Column: What ails Indias power sector

Written by Pramod Deo | Vijay M Deshpande | Updated: Jun 21 2014, 07:42am hrs
Piyush Goyal, the minister of state for power, coal and new & renewable energy, told a press conference that inadequate transmission lines meant Delhi could absorb 400 megawatts of power on top of its existing 5,300 MW, falling short of the current peak demand of 5,800 MW. Clearly, the power grid, as it stands today, is outdated, needs augmentation and modernisation, and may repeatedly have outages and tripping problems. He said residents in Delhi should brace for more power cuts, warning that dilapidated power grids could not cope with the extra electricity needed to meet demand. He charged that Delhi is suffering because of the inaction of the previous government.

Let us see whether it is inaction of only one state government or whether it is a common practice among states and how it affects performance of their electricity utilities.

Post Electricity Act, 2003, not only are the operations of transmission and distribution entities mandated by the conditions of the licence, but operations of these entities are regulated on the cost and revenue side too. Inter alia, any investment to be made by these entities, be it for creating new capacity to meet rising demand or to improve system efficiency or to improve system reliability or system stability, needs to be mandated by regulators. These investments by transmission or distribution entities have associated cost implications on the consumers. The general rule of thumb estimate is that 19-22% of the capital investments made by these entities get translated into yearly burden on the consumers, which needs to be compensated through increased consumer tariffs. Thus, a R100 crore investment would get translated into additional/incremental annual revenue requirement (ARR) of R19-22 crore, which will have to be made good through increased tariffs. In an era where there already exists an unbearable inflationary pressure on consumer tariffs due to rising fuel prices of coal and gas, investment decisions, because of their implication on consumer tariffs, often get deferred to the last minute at the expense of adequate capacity or adequate reserve capacity, system reliability, stability or efficiency.

The double failure of the Delhi Electricity Regulatory Commission (DERC) to come up with a cost-reflective tariff and a realistic amortisation schedule for costs yet to be recovered from the consumers (regulatory assets) created a chain of problems: two of the distribution companies (discoms) reduced payments to the Delhi government-run generating and transmission companies. Their over-dues, as on November 2013, were R2,900 crore and R1,200 crore, respectively. No wonder, Delhi transmission company over the years was unable to invest in strengthening its system, with disastrous consequences.

What is happening in Delhi is representative of the situation in all the states. Most state governments are reluctant to raise tariffs to make them cost-reflective. Despite clear statutory position and orders of the Appellate Tribunal for Electricity, most state regulators keep deferring to the political executive on account of some local issue or other and put off coming out with a tariff order. Then, when the position reaches almost breaking point, they come up with an order that increases tariffs by a small amount. Many a time they also do not implement adverse appellate orders that would impact the tariffs, putting them off to the future again. This results in making the whole supply chaingeneration, transmission and distributionfinancially very weak.

Other common practice among states to keep tariffs low is not to buy sufficient electricity to supply to its consumers.

Although the law mandates universal service obligation and 24/7 power to all, political executive asks government-owned discoms to resort to load shedding, a tactic employed by most states to keep utilities expenses low. The Electricity Act 2003 stipulates that in case of power shortage, load shedding should be done in consultation with the state regulator and this has been endorsed by the Supreme Court in a case relating to

Maharashtra. But most regulators are wary of stepping on the political minefield of load shedding. That is why we see Delhi LG directing how load shedding schedule be done in the capital and DERC shying away from it.

As long as utilities, which are completely owned and controlled by state governments, and regulators, who are ever willing to anticipate political executives wishes, exist, implementing or amending electricity laws will be futile. Since the new government at the Centre believes in cooperative federalism, it is high time that the Centre engages with all state governments and evolves a political consensus on cost-reflective tariffs, quality of service, how to manage subsidies to agriculture and low income groups and provision of 24/7 electricity to both urban and rural consumers.

Deo is former chairman and Deshpande is an energy economist and former principal advisor (economics), CERC