Editorial: Not by tariff hikes alone

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SummaryCARE says a lot more needed to fix power sector

Though the government has made much of the financial restructuring programme (FRP) for the power sector—just four states have signed on so far—and the tariff hike and other reforms the states have committed to, a recent report by credit rating agency CARE points out this may not be enough. Given the average gap of around R1.2 between every unit of power bought and sold in the country—around 1 lakh crore units of power are consumed in the country annually—regular revenue hikes are obviously an important part of the reforms story. And, as CARE points out, around 30 discoms across 11 states that account for 80% of India’s demand have hiked tariffs over the last three years. Some, like Tamil Nadu, even hiked it 37% at one go, but that was after years of doing nothing and, this year, the hike has been a muted 3%. All told, the ‘regulatory assets’, or that part of tariff hikes that are simply postponed, add up to around R70,000 crore—a one-time fixing of this requires electricity tariffs to be hiked 70 paise. In some states like Delhi, where the regulatory gap shot up from R1,000 crore in FY09 to R20,000 crore by FY13, this calls for a doubling of tariffs. Apart from this, there is the ‘untreated gap’, or the amount that the regulator doesn’t even recognise but will have to at some point—in the case of Punjab this is around R2,000 crore which is around 13% of the sector’s revenues.

The larger point CARE makes is that tariff hikes, difficult and impossible as they are, are just one side of the story. A 26% average AT&C loss level across the country, for instance, means tariffs are around a third higher than they would be in a zero-loss situation—at a time when power production costs are jumping the way they are, cutting AT&C losses becomes critical. But, apart from the government helping by setting up power courts and creating power-police to book electricity theft, large amounts of investment are required to beef up the transmission and distribution network for losses to come down—but even the basic amount of R1.8 lakh crore planned in the next 5 years requires a 20-25 paise hike in tariffs to be barely sustainable. There is then the levels of cross-subsidy—50% in Maharashtra—that needs to be fixed to keep the burden of price hikes reasonable for industrial and domestic consumers. In

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