Electricity reforms – missing the wood for the trees

On the eve of a meeting with state power ministers to discuss comprehensive reforms in the power sector, in a free-wheeling interview with a leading business daily, union power minister, RK Singh has come up with four ideas viz. (i) cross-subsidy will be restricted to 20% from fiscal year 2019-20; (ii) tariff hike to cover losses of state electricity boards [SEBs]/power distribution companies [PDCs] will be capped at 15% from April 2019; (iii) innovative measures to reduce technical and commercial [T&C] loss of SEBs/PDCs and (iv) direct benefit transfer [DBT] of power subsidy.

If, the multitude of problems facing the power sector including huge recurring losses of SEBs/PDCs could be solved by issuing diktats, this could have been achieved long ago. During the last one-and-a-half-decade, while giving them three financial restructuring package [FRP] [2002/2012/2015] – a sophisticated nomenclature for bail-out – union government had told them to take steps to prevent losses from cropping up yet again but little was done in this regard.

The first measure suggested by the minister connects with state governments [they own and control SEBs/PDCs] directing them to charge heavily subsidized tariff from farmers [in some states, this is even ‘free’] and poor households. This leads to low realization from sale to these preferred customers vis-à-vis cost of purchase and distribution. To make up for this gap, households consuming more units and industrial customers are charged higher tariff. The excess of this over cost plus reasonable return is also termed as cross-subsidy. Despite this, SEBs/PDCs continue to incur losses.

Mr Singh has alluded to amendment in the Electricity Act [2003] to give freedom to consumers choose their supplier. The provision is already there in the Act. But, there is another clause that forces the consumer to pay a cross-subsidy surcharge to the SEB/PDC that he wishes to leave. As regards the quantum of surcharge, this is left to be determined by concerned states who invariably keep it high. This defeats the very objective of helping the customer lower cost of purchase.

An amendment to cap cross-subsidy at a certain level [20% as proposed] may help in drastically slashing tariff charged from industries as the current rates are substantially higher than the cost. But, this will increase losses of SEB/PDC unless it is accompanied by hike in tariff charged from preferred customers viz. farmers/poor households or reduction in cost of purchase and distribution.

The second measure to cap tariff hike at 15% [albeit to industries] prima facie may give an impression that it will help in lowering tariff. But, in reality, it may not yield relief to industries and business establishments so long as fundamental factors contributing to losses viz. subsidized supply to farmers and T&C losses etc are not addressed. With increasing loss, even capping at 15% will lead to higher tariff.

The third step to reduce T&C losses merits attention. Mr Singh has talked of measures like smart meters, pre-paid bills, equipment to curb stealing of electricity from the pole etc. Power theft is a major factor contributing to losses of SEBs/PDCs. Households [mostly living in slums/jhuggis in urban agglomerations] are encouraged to steal by politicians who use them as vote banks at the time of elections. Technology driven solutions will work only if there is political will.

The losses also increase due to high cost of power. Under the extant system, while returns are guaranteed, fuel cost is ‘pass-through’/on actual. A few years ago, for ultra mega power plants [UMPP], union government tried with tariff based competitive bidding [TBCB] under which an IPP quotes a fix tariff for entire life of the project. This idea met with a fiasco and has been abandoned; instead, bidding is now restricted to fixed cost even as fuel cost is allowed on actual.

The system is prone to misuse and several cases of cost padding including over-invoicing of imported coal have come to light. The process of signing PPAs lacks transparency even as majority of these are done under memorandum of understanding [MoU] route. In several agreements, SEBs/PDCs are committed to pay exorbitant tariff to the generator. The minister has only stressed on honoring PPAs but not suggested any measures to rein in cost.

Finally, DBT of power subsidy is taken to be panacea for all problems.  It is easier said than done. It requires that distribution companies sell power to farmers/poor households [HHs] at full cost even as the latter receive subsidy directly in their bank account. With current cost ruling high [courtesy, high cost of purchase, inefficiencies and theft], there will be steep increase in tariff charged from them from extant up to Rs 1 per unit or ‘nil’ to at least Rs 5 per unit. This can lead to severe cash flow problems for farmers/poor HHs more so as debt-ridden states won’t be able to make timely subsidy payments.

Piece meal measures to cure the ills afflicting power sector won’t work. The government should go for ‘holistic’ solutions. SEBs/PDCs should be liberated from the clutches of the state. They should be allowed to function as truly ‘autonomous’ entities and run ‘professionally’ [if need be, these may be converted into corporations followed by listing]. They will decide tariff policies and free to sign PPAs. The consumers should be free to choose his/her supplier.

With freedom of pricing, SEBs/PDCs will be able to close the gap between realization from sale and cost without having to charge industries high tariff. Independent power producers [IPPs] will be forced to sell electricity at competitive rates even as shopping of PPAs to make unjust gains will be a thing of the past. Under pressure to sustain on their own [with no state/government support], distribution companies will take all necessary steps to eliminate theft.

Implementation of these far reaching reforms require political will.  Modi who leads BJP – a party that rules in as many as 18 states – should initiate the process without any further delay.


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