Fixing the power sector

The electricity sector's ills call for sustained intervention by the Central government, which should engage with the states to draw up turnaround strategies

The financial health of the power sector is causing anxiety, with even the Reserve Bank of India drawing attention to the risk it poses to state government finances. The last bailout package, UDAY (Ujjwal Discom Assurance Yojana), was put in place by the central government in 2015. Under it, the state governments took over 75 per cent of the debt of the distribution companies (or discoms), and the rest they could service with lower-interest bonds.

The states’ ratio of gross fiscal deficit to gross domestic product went up by as much as 0.7 percentage points, as a result. There were commitments to reduce aggregate technical and commercial losses as well as raise tariffs. These commitments have not been fulfilled by many states and an UDAY-2 is in the pipeline. Overall debt levels of the discoms are creeping up to pre-UDAY levels.

Power sector reforms should have restored the financial health of the sector years back. The Electricity Act 2003 provided for the setting up of independent Central and State Regulatory Commissions. The Regulatory Commissions had to determine tariffs, which were to lead to “recovery of cost of electricity in a reasonable manner”. The Commissions were to also reduce cross-subsidies.

The Tariff Policy of 2005 mandated that the State Regulatory Commission would notify a roadmap within six months, according to which, latest by the end of 2010-11, tariffs would be within +/- 20 per cent of the average cost of supply. The state governments were required under the Act to “pay in advance” the subsidy to the discom if they wanted any class of consumers to have a tariff lower than what the Regulatory Commission determined.

The key premise of the Electricity Act was that state governments would “let go”. Tariffs would be determined by the independent Regulatory Commissions, which would also protect consumers’ interests. State governments could give farmers free electricity, but had to pay for it from the budget. In reality, however, the political leadership across states has yet to fully accept the spirit of the Act. The discoms continue to be owned and micro-managed by state governments. They seek tariff increases only after clearance by the political leadership.

The Independent Regulators raise tariffs only within the band that they sense is acceptable politically. Being retired civil servants and technocrats, they have a finely honed sense of what would be acceptable. So, the expectation that tariffs would result in recovery of cost of supply has been belied. As state governments are perennially short of fiscal resources, their payment of subsidies to the discoms is usually in arrears, notwithstanding the provision in the law of advance payment.

Reforms would have restored the financial health of the power sector years back. The overall debt levels of the distribution companies are creeping up to levels that prevailed before the 2015 bailout

The Electricity Act provides for open access to all consumers above 1 Mw, separating content from carriage for them, with a cross-subsidy surcharge to compensate the discom for its loss of a subsidising consumer. Cross-subsidies have hardly come down and, as a result, the surcharge for open access is still too high. The use of open access remains a marginal phenomenon. There is hardly any point in now contemplating further legislative changes for separation of carriage from content for all consumers, before getting better implementation of existing provisions.

The situation, however, varies considerably across states. Gujarat turned around when Prime Minister Narendra Modi was chief minister. Separation of feeders, which took electricity for irrigation from those that went to village settlements, was a creative solution. Farmers got practically free electricity for irrigation, but only when they needed it. However, they got uninterrupted supply of electricity in their homes in the villages, and paid for it fully.

 Excluding agriculture, the sector became financially viable, with tariffs reflecting costs, with improved governance. For agriculture, supply was effectively rationed and the subsidy for free supply contained to manageable levels. The state’s power sector became commercially viable and provides quality supply to all consumers. Its power companies consistently get the highest ratings.

Sheila Dixit, as chief minister of Delhi, brought in the private sector to run electricity distribution in 2001 with the full support of the then NDA government at the centre. She recognised that only the private sector with independent regulation could set the sector right in the then prevailing commercial, administrative and political culture of Delhi. Losses in distribution, then around 50 per cent, have come down to under 10 per cent, and the quality of supply and service is getting better. The sector is no longer a financial drain on the Delhi government. So much so that it can now afford to offer a subsidy from the budget for free consumption of 200 units per month.

These examples illustrate that focused political leadership in a state can set the sector financially right and put it on a sustainable trajectory of commercial viability. Avoidable losses can be reduced through better governance, which has been made easier by technology, smart grids, smart pre-paid meters and real time effective energy audit. Where sustainable governance improvement is unlikely in the short term in states such as UP and Bihar, varying degrees of private sector participation — ranging from outright privatisation, to franchisee arrangements, to outsourcing of metering, billing and collection — would be the way forward.

Franchisee arrangements in Uttar Pradesh (in Agra and Kanpur) have shown encouraging results. Tariff increases are, however, unavoidable to get revenue to go above cost per unit. And increasing tariffs should not be politically difficult if farmers are excluded and the lifeline consumption tariff for the first 100 units is not raised. After all, consumers do pay for increased petrol and diesel prices and have, as voters, not imposed real costs on their political leaders.

The situation is really grave in a few states. This needs the political attention of the central leadership and engagement with the political leadership in the weak states. This alone can result in a state-specific turnaround strategy that could be implemented in a time bound-manner with the help of the centre.    

The writer is distinguished fellow, Teri, and former secretary, DIPP