Economic Policy News & Views January 2010

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CLIMATE CHANGE …

CLIMATE CHANGE

Copenhagen climate summit collapses

The global summit to tackle climate change collapsed in this Danish capital as host Denmark insisted on pushing its own "political declaration", ignoring the pleas of the poor nations.

With the failure at Copenhagen, it is time to vacate the barricades and examine the moral and strategic underpinnings of India's stance.
In a nutshell, the climate change problem stems from a stock of pollutants (``carbon'') in the earth's atmosphere that is expected to change climatic patterns, with geographically uneven implications. Ongoing emissions exacerbate the problem by augmenting the extant stock. Historical contributions to the stock have been highly asymmetrical, with a small subset of humanity being the principal culprits. The contributors to ongoing emissions include the old villains but also feature some polluters-come-lately. Thus, there are two related, yet distinct, problems that admit quite different treatments.
The stock problem is one of apportioning a noxious cake, which is a fait accompli produced by a few cooks. The obvious remedy for righting past wrongs is reparations, say as cash and technology transfers. The extent and nature of reparations is a matter of negotiations. The flow problem is about prospective emissions and there are well-understood ways to incentivize the future behavior modification of all nations. The incentive mechanisms range from quantitative caps to fiscal transfer mechanisms negotiated by the nations.
It is important to disentangle the stock and flow problems because this distinction offers an axis along which an inter-generational bargain between the past and future may be fashioned: future large emitters such as India and China sign-up to a global regulations regime on future emission flows in exchange for significant reparations from past emitters in the form of wealth and technology transfers.

POWER

Power ministry floats Cabinet note to push open access

The power ministry has floated a Cabinet note to resolve a contentious issue in implementing open access that allows large users to choose their electricity supplier.
One of the most disappointing aspects of the power sector reform has been the lack of tangible progress on competition and open access to wires in the sector. This is an area that significant responsibility may be placed on state electricity regulators, who should have been more proactive in “encouraging” introduction of open access and third party sales to break the monopoly of the state-owned utilities.
Although, several SERCs have notified open access regulations besides fixing surcharge, transmission and wheeling charges, it has hardly helped consumers to come forward to avail of the open access facility. There may be compelling reasons such as cross subsidy surcharge, transmission charges etc. that disincentivize the consumers to go in for open access. Applications seeking open access for over 25,700 MW have been submitted but actual implementation has, however, been as low as 7,400 MW, and that too largely for captive power.
The magnitude of wheeling charges and cross subsidy surcharges has de facto made open access unviable. Hopefully, the Cabinet can take on the power ministry, which has been reluctant in creating a competitive market for electricity, and suggest penalties for not mandating open access.

Companies cede power-trading licences

The government’s plan to encourage trading of power has received a severe jolt with some companies surrendering their trading licence to power sector regulator Central Electricity Regulatory Commission (CERC).
Even though pronouncements have been made and a CERC staff paper in 2006 recognised trading both for meeting short term fluctuations in demand and for resource optimization trading at present is feebly meeting the former objective and the design of the market microstructure has paid little attention to resource optimization. Section 66 of

