industry and the nation from the doom of neo liberal experimentation.