Open Access In The Indian Power Sector

Charlie Munger has said that India suffers from too much due process. It can seem at times that consensus building is a goal in itself among Indian bureaucrats and India's polity. Change in India is never voluntary. Politicians and bureaucrats are always dragged to change crying and kicking.

However, India does change. And the relentless march is onward and forward. I am going to once again refer to the much over talked about telecom sector. Twenty years ago when my father started his manufacturing business, he was put on a waiting list for two years for a telephone. He decided to jump the queue and paid a bribe of USD 1,000 to get an immediate telephone connection. Today India has 850 million telephone connections and counting. The country adds 120 million new connections every year.

What is the big deal one could ask? In 1991 there were no cell phones and the telephone company wasn't even a company, it was an arm of the government called the Department of Telecom (DoT) similar to the Indian Railways at the present time. The DoT was converted first into a company MTNL for the cities of Mumbai and Delhi and much later into a company called BSNL for the rest of the country.

China has more telephone connections than India. However, the big deal in India is that the entire telecom revolution has happened entirely with private capital. India has 6 (and counting) nationwide carriers for mobile telephone services. BSNL's market share is only 13.7% compared to 100% two decades ago. China on the other hand has two large telecom carriers, China Mobile and China Unicom and both are owned by the government.

In 1990 one could've asked, how will BSNL's monopoly ever be shaken given that it had a wire going to most homes and offices and it would be impossible for a private company to replicate.

The same questions are being asked of the power sector in India. The Electricity Act of 2003 (EA2003) was a miraculous act. When I look back, I wonder how an act like that ever got passed in a country like India. The EA2003 among many other things prescribed the corporatisation of state electricity boards (similar to the DoT of yore), their split into separate generation, transmission and distribution companies and the setting up of central and state electricity regulatory commissions to regulate the market for power.

It also prescribed open access. Open access meant that producers would be free to choose consumers and consumers would be free to choose producers and a competitive market for electricity would be created in the country.
We are in 2012 and eight years have passed since the EA2003 became law. Forget about open access, all state electricity boards (SEBs) are yet to split themselves up into separate companies. The fragmentation of Indian politics, the rise of populism and the mantra of inclusion has bankrupted most SEBs.

Now the government has passed an executive order, insisting on compulsory open access for all customers consuming more than 1MWe a month. These are the most paying customers for the SEBs and the implementation of this order will be the death knell to the model of SEBs.

I hear skeptics ask all kind of questions that are absolutely relevant today. Where is the spare transmission capacity? Where is the spare generation capacity? What are the fall back options for consumers when contracted producers suffer down time? How will the state and national grids cope with erratic supply and demand of electricity? India does not even have a single national grid. The eastern/southern grid is not connected to the northern/western grid.

However, we are asking all the wrong questions. Depending on the SEBs to implement open access is akin to counting on the DoT to bring India's telecom connectivity to 850 million connections.

Power generation in India has become sufficiently private. Power consumers in India now have critical mass and bargaining power. The implementation of open access will make transmission a remunerative business. I will not be surprised if private standalone transmission companies are created similar to private pipeline companies in the near future. The grid will have to play the role of being the grid and balance capacity and demand.

Would anyone have imagined twenty years ago that Indian private telecom operators would have more fiber-optic cable and more telecom towers than BSNL? There is redundancy and wasted capacity. But that is the only way to have a competitive market.

The SEBs will not fall in line and they will be bypassed in due course.

Food for thought: We already have privately operated toll roads, airports and airlines in India. Will we see a privately run railway network in India in my lifetime?
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