Many have warned over the last 20 years of the dire state of the power sector in India. Since 1991, officials assumed that opening private and foreign investment to generation, and from 1998 to transmission and distribution, would attract huge funds into electricity. It did not happen. The lessons were not learnt from the Montek Ahluwalia committee that converted into bonds the outstanding of state electricity boards of over R40,000 crore to central public sector suppliers like the Railways, Coal India, etc. These distribution enterprises were then supposed to improve their finances by improved efficiencies, reduced thefts, more remunerative tariffs, etc. Neither the Planning Commission nor the power or finance ministries pushed states in this direction. The distribution enterprises steadily became financially bankrupt. They were helped by compliant ?independent? state regulators who kept tariffs from rising with costs.
The situation now is that the financial losses of the electricity distribution sector stand at around 1% of GDP, increasing by 21% annually on a cumulative basis, and are expected to reach R1.16 lakh crore in FY15. There is little money with them for renovation and modernisation, in some cases even for maintenance, and none for new projects adding to capacity.
There are four principal reasons for the financial collapse of electricity distribution enterprises: inadequate consumer tariffs; no regular tariff revision; high aggregate transmission and commercial (AT&C) losses, and non-payment of subsidies by state governments. At the point of supply to customers, in 2009, the average cost per unit was R4.76 and the annual revenue realised was R4.06 per unit. Tariff revisions every year when they take place are inadequate to cover costs. Nationally, tariffs are increasing by 7% whereas power costs are increasing by 12%. This led to increasing accumulated losses.
The national AT&C loss of state distribution enterprises was 28.4% and on current trends will take over 10 years to reach below 15%. A loss reduction to 15% can raise revenues by an additional R35,000 crore or so annually. In contrast, the losses in the 12% of electricity distribution owned by the private distribution companies were around 12%. Privatisation of distribution can reduce losses. The experience of privatisation of distribution in Delhi proves this.
State governments have increased subsidies from R12,500 crore in 2005 to R29,665 crore in 2009. However, they paid up only 62%, thus causing serious cash shortages in distribution enterprises. This deprivation was in addition to legitimate costs not being allowed for tariff increases.
Remedies are well known and have been repeated many times. Tariffs have to at least cover costs, something which any housewife knows, but which government accounting does not. Annual filings for tariffs by distribution enterprises must not be delayed as they are many times, and often on instructions from the state governments. The regulatory commission does not insist on timely filing. There should be good baseline data with the enterprise and the regulator to set targets for AT&C loss reductions. State governments must on pain of losing central grants, not compel their enterprises and regulatory commissions to hold back tariff increases.
Regulatory commissions must be truly independent, and selection of members must not be confined to retiring government employees. The search for people must cover academia, business, media and other professions. Regulators must be administratively accountable to the higher judiciary and also meet the concerned legislature annually to report on their philosophy and actions to the elected representatives. Regulators must, after scrutiny, allow all permissible costs of distribution enterprises for tariff determination, not arbitrarily cut them. Even worse is the practice of many regulators of approving costs but holding some costs back as ?regulatory assets?. This is a ploy to prevent tariff increases which politicians would prefer to avoid. Regulators comply with politicians? wishes.
Fuel price changes must be automatically passed through into tariffs. Regulators must begin to build reserves in each distribution enterprise that can be used to meet sudden cost increases. Bulk users, including shopping malls, housing colonies, etc, must be allowed to aggregate their demand so as to avail of open access and buy from the cheapest suppliers. Free power even to agriculture must cease and instead the government should look at remunerative prices for agricultural outputs, cutting down on middlemen, building storage, roads and access to consuming markets.
Government-owned distribution enterprises must be headed by management professionals. They could be power engineers if they are trained in other management disciplines, but they must not be selected only from among bureaucrats. They keep moving between ministries, have no commitment to the sector or the enterprise and introduce an administrative culture, not a business culture. Privatisation of distribution must be accomplished as soon as possible so that efficiency can be improved, theft reduced, discipline improved. One way could be for distribution privatisation to be a condition for disbursing central grants.
The Indian power system is on the verge of collapse. State ownership, suborning of independent regulators so that they are compliant to government intentions, populism in tariff setting, governments not reimbursing subsidies, lack of desire and finances for renovation and modernisation, and laying new lines and building new capacities are known ills of the power sector. Unless they are corrected soon, power will hold back India?s ambition for inclusive growth.
The author is the first chairman of CERC, independent director on R-Infra and R-Power, and an extensive commentator on infrastructure