For decades, the power sector in India has turned market economics upside down. Large consumers were charged higher tariffs and small customers were charged less or received it free. This was because there was a shortage of electricity across the country and power, despite high capital costs, was treated as a public good by state governments, which in turn expected the power distributing companies to foot the bill for shortfall in revenues and never reimbursed them. Unfortunately, electricity is a concurrent subject in our Constitution. The consumers are served by distribution companies, and therefore come under state governments and their regulators. This has resulted in making a very heavy-capital essential service into a highly uneconomic one, with little or no surplus generated. Many distribution companies are short of funds even for regular maintenance and investment. State politicians have wooed voters with cheap or free electricity. They expect companies to cross-subsidise by charging higher rates to well-off customers to compensate for subsidising the low-income ones. Even the ‘independent’ electricity regulatory commissions—these were appointed in each state to determine tariffs each year—have been a party to this debacle as the appointees have often been subservient retired bureaucrats, who toe the line of local state ministers on electricity tariffs. Electricity has been in short supply, and ensuring that the marginalised people get it regularly and affordably or free of cost has been a top priority for all political parties. And, state ownership of distribution has been the cause of this, making for a corrupt, indiscipline and inefficient system, saddled with losses. This has also contributed to the problem of inefficiency leading to huge electricity thefts and technical losses.
At present, we are a power surplus nation, and more is expected to accrue from thermal (nuclear and coal) and renewable sources. Therefore, now is the time to make electricity price lists more conformed to standard market economics. In a sensible market, prices are related to volume. We, on the other hand, have been going in the opposite direction—charging higher for more consumption and less or even free for the smallest consumers. This has to change. The government, thus, needs to ensure that every supply is metered. We do not know, for instance, as to how many get electricity free, what is their consumption and user-profile. It has also led to distortion in cropping patterns as farmers are using ground water—pumping it using electricity is free—to grow water intensive crops. This has also contributed to India becoming the largest user of ground water in the world, declining ground water levels, and weak recharging of river waters. If a particular consumer or group or industry is to be favoured and supplied free or subsidised power, we must identify them to gauge how much is to be supplied at subsidised rates. The government must reimburse the electricity distributing company and the distributor must not be asked to cross-subsidise by charging lower rates or providing free electricity to certain sections. This requires complicated accounting and is not the business of an electricity distributor. Also, this has snowballed into high debt problem for electricity companies and state governments.
We must have tariffs that vary with time of day and seasons—allowing for higher rates during peak consumption hours. This will optimise the use of electricity. The distributor can then maximise sales, leading to maximum use of generation capacity and gains due to better efficiencies.
Tariffs could also vary over distance, so costs of supplying distant consumers are not subsidised by closer ones. And, if distant consumers have to get cheaper electricity, government should bear the extra expense. There could also be a discount for steady and large purchases made consistently. Again this will ensure stability for generators. Of course, being in a surplus availability situation that makes all this possible. But state governments must look to buy electricity at the cheapest rates. This demands that state governments follow the law and encourage open access—allowing consumers to purchase electricity from a discom of their choice. These changes will lead to better efficiencies, stop complicated and inefficient accounting for cross-subsidies—subsiding the poor for low consumption by taxing the rich, discipline those who are supplied subsidised rates, ensure demand consistency through the year, improve capacity utilisation in generation and even distribution, and benefit the steady buyer.
Now that supply is better and we are even exporting electricity to Nepal and Bangladesh, the government has the ability take these actions. We must also get the government out of ownership of electricity companies. The private sector must take over, under tough regulation, not the wishy-washy ones that characterised government ownership. More important, the country needs independent and courageous regulators, who will not allow state governments’ to give a political direction to tariffs. Whether our narrow minded, election-oriented political parties and governments will do what is necessary is the big question.