A small step towards growing out of the mess in electricity supply

Updated: May 9 2006, 05:30am hrs
Finally perhaps the wheel has moved, even though an inch. The recent decision to allow captive units to supply at prices (even though only a little) higher than the marginal cost of generation finally means that a win-win move has been made. However, the scope of gain is limited to the value of additional generation amounting to about 20% of the installed captive capacity of about 20,000 mw right through the country.

I had argued for this change as the first step to reform way back in 1996. The importance of the change is not the gains per se but that it may well be the first movement away from zero and negative sum games that much of reform has so far been about.

Growth in the electricity sector had been stalled ever since 1994 on account of reforms (unbundling for its own sake and the IPP policy) that were technically unsound and designed to fail. This was because they did not address the real problemthat of revenue interruption on account of price-based subsidisation and the distortions that they bring in.

That problem still has to be fundamentally addressed. The only way forward is direct subsidy to the farmer based on entitlements while the price of electricity moves to its cost, killing all possibility of price and demand mix arbitrage which is currently large and is being exploited in many ways.

The gains to be made in such a transition are enormous. Out of the Rs 40,000 crore of losses that distribution systems make (in the name of the poor and the farmer) no more than Rs 8,000 crore is of significance to the beneficiaries. The rest constitutes national waste and rents.

If the costs of coping with the resulting erratic and poor quality power is also taken into account, then to deliver some Rs 8,000 crore of effective subsidy we may be suffering a social loss of over Rs 50,000 crore annually. (Some may still think this is not too large when we deliver a Re 1 subsidy to the BPL consumer of food through the PDS at a fiscal cost of Rs 6.22!). I am surprised at the naivety of expecting to achieve 10th Plan targets without fixing this problem.

The present move is to go mega-mega with all possible concessions (and the distortions they bring relative to the non- mega proposals) and bids to be invited to buy power on tariff basis.

This does not address the fundamental problem, but is certainly better than the IPP idea of return-based cost plus pricing and needs to be extended without the fiscal concessions to all potential bidders. It presumes that for the additional capacities so created, the additional demand would be unencumbered and profitable.

Reaching out to high tariff and industrial consumers is the key. This means that the Centre would logically have to give up being patient with state governments who have delayed open access. Since the tariffs of nearly all consumers, other than agricultural consumers, are higher than the cost to serve, there is tremendous scope for state governments to move on to a win-win path by accelerating open access.

However, this means that power to agriculturalists would have to be limitedthe point is not the amount but to say no more increase. This would mean a movement from wasteful allocation of shortages to revenue maximisation (through priority sales to high tariff categories), subject to a guaranteed minimum power being served to agriculture.

But the catch How does the politician representing the farmer ensure that the farmer gets enough power Today many state systems, under pressure to maximise revenue, choose the administratively and managerially easy route of supplying less than the reported amount of power to agriculture, and showing the rest as a recovery of AT&C.

This is possible since agricultural consumption is notional, and the AT&C losses are calculated only after removing assumed supplies to non-metered consumers. It would be necessary to negotiate with farmers groups to commit a certain amount season wise and for the government to ensure that this is done (none of the four hours of supply against claims of six hours that are rife today).

At least in states with no great shortage, such a deal can be struck and the throughput (to other consumers) maximised, to grow out of the current mess. Appropriate incentives and changes in the reporting structure within distribution companies could achieve this.

The problem, though, is that state governments are not willing to see the benefits of such a strategy. For every additional unit sold to high tariff consumers there is a surplus of Rs 1.5 if the fully charged cost of power is Rs 3.0. This is a rent that works out to the equivalent of a additional return of over 36% on the capital cost of generation, after a charge at 12% has been already included! Nothing could be more rewarding than electricity, if regulators do not scale down the tariffs of paying consumers.

The point is the Indian consumer has been beaten so black and blue that he is happy to pay even Rs 5 for power and in some places such as Gurgaon, for example, as much as Rs 8 for what would be very low quality power by international standards.

Instead of moving in circles of a transcendentally determined (by regulators under a confusing framework) cross subsidy fee, should not the Centre force the issue and ordinance open access with a limit of Re 1 on cross subsidy charge, irrespective of the complexities of distribution territories for all new generation public private mega, mega-mega and small projects

Well, should it not force states to move to entitlements- based subsidies and away from price-based subsidies in the first place

The writer is professor at the Indian Institute of Management,Ahmedabad. email: morris@iimahd.ernet.in