Promote, do not stifle power trade competition

In its statement of reasons for fixing the trading margins on electricity trading, the Central Electricity Regulatory Commission (CERC) has emphasised the need for protecting the common man against price increases arising from retrograde profiteering. It has also stated that state utilities have welcomed the proposal for fixing trade margins. At the same time, it recognises that units available for trading constitute less than 5% (around 2-3%) of total units sold in the country. Keeping this in mind and taking the trading margin range of 10 paise/unit (current weighted average) to 148 paise/unit (current maximum), the average cost added on account of trading margins per unit of electricity sold would vary between 2 to 3 paise/unit at the national level. Fixing the trading margin at 4 p/unit would bring the average trading cost down to 8 paise/unit. Compare this with the average tariff of supplying electricity in Delhi at 436 paise/unit?where more than 20% of this tariff, i.e 87 paise/unit, is on account of theft! Thermal efficiency improvements in power plants of 2-3% that are possible could reduce cost of supplying electricity by approximately 3 paise/unit. Electricity trading would happen when certain utilities are facing shortages whereas surpluses exist in other utilities. The deficit utility could well negotiate directly with the surplus utility(ies) or engage a trader to do the needful. The trader?s responsibility would be to source the power needed through multiple sources at the best prices, ensure transmission rights and match the average price of the traded power to the buyers? willingness to pay. Electricity regulators need to be sensitive to the fact that neither are buying utilities under any compulsion to purchase electricity through traders, nor do they have to accept the cost at which such electricity is available. If they choose to do so, presumably, the transaction costs of traders are lower and their procurement mechanisms more efficient than their own. Additionally, since the final consumer tariffs are set by regulatory commissions, presumably the cost of traded electricity purchased would still be within the overall procurement cost limits of the purchasing entity. Having said that, there does exists an incentive for utilities to sell power through traders while depriving their own consumer base so as to avoid the challenges of tackling theft and recovery of dues. This is definitely an issue of concern for regulatory commissions, but the solution does not lie in tackling trading margins. Utilities must have an obligation to serve their licence areas first, and any violation of such obligations can be detected and penalised fairly simply. On the other hand, a trader could sell high-cost electricity to a related entity, thereby benefiting from higher unregulated returns on the trading business while passing through the higher procurement cost to consumers and earning regulated returns on this business. The solution here would lie in ensuring enough competition in the trading business and requiring utilities to source power through competitive bidding, covering both the cost of electricity as well as the trading margins. In other words, electricity trading in the country has to be encouraged, not throttled, and competitive pressures can and should be used as self- regulatory mechanisms. One also needs to recognise that electricity traders are acting as national clearing houses, optimising transactions across deficit and surplus situations at different times of the day and the year. Regulatory commissions have sufficient checks and balances in the system in the form of merit-based procurement and regulated consumer tariffs to allow markets to function freely at intermediate points. In light of this, even the attorney-general?s opinion on capping the price at which traded power can be bought or sold needs to be viewed cautiously by regulatory commissions. It would serve consumers in the country well if electricity regulators were to focus their attention on efficiency improvements in generation and distribution, rather than tinker with unnecessary and relatively low-impact issues, such as trading margins.