The Indian power sector has shown good results in recent times, particularly in generation and transmission. The generation capacity addition of ~54,000MW in the 11th Plan has been the highest so far in any Plan. The private sector has shown a promising performance in capacity addition and we have crossed the psychological barrier of 200,000MW generation capacity in the country. In the transmission sector, too, we are close to realising the dream of ?One Nation One Grid?. But distribution sector issues are likely to derail economic growth, with the utilities reaching unprecedented loss levels.
The Electricity Act (EA) 2003 had envisaged the restructuring of vertically-integrated entities into separate generation, transmission and distribution utilities. Most of the states embarked on this corporatisation, albeit half-heartedly. As per the Shunglu Committee?s report, those changes were more ?in form than in substance?. The cumulative losses for the five years up to FY2010 reached R1,79,000 crore before subsidy, and R82,000 crore after subsidy. These losses were primarily because of the gap of about R0.60/kWh between the average cost and average revenue, and operational and management issues coupled with regulatory shortcomings.
Sustainability of bailouts
It is learnt that another attempt to bail out state power utilities is being contemplated. The ministry of power is believed to have given a directive to state governments to clear the balance sheet of state power utilities and ensure that no further losses are incurred.
Earlier, a bailout was given about a decade ago when the Montek Singh Ahluwalia Committee recommended state governments to issue bonds as many state power utilities (SPUs) were defaulting on payments of dues to central power utilities and financial institutions (FIs). At that time, it was emphasised that this would be a one-off event. We have come full circle again. And not only that, the situation seems more precarious. Some state governments are not in a position to even redeem the bonds that were issued earlier.
What kind of signals are we giving through such bailouts to the non-performing distribution utilities? Shouldn?t we use this challenge as an opportunity to effect serious structural changes in SEBs? This doesn?t seem sustainable in the long run. What is the guarantee that utilities will not run in the ?business-as-usual? way? It is likely that the need for such bailouts in the future would be more frequent, with more severe liabilities, if the root causes are not addressed.
The curious case of tariff revisions
Many states have not revised their tariffs for a long time. Tariff hikes should be gradual to avoid any shock to the consumers, and concomitant with distinct improvements in supply conditions, such as reliability and quality of supply, for better acceptance by consumers. The Appellate Tribunal?s landmark judgment that State Electricity Regulatory Commissions can initiate suo motu tariff determination without waiting for state power utilities to file tariff petitions is encouraging, but the moot question about implementation remains. A Crisil study conducted recently has revealed that the expenses on electricity as a proportion of total household expenses are either static or going down.
Consumers are ready to pay higher tariff, if they are ensured quality and reliable power. Their propensity to spend on high-cost diesel generator sets or even on inverters, etc, supports this view. Even in rural areas, diesel and biogas generators are doing brisk business, by charging around R10/kWh to R18/kWh. How come the rural population is ready to pay higher tariff to private players but not to SEBs? The most obvious reason seems that SEBs have yet to adopt the concept of service to the consumers. As long as they think that they are doing favours rather than providing a service to consumers, we cannot expect transformation in the distribution sector. A universal obligation to supply should not merely be an obligation to give connections.
The road ahead
Utilities don?t have much headroom as their cost of power procurement, including from the short-term market, is going up due to increased input costs and the rising component of imported fuel (coal or gas) in generation. So the era of cheap power is almost over. The public has to be sensitised accordingly, that a rise in the cost of electricity is inevitable.
SEBs have to decrease their cost of procurement and cost of supply through efficient and economic measures. About 60-70% of the total cost for SEBs involves procurement of power and there is room for optimisation. There is a marked difference in tariffs between long-term, medium-term and short-term procurement. Therefore, procurement must be planned properly with advance tie-ups. Utilities should rely on ST/power exchanges only to take care of short-term mismatches. Unscheduled interchanges should also not be relied upon for ST power requirements, with narrowing of frequency band and higher penalties.
For the overall system to be viable, interests of other stakeholders in the value chain like generators, fuel suppliers, intermediaries etc need to be protected so that they are able to get reasonable returns. Distribution companies must be allowed to run on commercial principles and give more emphasis on quality and service. The separation of the wire business from retail supply could bring much-needed investment in distribution infrastructure and competition in retail supply would give choice to consumers. Retail suppliers would vie for improved service to retain consumers. EA 2003 should be amended appropriately to bring about this change.
The fact is that such changes will not happen overnight. Regulators need to work more on fundamentals and refrain from setting unrealistic targets, be it performance standards or loss reduction.
If at all a bailout is to be given, it should be with strict pre-conditions that tariffs be revised annually, that there is a distinctive improvement in overall efficiency and performance standards, that open access to 1MW and above is implemented, and that austerity measures are adopted. The ministry of power should take the political agenda with state governments forward, as it has the necessary wherewithal, by having a say in funding through Power Finance Corporation, Rural Electrification Corporation, R-APDRP scheme, allocation of unallocated power from central sector power stations, among others.
The author is CMD, PTC India
