The Hindu Business Line : Volatile politics puts Karnataka power reforms on back burner

Current dilemma
Private sector looking only for minimum guaranteed return of about 14% from State.
Finds power sector unattractive now due to high distribution losses.

C. Shivkumar

Bangalore, Oct. 11

Political instability has gridlocked power sector reforms in Karnataka and equity divestment proposals of the five distribution companies (discoms) are virtually on hold.

State Government officials said there were no takers for the Discoms as major issues on protecting private sector on equity were not “reconcilable”.

This implied that the State Government was not in a position to guarantee any minimum returns to private sector equity investors.

Besides, for the State Government caught in the “pushes and pulls of coalition politics”, power sector reforms were the least of its priorities and there has been little discussion on the subject during the last 20 months.

For minimum returns

The officials said that at best, the private sector was looking only for a minimum guaranteed return of about 14 per cent. This implied that power supplies to directed sectors, as in the case of the agriculture, would have to be offset by subsidies from the State Government through budgetary provisions.

The sources said that the State Government was unwilling to make any such commitment. In fact, under the distribution margin system that was proposed initially, the State was expected to make provisions for meeting the minimum Return on Equity of private sector investors.

For the current financial year, the actual subsidy demands by all discoms in the State were expected to be in the region of about Rs 2,500 crore.

However, the provision in the Budget for the current year was only for Rs 2,100 crore.

Coupled with the high cost of power procurement, most of them are expected to fall far short of the prescribed Return on Equity of 14 per cent.

Loss impact

What also made the power sector unattractive to private sector investors now were the high distribution losses. The losses are currently as high as 30 per cent in the case of the Gulbarga Electricity Supply Company (GESCom). The lowest losses were in Mangalore Electricity Supply Company (MESCom). The losses were largely on account of unmetered connections including those in the agriculture sector. There are currently about 15.5 lakh irrigation pump sets in the States. At least 7 per cent of these pump sets were unmetered connections.

Assuming a specific consumption of about 5,100 units per pump sets per year, the average losses translated to about 425 million units a year or a revenue loss of about Rs 2,100 from the unmetered connections, through under recoveries.

Where some of them were registered, the billing was done on the basis of a specific consumption of 5,100 kilo watt hours, though the actual specific consumption was in excess of 7,500 units.

Resistance to hike

Besides, the sources said, State Government was reluctant to further push tariff hikes in the farm sector or to start aggressive metering. Part of the reason for the resistance to tariff hikes was on account of the already high average power tariff in the State.

Average power tariff in Karnataka is estimated at Rs 3.40 a unit, among the highest in the country. That clearly cut the flexibility to hike tariffs to meet Return on Equity expectations. The alternative was only to cut costs and cut losses.

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