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US power crisis: Lessons for India - Views on News from Equitymaster
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  • May 11, 2001

    US power crisis: Lessons for India

    We in India wonder how on earth did we manage to sign a contract with Enron for the 2,184 MW Dabhol Power Project (DPC), which led to the bankruptcy of the Maharashtra State Electricity Board (MSEB). The SEB until a couple of years ago was one of the few profitable boards in India. For most of us who have been so used to the political maneuverings for such contracts, the lack of foresight by the political establishment hardly surprised many. The general refrain was that “It happens only in India”. But the DPC-MSEB crisis has put a dampener on the government efforts to liberalise the sector in order to generate more investments for the power sector. However, this article is not about how India goofed up. It is just a way of saying “We are not alone”.

    The US is perceived to be far more developed and such goof ups are normally not associated with its image. However, lately in the US, the power crisis in California is causing major worries for the country’s power sector reforms. Let’s take a look.

    California was the first state in the US to deregulate its electricity market in 1996. Under deregulation, the state's utilities sold most of their power generating plants and became buyers of wholesale electric power. This move was supposed to lower electricity bills of consumers. The state also prevented most utilities from passing rising costs to their customers until at least March 2002.

    However, five years down the line the move seems to have boomeranged. It is now being felt that not enough foresight was exercised before deregulation and it came a little too soon.

    While deregulation mandated that utilities buy their power from the open market and pay market prices, it barred them from passing on increases to their customers until March 2002. But the market prices surged as demand continued to grow without enough supply back up. For nearly 20 years, no significant power generation capacity has been added in California.

    Because of the demand supply gap and the oil shock the wholesale energy prices turned volatile. As a result prices per megawatt-hour of electricity sold rose from an average of US$ 30 last year to around US$ 265 in January 2001. In December 2000 the prices peaked at levels as high as US$ 1,400 per megawatt-hour.

    Unable to recoup higher costs from their customers, the utilities went into the red (sounds like MSEB, doesn’t it?). Two of the largest utilities posted combined losses exceeding US$ 9 bn as on December 2000. Many banks grew increasing uncomfortable to lending more money to these cash starved utilities. That, in turn, made power generators reluctant to sell more power to California. The federal government intervened in December 2000 to force generators to continue selling power to California utilities at reasonable rates.

    Meanwhile consumers are refusing to pay high costs for electricity. There are also allegations that there is no energy shortage in California and an energy cartel is manipulating supply to raise prices and profits. They had statistics to prove this. While demand in California has increased 4% over 1999, the wholesale prices jumped 266%. At the same time, the profits of some wholesale suppliers have soared by an average of 508%.

    As a result of pressure from consumer groups the power industry in California is now the target of six investigations by state and federal agencies.

    California’s deregulation, being the first, was supposed to provide guidance to other states and to come up with a long-term solution to its energy crisis. However, with the California experiment having proved to be a disaster, many other states in the US are taking a long hard look at their deregulation plans. Increased use of computers, electronic devices and the lack of adequate new power plants is seen across the US.

    For India there are lessons in this. Power is a capital-intensive industry and as such it is only natural that power generators and investors are apprehensive about supplying to cash starved SEBs. At the same time power has to come at a reasonable cost to the people as it is a part of their daily lives. Therefore, an equitable balance keeping both the considerations in mind is the need of the hour for India.



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