Achilles heel of the power sector

The Hindu Business Line, October 15, 2015

The power sector in India faces a paradoxical situation. In some cases, distribution companies are unable to buy power from generation companies due to financial problems. Consequently, the discoms are starving their consumers and the gencos are cutting down their production.

The debt of State-owned discoms is serious — ₹2.9 trillion in 2013. Every year, the figure is being topped up by nearly ₹1 trillion. Of this 40 per cent is due to theft-and-dacoity losses (transmission and distribution), and the rest because the tariffs have not kept pace with the rising cost of supply.

The Union power ministry led by Piyush Goyal is making hectic efforts to salvage the situation, but unless the recalcitrant States are willing to take politically difficult decisions, such as raising prices and cutting T&D losses, it is unlikely that things will change.

Reform gone wrong
The Electricity Act of 2003 was brought in to reform the power sector and make it a productive one. In many States, electricity boards were wound up and the sector unbundled — different entities to generate, transmit and distribute power.

Further, independent regulators were established to work at arm’s length relationship to ensure quality of service and real pricing. Alas, unbundling was just old wine in a new bottle — discoms were run as departmental units. And the regulators were captured by the State government, defeating the purpose of reforms.

The law also stated that subsidies to be paid to low-priced consumers will be reimbursed by the State to the discoms. Alas, in many instances the States did not pay up, with the result that the discoms had to carry the loss in their books.

So how are these discoms running? By borrowing heavily from banks and becoming complacent in making significant efforts to increase their efficiency and tariffs. A whopping ₹53,000-crore exposure of Indian banks to seven State electricity boards (SEBs) has a “very high probability” of turning into non-performing assets (NPAs) in the quarter ending September, 2015, noted the RBI in its Financial Stability Report.

If there is one sector in the country where everyone knows what the problems are and has a solution to provide, it is the power sector. But it is in the implementation of the solutions that the difference seems to arise. For some, the answer to power sector woes lies in correcting the demand-supply gap; for others, the solution lies in increase in tariffs; while for others, the solution lies in cutting down on the T&D losses.

Revision of tariffs is the responsibility of electricity regulators in India. As compared to other economic regulators, such as financial sector regulators, which exercise pricing control powers effectively and also the Insurance regulator that puts caps and intervenes in the designing of insurance products that have an impact on the premium, most of the electricity regulators are ineffective when it comes to pricing issues in the sector.

States must step up action
This raises a pertinent question about the capacity and independence of the electricity regulatory commissions and their interactions with political masters when called to taking tough decisions on tariff revisions.

In the words of Goyal, “I don’t think it’s only about tariff. I must tell you Gujarat, which has turned from an ₹2,500 crore loss-making utility into an ₹500 crore profit-making entity over the last 10-12 years and giving 24×7 power to everybody, has had the lowest increase in tariffs compared to any other State in the country.”

He added that we cannot have a system that everything can be passed on to the final consumer in the garb of cost being recovered without being sensitive to their own problems and affordability. Goyal, however, said the problems cannot be solved by the Centre alone, and State governments will have to play a pivotal role by keeping a grip on expenditure and revenue, metering every consumer and involve people in curbing power theft.

Taking cue, three States (Goa, Uttarakhand and Meghalaya) have taken the lead to introduce reforms in the distribution sector. The move to select the three States is politically a viable solution, given that the total amount of accumulated losses is around ₹3,000 crore which is far less than what exists in Rajasthan — ₹90,000 crore. The five point agenda for these States are: increased power generation from local energy sources (for instance, hydro in Uttrakhand); improve inter-State transmission network; revive the sick distribution sector; enhance use of renewable energy; and use energy efficient measures. Among other suggested initiatives are developing a strong communication, IT and monitoring system.

Just do it
However, unlike earlier populist measures of giving financial aid, the Centre is facilitating technical reforms and pursuing States to take up financial issues such as hiking tariff, bringing down debt and losses, and raising funds from market.

The time has come to deal with the issue and overcome the ‘Achilles heel’ of the power sector. It is not an impossible task and would require political will and vision. The same was visible in the turnaround of Coal India under Goyal, which has indicated that it will produce one billion tonnes of coal by 2019-20, which is about double the amount of present level of coal production.

Clearly, given the country’s tryst with power outages and increase in theft-and-dacoity losses, the need for power distribution reforms is timely. In days to come, it would be interesting to see how the implementation of reforms in the mentioned three States is rolled out and the benefits that accrue to the sector and consumers.

However, one cannot replicate the steps being taken in the three States in the other big Indian States and some sort of localisation would be required given the amount of losses, size of the States, political economy, etc.

Thus, overcoming the barriers would require political will and vision both at the Centre and State and would also require going against populist measures that have dominated the sector and the policies, till date. Time has come to walk the talk.

The writer is Secretary General, CUTS International. With inputs from Udai Mehta

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