Module1: Introduction

The power industry across the globe is experiencing a radical change in its business as well as in an operational model where, the vertically integrated utilities are being unbundled and opened up for competition with private players. This enables an end to the era of monopoly. Right from its inception, running the power system was supposed to be a task of esoteric quality. The electric power was then looked upon as a service. Control consisting of planning and operational tasks was administered by a single entity or utility. The vertical integration of all tasks gave rise to the term – vertically integrated utility. The arrangement of the earlier setup of the power sector was characterized by operation of a single utility generating, transmitting and distributing electrical energy in its area of operation. Thus, these utilities enjoyed monopoly in their area of operation. They were often termed as monopoly utilities.

Why were earlier utilities the ‘monopolies'? The reason for monopoly can be traced right back to the early days when electricity was comparatively a new technology. The skeptical attitude of the government towards electricity led to investment by private players into the power sector, who in turn, demanded for the monopoly in their area of operation. This created a win-win situation for both- government and the electrical technology promoters. However, the government would not let the private players enjoy the monopoly and exploit the end consumer and hence introduced regulation in the business. Thus, the power industries of initial era became regulated monopoly utilities . The structure of a conventional vertically integrated utility is shown in Figure 1.1. As evident from the figure, there was only a single utility with whom the customer dealt with. Thus, only two entities existed in the power business: a monopolist utility and the customer.

Fig 1.1

What does ‘regulation’ mean? The regulations are generally imposed by the government or the government authority. These essentially represent a set of rules or framework that the government has imposed so as to run the system smoothly and with discipline, without undue advantage to any particular entity at the cost of end consumer. All practical power systems of earlier days used to be regulated by the government. This was obviously so. The old era power industries were vertically integrated utilities and enjoyed monopoly in their area of operation. Whenever a monopoly is sensed in any sector, it is natural for the government to step in and set up a framework of way of doing business, in order to protect end consumer interests. Some of the characteristics of monopoly utility are:

Single utility in one area of operation enjoying monopoly. Regulated Framework: The utility should work under the business framework setup by the government. Universal Supply Obligation (USO): Utility should provide power to all those customers who demand for it. Regulated Costs: The return on the utility's investments is regulated by the government.

In a nutshell, regulation is about checking the prices of the monopolist in the absence of private players and market forces.