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  1. 20 percent cross-subsidy cap: Industrial power cost to reduce by 14-20 percent

20 percent cross-subsidy cap: Industrial power cost to reduce by 14-20 percent

Move to disallow AT&C losses above 15% in tariff orders threatens to add Rs 32,000 crore per year.

By: | New Delhi | Published: February 13, 2018 6:35 AM
power tariff, power sector, economy, india, tamil nadu, india The situation in Tamil Nadu, which has one of the highest commercial and industrial power tariffs, can illustrate the situation.

The power ministry’s plan to cap cross-subsidy — additional tariffs paid by industrial and commercial consumers to subsidise households and farmers — at 20%, effective January 2019, could reduce the cost of electricity for businesses by up to 14-20%. At a time when raw material costs are high and pricing power is subdued, this could help companies increase earnings. Among the states, Tamil Nadu keeps the cross-subsidy at the highest level of 60%, while in Uttar Pradesh it is around 40%, one of the lowest.

However, the move will dampen the receipts of cash-strapped electricity distribution companies, which, helped by the revival scheme UDAY, are struggling to cut losses.

Besides, the ministry’s decision to compute tariffs assuming aggregate technical and commercial (AT&C) losses of 15% — the actuals are higher; the reported national average is around 23% although there are wide variations across discoms — is also threatening to diminish discoms’ revenue realisation by a substantial Rs 32,000 crore annually (assuming, based on industry inputs, the monetary value of every 1 percentage point change in AT&C losses to be around Rs 4,000 crore). To put this in perspective, the aggregate book losses of state-run discoms in the country were `50,907 crore in FY16. States with higher AT&C losses (for example, Jharkhand at 39.3% and Bihar at 38.4%) would face more problems.

Currently, regulators compensate the discoms for bulk of their actual AT&C losses. To ward off the threat of disallowance of AT&C losses, discoms will have to make aggressive reduction in these losses with higher efficiencies in billing and collection.

If states comply with the power minister RK Singh’s direction to limit cross subsidy at 20%, commercial and industrial consumers, who pay hefty power tariffs as high as Rs 8-12 per unit, might see rates coming down to around Rs 6.50 per unit. The average cost of power supply at the national level was Rs 5.43 a unit in FY16. Therefore, cross-subsidy at 20%, across all categories, would roughly translate into Rs 1.10 a unit.
Kameswara Rao, partner, PwC, said, “Regulators have had a long time to gradually rationalise tariffs to cost-reflective levels but have refrained from doing so, leaving a huge backlog.”

The situation in Tamil Nadu, which has one of the highest commercial and industrial power tariffs, can illustrate the situation. The average cost of power supply in the state was determined to be Rs 5.85 a unit for FY18. A reduction in cross-subsidy surcharge to 20% from 43% now would bring down industrial power tariffs in the state to Rs 7.02 a unit from Rs 8.37 a unit at present.

The latest tariff order by the Tamil Nadu Electricity Regulatory Commission (TNERC) admitted that “given the existing level of cross-subsidy, it looks difficult to reduce them to +20% of the average cost of power supply for all categories within a short span of time”. Industrial consumers used 27% of the electricity sold in Tamil Nadu in FY16 but contributed 53% of the revenue.

The National Tariff Policy, 2016, specifies that state electricity regulatory commissions should lay a roadmap to align tariffs within ±20% of the average cost of supply. However, as per the TNERC roadmap, this can be achieved only in 10 years to avoid a shock to consumers.

As far as AT&C loss reduction is concerned, the regulators prescribe glide paths to discoms; since these paths are not strictly adhered to, there is of course an element of disallowance of the (AT&C) costs.

According to Rao, the current ownership structure of discoms is not conducive for them to drive aggressive AT&C loss reduction. “Also, the claims some states make of having reduced losses has to be tested, because it is easy to hide them under unmetered supplies For this reason, a distribution franchisee which has both the incentive to reduce losses as well as stricter monitoring protocols is the right approach.”

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