Power reform conundrum: Pay now, cost later

RK Roy

Power reform, it may seem, has crossed a major hurdle with the report of the Montek Singh Ahluwalia Committee on the settlement of dues of the state electricity boards (SEBs) to central power and coal utilities. The dues are of Rs 40,000 crore, scaled down by the committee (judging by available reports) to Rs 33,600 crore—by halving the surcharge\interest on delayed payments to Rs 8,000 crore.

The SEBs will offer creditors 8.5 per cent, tax-free, 15-year bonds; there will be a moratorium on repayment of principal (Rs 25,600 crore) for the first five years; repayment will begin in the sixth year and be completed in the 15th. Assume the states (owners of SEBs) accept the Ahluwalia report, including the discipline of no-
default on current dues. The issue then is the viability of SEBs in the coming 15 years.

SEBs will pay creditors an annual interest of Rs 3,060 crore during the first five years. From the sixth year, the interest liability will decline by 10 per cent, following repayment of principal. But the repayment obligation in the sixth year will be Rs 2,568 crore; this will take the total debt servicing outgo to over Rs 5,500 crore that year. Thereafter, debt servicing will taper, slowly to start with.

SEBs earn hardly a surplus worth the name. The period of the hump in debt servicing will be excruciatingly difficult. It is simplistic to hold that SEBs will plug mega collection holes at higher tariffs (the latter to avoid default in current dues). The state governments concerned will have to bail out the SEBs; but the state governments’ finances are in a shambles.

The Ahluwalia Committee cannot be faulted for not straightening a dog’s tail. By proposing a five-year moratorium, it has passed the problem to the next finance commission, which will have to give an interim report on the specific issue of states’ electricity liabilities. However, even during the period of moratorium, many states will find the interest payment obligations difficult to meet. There is no easy route to power reform.
One question that electricity regulatory commissions in different states are likely to raise is: how rational were\are the electricity tariffs the central utilities charged\charge the SEBs? (The issue has been lost sight of as a result of the spotlight—albeit justified—on inefficiency and corruption in SEBs.)

Take the plant load factor (PLF) which goes into tariff-fixing. Should the norm be the national average PLF in a year long past? It makes sense to take the PLF of modern plants; also to upgrade the norm with technological advance. Is it fair to price up electricity with accelerated depreciation of power plants? If yes, how to ensure the consequent gain goes into investment? How is notional equity fixed for working out a rate of return? And (after the burial of the bank rate plus norm) should the return be a high 16 per cent?

These are tricky issues in costing power. Their obfuscation helps inflate costs and SEB liabilities. The past is contained in the present which, in turn, shapes the future. Should the Ahluwalia Committee, in fairness to SEBs, have waived the entire penalty on overdues? Furthermore, arriving at current dues requires transparency in pricing. Instead of burdening the individual state regulatory commissions, it will be worthwhile to have a national consensus on clear-cut power costing norms.