Privatize

only if power tariff can further be reduced

By- Ashwini Kumar Verma, Sr. Manager (PE-Mech), EOC, NOIDA

1. Introduction: -

It is needless to say NTPC contributed immensely in Indian power sector and has reformed the entire
sector in many direct and indirect ways. One of such contribution is setting up of best and efficient
O&M parameters and practices which are now taken as benchmark in Indian power sector. Regulation
in this sector could only become possible because of availability of these benchmark parameters in
public domain shared by none other than NTPC. State regulatory bodies also took these parameters
as bench mark and reformed the functioning and efficiency of state owned power generation utilities
to the great extent possible.

NTPC also acquired several sick and underperforming power plants and showcased its turnaround
capacity by making those plants performed at highest ever plant load factor (PLF). NTPC Tanda and
Unchahar are live examples which once used to run at 14% and 33% PLF respectively. NTPC acquired
these sick power plants from UP state and showcased its turnaround capability by running these plants
well above 95% PLF.

Later on, era of privatization came where power generation capacity increased exponentially with
private participation to cater electricity demand of country. In last two decades, many power
generation capacities were built, owned and operated by private players under regulatory regime
where benchmark parameters of NTPC are also serving effectively to contain electricity tariff within
reasonable limit and to prevent the lobbying. Such a well- regulated power sector with adequate
private participation can be said to be a good example of a sustainable, transparent and mixed
economy which is the very goal of any Government.

However, at the same time many of power projects being built up by private players are also reported
to went NPA which seems to adversely impact the baking sector in India. The reasons given for these
NPAs are many such as coal block cancellation, inappropriate fund diversion, price under quoting to
grab bid during tariff based bidding etc. However, NTPC is actively involved in brainstorming for
converting these stress assets into profitable assets.

Ironically, Government of India said in parliament that in order to improve performance, efficiency
and transparency, government is mulling to privatize PSU like NTPC. This created several questions on
the very intent of privatization of NTPC as far as reasons given are concerned.

Private participation in power sector was always a welcomed step but privatization of PSU like NTPC
does not seems to go a long way as far as grid stability, transparency and power tariff are concerned.
It is learnt that NITI Ayog has put up this proposal. However, it is not clear that how privatization is
going to improve the transparency, efficiency and performance of NTPC which is a benchmark in itself
in present scenario. What are the other benchmarks which have been studied before putting up such
proposal? How this move shall prove to be in interest of consumer as far as power tariff is concerned?
Push for privatization may be justified only if power tariff can further be reduced and stability of grid
may be ensured. There are several aspects to it which is required to be deliberated before any such
move in larger interest of consumer. This white papers deals with such aspect which may prove to be
food for thought for government and policy makers.




2. Case study of California Electricity Crisis-

In place of regulatory regime, many times demand supply based free electricity market is advocated
to increase competition in market and get competitive price of electricity. NITI Ayog has also hinted
for implementation similar mechanism in Indian power sector by privatizing power PSUs and doing
away with regulatory mechanism. However, here comes the importance of case study of California
Electricity Crisis where govt. in California tried to implement free market mechanism in power sector.
This led to increased power tariff to almost 8 times during April 2000- December 2000 due to market
manipulation which was in contrast to what has been postulated earlier to take advantage of
competition. In addition, rolling blackouts adversely affected many businesses dependent upon a
reliable supply of electricity, and inconvenienced a large number of retail consumers which also led to
economic fallout. One of the state’s largest energy company collapsed.

California had an installed generating capacity of 45 GW. At the time of the blackouts, demand was
28 GW. A demand-supply gap was created by energy companies, mainly Enron, to create an artificial
shortage. Energy traders took power plants offline for maintenance in days of peak demand to
increase the price. Traders were thus able to sell power at premium prices, sometimes up to a factor
of 20 times its normal value. Because the state government had a cap on retail electricity charges, this
market manipulation squeezed the discoms’ revenue margins, causing the bankruptcy of Pacific Gas
and Electric Company (PG&E) and near bankruptcy of Southern California Edison in early 2001.

