The central government has set up a committee consisting of the officials of states and power ministry to look into restructuring tariff to reduce burden on industrial units by making large domestic and commercial consumers of electricity pay more [most states categorize households consuming more than 800 units of power a month as large domestic consumers].
The committee will work on classifying consumers in two to three categories and sub-categories to bring transparency in power billing. It will also study the possibility of increasing fixed charges on connected load of domestic consumers to encourage them to surrender un-utilized load. What has triggered thinking along these lines?
At the outset, it is important to know as to why industrial consumers are currently paying more and what is the justification for seeking reduction in tariff applicable to them? The second question has a clear and unambiguous answer.
Electricity is one of the most crucial inputs used by manufacturing and services/business establishments. So, the tariff charged on these has to be necessarily low to enable them stay competitive in both domestic and export markets. This is also a pre-requisite for making India a manufacturing hub – a major goal enunciated by prime minister, Modi time and again.
Keeping cost of manufacturing operations low in this manner also makes Indian export of goods immune to attacks from other countries at WTO [World Trade Organization] unlike ‘subsidies’ that can be easily questioned and contested.
To answer the first question, we need to address many imponderables and there are no easy answers. It is a known fact that power distribution is a ‘monopoly’ of state electricity boards [SEBs] and tariff policies are decided by concerned governments. Majority of them are prone to charging low [heavily subsidized] tariff from farmers [in some states, this is even ‘free’] and poor households.
The states are also incurring the so called transmission and distribution [T&D] losses ranging from 15% to 50%. T&D losses are a sophisticated nomenclature for power ‘theft’ which cannot happen without connivance of state political establishments. Together with subsidized tariff charged on supplies to farmers/poor households, these impose a huge liability on SEBs who are left gasping for suitable cover.
In this backdrop, an easy and most convenient pick is industrial customers who need un-interrupted supply of good quality power so that their plants can be run at full capacity utilization. So, SEBs charge them exorbitant rates, much more than what is warranted even by cost-plus principle. The latter cannot afford to say ‘no’ as they do not have an option of choosing their supplier.
Under amended Electricity Act [2003] [provision for ‘open access’], choice is given to bulk consumers – those with consumption more than 1 megawatt [MW] – to choose their supplier. But, this is defeated by another provision in the Act that requires former to pay an ‘open access surcharge [OAC]’ to the SEB whom they want to leave.
By fixing surcharge at a high level and not reducing [as mandated under the Act], they ensure that post-switch, effective cost of power viz., tariff charged by new supplier plus OAC is higher than amount charged by SEB. That renders switch un-economical and customers have no other option but to remain glued to the SEB.
The irony is that despite charging high tariff from industrial customers, SEBs incur heavy losses as the revenue from sale of electricity is grossly inadequate to fully pay for the cost of purchase and distribution. Since 2000, central government has come out with three financial restructuring packages [2002, 2012, 2015] to address their mounting losses. Yet, the boards have not come out of the red.
This is because the states are in no mood to discontinue low tariff charged on supplies to farmers/poor households; nor they are all that keen to take action against power thieves. Meanwhile, even attempts to rein in cost of generation have not succeeded as independent power producers [IPPs] take recourse to disingenuous ways to inflate their fuel bills which are readily allowed by regulators.
The concern for high cost of power to manufacturing units is genuine. But, shifting the burden to domestic consumers is not the way forward. At present, already, under a progressive rate structure for households, tariff is hiked with increase in monthly use. For instance, on units consumed in excess of 800, the applicable rate is over Rs 8 per unit. These users at the higher end are cross-subsidizing farmers/poor households in much the same way as industrial customers.
In this backdrop, it will be preposterous to further increase the charges on residential customers. It will tantamount to ‘robbing Peter to pay Paul’. Even after that, it is not certain that Paul will get any relief. This is because the causes [hugely subsidized tariff to farmers and theft] leading to excessive burden on him remain un-attended.
Even so, it needs to be clearly understood that ‘services’ constitute more than 60% of India’s GDP. That includes tens of thousands professionals. If, tariff charged from them is further increased from their existing high level, this will seriously undermine their competitiveness. Clearly, it cannot be government’s intention to help manufacturing sector at the cost of making services un-competitive.
In a nutshell, the mandate given to the committee pre-supposes that large domestic consumers are well positioned to pay even higher charges [than what they are already paying] and that this would help in enabling reduction in tariff on supplies to industrial units. Both these assumptions are seriously flawed. Therefore, any move on these lines is bound to result in failure.
A viable and sustainable solution to the problem of high tariff currently charged from industrial units can only be found within the framework of fundamental causes behind it.
Modi – government should goad (i) states to stop giving subsidized/free power to farmers/households and curb theft; (ii) regulators to enforce strict norms for allowing cost to generators. This will help in lowering cost of power to both industry and services. A beginning can be made with BJP ruled states.