The Slow, Secret Death of Open Access

Natural monopoly businesses such as electric grids, telecom networks, gas pipelines, railways etc. are heavily regulated since they need to be readily available and affordable – these services are considered basic public necessity and should be within reach of citizens, of all economic classes. That makes the tasks of regulators difficult as they have to ensure consumers’ interests while at the same time provide sufficient incentives for investments required to maintain existing infrastructure and to create new infrastructure. In short regulators/ regulations provide a proxy for fair and transparent market conditions. 

The Electricity Act, 2003, was enacted to enhance efficiency and bring transparency in India’s electricity industry and provides a fundamental regulatory framework. One of the path-breaking policies under the Electricity Act, 2003 was allowing a consumer to purchase power directly from one or more generators/traders by securing “Open Access” on transmission and distribution grids. In exchange of allowance of free flow of electricity from point source A to B, the users have to pay for various network related charges (wheeling) and losses, as well as some other derived charges to keep level playing field unchanged for the incumbent utility and thereby avoidance of cherry-picking by rival suppliers (these include cross-subsidy surcharge, additional surcharge, open access approval related costs etc.).

For electricity consumer the freedom of alternate/ choice makes sense if it translates into a business case for tariff reduction. The assumption here is that the alternate arrangement is better in one or both parameters – (a) power procurement, and (b) power supply. This meanseither the customer in not happy with the power procurement decisions of the incumbent supplier (price/ quality/ attributes) OR is unhappy with the power network infrastructure costs/ efficiencies, or both. However given the natural monopoly nature of electricity infrastructure (which means parallel licensees/ multiple wires infrastructure providers are not encouraged) OA only brings choice of power supply source, and not the choice of connecting to a particular utility’s wires infrastructure.  

Therefore with such limited choice a consumer may procure power more efficiently as compared to its incumbent utility; though the consumer still has to bear the burden of network related inefficiencies of the incumbent. As discussed above the OA consumer is burdened with several charges to make him pay for what is right (usage) as well as what is wrong (inefficiencies of the system). The incumbent utilities understand that such charges shall make the entire OA feasibility exercise futile and have waged a polarised propaganda to widen the scope and scale of such charges, which if successful shall lead to slow and secret death of open access.

A consultation paper recently issued by the Ministry of Power recommends increase in charges on similar lines. The paper makes a case that Discoms are at loss on several accounts if their consumers avail OA. According to the paper, frequent shifting of supplier by OA consumers’ results in lack of clarity to the Discom for firming up its power requirement and tying up contracts to meet those requirements. The cross subsidy surcharge and additional surcharge are either not calculated by state commissions or not calculated accurately. This leads to recovery falling short of expenses which further stresses Discoms balance sheets. 

At a more fundamental level the paper appears to make a case for blanket increase in fixed charge so that the Discoms (and their remaining consumers) are not burdened with fixed costs obligation for open access consumers. However this argument fails to acknowledge that equilibrium can only be obtained in this cost vs. recovery equation when 100% of the fixed costs are charged basis load/ connection (on per KW) and only the variable charges are charged basis consumption/ usage (on per kWh). Till the time such equilibrium is achieved, any unit reduction in sales will lead to under recovery of some portion of the fixed costs. 

In reality the reason for not recommending such hypothetical equilibrium condition lies in the fact that energy billing should be such that conservation is promoted and there are enough incentives to the consumer to reduce her electricity usage. Imagine a situation where the fixed charge for a residential household connection is Rs.150 (instead of current ~ Rs.25) and usage charge is a meagre 0.50 Rs./kWh (instead of the current ~ 4.50 Rs./kWh). Will the residential consumer have any motivation to switch off the fans and television? The same logic when applied to high usage industrial / commercial consumers, leads to even further skewed results.    

This in my opinion is the fundamental weakness in the Ministry’s recommendation with ways to handle OA chargeability issues. Any increase in the OA transaction related charges shall eventually lead to consumers giving up their freedom of choice. OA may then be just a theoretical reform which failed to achieve its impact and died a slow death.