One of the key elements of India's power-sector reforms, enshrined in, among other things, the Electricity Act of 2003, envisages that large consumers, at least, should enjoy the option of choosing their suppliers. The law had given a five-year grace period for introducing this option for electricity consumers with a demand higher than one megawatt. Widely known as the open-access policy, the freedom it gave to consumers meant they could bypass their existing suppliers and opt for a new one on payment of such surcharges and special tariffs as would be approved by the regulator. The surcharges were levied to safeguard the existing suppliers against the loss of their high-paying large consumers to new suppliers.
The objective was to create a level playing field so that new suppliers, without having to incur costs on setting up local distribution channels, did not have an unfair advantage over the old suppliers, which had already spent valuable resources to create such infrastructure. But as this newspaper reported recently, the open-access policy has remained a non-starter with only a handful of large consumers - 1,883 consumers in only 10 states in the whole country - opting for new suppliers in preference to their existing distribution companies. What was supposed to be the biggest benefit of electricity-sector reforms has turned out to be an abject failure even after six years of its mandated introduction.
Analysing this failure raises some important questions. Data compiled by analysts have demolished the earlier thesis that transmission and cross-subsidy charges levied by the existing distribution companies have made the final open-access tariffs prohibitive. Nor do they seem to have discouraged any large-scale switchover by consumers to new suppliers. Barring Odisha, almost all the states levy an open-access tariff that is not substantially higher than the rate at which the existing distribution companies charge their existing customers. It is a relief that the time-tested principle of providing safeguards for existing suppliers against unfair competition has worked without creating any unnecessary tariff distortions. The reason for the open-access policy becoming a non-starter, therefore, has to be found elsewhere.
The National Democratic Alliance government now needs to spend its energies on identifying what could be the real reasons for the failure of the open-access policy - a key element in power-distribution reforms. For instance, it must examine the nature of constraints in the transmission infrastructure that may not encourage many large consumers to opt for the open-access policy. It must, therefore, try to attract greater investment in transmission networks. Procedural bottlenecks or regulatory issues also may not be conducive to ushering in greater competition in power distribution in many states. The government needs to pay attention to resolving them without losing much time. More importantly, regulators have to address the wide-spread problem of differential tariff structures in most states, where the power rates for agriculture or household consumers are substantially lower than those applicable to other sectors. It is the prevalence of such differential rates that prevents greater use of the open-access policy. High-paying large industrial consumers are often a cash cow for existing suppliers because of their differential tariff structure; letting them go to a new supplier can deal a big blow to their finances. Phasing out differential tariff rates would go a long way towards beefing up the distribution companies' strained finances, and also encouraging greater use of the open-access policy.