Had the ambitious UDAY electricity reforms package delivered as planned, ATC losses would be down to 15% by December 2018—with a minor slippage perhaps as not all states joined the scheme at the same time—and, as a result, electricity tariffs would have come down considerably. This, however, doesn’t seem to have happened and, going by a recent letter written by power minister RK Singh, “there are many states in which the losses range from 20% to 50%.” With this, Singh says, there could be a situation where states “will not be able to pay for the power which they purchase”. Add to this the problem of cross subsidies. Right now, if the average cost of power is X, states charge industrial and commercial users like shops even 1.5X, making industrial tariffs very high and add to their uncompetitiveness. According to Singh’s letter, “the tariff policy mandates that the cross subsidy should not be more than 20%”. If additional subsidies have to be given, Singh suggests, the states should give this to consumers directly through cash transfers.
So, if Singh has his way, starting January 1, 2019, even if the ATC loss in a state is 25%, the regulator will fix tariffs on the assumption that this is only 15%. In other words, this will put a cap on the tariffs and the loss will have to be borne by the state electricity board (SEB). Similarly, if industry cannot be charged more than 1.2 times the cost, X, the SEB will either have to raise tariffs for farmers and households or will have to absorb the loss, and industrial tariffs will decline substantially due to this.
That is the plan. What needs to be seen is whether the minister will be able to push through his proposal, especially now that the general elections are approaching. If states are not able to reduce their ATC losses along the lines they promised when they signed on to the UDAY terms, there is no way they can take on the burden Singh is talking about. Ideally, as per the terms, they have to be forced to suffer, but whether this will happen remains to be seen. There will be a lot of pressure on the Centre to relax the UDAY terms and to not penalise the states and to cajole centrally-owned banks to keep lending to SEBs whether or not they are viable—whether this happens or not will determine whether, a few years down the line, India will have yet another power sector bailout.