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Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Strong competition as a reform

India's electricity markets show how reforms on their own can't do much unless backed by strong institutions

Much has been written about the maiden budget of the Narendra Modi government and its lack of a blueprint for economic renewal, thereby missing the opportunity to introduce 1991-like economic reforms. But considerably less attention is being paid on how pro-growth laws/policies are being implemented.
Introducing new reforms is not enough if their implementation is not backed by an institutional architecture that supports the larger goal of such reforms.

There is, thus, need for Indian economic policymaking to shift from a mere structural to a more behavioural paradigm; where pro-competitive market-reforms are supported with pillars of an institutional framework that facilitate the implementation of such reformist laws/policies. We use India’s dysfunctional electricity sector an appropriate case to illustrate our argument.

The Electricity Act, 2003 is one of the few modern pro-competitive legislation on India’s statute book. The Act stipulates licence-free thermal generation, non-discriminatory open access of the transmission system, gradual implementation of open access in the distribution system to pave way for the creation of a power market in India and encouragement of private sector participation in generation, transmission and distribution. The reformist provisions of the Act clearly indicate the intention of promoting competition and market-based regime in the electricity sector, yielding efficiency gains and enhancing consumer choice.

Even after a decade of the Act coming into being, India’s electricity sector remains untouched by the benefits of dynamic competition and is widely viewed as a constraint to economic growth. India currently experiences a yawning gap of more than 10% between electricity generation and distribution. On average Indians consume a mere 917 kilowatt per hour, as compared with 3,300 in China. The World Bank’s Ease of Doing Business index (2014) ranks India at 111 out of 189 countries in challenges faced by new businesses to get a permanent electricity connection.

The cornerstone of the Act’s design of a liberal electricity market for India—an “open access" regime which allows consumers the freedom to choose their distributors—remains a non-reality. This is primarily because the regulatory institutions implementing the law have been hijacked by extraneous political or socialist agendas, including rampant misuse of the provisions of the Act by state governments to thwart competition and manipulate the market for supply of power. Directions issued by the Central Electricity Regulatory Commission (CERC) to discipline such errant behaviour have been largely ignored.

Further, in spite of India’s tariff policy providing for competitive procurement of electricity, pricing remains heavily politicized. In the last 10 years, power tariffs have increased by 65% while the cost of generating power went up by 300%. Routinely, political parties have used the power sector as a populist football. Regulating for lower electricity tariffs, causing substantial losses to both state-owned and private electricity companies and forcing mere token private investment in the sector are normal.

There is no silver pill for the malaise and the government should quickly realize that a mere forward-looking, pro-competitive law—as envisaged under the Act—is not sufficient for market reforms unless such policy is implemented within a regulatory framework that favours competition unimpaired by bureaucratic politics and political red-tapism.

Expectedly, the electricity sectors of states with governments having a pro-growth focus have fared better. A 2013 report of the international financial accounting firm Deloitte shows that states which made most progress in implementing the reforms under the Act are Rajasthan, Maharashtra, Madhya Pradesh, Gujarat and Punjab. Not surprisingly these states also are among the highest economic achievers in India.

One of the first promises made by the new Union power minister Piyush Goyal was to study the governance practices of the efficiently and commercially run electricity industry of Gujarat and replicate that in the entire country. But with India’s electricity regulation being largely left to the states how will the Modi government undertake such reform efforts? The need of the hour is to adopt an institutional framework which will help the government harmonize decision-making for India’s electricity sector such that the Union government’s pro-growth policies translate into ensuring a seamless, free, electricity market with minimal political or regulatory risk for investors.

The government can create a platform for co-operation of India’s electricity regulators on the lines of the European Agency for the Cooperation of Energy Regulators to harmonize decision-making in the sector.

The agency could be designed as a peer-to-peer body consisting of various decision-makers in the electricity value chain including members of Central Electricity Authority (CEA), CERCs and various other state electricity regulatory bodies under the leadership of the power minister. It could help align the regulatory agendas of India’s Union and state electricity regulators to the reform goals of the Union government. The body could also enhance regulatory synergy and better implement the pro-growth reforms envisaged under the Act, with powers to guide and discipline the various actors when they deviate from a market led investment friendly agenda.

The role of institutions goes beyond the legal framework. Government attitudes toward markets and the efficiency of its operations are equally important. Such an institutional framework will enforce an “arms-length" approach to electricity regulation, replacing the current political or corporatist regulatory approaches adopted by various state electricity regulators besides providing a level playing field for public and private electricity companies.

Payal Malik and Avirup Bose are, respectively, economic advisor with the Competition Commission of India (CCI) and a lawyer with CCI.

Comments are welcome at theirview@livemint.com

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