On a federal level, the Energy Policy Act of 1992, for which Enron had lobbied, opened electrical
transmission grids to competition, unbundling generation and transmission of electricity.

On the state level, part of California's deregulation process, which was promoted as a means of
increasing competition, was also influenced by lobbying from Enron, and began in 1996 when
California became the first state to deregulate its electricity market. Eventually a total of 40% of
installed capacity – 20 gigawatts – was sold to what were called "independent power producers."
These included Mirant, Reliant, Williams, Dynegy, and AES. The utilities were then required to buy
their electricity from the newly created day-ahead only market, the California Power Exchange (PX).
Utilities were precluded from entering into longer-term agreements that would have allowed them to
hedge their energy purchases and mitigate day-to-day swings in prices due to transient supply
disruptions and demand spikes from hot weather.

Then, in 2000, wholesale prices were deregulated, but retail prices were regulated for the discoms as
part of a deal with the regulator, allowing the discoms to recover the cost of assets that would be
stranded as a result of greater competition, based on the expectation that "frozen" retail price to
consumer would remain higher than wholesale price.

However, Energy deregulation put the three companies that distribute electricity into a tough
situation. Energy deregulation policy froze or capped the existing price of energy that the three energy
distributors could charge. Deregulating the producers of energy did not lower the cost of energy.
Deregulation did not encourage new producers to create more power and drive down prices. Instead,
with increasing demand for electricity, the producers of energy charged more for electricity. The
producers used moments of spike energy production to inflate the price of energy. In January 2001,
energy producers began shutting down plants to increase prices.

When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the
discoms still had to purchase power, albeit at a loss. This allowed independent producers to
manipulate prices in the electricity market by withholding electricity generation, arbitraging the price
between internal generation and imported (interstate) power, and causing artificial transmission
constraints. This was a procedure referred to as "gaming the market." In economic terms, the
incumbents who were still subject to retail price caps were faced with inelastic demand. They were
unable to pass the higher prices on to consumers without approval from the public utilities
commission. The affected discoms were Southern California Edison (SCE) and Pacific Gas & Electric
(PG&E). This led to rolling blackouts when discoms started to stop supplying electricity.

A state of emergency was declared in California. To handle the emergency, further long term contract
for purchase at even higher price was done by government, it was then the situation was restored.

In a speech at University of California, Los Angeles on August 19, 2003, Governor of California said "I
inherited the energy deregulation scheme which put us all at the mercy of the big energy producers.
We got no help from the Federal government. In fact, when I was fighting Enron and the other energy
companies, these same companies were sitting down with Vice President Cheney to draft a national
energy strategy.”

Learning from the California electricity crisis, States of USA didn’t introduce deregulation in all the
states and they saw complete deregulation as catastrophic, however, they saw a mix of both
regulation and deregulation as optimal which is already a case in India today. Majority of States of
USA has regulation as shown in following table: -

Conclusion: -

Being an essential item, demand supply behavior of electricity remains inelastic. Therefore,
deregulation and free market policy can never work in power sector as also evident from above case
study.

For an effective regulation, a transparent, authentic and optimal benchmark parameters are
important which could only be possible if there is a PSU in power market who could support regulator
in its endeavor. In era of private participation in power sector, NTPC as a PSU shall always maintain its
strategic position by supporting regulators and making electricity regulation more effective. Though
Government has reiterated many times that it is not Govt’s business to run a business, but at same
time it is also true that it is 100% Govt’s business to regulate a business of at least essential category
like electricity which is directly impacting individual’s life and economy of nation at large and
regulation can never be effective without having support of Govt owned power players like NTPC in
market.

Based on above, Govt. and policy makers should consider these aspects while formulating policy in
power sector and can also take support of NTPC wherever required. Ultimate aim should be interest
of consumers, privatize only if power tariff can further be reduced. Some pilot projects may be done
in one state to see its results on grid stability and tariff before its implementation on pan India basis.


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