Nowhere near a power trip
Financial Express, July 17, 2013
The Ultra Mega Power Projects (UMPPs) may soon get a new start if the committee set up by the electricity regulator (CERC) and headed by HDFC chairman Deepak Parekh makes recommendations that will help Adani Power Ltd to revise power tariff till the time it recovers losses—accrued due to increase in the price of imported coal—from its UMPP in Gujarat.
The committee, comprising the principal secretaries of the states concerned, senior officials of distribution companies (discoms), representative of Adani, besides Parekh, is all set to finalise the quantum of tariff rise from power plants using imported coal and give its recommendations to the CERC soon.
Through a landmark order in April, the CERC allowed Adani to temporarily hike electricity tariff from its 4,000-plus MW power station largely using coal from Indonesia. A change in regulations in Indonesia led to increase in prices of coal, thus making Adani’s UMPP unviable.
The CERC made a case for this ‘positive intervention’, justifying it on the basis of unforeseen circumstances that rendered the prior arrangement between a generator and distribution unworkable. The CERC order, then largely criticised on the grounds that it will jeopardise consumers’ interest, found favour with the Cabinet Committee on Economic Affairs (CCEA) in June. The CCEA allowed power companies to raise electricity prices so that they can be compensated for rise in prices of imported coal.
With around 78,000 MW of capacity being created by 2015, the dependence on imported coal will only increase. Besides, UMPPs are based on the premise that they will deliver low-cost power by providing economies of scale.
With the electricity tariff set to be raised up to 20 paise per unit after the CCEA decision, is raising electricity tariff necessarily bad for consumers? A look at recent data suggests otherwise.
An analysis of two sets of data—an integrated rating done by independent rating agencies CARE and ICRA at the behest of power ministry, and the annual report on the workings of power sector utilities and electricity departments in 2011-12 brought out by the Planning Commission—makes this more explicit.
As part of a research work, we selected four states and analysed the impact of unbundling on the consumers. Our findings suggest that unbundling of utilities into separate generation, transmission and distribution, and corporatisation of the distribution segment have strong links to efficiencies. Corporatisation essentially reorganises a public-owned entity into a corporate structure having features of a publicly-traded company.
A comparison of Gujarat, Maharashtra, Bihar and Tamil Nadu shows that while both Maharashtra and Gujarat are reaping the benefits of early corporatisation and unbundling their utilities in 2005, Bihar which started unbundling only in 2012 and Tamil Nadu in 2010 are still grappling with problems including long power cuts, dilapidated wires, poor metering and high losses of electricity during transmission and distribution. We feel unbundling, when executed in letter and spirit, will help these states overcome these problems.
All four state-owned discoms of Gujarat have been awarded the highest grades followed by the Maharashtra State Electricity Distribution Company Ltd in the integrated rating done by ICRA and CARE in March. Discoms in Tamil Nadu and Bihar landed with poorer grades. The ratings were based on parameters such as operational and financial efficiencies. Neither Gujarat nor Maharashtra have been kind to customers as far as tariffs are concerned. But Tamil Nadu has been. Not only does it give free power to agriculture, it deferred tariff revision for seven years between 2003 and 2010 due to political considerations. The result is: not only do consumers face long hours of power cuts and load shedding but the productivity of micro and medium industries is being affected.
Bihar leads in theft of electricity, reportedly has 72,000 km of dilapidated wires, and has T&D losses as high as 43%.
Corporatisation helped Maharashtra reduce distribution losses from 35% to 17.28% in five years, according to the integrated rating report. Gujarat used modern management techniques rather than tariff cuts to make its agricultural and rural sectors get better access to electricity. Under the Jyoti Gram Yojana, the state bifurcated its feeders for rural and agriculture consumptions. Different metering for both also ensures timely payments from customers. The result of this is that agriculture contributes positively to the total revenue of the electricity sector in Gujarat. The share of revenue from agriculture in total sales was 13% in Gujarat, 0% in Tamil Nadu and 3% in Bihar in 2011-12, according to a Planning Commission report.
Not just that, Gujarat also provides 29% of total electricity to the agriculture sector as against Bihar, a highly agrarian state, which provides 13%, and Tamil Nadu which gives 18%.
The average electricity tariff rates in Gujarat and Maharashtra both lie within plus-minus 20% of the cost of power supply, in compliance with the mandate of the National Tariff Policy to make tariffs reflective of the cost of power supply.
While the difference between the cost of power supply and average electricity tariff has been minus seven and minus three in Gujarat and Maharashtra, respectively, they have been as high as minus 39 for Tamil Nadu and minus 52 for Bihar (see table). Such gaps, apart from poor state of discoms in these states, suggest why there is no incentive for private players to be in these states.
While low tariffs generally benefit consumers, tariffs that do not cover costs act as entry barriers, preventing new firms from entering the market, which in turn reduces competition, creates supply shortages, and eventually reduces consumer welfare.
Sangeeta Singh is Principal Economist and Nandita Jain is Senior Economist, Nathan Economic Consulting India.
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