Column: In no state to subsidise

Mar 11 2014, 03:27 IST
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SummaryAlready heavily burdened by subsidies, states must focus on the cost side of the power sector to keep tariffs low

In the previous column, Financial Express, ‘Striking a balance’,, we dealt with how the Central Electricity Regulatory Commission’s (CERC) formula to restore the financial viability of the two power plants, Tatas' and Adani's, at Mundra has hit consumers in five states by increasing tariff by more than 50 paise. In this column, we will examine what is happening to retail tariffs in different states.

Tariff subsidies made headlines recently when the AAP government in Delhi announced subsidies, targeted at consumers using less than 400 units of electricity per month, bringing down the effective tariff to half of what the Delhi Electricity Regulatory Commission had fixed. The move was quickly followed by Maharashtra and Haryana, which announced subsidies to bring down the tariff for identified categories of consumers. Provision of subsidy per se by the state governments is not precluded by the Electricity Act, 2003. However, section 65 of the Act provides that the state governments have to pay such subsidies up-front to the utilities. Despite the provisions of section 65, in reality, neither are the subsidies being paid up-front nor are the booked subsidies being paid by the state governments. Data for the period FY07 to FY12 (Reports of Power Finance Corporation on Performance of State Power Utilities) shows that, on an aggregate at all-India level, the uncovered subsidies (gap between subsidies booked by utilities and subsidies actually paid by the state governments) have ranged from R7.5 billion to R150 billion per year. In percentage terms, the uncovered subsidies have ranged 3% to 24 % of the total yearly losses suffered by utilities. Clearly, there is something beyond mere subsidies that is contributing to the total losses suffered by utilities.

Apart from uncovered subsidies, under estimation of the subsidy amount due to lower than actual estimates of cost of supply to the subsidised consumer categories, regulatory inefficiencies in terms of low tariffs, non-revision of tariffs on a timely basis, tendency to postpone the servicing of the legitimate utility costs by creation of regulatory assets, inability of regulators to rein in aggregate technical and commercial (AT&C) losses or improve energy accounting, as well as non-achievement of the regulator-prescribed operating norms by utilities have largely been responsible for the losses being suffered by utilities. Combined interplay of these factors has meant that the average per unit cost of supply has consistently remained above the per unit average revenue

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