The big black-out threat!

Both the Supreme Court and Delhi’s Aam Aadmi party government may or may not be fully aware of how a combined impact of the power sector deregulation and nexus between electricity whole-sellers and retailers (discoms) led to the worst ever power crisis in North America, involving the state of California, in 2000 and 2001. The big black-out threat posed by Reliance discoms in Delhi, following cash-strapped NTPC’s warning that it would cut off power supply to the private retail distributors belonging to the Anil Ambani-led Reliance group if it did not settle large payment dues against the bulk purchase of electricity from the public sector power producer, is somewhat reminiscent of the artificially manipulated power crisis by the supplier-distributor nexus in California, just 14 years ago.

The only difference was that in California both the private power producers, led by notorious Enron, and discoms engineered the crisis to rake in huge profits. Enron had collapsed soon after as several US regulatory agencies pounced on the company and its financial auditors for cheating. The auditors, Arthur Andersen, too were forced to fold up. In the case of Delhi as also in a few other cities like Kolkata, private discoms are making profits at the cost of government controlled power generators cum whole-sellers with whom they habitually run large credit by way of payment default. Driven to desperation, the state of California even ordered takeover of discoms to control the crisis. The US federal regulator blamed ‘disincentive’ for under-generation by power producers leading to power shortage helping discoms to take its full advantage to maximise profits by manipulating tariff rates.

The real victims of the tussle between the public sector power generator-suppliers and Delhi’s discoms are the former. And, the common man or retail subscribers are held hostage by this unhealthy development. The agreement offenders in the case of Delhi are the discoms and allegedly the Delhi government under the previous Congress rule with both running huge payment arrears with their respective suppliers of electricity.  Surprisingly, the offenders secured a much greater relief from the apex court than the generator-suppliers such as NTPC, whose payment they habitually hold back. Understandably, Reliance discoms’ public reaction to the interim court order is highly appreciative of it. In contrast, the US federal regulator recommended ‘incentivising’ power generation and punishment to the discoms and retail tariff manipulators in the California power crisis case.

In brief, the genesis of the then famous California power crisis was the deregulation of the power sector under a wrong assumption by the government that it would lead to competition among electricity companies and lower electricity tariff for the benefit end consumers. The government even fixed artificially low consumer price of electricity by capping the tariffs at the pre-deregulation levels, which, in turn, encouraged wasteful consumption and higher power demand, providing opportunity to discoms to rate-squeeze bulk power suppliers. As a result, the latter did not see any incentive to generate more power to meet discoms’ capricious demands. In 2003, after extensive investigation, the Federal Energy Regulatory Commission (FERC) substantially agreed that there was significant market manipulation by the companies and ‘many trading strategies employed by Enron and other companies violated the anti-gaming provisions..’

In India, the deregulation is playing havoc with the power sector which is uniquely allowed a guaranteed return on capital investment. This led to massive import of substandard power equipment at inflated cost and siphoning out of reserves built with the help of tariff manipulation by distribution arms of these private companies even to unrelated non-core activities and strip existing assets. For instance, in Kolkata, where the power tariff is the highest among metro cities despite its big locational advantage of being close to coal supply sources, private distributor CESC Limited diversified into totally unrelated retail grocery business by acquiring a sick Chennai firm, Spencers, using CESC’s surplus and assets. After supporting Spensors for years and charting its huge expansion with CESC’s funds, the private power distributor now plans to demerge Spencers ensuring its independent financial viability. On the other hand, the reckless import of substandard power equipment by many Indian private power firms not only led to massive foreign exchange outgo amounting to tens of billions of dollars from the Reserve Bank, but also weakening the business prospects of India’s world-class power equipment manufacturer, BHEL Limited in the process.

Unfortunately, both the governments – central and state – and their respective tariff regulatory commissions seem to be often in a kind of unfair alliance with private power producers along with state sector banks, the key source of finance, hurting the broader interest of economy and society. A thorough independent cost study report on a regular basis along with periodical forensic audit of power companies as originally suggested by Aam Aadmi party and Chief Minister Arvind Kejriwal in the case of Delhi discoms is the correct way to ensure ‘best practices’ among power generation and distribution firms in the overall interest of the nation and the specific interest of industry, trade, agriculture and domestic consumers.

The efficiency of the power sector concerns all. Efficient power generators like NTPC need to be encouraged and not envied upon and, the least of all, be kicked around and demoralised by willful payment defaults by power traders. It would be very unfortunate if the operations of companies such as NTPC, bulk generators and suppliers of electricity across the country, are allowed to be adversely impacted by often willful large payment defaults by some private retail distributors in a regional market. Such retail power firms don’t deserve distribution licence allowing monopoly operation within a specific geographical limit.

The most famous observation by the USFERC, following the California crisis, that the power sector needs to be ‘both deregulated and regulated’ in societal interest has ever since been regarded as a bible even in highly developed economies. Vladimir Lenin, the original champion of state control of the power sector, said with some valid justification and a tinge of satire that ‘communism is Soviet power plus the electrification of the whole country.’ The government and the regulator must appreciate that guaranteed profit or profit motive alone can not necessarily guide a healthy growth of the power sector which is as basic to human existence as air and water.         

IPA