In the Delhi elections, tall promises have been made by the contesting parties on reducing electricity rates in the city. Without going into the details of why such reduction is not possible in Delhi without resorting to huge subsidies from the state government’s budget, it is sufficient to say that the entire political class believes that bringing down electricity rates will pay rich electoral dividends.

This belief is reflected in the actions of most state governments and, inter alia, of independent state electricity regulators. Statutorily, all state regulators should have come out with annual tariff orders by end of the last financial year, i.e., March 31, 2014. But this would have been just before the Lok Sabha elections. Hence, they discussed the issue of tariff revision when the code of conduct is in force in the Forum of Regulators (FOR) meeting and referred it to the Election Commission (EC). Most of the regulators, being retired civil servants, knew very well what will be the response of the Commission. They were advised that EC will decide the matter on a case-by-case basis when such references are received from state regulators separately. This was despite the fact that in the past elections, the Central Electricity Regulatory Commission and some state regulators had declared tariffs during the election period without consulting the EC. Tariff determination being a statutory and time-bound function, it cannot be subject to other laws unless there is a specific overriding provision in those laws. Such delaying tactics no doubt suited the political executive in all states irrespective of their political affiliation. What is shocking is that Delhi regulator, after having declared tariff for the current financial year before even the Delhi state elections were declared, withdrew it the very next day!

Even after the national elections, only 22 of 29 states have issued tariff orders so far for this financial year and the increases are, on average, a low 6%. This is smaller than last year’s modest hike of 7% and way below the 14% seen in the previous financial year. In Uttar Pradesh, despite the tariff revision of 8.9%, the uncovered revenue gap remains high at R11,900 crore, and the UP regulator has allowed only a 5.6% regulatory surcharge whereas 16% regulatory surcharge was needed to cover the gap. What is more surprising is that regulators in seven states have opted for no revision at all for distribution companies.

This performance of electricity regulators needs to be seen against the central government’s official press release on completion of its first 100 days: “This Government inherited a host of legacy problems in the power sector. Over 30 crore Indians do not have access to electricity, which has a debilitating impact on healthcare, education and income-enhancing opportunities, particularly for women and children. Power cuts have become a part of daily life. Despite such enormous demand for electricity, coal and gas-based power plants, where lakhs of crores have been invested, are either lying idle or performing sub-optimally. State electricity boards have an accumulated debt of over R3,04,000 crore and their losses are R2,52,000 crore—putting them at the brink of financial collapse.”

The Electricity Act 2003 sought to limit government interference in utility operations, yet state governments are still a major presence with a generally detrimental impact on utility operations especially of distribution companies (discoms). They have exacerbated utilities’ financial difficulties by compelling them to borrow to cover operational expenses (given the revenue shortfalls due to under-recovery of power purchase costs and incomplete or late subsidy payments by state governments), by applying political pressure to keep tariffs low, and by ‘ordering’ discoms to purchase power during elections to keep voters happy. There are no two opinions that state regulators are statutorily mandated to set cost-reflective tariffs annually. But the old habit of the regulators (who are either retired chief secretaries or technocrats heading state utilities) to be ‘guided’ by political masters has resulted in irregular and inadequate tariff increases over the past decade, resulting in lowered cost-recovery and increased regulatory assets.

Assuming that the proposed amendments incorporated in the Electricity Amendment Bill 2014 improve accountability and transparency in the working of the electricity regulatory commissions and they start delivering, how big is the political challenge of increasing electricity tariffs?

Today, the gap between average cost of supply and realisation is not less than R1.There will also be a need for upward adjustment of consumer tariffs to service the additional generation, transmission and distribution capacity needed to meet rising future electricity demand. In addition, there are emerging a whole host of new issues that will put further severe upward pressure on tariffs. Dependence on imported coal to the extent of 30% of the requirements, resulting in increase of generation costs by 10-15%; the inevitability of needing high-cost gas-based generation to meet peak power requirements in the absence of adequate storage based hydro capacity; the additional cost of compensatory flexible (gas or hydro) capacity and/or electricity storage capacity to optimally integrate non-firm wind- and solar-based electricity generation; the additional amounts required for servicing the sub-transmission and distribution capacity being created under Deendayal Upadhyaya Gram Jyoti Yojana with expected investment of about R43,000 crore for feeder segregation for agriculture and domestic usage in rural India, and the Integrated Power Development Scheme with expected investment of about R32,600 crore for strengthening of sub-transmission & distribution infrastructure, including metering in urban areas and underground cabling are some of the examples of issues that would put additional upward pressure on the tariffs.

With the consumer already burdened with higher tariffs, pressure on state governments to provide increased subsidies will mount and may erupt as a major contentious political issue. However, with the state governments already burdened with subsidy to agriculture as well as with meeting their obligations under the Fiscal Responsibility and Budget Management Act, it would be practically impossible for them to meet any new demand for still higher levels of subsidies. Any solution, therefore, will necessarily have to focus on the cost-side of the operations of the power sector for securing overall sustainability of the power sector. We shall examine later whether the proposed amendments to the electricity law can do that.

By Pramod Deo

The author is former chairman, CERC