2.4.1.1 Regulatory reform

The Electricity Regulatory Commission Act, 1998 establishes an independent regulatory commission at the center and enables the establishment of regulatory commissions in the states, to introduce competition, efficiency and economy in the power sector, safeguard the consumer interest and improve the quality of supply and service. These bodies function in a quasi-judicial manner and have the powers of civil courts. They consist of members, selected in a prescribed manner, which ensures fair and impartial selection of professionally competent, upright and committed people who serve the commissions for fixed tenures. The government has thereby externalised a substantial part of the entire process of regulation of the power sector, from the government. It has done so with the hope that greater professionalism, transparency of process and procedure and the participation of a larger group of stakeholders in the decision making process, will result in informed, unbiased, efficient, fair and commercially sound decision making. Tariffs, conditions of supply and service and in many cases, licensing of investments and operations, are within the purview of the regulatory commissions. Any tariff policy guidelines, issued by the government shall be characterised by fairness to consumers and aim to facilitate mobilisation of adequate resources, for the power sector.

2.4.1.2 Market reform

Amendments to the Indian Electricity Act, 1910, made in 1998 have established the Central Transmission Utility (CTU) at the center and the State Transmission Utility (STU) in the states. Any company, owned by government, can be the CTU which is charged with the responsibility of undertaking inter state transmission of energy, discharge all functions of planning and coordination and supervise and control the inter-state transmission system. Similar provisions exist for the states. The government has designated POWERGRID as the CTU. While private investments in transmission are possible, these private operators will function under the supervision and control of the CTU. They will transact with the CTU and not directly with the consumer. Hence a structure has been created which ensures the dominance of a public owned transmission utility. In generation, the dominance of the central generators continues, but is sought to be controlled through the regulatory process. However, the Mega Power Policy of 1998 does facilitate large generation projects in the private or joint sectors, which will over time compete with central generators. To reduce the cost of bulk power, to increase the availability of power in the bulk power market and thereby to establish a national market for power, the central government has incorporated the Power Trading Corporation Limited (PTC) in 1999. The PTC will assist in the development of mega projects, which will supply power on a regional or national basis. Economies of scale and preferential tax treatment are expected to make bulk power available at economical rates. The projects are insulated from payment risk since they will sell power directly to the PTC under a composite scheme for the generation and sale of power in more than one state. The policy framework is several steps away from competition in bulk supply. However, there is a clear departure from the past, in that a simulation of competitive conditions has been attempted.

2.4.1.3 Optimisation of supply profile

Concerned by the declining shares of hydropower in the total generation of electricity, the central government formulated the Hydro Power Policy in 1998, which sought to reverse this trend. This policy proposes the levy of a cess on energy consumption for financing the growth of hydropower. It also prescribes a reduction in the availability target for full recovery of fixed cost from 90% to 85%. It recognises the higher risk and uncertainty inherent in hydropower and seeks to adopt risk mitigation strategies so as to make the sector attractive for private investment. It prescribes a preferential tariff for hydropower in recognition of its suitability as a source for peaking power. It recognised the undeveloped potential in small hydro and sought to transfer all hydro projects of 25 MW and below to the Ministry of Non Conventional Energy for specialised assistance and promotion.

2.4.1.4 Institutional reform

The Central Electricity Authority is expected to continue to discharge its functions in the areas of national planning and technological support to the government. However the intrusiveness of its decision making has been progressively reduced. Since 1995, the investment limit for thermal, generation below which the projects do not require the techno-economic clearance of CEA, has been progressively raised from Rs. 100 crore to Rs. 5000 crores allowing most investment decisions to be taken on purely commercial considerations and as per the business plans of individual developers. However to ensure that such investments are least cost the limit for projects which do not go through the competitive bidding route is lower at Rs. 250 crores. With the deletion of section 43 A (2) of the E (S) Act, CEA will no longer have a statutory role in the determination of operational norms for generation projects. All the functions regarding dynamic, short term planning of the transmission system, with a time span of one year and under have been now vested with the CTU for the interstate transmission system and the STU for the state level transmission system. CEA will however continue to make the five to twenty year national plans and integrate the transmission plans of the states and the center. Through amendments made in 1998 to the Electricity (Supply) Act, 1948, the role of the Regional Load Despatch Centers (RLDCs) has been strengthened in view of the urgent need to improve grid operations. RLDCs will be managed by the CTU and will be in control of the real time operations of the inter-state grid while State Load Despatch Centers have mirror functions for the state grids. This will involve a reallocation of the existing functions being performed by the Regional Electricity Boards (REBs) which till now have been the primary regional entity for exercising control over the regional grids.

2.5 Conclusion

The policy changes effected by the central government since 1991 are supportive of the overall objectives of improving the efficiency and economy of the power system. With this new phase, policy determination has evolved into an exercise in creating the enabling environment within which specially empowered institutions, like the regulatory commissions, the CEA, the CTU and STUs have to function creatively, to translate objectives into achievements. Many of these functions are new and precedents are unavailable to assist the institutions charged with executing these functions. Policy support, as for example those necessary for structural change, may therefore be required to make these institutions more effective. Prescriptive rule making is on the decline while indicative planning and directional regulation is being adopted. However clearer policy directives, as for example with respect to the role of the private sector, the scope for introducing competition through structural change, the role of the regulatory commissions in the areas of environmental regulations, in deciding input costs for power and in the establishment of incremental capacity are required. The final stage of evolution, under the reform program currently being implemented, envisages greater reliance on markets to allocate resources and to induce improvements in efficiency. However significant institutional strengthening is indicated, before the Indian power sector can become competitive and market oriented.