Power sector reforms - farm power and tariff revision

The Business Standard reports that the Union Power Ministry have advised State Governments to transfer the massive losses, estimated at Rs 1.06 lakh Cr at end of 2009-10, off the balance sheets of state distribution utilities. It has also advised that states take action to ensure no further cash losses.



If the bailouts or restructurings happen, it will be the second time in almost a decade that state distribution utilities have received such help. At the turn of the century, as part of the first flush of reforms in electricity sector across the country, many state electricity boards were bailed with a Rs 41,400 Cr package. State governments assumed the debts and issued long-term bonds.

Like with the earlier bailout, the present need for bailout appears to have been triggered by similar reasons - the near inevitability of widespread defaults to central generating utilities by state and private sector distribution utilities. This is a clear sign that very little appears to have changed with the sector except in processes and formalities.

In fact, for all the structural reforms that have been enacted in the sector over the past decade, central and state governments have refrained from addressing the twin-elephants in the room - limiting free power for agriculture and regular increases in power tariffs. Unbundling, private sector participation in generation, liberalization of regulatory restrictions in transmission and distribution, and operational improvements like loss reduction, can only get you to the starting line.

Any earnest and meaningful effort to reform the sector has to place farm sector reforms and periodic tariff revision at its center. There is nothing secret nor mysterious about this. Any trading enterprise can survive only if its cost of purchase and service delivery matches its price of delivery. In simple terms, the power procurement cost plus the transmission and distribution cost have to match the aggregate tariffs.

In fact, its importance for the long term health of the sector itself cannot be over-emphasized. The problems faced by privatized distribution utilities in Delhi, who too have massive pending dues with generators, is a reflection of the magnitude of the problems. If the present trends are allowed to continue, it will adversely affect the prospects of private sector generation too. Unlike state generation utilities, private generators will not be able to manage their operations without regular payments on their power sales.

In many respects, the current sorry state of affairs is a serious indictment of the state and central power sector regulators. It is also a classic case of how easily important reforms can be subverted and given lip-service in implementation. It also drives attention to the important issue of tariff revision and the need for public conditioning to accept such revisions.

1. The Electricity Act 2003 and the various state regulatory acts clearly mandates that utilities should not bear state subsidies and state governments should transfer upfront (and not reimburse) the subsidy amounts to utilities for all subsidies being implemented by them. The regulators are supposed to safeguard the interests of the regulated utilities through the annual tariff revision filings. They are mandated to fix tariffs in a manner that reflects utilities' cost of power procurement, a reasonable level of operational efficiency improvements (read loss reduction), and required capital and operational expenditures.

But regulators across states have made a mockery of this, accommodating the interests of their paymasters, the state governments, at the expense of the utilities they were statutorily mandated to protect. Tariff filings in most states have been reduced to a charade, an academic exercise, and most often unprofessional at that, that has no relevance to realities in the field. Regulators, barring a few occasions, have failed to exercise their due powers and force states to bite the bullet on tariff and farm power related issues.

2. The policies of state governments since the reforms were initiated is a classic example of how easy it is to subvert well-intentioned and critical reforms. States have not raised tariffs on domestic consumers for many years now. Assuming inflation and the general increase in cost of procurement, the real subsidy has increased massively. Free power to farmers has remained a holy cow. Even the issue of mere metering of agriculture services raises unbelievable amount of passions.

Even with the latest crisis facing utilities, and despite being fiscally constrained, state governments are unlikely to take any meaningful steps to address this issue on a sustainable basis. It will require commitment at the highest levels to stand even a reasonable chance with pushing through such reforms.

3. Despite nearly two decades of liberalization, the one area where public debate, both in the political realm and in popular media, has remained entrapped in the mindset of the bygone era is that relating to cost-recovery and tariff revision. We cannot shy away for too long from the inevitable fact that consumers have to pay the full cost of any service consumed by them.

Public and political opinion needs to be conditioned into accepting the reality that there are no free lunches. Apparent free lunches are unsustainable and cause serious indigestion down the line. Reforms are not just cheap talk. For any meaningful reforms in sectors like utility and municipal services, important structural reforms have to complement with cost-recovery in service delivery. In simple terms, the culture of free or subsidized delivery has to end. At best, cost-recovery can be ensured in the aggregate through some form of cross-subsidization.

There can be a silver-lining to the crisis. If utilities are to be bailed out, it is a great opportunity for all stakeholders - regulators, state and central governments - come together and agree on some minimum steps with reforming farm power and tariff revision. This blog has always talked about scalable and practical steps in public policy reforms. However, the time may have come to stretch the definition of practicability given the serious magnitude of crisis facing power sector in India. I can think of three such minimal set of steps

1. All agriculture services should be metered. Leave alone bringing in efficiency and accountability in farm power consumption, this is an absolute essential requirement for many upstream reforms. For example, current estimates of distribution losses are badly flawed in the absence of any reliable estimate of agriculture consumption. It is common practice for utilities and regulators to use this as a sinkhole to doctor various operational efficiency and tariff figures that suit their respective agendas.

2. There is scope of considerable reforms with the terms of free farm power supply. To start with, free power supply should be restricted to only certain types of farmers, with the restriction being confined to easily enforceable or detectable parameters or proxy parameters. As I have blogged earlier, governments should move over to a system of fixed monthly units for agriculture consumption, to be reimbursed into the farmers accounts when they pay their monthly farm and domestic supply bills. Its benefits are manifold and the availability of Aadhaar, atleast in certain areas, makes the logistics simpler.

3. Periodic tariff revision, for all categories of consumers, must be made mandatory. In fact, even a simple, rule of thumb increase based on inflation or some other fixed parameter, will be one of the biggest boost for the sector. Just as was done to encourage unbundling of state utilities in the first generation of reforms, state governments should be directed to enter into MoUs or agreements with their utilities or mandate rules that define the terms for periodic tariff revisions. A mandatory and automatic requirement to periodically revise tariffs, agreed between all states and the centre can overcome, atleast partially, the political and collective action problems that accompany such hard reforms.