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  • 1. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ Policy News & Views Volume 2, Issue 1, January 2010 CLIMATE CHANGE Copenhagen climate summit collapses The global summit to tackle climate change collapsed in this Danish capital as host Denmark insisted on pushing its own "political declaration", ignoring the pleas of the poor nations. With the failure at Copenhagen, it is time to vacate the barricades and examine the moral and strategic underpinnings of India's stance. In a nutshell, the climate change problem stems from a stock of pollutants (``carbon'') in the earth's atmosphere that is expected to change climatic patterns, with geographically uneven implications. Ongoing emissions exacerbate the problem by augmenting the extant stock. http://www.indicus.net/Newsletter/Policy_News_Views.aspx
  • 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ Historical contributions to the stock have been highly asymmetrical, with a small subset of humanity being the principal culprits. The contributors to ongoing emissions include the old villains but also feature some polluters- come-lately. Thus, there are two related, yet distinct, problems that admit quite different treatments. The stock problem is one of apportioning a noxious cake, which is a fait accompli produced by a few cooks. The obvious remedy for righting past wrongs is reparations, say as cash and technology transfers. The extent and nature of reparations is a matter of negotiations. The flow problem is about prospective emissions and there are well-understood ways to incentivize the future behavior modification of all nations. The incentive mechanisms range from quantitative caps to fiscal transfer mechanisms negotiated by the nations. It is important to disentangle the stock and flow problems because this distinction offers an axis along which an inter-generational bargain between the past and future may be fashioned: future large emitters such as India and China sign-up to a global regulations regime on future emission flows in exchange for significant reparations from past emitters in the form of wealth and technology transfers. POWER Power ministry floats Cabinet note to push open access The power ministry has floated a Cabinet note to resolve a contentious issue in implementing open access that allows large users to choose their electricity supplier. One of the most disappointing aspects of the power sector reform has been the lack of tangible progress on competition and open access to wires in the sector. This is http://www.indicus.net/Newsletter/Policy_News_Views.aspx
  • 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ an area that significant responsibility may be placed on state electricity regulators, who should have been more proactive in “encouraging” introduction of open access and third party sales to break the monopoly of the state- owned utilities. Although, several SERCs have notified open access regulations besides fixing surcharge, transmission and wheeling charges, it has hardly helped consumers to come forward to avail of the open access facility. There may be compelling reasons such as cross subsidy surcharge, transmission charges etc. that disincentivize the consumers to go in for open access. Applications seeking open access for over 25,700 MW have been submitted but actual implementation has, however, been as low as 7,400 MW, and that too largely for captive power. The magnitude of wheeling charges and cross subsidy surcharges has de facto made open access unviable. Hopefully, the Cabinet can take on the power ministry, which has been reluctant in creating a competitive market for electricity, and suggest penalties for not mandating open access. Companies cede power-trading licences The government’s plan to encourage trading of power has received a severe jolt with some companies surrendering their trading licence to power sector regulator Central Electricity Regulatory Commission (CERC). Even though pronouncements have been made and a CERC staff paper in 2006 recognised trading both for meeting short term fluctuations in demand and for resource optimization trading at present is feebly meeting the former objective and the design of the market microstructure has paid little attention to resource optimization. Section 66 of the Electricity Act, 2003 mandates that Appropriate Commission shall endeavor to http://www.indicus.net/Newsletter/Policy_News_Views.aspx
  • 4. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ promote development of market (including trading) in power. In the absence of a deep market for electricity trades the regulator has resorted to trading margins and caps on short-term prices to contain the volatility of these prices. By CERCs own admission these regulatory steps have throttled the contribution of trades in providing new trading products and bringing more supplies to the market. So this development is not a major surprise as all the incentive structures for trading have been distorted. NEWS WITH ANNOTATES PNGRB against proposed gas highway authority The proposed authority will be on the lines of the National Highways Authority of India and aims to facilitate coverage of pipeline network across the country. Profligation of regulatory bodies to create jobs for retired bureaucrats; Rent seeking at its best. 3G auction on time, 4 slots / circle for private companies The bidding process for 3G telecom services will proceed as per schedule and up to four private players in each circle can offer 3G services, the empowered group of ministers (EGoM) is learnt to have decided. The current auction design of auctioning of only 5 MHZ of 3G spectrum reduces the competition for the market; foreign players with no 2G spectrum are not interested in participating in the auction; What is the Competition Commission of India doing in this matter? Freeing petrol prices, market rates for diesel on agenda http://www.indicus.net/Newsletter/Policy_News_Views.aspx
  • 5. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ A committee of experts set up by the petroleum ministry may suggest several measures to cut the fuel subsidy, including freeing of pump, in its report that will be submitted by the end of January 2010. Oh okay! We thought the Administrative Price Mechanism for petroleum products had been dismantled a few years ago; Subsidy for fossil fuels in this age of climate change makes a lot of sense! MORE NEWS Bill to transfer monopoly cases to CCI The Lok Sabha has passed a Bill to transfer to the Competition Appellate Tribunal all pending cases lying before the Monopolies and Restrictive Trade Practices Commission (MRTPC) under the Consumer Protection Act. Power producers may get to sell unused output The Union Cabinet will shortly take up a proposal allowing existing power projects to sell a part of their unallocated generation capacity in the open market at market- determined prices. India draws back from tighter oil trade regulation India will not change its rules for hedging risks by oil firms in the over-the-counter market, a spokeswoman for the Reserve Bank of India said, calming fears that such derivatives may be banned for refiners. Road ministry still sits on safety budgets The ministry of road transport and highways had been able to utilise till November 2009 only 10% of the fund http://www.indicus.net/Newsletter/Policy_News_Views.aspx
  • 6. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ allocated for providing road safety during the current financial year. Draft corporate governance code released A draft corporate governance code by a task force set up by a prominent industry body calling for harmonization of regulation between the Companies Act and SEB regulations among other measures was released. NHAI relaxes bidding norms To push the bidding process and speed up the awarding of highway projects, the National Highways Authority of India (NHAI) board has approved to relax the controversial sections of the ‘conflict of interest (CoI) clause. Government launches incentive scheme for wind energy projects The Ministry of New and Renewable Energy (MNRE) has announced an incentive of 50 paise per unit of wind power fed by independent power producers into the grid. Revised Copyright Act to pinch broadcasters' pockets Broadcasters may be forced to shell out Rs 1-1.5 lakh for every song that is sung by the contestants in musical talent hunt shows like Indian Idol or Sa Re Ga Ma Pa. Now babus will have to pay for sitting on files Delhi government’s order that proposes to penalise officials found guilty of sitting on files has implemented the order as part of the Service Level Agreement (SLA). http://www.indicus.net/Newsletter/Policy_News_Views.aspx
  • 7. Indicus Analytics, An Economics Research Firm http://indicus.net/Research/Home/Research%20Area/Policy%20and%20Institutional%20Analysis/ India may take some time to join OECD The Organisation for Economic Co-operation and Development (OECD) may have opened its doors for India, but the government is unlikely to rush for membership, given the commitments it might have to undertake. New norms for redrawing urban, rural poverty lines The Tendulkar Committee report on poverty estimate is yet another bid by the government to pin down the level of rural and urban poverty in the country so that the various poor-friendly programmes could be scaled up. PM calls for reforms to ease urban chaos The Prime Minister said that Indian cities and towns were not in sync with the rapidly modernising economy and called for greater municipal reforms. http://www.indicus.net/Newsletter/Policy_News_Views.aspx