Why Are Power Sector Reforms Unable To Reform The Sector?

The financial mess in India’s state government-run power distribution (DISCOM) sector has been a thorn in the flesh of every government in the Centre since liberalisation.

At the root of it is the tendency of state-level politics, of all hues, to offer free lunches to voters.

This tendency is only rising with marked progress in rural electrification over the last few years.

Arvind Kejriwal’s Aam Aadmi Party (AAP) made it a rule to promise a cut in the electricity bill for the residential sector too, even though economic logic demands residential tariffs be revised sharply upwards.

‘Rewari Culture’

Prime Minister Narendra Modi is right in calling this out as ‘Rewari culture’ and making a renewed attempt to bell the cat.

However, the job seems to be easier said than done. The Ujjwal DISCOM Assurance Yojana (UDAY), rolled out in 2015, failed to change the very same culture.

In the second round, Prime Minister Modi is now back with a range of arsenal as is visible in the parallel rollout of Revamped Distribution Sector Scheme (RDSS), strengthening of the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022 and introduction of the Electricity (Amendment) Bill 2022.

The electricity bill is now under the consideration of the standing committee. It primarily wants to open the retail market of power by opening the network to multiple operators, enhancing the legal status of the state-level regulator and bringing him out of the clutches of local politics.

The last one is highly needed.

The Rs 300,000 crore RDSS is not a financial restructuring scheme. It is aiming for a technical upgrade — like prepaid smart metering at the customer end, system metering etc — to help distribution utilities plug leakages and improve realisation.

The change in late payment surcharge (LPS) rules was an executive decision. The rules were invoked in restricting nearly a dozen states in participating in spot trade in electricity exchanges, till they clear the dues to power generation companies (GENCOS).

The decision sent shockwaves through the political circles. If the pressure is sustained, this rule might prove effective in disciplining DISCOMs who are at the centre of a $ 75 billion or Rs 600,000 crore hole in the national economy.

Approximately Rs 110,000 crore is unpaid to GENCOs. The rest are receivables to the DISCOMs in the form of unpaid subsidies and ‘regulatory assets’.

The latter is an innovation by states, in collusion with the state-level regulators, to delay due revision in tariffs.

DISCOMS either turn to banks and/or delay payments to GENCOs, to mitigate the cash shortfall. The state-run GENCOs use the political handle to pass the burden to coal companies. Private GENCOs suffer cash crunch. In the end, the nation’s banking sector pays for the ‘Rewari’.

Separate Tariff From Subsidy

Independent India avoided the temptation of building an artificially low auto-fuel-based economy as was prevalent (then) in the US and was copied by Pakistan to their peril.

However, it designed electricity tariffs in socialistic lines on the ‘rich-subsidises-poor’ formula. Large industrial customers are considered rich. On top of everything, states were granted near complete rights in electricity distribution.

Together they created a political economy that has proven itself to be extremely detrimental to national interests. The Electricity Act 2003, tried to correct part of it by setting a regulatory goal to eliminate cross-subsidy. But the 2007 amendment to the act deleted that provision.

The damage is manifold. The first casualty is transparent tariff discovery. DISCOMs don’t need to invest in extensive downstream infrastructure to serve a large industrial customer. On the contrary, the smaller the customer, higher the technical and commercial costs.

This is exactly why residential customers pay higher tariffs than the industry in the West. India has a way larger population to serve and the number of small customers has gone up dramatically in the last decade. But the tariff is kept artificially low.

Officially, the gap is mitigated by up to 20 per cent cross-subsidy. In reality, the gap is significantly wider than the allowed subsidy band.

Moreover, several studies indicate that the Indian industry is losing export competitiveness due to relatively high electricity tariffs.

It means there is little room for any further cross-subsidy and the ruling politicians in states — particularly those aspiring to attract investment — know that.

As a shortcut solution, they are abusing the subsidy provision and the political control over the state regulator.

The state regulator deprives just tariff to the DISCOM both in terms of announcing the advance or projected tariff for a year and, by delaying or denying the truing-up of costs, which is done after the year.

Creating regulatory assets is another trick. To complete the cycle, the state subsidies announced with much fanfare rarely come in time. As if that’s not all, despite such rampant financial engineering, the average realisation in India is Rs 0.39 a unit short of the average cost.

The need of the hour is the removal of cross-subsidy and move to a market-determined tariff regime. State governments should be eligible to give subsidies but only as direct benefit transfer (DBT), to bring an end to the nexus. The new bill largely bypassed these issues.

Discipline Habitual Offenders

It is also to be considered if the nation should take exception to habitual offenders. A closer look at the numbers will reveal that the majority of the total outstanding to GENCOs is contributed by select states like Tamil Nadu, Maharashtra, Andhra Pradesh, Telangana, Rajasthan, etc.

These states have always featured on the list, irrespective of whichever party is in power. Ask coal companies, and they will tell you that they have always had a hard time recovering dues from Rajasthan. Private power producers were traditionally wary of payment delays by Tamil Nadu.

And it is not that these states are any ‘paupers’. Tamil Nadu and Maharashtra are India’s top industrialised states with their own-tax revenue clocking over 70 per cent of the total receipts. But when it comes to unpaid bills to GENCOs, these two states contribute nearly half of the total.

The reasons are not hard to find.

Over the last two decades, there were eight changes in the position of chief minister of Tamil Nadu. It is questionable if the electricity tariff was revised even half the number of times.

The state utility approached the regulator for tariff revision in 2010, after a gap of seven years. In July 2022, the Tamil Nadu Generation and Distribution Corporation (Tangedco) hiked tariffs after eight years. Not to mention that such hikes were not adequate.

Essentially, therefore, a few states made it a practice to enjoy free lunch. Every bailout gave them the opportunity to pile up fresh outstanding dues. The Comptroller and Auditor-General recently pulled up the DISCOM in Tamil Nadu for failing to turn around despite availing UDAY. The buck must stop here.