Fixing power tariff not your job, Mr Chief Minister

Kejriwal’s ‘populist’ govt has reduced not only power tariffs but possibly also the role of regulator. Is it a good move in long run?

srishti

Srishti Pandey | January 20, 2014



The utility of the electricity regulatory commissions, set up to reform the gargantuan power sector, has come under question, as the AAP government of Delhi led by inimitable Arvind Kejriwal has gone ahead and reduced charges. The populist move, following the promise the party has made in its  election manifesto, provides relief to the common man but does it throw a spanner in power sector reforms by rendering regulatory panels useless?

That is why as soon as Kejriwal made the announcement, Delhi electricity regulation commission (DERC) chairman PD Sudhakar, a former additional secretary with the power ministry, reminded the state government that tariff fixation is a “regulatory issue” and the government had no business interfering in it. He clarified that the government could only provide subsidy if it wishes to reduce the burden on consumers, but a tariff change was the regulator’s domain.

While experts from the power sector maintain that the AAP government has not circumvented DERC, given that it is “perfectly all right” for it to give out subsidies, they do suggest that the regulator needs to assert its position better. They believe that while the government can go ahead and give as much subsidy as it can afford, it is the regulator’s job to ensure that the benefit to consumers would not come at the cost of hurting the financial position of distribution companies (or discoms, as the private sector firms brought in to reduce transmission and distribution losses are called) that claim they are already struggling to keep the ship from sinking.

The state regulator, experts say, should be able to effectively communicate to stakeholders the terms of the subsidy agreement, specifying clearly the mode and duration of payment and time period of the subsidised electricity supply, among other things.

Electricity regulatory commissions were established at both the central and state levels under the Electricity Regulatory Commissions Act, 1998. Their task was to independently fix tariffs in a fair and transparent manner, regulating the discoms and ensuring fair competitive practices. While the central electricity regulatory commission (CERC) looks at regulating tariffs of power generation companies owned or controlled by the government and setting tariffs for inter-state transmission of electricity, the state panels look at regulating and tariff fixing of power distributed within the state.

However, given the importance of the amenity to the public, a lot of politics continues to be played when it comes to its supply and pricing, admits a former head of a state electricity regulatory commission who did not wish to be named.

State regulatory authorities face more problems in discharging their duties in a more transparent and easy manner, compared to the CERC, because their decisions have direct impact on people and hence they have to face political pressure, says former telecom regulatory authority of India (TRAI) chairman Nripendra Misra. “While this situation (in Delhi) is not one where the regulatory commission has been circumvented or forced to act in a certain manner as desired by the state government, the overall impact of this politically popular move will definitely be economically disastrous in the long run,” Misra says.

“Political parties will politicise issues (of service delivery) like water, electricity and roads, and it is fine as long as they are not interfering in anybody else’s business,” the former state panel chairman says. “In this case also, it is wrong to assume that the state electricity regulator has been circumvented or overlooked because the government has not effectively slashed the power tariff but announced that it will subsidise it and that is legally within their right.

“As long as they are not encroaching upon the functions of the regulator, there is no problem. But it is for the state government to seriously consider the overall impact and sustainability of such a move.”

He, however, points that DERC must now ensure that the discoms do not have to run from pillar to post to receive the subsidy amount. Every regulator should be able to strike a balance between the benefits to consumers and discoms and ensure that with the recent move, the “finances of discoms are not distorted”, he adds.

On the other hand, while terming Kejriwal’s move as legally right, SL Rao, former chairman of CERC, maintains that state governments have a tendency to interfere in tariff setting which by law is the state regulatory commission’s job. “Through the announcement made by the AAP government to subsidise power, the state regulatory commission has not been rendered a useless body yet but it will be important for the regulator to show some spine. Unlike many state regulatory commissions which are subservient to the local government, the DERC should take a strong stance and advise the government that with costs of raw materials like coal used in the generation of electricity going through the roof, adequate supply of power can be ensured only at higher prices,” he says.

He adds, “The appellate tribunal for electricity (ATE) has already ordered tariff increases in states like Tamil Nadu, which had not raised tariffs under government pressure, and thereby added substantially to the losses. Any state government needs to understand that like every other expenditure, subsidies have an opportunity cost and, hence, the additional power subsidies will reduce government expenditure in other development sectors.”

Background check

In Delhi, power distribution was privatised in July 2002 and since then three discoms – BSES Rajdhani and BSES Yamuna (51 percent stakes in both companies are owned by the Anil Dhirubhai Ambani group) and Tata Power Delhi Distribution (in which Tata Power holds a 51-percent stake) have been distributing power to around 45 lakh consumers. (The remaining 49 percent stakes in each of the three companies are held by the Delhi government through Delhi Power Company Ltd.)

Power supply and tariff setting in the capital became a matter of heated debate after the introduction of the concept of ‘regulatory assets’, which included a portion of the approved expenses of the discoms that were not taken into account in tariff-setting. Simply put, these assets are the difference between the amounts owed to the discoms and the amounts actually collected from consumers. Regulatory assets were created in order to avoid increasing tariffs in line with the increase in cost of power generation.

In this way, while discoms were given an assurance that the expenses would be reimbursed at a more convenient stage later, it was also ensured that consumers were not burdened with rate hikes. By March 2014, the total amount of regulatory assets of the three discoms is set to cross '20,000 crore, which the consumers will have to reimburse ultimately. However, the practice was abolished by the ATE last year when it asked state commissions to not create regulatory assets for discoms unless they can be justified.

The tribunal further ordered that recovery of such assets should be completed within three years.

“The creation of regulatory assets was the biggest problem. Delhi is a classic case where the regulator has let down the citizens since it introduced a concept as illogical as regulatory assets without thinking that they were not solving the problem but compounding it. It is always a better idea to go for tariff hikes every now and then instead of postponing it for a ‘more convenient stage’. Through this practice, the regulator was simply postponing the inevitable (rate hike), which will result in a sudden burden for consumers at a later date,” says Shakti Sinha, former finance and power secretary of Delhi.

Pointing at the absolute mismatch in distribution tariff setting with the increasing generation costs, Sinha says that this is a bubble waiting to burst. “In July 2012, when the government was giving a subsidy of Re 1 [for 0-200 units], the total subsidy cost for the government was Rs 270 crore per year, which went up to Rs 600 crore in July 2013 when the subsidies were increased to Rs 1.20 for 0-200 units and Rs 0.80 for 201-400 units of power. This will now go up to Rs 1,400 crore with Kejriwal’s idea of giving a 50-percent subsidy, and this is definitely not sustainable given that power generation and transmission in India is such a costly affair,” he says.

Sinha says it is high time the DERC took a bold step and asserted its position as an independent and fair body solely responsible for effective supply of power at rates that don’t burn a hole in the pocket of either the consumer or the discoms. “The DERC should not really worry about what its political masters think. It should set tariffs depending on the actual expenses and revenues reported by the discoms after auditing their accounts. This is the correct way to look after the consumers’ interests,” Sinha says.

While echoing the sentiment, Rao admits that governance in India is in a state of flux and that politicians are still reluctant to let go of all their decision-making powers to the regulatory authorities. “Regulatory authorities are a major irritation factor for the existing political system, which continues to work in an authoritarian style without being questioned or held accountable for their actions. However, this outlook is slowly changing as more and more people are waking up to the concept of regulatory authorities and their independent role,” Rao says.

(This story first appeared in the magazine's January 16-31, 2014 edition)

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