National Tariff Policy: Stress on viability is its USP

Published: February 3, 2016 12:18:06 AM

The revised Tariff Policy 2016 breaks new ground to address old and persistent problems that ail the electricity sector. It resets the regulatory principles, which were conceived in fact on similar lines in late 1990s, but in practice were watered down over the years.

The revised Tariff Policy 2016 breaks new ground to address old and persistent problems that ail the electricity sector. It resets the regulatory principles, which were conceived in fact on similar lines in late 1990s, but in practice were watered down over the years.

The emphasis on the viability of the sector in order to serve consumer interest is perhaps its most compelling theme. The past debts and continuing financial losses in the distribution sector that impacts the banks and government finances, besides underinvestment across the electricity sector, is largely a failure of the regulatory process. Many, including the regulators, have felt the need for a clearer articulation of the tariff principles.

The tariff policy must be seen in this context. By setting out the tariff principles, in what some may argue as too detailed a form, it offers regulators and utilities clarity and plugs procedural abuses that have dragged the sector into its current financial morass. A common misuse is in setting targets and operating norms, which now have to be pre-determined (and not substituted by actual outturn) and achievable i.e., in relation to its current performance or baseline data as it becomes available. Further, regulators must consider all power purchase costs as legitimate, permitting a justified variation in power purchase mix, and avoid unreasonable disallowance.

Cost disallowance, over the years, had become an unfortunate but handy tool to avoid tariff increases and subsidy payments, which left utilities strapped for cash and banks holding bad debts. The revised policy encourages regulators to suggest tariff scenarios for different levels of efficiency to create the “political will” to combat theft and minimise the prospect of large tariff hikes.

The policy offers regulators a powerful set of tools to improve financial discipline, which if used diligently can turn around the sector. The policy reiterates that state regulators can revert to a full-cost tariff if subsidy support committed by state governments is not paid in time. The policy removes the scourge of regulatory assets i.e., costs incurred today cannot be kicked down the road to future generations, other than in exceptional situations, and must be recovered within 7 years.

Competition receives strong support in this policy. Although open access has been permitted since the Electricity Act 2003, various policy, regulatory and utility actions created barriers and limited competition. Such actions are unpredictable and discretionary, and tend to deter investments. The policy cuts through this by setting clear limits on the cross-subsidy surcharge (20% of relevant category tariff), additional surcharge (to actual stranded cost), and standby arrangements (125% of normal tariff), to give retail competition a renewed boost.

This has a serious implication for distribution utilities, both state-owned and private, which will suffer an exodus of large consumers. Already, the move of Indian Railways to source cheaper power has hit the revenue base of utilities. While the policy allows for a phased reduction, states must act soon to bring down cross-subsidy to within 20% of cost of supply to stop eroding their consumer base. The policy proposes the subsidy shortfall be paid directly or via prepaid meters and funded through electricity duty, which is levied on the consumer and is a more assured source and, unlike cross-subsidies, does not distort competition.

Competitive bidding for all power procurement by distribution licensees remains undisturbed except for some one-off provisions to permit expansion or attracting investments. Regulated tariff determination is limited to projects using waste-to-energy, coal washery rejects and hydro, subject to conditions, inter alia, that licences are awarded on a competitive basis.

Renewable energy, expectedly, receives strong support in the policy. Distribution companies and other obligated entities must source equivalent of 8% of their consumption from solar power by 2022. This is a significant step up from current obligations. States rich in renewable energy can continue to invest in it as wind and solar power sold using the interstate transmission system is exempt from network charges and losses.

Conventional power generators have an interesting growth and diversification opportunity under this policy. New coal power projects are required to build and contract renewable energy with procuring utilities. Existing thermal companies too can expand their portfolio by building new renewable generation on regulated tariffs.

The Tariff Policy 2016 has a powerful intent, to commercialise power utilities so that they are financially sustainable and offer services of global standard. The policy equips regulators to deliver on this and offers market participants better clarity. Utilities gained from lower fuel cost and lesser debt burden with the UDAY scheme. The governments have a golden opportunity to drive distribution reforms now when the chances of success are the best.

Kameswara Rao
The writer is Partner– Energy, Utilities and Mining, PricewaterhouseCoopers India

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