The union power minister, RK Singh has convened a meeting of state power ministers to discuss comprehensive reforms in the power sector to discuss among others measures (i) to uphold sanctity of power purchase agreements [PPAs] between generators and state electricity boards [SEBs]/power distribution companies [PDCs]; (ii) curbing wasteful electricity consumption; (iii) remove cross-subsidy surcharge and (iv) direct benefit transfer [DBT] of power subsidy.
Before discussing the reforms at the outset, it is important to take cognizance of the problems facing the sector and the source of their origination.
First, SEBs/PDCs, the life-line of power sector are incurring huge losses – a phenomenon seen for over two decades. Unable to make timely payments to power generators – public sector undertakings [PSUs] and independent power producers [IPPs] – they often face disruption/cut in supplies. This together with their inability to keep their own supply and distribution systems in a healthy state comes in the way of maintaining uninterrupted supply to the consumers.
Second, a big chunk of the installed capacity [about 50% according to an estimate] most of it with IPPs remains un-utilized. This is due non-availability of fuel [relevant mostly to gas based generation units] and unwillingness/inability of SEBs/PDCs to sign PPAs with generators. This has led to huge outstanding debt on the balance sheet of IPPs and in turn, affected the banks by way of unsustainable increase in their non-performing assets [NPAs].
Third, the industries and businesses including small and medium enterprises [SMEs] face exorbitant tariff averaging Rs 7-8 per unit – in some cases even touching double digit. This makes goods and services costly and affects competitiveness of Indian manufacturers and service providers particularly in the international market. This has ominous implications for current account deficit, fiscal deficit, inflation and overall macro-economic situation.
Fourth, there is a huge wastage of electricity which arises due to excessive use by farmers on the one hand and large-scale technical and commercial [T&C] losses on the other. T&C loss is sophisticated nomenclature used to camouflage theft.
The genesis of these problems lie at the door steps of the states who own and control SEBs/PDCs. The former direct the latter to charge heavily subsidized tariff from farmers [in some states, this is even ‘free’] and poor households. This leads to low realization from sale vis-à-vis cost of purchase, transmission and distribution. To make up for this gap, industrial customers are charged exorbitant tariff.
A provision under Electricity Act [2003] to let a consumer [albeit large] to choose his supplier is frustrated by yet another clause in the Act that forces the consumer to pay a cross-subsidy surcharge to the SEB/distribution company that he wishes to leave. Hence, the latter continue to charge high tariff.
Despite charging high rates from industries, distribution companies incur huge loss. The losses are aggravated by theft. Households – mostly living in slums/jhuggis – are encouraged to steal by politicians who use them as vote banks at the time of elections. Since, the political establishment is a collusive partner, the theft continues unabated.
The losses also increase due to high cost of power. Under extant system, while returns are guaranteed, fuel cost is ‘pass-through’/on actual. A few years ago, for ultra mega power plants [UMPP], union government tried with tariff based competitive bidding [TBCB] under which an IPP quotes a fix tariff for entire life of the project. This idea met with a fiasco and has been abandoned; instead, bidding is now restricted to fixed cost even as fuel cost is allowed on actual.
The system is prone to misuse and several cases of cost padding including over-invoicing of imported coal have come to light. The process of signing PPAs lacks transparency even as majority of these are done under memorandum of understanding [MoU] route. There are several agreements wherein, SEBs/PDCs have committed to pay exorbitant tariff to the generator.
This has boomerang on IPPs as in several states, distribution companies have stopped signing fresh PPAs. Even subsisting agreements are being opened up seeking reduction in tariff. Encouraged by overall surplus in availability, some states [for instance, Uttar Pradesh] have even threatened cancellation of such agreements.
The centre and states have come out with bail-outs or so called financial restructuring package [FRP] for SEBs/PDCs under which the debt lying in their books is taken over. Three such packages have been granted in last one-and-a-half decade. While, these FRPs allow them to start on a clean slate, the losses build up again as the fundamental causes remain unaddressed.
In short, the problems arise due to all pervasive control on pricing of power, absence of transparent mechanisms for making payments to generators and flagrant misuse of PPAs – mostly signed via MoU route. Large-scale theft encouraged and abetted by political establishment makes matters worse.
Clearly, piecemeal measures won’t work. For instance, upholding the sanctity of PPA makes no sense when such agreements smack of nepotism and corruption. Wasteful use cannot be reined in without setting tariff policies right. Removal of cross-subsidy surcharge is unthinkable with state ordered subsidized supplies to preferred customers [read: farmers/poor households]. DBT sans correction of so many anomalies will be a non-starter.
The government should look for ‘holistic’ solutions. The SEBs/PDCs should be liberated from the clutches of state. They should function as truly ‘autonomous’ entities and run ‘professionally’. They will decide tariff policies and free to sign PPAs. They will have to shed extant differentiated pricing viz. less/nil from farmers/households [state subsidy should be given to them directly] and high from industries. The consumers should be free to choose his/her supplier.
With freedom of pricing, SEBs/PDCs will be able to close the gap between revenue and cost without having to burden industrial users with excessive charge. IPPs will be forced to sell electricity at competitive rates even as shopping of PPAs to make unjust gains will be a thing of the past. Under pressure to sustain on their own [with no state support], SEBs/PDCs will take all necessary steps to eliminate theft.
Implementation of these far reaching reforms require political will. Will Modi who leads BJP – a party that rules over 2/3rd of India – crack the whip?