The Hindu Business Line : Power reforms unplugged?

Avoidable tinkering: The demand for removal of the clause in the Electricity Act that provides for the elimination of cross-subsidies is short-sighted, as such a step could short-circuit the SEBs. — G.R.N. Somashekar

THE PROPOSED amendment to the Electricity Act, 2003 to remove the provision for elimination of cross-subsidies and give time for further extension for the reorganisation of State Electricity Boards (SEBs) will negate the very objective with which power sector reforms were undertaken.

Reforms in the power sector were initiated because the performance and the financial viability of the boards had started deteriorating over time and the lack of funds available with the utilities was affecting the financial viability of the sector as a whole.

The root of the problem was the SEBs' blatant disregard for commercial principles in their operations, particularly the high level of cross-subsidisation that skewed tariff structures, primarily on account of their ownership structure.

The heavy cross-subsidisation led to increased captive generation, leading to a decline in revenues from the subsidising industrial consumers. Reorganisation of these SEBs and institution of commercial principles in their operations was, therefore, essential to ensure the very survival of the utilities.

Among all the power sector reforms, perhaps the most crucial is the removal of cross-subsidies by way of rationalisation of tariffs.

Despite the focus on distribution reforms since 1998 and the efforts to remove cross-subsidies, the fortunes of the SEBs changed little. The average (all-India) unit cost of power supply increased from 215.6 paise/unit in 1996-97 to 350 paise in 2001-02. But the average tariff increased from 165.3 paise/unit to 239.92 paise in the same period. The average cost of supply was more than the average realisation for 29 out of 36 utilities in FY 2002-03.

Further, a report by Power Finance Corporation shows that in 2002-03, only 15 utilities showed profits and 18 losses, with six recording zero profit/loss on subsidy booked basis. But on the basis of subsidy actually received, the record is worse since the governments of Kerala, Rajasthan, Tamil Nadu and Karnataka had not released subsidy.

Against this dismal picture, the Electricity Act 2003 brought a ray of hope for the SEBs/utilities. It provided the very tool the SEBs needed to break away from the constraints that held them back. Sadly, the opponents of reforms have made it their agenda to ignore the essence and objectives of the Act, which aims to improve the efficiency and financial health of the State power utilities and ensure their survival.

They have been stalling reforms by equating restructuring with privatisation.

Restructuring which entails changes in structure of the SEBs does not automatically imply privatisation, which means a change in control of the utility and ownership. In fact, the Act, in no way, compels States to privatise power utilities.

One of the proposed amendments to the Act is the removal of the provision for elimination of cross-subsidies. It is well-known that cross-subsidies, while threatening the competitiveness of industry and commercial enterprises, have also compelled timely-paying customers to opt for captive generation, adding to the miseries of the SEBs.

According to reports, the total installed capacity in captive generation has increased by almost 74 per cent from 1993-94 to 2002-03. Also, the share of domestic and agricultural consumers, who get power at subsidised rates, has been progressively rising over the years compared to the decline in the share of industrial consumers.

In the early 1970s, subsidising consumers constituted 74 per cent and the subsidised consumers only 26 per cent. In 1999, the figures were 40 per cent and 60 per cent respectively.

One does not need statistical tools to figure out that demand from industrial consumers, the cash cows for the State utilities, has declined over the last few years. In such a situation, the pressure of cross-subsidies on the finances of the State utilities cannot be ignored. Removal of cross subsidies, as provided for in the Act, is, therefore, of utmost importance.

If the cross-subsidies are not eliminated, the above trends will only accelerate with more industries taking recourse to captive generation. Moreover, the provisions of open access will allow industrial consumers to procure power from sources other than the SEBs on payment of wheeling and cross-subsidy charges, which will be fixed by the regulator. How the SEBs will supply power to the subsidised category in a scenario where there are no subsidising consumers left and the cost of supply is not recovered is anybody's guess.

They may either have to stop supplying power to the subsidised domestic and agricultural consumers or inflict tariff shocks of unimaginable magnitudes on such consumers. Is this what opponents of reforms call consumer interest?

If cross-subsidies are not eliminated gradually, as the Act seeks to do, the financial viability of the already funds-starved State utilities will deteriorate. This will also impact investment in the sector, as under such circumstances, investors will not be able to sell power at the right price.

Moreover, there will be doubts over the ability of the State power utilities to pay even for the power that is sold. Given the spiralling effect that the finances of the State utilities have on the power sector as a whole, it is only a matter of time before the entire sector plunges into darkness again.

The amendment to the Act to remove the provision of elimination of cross-subsidy will only perpetuate the trend of cross-subsidies. The State power utilities and regulators, may either unduly defer the elimination of cross-subsidy or indefinitely delay the process. It is time we realised that despite several initiatives towards reforms, the situation in the power sector continues to be worrisome.

The slow progress of distribution reforms is a matter of concern as without the removal of cross-subsidies, the sector will not be financially viable and will not be able to achieve the required levels of public investment or attract private investment.

Who knows, the cross-subsidy levels may go back to the levels of the 1980s or the 1990s. Incidentally, that will also mean that days of power shortages and high transmission and distribution losses will be back. That would be time to write the epitaph for power sector reforms.

(The authors are Area Convener, Regulatory Policy, The Energy and Resources Institute and Senior Analyst, ICRA Management Consulting Services.)

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