Tariff troubles

The Hindu, April 25, 2009

Chennai: In a chapter titled ‘Regulatory challenges in electricity markets in India,’ Devendra G. Kodwani observes that delivering competition in retail (low voltage supply to domestic and other consumers) requires major developments in meter reading capabilities of distributors in addition to first having all connections metered with uniform metering technology. “This has been achieved in England and Wales where consumers can easily switch from one distributor to another at no extra transaction costs.”

Exploring the question whether tariffs can mimic competitive rates, the author notes that the tariff determination process spans over months of petition submissions, information exchange, analysis, negotiations, hearings, and decision making, involving also stakeholder comments, objections, expectations of consumers on tariff adjustments.

Each tariff order usually runs into about 175-200 pages, he frets. “There is item-wise comment and querying on the justification of projected expenses, forecast capital expenditure and other assumptions that the licensee has used in the projections for next year. The exercise appears almost like a budget approval of a government department.”

Tricky issues of asset base require judgment on the purchase and replacement costs, depreciation rates, and cost of capital, Kodwani finds. In some cases, “Publicly-owned distribution companies do not provide timely and adequate information, practically sabotaging the regulatory process, and ERCs (Electricity Regulatory Commissions) can do little other than extend the deadlines.”

Another chapter in ‘Politics Triumphs Economics?’ edited by Pradeep S. Mehta and Simon J. Evenett (www.academicfoundation.com) studies concession contracts in Latin America and finds that regulatory efforts in the matter of infrastructure seem to be ‘more closely associated with keeping tariffs as low as possible for current consumers, than keeping profitability well-aligned with hurdle rates of return.’

While regulation is in itself an economic and technical concept, the fact that the regulated services – such as water, transport, and energy – are essential and very visible, it is unavoidable that politics can interfere with the implementation of good regulation, the essay’s authors Luis Andres, Jose Luis Guasch and Stephane Straub concede. “Using tariff setting for political gains is often too tempting, particularly around election time.”

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