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Power policy: Let there be light

August 19, 2003

A 21-page document is what the power ministry now calls the draft tariff policy to be followed by the central and state electricity regulatory commissions.

There is no problem with the idea of a tariff policy from the central power ministry. The government has the right to outline the broad framework of policy within which the regulators should function as far as setting of power tariffs is concerned.

But what has irked the regulators is the tone of this draft, flowing from which are the detailed directions that have been given on the depreciation rates that need to be fixed for power projects, the rate of return on investment and many other aspects that should have been left to the regulators.

Two years ago, the power ministry had come out with another draft tariff policy. That document had only two and a half pages.

Nor did that try to stipulate specific rates for depreciation, capacity utilisation or the rate of return on investment. It had 20 broad policy objectives and guidelines on how the regulators should decide on tariffs and returns on investment.

The two-page document was an outcome of several rounds of meetings held by the chairman of the group on tariff policy, S Prabhakaharan, who was then special secretary in the power ministry.

States and representatives of the private and public sector power producers were consulted before the ministry put out that draft.

Nobody knows where that draft has disappeared. It would have perhaps seen the light of day if Suresh Prabhu had retained his job as the power minister.

For Prabhu was very keen that the government should reduce its regulatory role and allow the central and state regulators to play a larger and more effective role on issues such as tariff fixation.

Prabhu was also conscious of the fact that there was a natural conflict of interest if the power ministry controlled tariffs and investment norms.

After all, almost one-fourth of the country's total installed power generation capacity is held by the state-owned National Thermal Power Corporation and the power ministry would be naturally inclined to opt for a policy framework that favours the public sector power giant.

No wonder, the current draft of the tariff policy has upset the central and state power regulators.

Prabhu's fears have now been confirmed.

The current draft has been finalised by a team of officials under the overall guidance and advice of the power secretary, R V Shahi.

Now, his critics are alleging that Shahi has a soft corner for NTPC for two reasons. One, as power secretary, it is his job to promote the interests of NTPC. Two, Shahi has spent several years of his working life in NTPC.

Indeed, there are many suggestions in the current draft of the tariff policy that favour NTPC. There is only one proposal that does not seem to favour the public sector power producers.

The draft recommends a pre-tax rate of return on investment.

Regulators, who are quite puzzled by this proposal, believe that even this would be changed soon to switch over to a post-tax rate of return on investment to benefit public sector power producers like NTPC.

The power regulators are upset for another reason. They point out that they have moved ahead in various areas of power reforms.

For instance, power trading has begun in small way and this sector looks very promising in view of the positive response received from many companies.

But the power ministry is yet to come out with a broad policy on the licensing regime for power trading.

The regulators feel that it is for the government to decide whether it would prefer a revenue-sharing or a licensing regime in respect of power trading business.

But such policy advice is yet to come. Instead of remaining obsessed with what should be the contours of the tariff policy, the power ministry perhaps can focus on other areas of the power sector which are crying for attention.

The regulators have a simple solution to resolve the controversy over the current draft tariff policy. The need for setting tariffs, the rate of return on investment and depreciation rates arises mainly because no power project in India is set up through competitive bidding.

If there is competitive bidding, then the companies can quote tariffs on the basis of which they are willing to set up a project. The company making the best tariff offer can be awarded the contract.

Thus, there will be no need for the government to outline a tariff policy or for the regulators to quarrel with the power ministry on what the tariffs should be for power projects. This will mean less work for the power ministry and the regulators.

And they will have more time to focus on areas like introducing phased open access and a licensing regime for power trading.

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