Making UDAY sustainable

States must do their part on power tariff reform

The Ujjwal Discom Assurance Yojana, or UDAY, that was launched by the National Democratic Alliance government last year has been a success in many ways. It has helped state power utilities get some of their massive debt off their books, in order to ensure that they can borrow again, and buy power from generation companies. Otherwise, India was facing the peculiar situation of having more than enough supply of electricity, more than enough unsatisfied demand, but no way of connecting demand to supply - the purpose the distribution companies serve. At the time UDAY came out, India was using just about half of its 270-gigawatt power generation capacity, and the scheme has helped address that problem. But, as a report in this newspaper points out, UDAY has at least one major flaw - one which, if left unaddressed, will cause it to be nothing more than a temporary bailout, and not the permanent solution to the power intermediation problem it was supposed to be. It might end up being just the third bailout of state power utilities, and pave the way for a fourth a little way down the road.

It appears that in general, in the 10 states that signed up for UDAY, upward tariff revisions have not gone into effect. In the tariff orders issued by state electricity regulators so far for 2016-17, Gujarat has made a tariff change - and that was downward. Madhya Pradesh has marginally tweaked tariffs to reflect some change in market conditions - the tariff order says the average cost of supply for 2016-17 in Madhya Pradesh is Rs 5.83 per unit as against Rs 5.29 per unit for 2015-16. The overall picture is, however, worrying. It suggests that state electricity regulators are still not following one basic principle: that distribution companies must be allowed to charge prices that do not just reflect the cost of purchasing power, but also the cost of delivery and a reasonable return on capital. The inability to charge these prices to end-users has always been the precise reason why distribution companies, three times now, have wound up needing bailouts. At the time of its launch, observers worried that UDAY did not create any structural reform that would end this dynamic - and the experience so far bears out these concerns.

Unfortunately, it appears that - although the distribution companies may have petitioned for proper tariff increases - most state electricity regulators continue to be pressured by state governments to spare their constituents the necessary tariff hikes. The West Bengal and Delhi governments, in particular, made the nature of this pressure transparent in the past. Clearly, institutional safeguards for state electricity regulators are necessary so that they are less prone to being pressured by state governments. If the Centre wants UDAY to succeed, then it must not just work on this important structural reform - and, in the interim, put direct pressure on states to fulfil their end of the bargain. States should no longer be subject to a moral hazard - they should not feel that populism will go rewarded with another bailout in the future. A warning should be issued that states that do not co-operate with UDAY in both letter and spirit will be barred from any further round of reform-linked incentives.