Power policy puts the cart before the horse

A few weeks ago, the government announced that a new tariff policy under the Electricity Act, 2003, would be introduced shortly. The policy appears to have been delayed but it may be mentioned that tariff policy is prepared under section 3 of the Electricity Act and it was first drafted in January 2006. It has undergone amendments in the past, in 2008 and 2011. A draft policy incorporating the latest proposed amendments was put up in the public domain for comments in May 2018 and a perusal reveals that the amendments are pro-consumer and attempt to deliver power at affordable rates with due emphasis on the quality of service. The question, however, is whether they can be implemented, especially when they impinge upon the prerogative of the state governments and the state electricity regulatory commissions. Perhaps this is what is causing the delay in finalising this policy!

The foremost question is whether the tariff policy is mandatory or discretionary. While the Central government holds the view that it is mandatory, not all states agree to this proposition. The only time this premise has been mentioned in a court of law is when the apex court, while dealing with a bunch of petitions concerning a different issue, had stated in its order of April 11, 2017, that the tariff policy has the force of law. Many feel this remark is obiter dictum — that is, it is an opinion expressed by the court while examining a different issue, and hence would not be a part of the operating portion of the order as this issue itself had not been debated upon during the course of arguments. The government, however, in its recent draft Electricity (Amendment) Bill, 2020, has mentioned in several sections that the provisions have to be in conformity with the tariff policy, in a way reiterating that the policy is mandatory.

Among the amendments being discussed is the proposal to reduce the number of consumer categories to five to make the tariff schedule less complicated and more transparent. To give an example, the number of consumer categories in Andhra Pradesh was in excess of 90. It is seen that in many states some of the categories account for less than 1 per cent of the discoms’ revenues, thus defying the logic of having a separate category.  Moreover, there is no consistency across states. While aquaculture is treated under industry in Andhra Pradesh, it is under agriculture in Maharashtra. There are several such examples.

The policy also states that tariffs would be based on voltage. This means that consumers drawing power at a higher voltage will pay less than those at a lower voltage. Consequently, an industrial consumer will pay less than a domestic consumer. The differential pricing is because voltage has to be stepped down to 220 volts for a domestic consumer, which necessitates more capital expenditure by the discoms. This concept is in line with international practice and a crucial one in making Indian industries more competitive globally. The policy, however, could add to discoms’ financial burden. In the current regime, industrial consumers pay a tariff way above the cost of supply and this revenue is used to provide cheaper power to agriculture and lower-end domestic consumers, among others. 

With tariffs being linked to voltage, the discoms will no longer have access to this revenue to continue providing cheaper power to such consumers. To do so, state governments will have to step in and provide more subsidy, over and above what they have already been doing, under section 65 of the Electricity Act, 2003. The states, put together, provided subsidy in excess of Rs 85,600 crore in 2017-18 (audited accounts beyond 2017-18 are not available). This gives an idea of the quantum of resources required.

The proposal to calculate retail tariff assuming a 15 per cent loss level is a pro-consumer move. It means consumers are not expected to finance the inefficiencies of discoms. The draft tariff policy states that all discoms have to bring their loss level to 15 per cent or less immediately and to 10 per cent within the next three years. If a discom is unable to reduce its losses, its financial position will worsen and since most discoms are public-owned, there will be pressure on the state governments to improve their books. Such measures, therefore, can be effective only in the case of private discoms, as has been seen in the case of Delhi. In 2017-18, out of the 55 discoms being monitored by the Power Finance Corporation (PFC), there were about 40 whose loss level was in excess of 15 per cent, 27 had a loss level exceeding 20 per cent, 16 had in excess of 30 per cent, and six discoms had a loss level of over 40 per cent.

The loss level for all discoms put together was 22.62 per cent in 2013-14, and has remained almost static at 22.31 per cent in 2017-18 (PFC data). So, it would be a herculean task for several discoms to bring down their loss levels to 15 per cent within a reasonable time frame.

Finally, a word on the levy of fines on discoms for deficiency in service, including load-shedding. This is expected to bring in an element of accountability but, undoubtedly, it would be resisted tooth and nail by the discoms. Having to prove that load-shedding was gratuitous will be a difficult proposition. This is going to increase litigation before the Consumers’ Grievance Redressal Forums. For such a system to work, the institutional mechanisms have to be strong, which is not the case in India.

To sum up, though the amendments to the tariff policy are pro-consumer, they have a better chance of effective implementation in the private sector. The first step, therefore, should be to privatise distribution. In the absence of privatisation, the proposed draft tariff policy may well result in a case of putting the cart before the horse.

The writer is former member (Economic and Commercial) Central Electricity Authority

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel