Trimming tariffs now is just postponing the problem to tomorrow

The politics over reducing electricity tariff will further deteriorate the already financially stressed distribution utilities (discoms) across the country. For consumers — both domestic and industrial — this will translate into more power cuts.

The Power Ministry fears that all these will lead to the failure of reform moves, such as the financial re-structuring package (FRP) targeted to strengthen the distribution sector.

“Electricity tariff must be ‘cost-reflective.’ Like other commodities, the price should factor in the inflation, considering an ideal situation when other generation costs do not increase. Subsidy is not a long-term solution and discoms must become self-sustainable,” said a senior Power Ministry official, requesting anonymity.

The combined losses of the distribution companies is close to ₹ 92,000 crore and only about a third of this is subsidised by the State Governments. Besides, the ability of the State Governments to advance more subsidies is limited.

These accumulated losses should ideally be sitting in the State Government’s books because the separation between the Government and state-owned distribution utilities is artificial. At some point, such as in the last round of debt recast in 2013, the State Governments have to bail out the state-owned utilities by taking on their outstanding liabilities.

Most State Governments ignore these past liabilities when they evaluate additional subsidies for the ensuing year. Advancing subsidies without a medium-term evaluation of the Government’s finances (taking past liabilities into consideration) mortgages its future against offering short-term benefits to consumers.

Four States — Tamil Nadu, Rajasthan, Uttar Pradesh and Haryana — have implemented FRP. An encouraging part of the FRP is the buy-in of State Governments to allow annual tariff revisions.

Consumers had begun to realise that the power sector in India has real input-side cost push factors, which require tariff revisions on a regular basis. Close to 80 per cent of discoms’ costs are related to power procurement, and fuel costs have escalated over 50 per cent over the past decade.

“One just hopes that State Governments take a more medium-term view and consumers too don’t get swayed by such promises,” said Shubhranshu Patnaik, Senior Director, Deloitte in India.

The AAP government in Delhi has reduced rates by half for domestic consumers, using up to 400 units a month by way of offering more subsidy. Maharashtra followed a similar step. Now, the BJP has promised a 30 per cent decrease in power tariff.

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