PM must debate power tariff hike at NITI Aayog: Pramod Deo, former chairman, CERC

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Updated: April 3, 2015 9:16:40 AM

In the 1990s, the SEBs’ situation had become precarious. Then it was decided at the NDC to constitute a committee which recommended that tariff setting should be apolitical and should be done by an independent authority.

The former chairman of the Central Electricity Regulatory Commission, Pramod Deo, says that the Centre must utilise the NITI Aayog platform for an extensive debate on raising power tariffs. In a wide-ranging conversation with Santosh Tiwari on the problems plaguing the power sector, he explains how the ultimate solution lies with the chief ministers.

Do you think the government’s decision to provide subsidies for gas-based power plants from the Power System Development Fund is a good idea?

This fund was created mainly for strengthening transmission. If there are any important links, and money could be used for that purpose, it has to be used obviously to help the states. This is a fund which gets created because of imbalances such as congestion charges. We did not have enough transmission capacity; naturally there was congestion and this money has accumulated. The reasoning given now is that this money can be used for gas-based peaking power plants. All gas-based power plants are combined cycle plants. What you require now is a peaking power plant where you will be using gas in the open cycle and not the combined cycle. That improves the thermal efficiency, but the purpose is not solved. The government had appointed a committee under the chairman of the Central Electrical Authority (CEA), which must have given its report. The report should be shared with the states, and it should be in public domain. As the peaking power has a different value, if you have say R7-8 tariff for that peaking power, it would be justified. In the current scenario, these will again be run only as a restored plant, and the purpose would be defeated. The aim should be to not only meet the peaking power demand but also use the plants optimally.

In the ultimate run, gas supply has to improve as the current subsidy regime announced can just be a short-term fix…

That is so because we will always be importing gas, so the cost is very high. This has been the way out—subsidise it and ask power developers to take a hair-cut. They won’t earn any return on equity—they would at least be able to repay their loans, and that way the financial institutions would be able to help. I think, in any market economy, it can only be a short-term solution. The question is how to get over it? It may be possible to say that for two years we don’t earn any return on equity, but beyond that it is very difficult to justify that.

Another problem is the bid documents for case 2 power plants and UMPPs have been finalised but no private player bid for the two UMPPs, Odisha and Cheyyur. How to fix that?

I cannot really comment on that because the government has appointed a committee on case 2, which includes UMPPs, bid documents. I am a member of that committee. We will be giving the report soon. As far as case 1 is concerned there is no change, the government feels that the case 1 documents are quite satisfactory.

The financial restructuring plans (FRPs) have got stuck because states are reluctant to raise tariffs. How can this be corrected?

Here the issue is the political judgement of chief ministers. You supply good quality power to your consumer, politically that is more rewarding; or keep the cost low, which means that the tariff will not go up, which really entails that you don’t supply quality power. You resort to load-shedding, and also discriminate, you supply 24×7 power to state capitals and cities, and in the rural areas, power situation becomes worse. Those are political decisions. As per law, the distribution companies owned by states can’t make that discrimination, but that is the practice being applied everywhere. Separation of agriculture feeder lines is aimed at that, so that the supply to farmers in rural areas is controlled and managed. Farmers require power for 7-8 hours but small businesses like poultry and dairy need uninterrupted power—they should not suffer. That being the case, you have to decide how much increase in tariff you can allow. Then the industry subsidises tariff for agriculture. If you have to support industry and Make-in-India, this is not a good scenario—you have to think how can industry subsidise agriculture if it has to become globally competitive. The Maharashtra chief minister said that the tariff for industry should be reduced but how can you reduce tariff for industry if it cross-subsidises agriculture. This is a political decision.

This means that FRPs are meaningless…

That is why I gave you the example of how political economy dictates decisions of the state governments and that the discoms are nothing but owned by the state governments.

Don’t you think a better idea would be to handle this through the cooperative federalism model being talked about by the Prime Minister?

That is why NITI Aayog has the regional committees of chief ministers. This is the forum where the Prime Minister can discuss these issues and have a debate. Again going back into history, it was in the 1990s when the SEBs’ situation had become precarious, then it was decided at the National Development Council to constitute a committee under Sharad Pawar which recommended that the tariff setting should be apolitical. It should be done by an independent authority and, most importantly, it was decided that the agriculture sector must pay at least 50% of the average cost of supply. That is how the 1998 Electricity Regulatory Commission Act came. You need to specify how the agriculture sector would be subsidised.

Do you think that the Gujarat Jyotigram Yojana can work for the entire country?

The Gujarat model has been replicated in Maharashtra and Karnataka. Today, Maharashtra is in a comfortable position but again tariffs have to go up. You have PPAs now and the cost of electricity is high because coal cost has gone up and you have a shortage of coal. How do you keep costs low? Reducing costs means privatisation, but that can’t be done across the state, it can be done only in pockets, in urban and industrialised areas. These are the places where private players would be interested as these are the revenue earning areas.

Against the backdrop of coal auctions, the government is likely to cap the cost of power plants to prevent rise in tariffs. Is that practical?

For that they will have to amend the case 1 bid documents. For the existing ones in which you already have PPAs, they are covered under the law. Changing the law could lead to litigation.

Which are the major areas in the Electricity Act that require change?

This again goes back to the basic question, how would you subsidise agriculture? If you go for open access, the paying customers will go away from the discoms, making cross-subsidisation difficult. So you have to address the basic problem and only chief ministers can do that. Let everybody sit together and get to a workable situation. Electricity, for all practical purposes, is a state subject. The Centre can only help but it can’t get into the role of a supplier of electricity.

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