Business Standard / New Delhi Sep 17, 2009, 00:36 IST
Price controls have rarely been known to solve problems caused by supply-demand mismatch, without provoking attendant aberrations or unwanted consequences. Yet the power regulator has gone ahead and notified a price cap on short-term power trades. According to an order of the Central Electricity Regulatory Commission (CERC), issued on Friday, there will be a price cap of Rs 8 per unit on inter-state day-ahead power transactions. This is said to be a transient measure for a limited period of 45 days, triggered by the high price volatility observed in this segment of the market. The move is ostensibly to protect the interests of consumers while balancing the regulator’s statutory obligation to ensure “reasonable” return for the investor. These investors are said to be comfortable with a selling price of no more than Rs 7-8 per unit. However, prices are crossing the double-digit mark as buyers — the various distribution companies — are under pressure to procure power at any price to ensure uninterrupted power supply. These price spikes then reflect the actual demand and supply position rather than exploitative behaviour by a player or group of players in the market. After all, the price would not cross Rs 8 per unit if no one bought power at that price. So why the cap?
The cap would work against the interests of consumers who would have gained from the increased investment in power generation capacity that would have resulted from the market signal of high prices. Such a price signal is after all the whole purpose of having a market mechanism in place, with all its imperfections. There is another problem with the price cap, in that it is arbitrary. There is no explanation for why it has been fixed at Rs 8 per unit, and not the Rs 11 proposed originally. This latter price may have made more sense as it probably reflects the cost of alternative power through diesel generating sets. In any case, a superior alternative to a fixed price cap would be to follow stock market practice and to have a more dynamic structure. This could be done by defining high price volatility (which could be a 20 or 40 per cent variation in price over a particular period), and a formula which would stipulate the price cap as a certain premium over the price of a previous period of some weeks).
The CERC also needs to acknowledge the changing character of Indian power consumers (retail and commercial). Many now have the ability, and more importantly the willingness, to pay more for power, as long as supply is assured. A whopping Rs 100,000 crore have already been invested in private power generation solutions (back-up power equipment) according to a study commissioned by Wärtsilä India, and an additional Rs 30,000 crore are spent every year to run this. CERC should look at how it can tap this changed consumer sentiment to augment supply rather than focusing on prices, and that too in a segment of the market which is just about 1 per cent of the overall power market.
Caps, controls, licenses, handouts, scarcity - these are in the DNA of Congress and governments run by it since 1950. And, Dr Fake Singh has been an intimate part of this Permit Raj!
Content Guide
