High currents in pricing debate

These statements reveal the bureaucracy’s war economy mindset and ignorance of elementary economic theory. It neurotically keeps coming back to the bad cost plus so-called “fair rules”, which uninformed politicos and bureaucrats love for the powers they give them on individual economic agents. Fifteen years ago we set down the roadmap in fertiliser and sugar — that we should give up individual unit level price fixation, move to a “group” in the case of fertilisers and a few “zones” for sugar, and then after a reasonable adjustment period move to a zone-less, group-less world of long range marginal cost pricing rule, with a suitable tariff rate to regulate imports. Every few years an expert committee repeats the rule. We moved from firm level to economy level rules for two-thirds of Indian industry in the late ’80s, but these naive questions are raised in 2003. The Ruets and the Kannans get to the roots of these kind of irrationalities. Part of the answer according to them is not naivete, but corruption.

The Ministry of Power in the Electricity Act allows a cost plus pricing rule. In some parts of the country the state level power pricing regulator has not even done the cost calculations properly and wants the farmer to pay more, presumably as an act of good “faith”. In 1997 the Electricity Transmission Bill was stuck in the parliamentary standing committee. We supported its chairman, Jagmohan, to get a near unanimous report. The vision of a market for power was now in draft law and the Coelho committee spelt it out. The cabinet decided to set up a power trading corporation and a national electricity grid. Soon with back to back arrangements and high voltage transmission lines in position we were flinging power from almost a thousand megawatt power capacity, from Kashmir to Kanyakumari. But we soon discovered that pricing was a bottleneck. If you don’t generate power, as in your region demand is low, you add a high “overhead cost” of low capacity use to the guy who solves your capacity use problem by buying from you. Disregard of simple economic rules leads to crazy outcomes. Power plants in the eastern region wanted Rs 6 a unit from the south, for selling power which cost them Rs 2. We “solved” the problem then and I argued for an “availability tariff” based on the principle of efficiency avoidable cost. It is with this principle that the Maharashtra electricity regulator refused to grant cost plus prices to Enron for interstate sale of power.

The Central Electricity Regulatory Commission had suggested two principles for pricing: a long range marginal cost price for generation and an availability tariff for transmission. The first means that a generator gets the efficiency price to the economy and the latter that trade takes place at the least cost possible to the economy. Both are workable. For, an extra unit of electricity can come from rehabilitating an existing unit or a new technology, where capital costs are higher, but then energy costs will be lower on account of efficiency and the pricing principle takes it into account. This way, we can also then tell the farmer that he is paying the real cost of energy to the economy. If we want him to pay less that will be a real subsidy. Besides, these rules keep babus and netas from cosying up to one firm. Perhaps that is why they are ignored. The Electricity Bill cannot function without transparent rules and even the architects of the fast track projects accepted later that cost plus pricing is not one of them. Policy then has a level playing objective, so that the transition to a global economy is knowledge based and without avoidable human costs.