The
Aam Aadmi Party's (AAP) election promise to roll back power tariffs in
Delhi followed by similar announcements in Haryana and Maharasthra has
called into question the efficacy of the power sector reforms process
initiated in the country since the early 1990s. This populist
clamour for it merits a re-look at the legal, policy and regulatory
processes in place to determine a "fair" price for consumers and
balancing of stakeholders' interests in the determination of tariffs,
that are mandated by regulatory commissions. The ad hoc political
commitments to "slashing"
power tariffs
by an arbitrary percentage point, in fact, makes a mockery of the
processes that have been developed in the sector. One should introspect
and analyse the root causes for the failure of processes that have been
put in place and take corrective action.
The
Electricity Regulatory Commissions
(ERCs) are empowered to set electricity tariffs under Section 61 of
the Electricity Act (EA) 2003 which states that the methodology and
principles followed have to provide for "safeguarding of consumers'
interest and at the same time, recovery of the cost of electricity in a
reasonable manner".
The first objective of the Tariff Policy
2006 states that the ERCs must "Ensure availability of electricity to
consumers at reasonable and competitive rates", even while ensuring
financial viability, transparency, and efficiency of operations and
improvement in quality of supply. Moreover, Section 65 of EA 2003
provides for the provision of a government subsidy to any consumer or
class of consumers in the tariff determined by the ERC provided that the
subsidy is paid in advance in the manner the ERC directs. In effect,
these steps provide for an "arm's length" distance between the
government and regulator in order to bring in transparency into the
tariff-setting process.
Despite the legislative, policy and
regulatory provisions, the report of the High Level Committee on
Financial Position of Distribution Utilities brought out in December
2011 pointed out the alarming nature of financial losses of the discoms
and highlighted the fact that there were serious lapses in the
regulation of electricity tariffs.
The Committee came down
heavily, not only on the working of the distribution companies, but also
on the lapses of the regulators in discharging their duties. Tariff
setting was delayed, sometimes for several years, in several states,
timely adjustments of power purchase costs were not made, and that there
was a need to evaluate and check on the performance of the regulators
themselves. Subsequently, a letter was sent by the Ministry of Power
(MOP) to the Appellate Tribunal for Electricity (APTEL) complaining that
most of the state distribution utilities had failed to file their
annual tariff revision petitions in time and as a result tariffs had not
been revised in a number of states for years while ERCS had not
determined the tariffs suo moto either, resulting in the poor financial
health of the state distribution utilities. The MoP, through this
letter, requested APTEL to take appropriate action.
APTEL, in its
Order dated 11 November, 2011, issued directions to State ERCs to ensure
that Annual Performance Review, true-up of Past Expenses and Annual
Revenue Requirement and Tariff determination is conducted annually and
as per the time schedule specified in the regulations. It also called
for every SERC to ensure that tariffs for the financial year are decided
before 1 April of that financial year; in the event of a delay, the
SERC must initiate suo-moto proceedings for tariff determination; and in
the tariff-setting process, revenue gaps must not be left and
regulatory assets should not be created unless they can be justified and
have a recovery period not exceeding three years. A mechanism for
Fuel and Power Purchase cost adjustment, at least every quarter, must
also be put in place
In order to ensure compliance, APTEL directed
the SERCs to send periodical reports regarding compliance to the above
directives to the Secretary, Forum of Regulators, who would, in turn,
report it to the Tribunal. These reports are placed on the website of
the FOR. (www.forumofregulators.gov.in)
Despite this
tariff-setting machinery that has been put in place, why then is there a
clamour for ad hoc interventions in terms of cutting down power rates,
bringing back populism to an exercise that all interventions in more
than a decade has sought to divorce? Let us take, for example, the
Delhi case. The three distribution companies-BYDPL, BRDPL and TPDDL-are
private companies, albeit joint ventures, with the Government of Delhi
holding 49 per cent of the equity. The fourth distribution company which
is less discussed is NDMC which distributes electricity to a small
pocket of Lutyen's Delhi.
Under the multi-year tariff (MYT) that
has been put in place to streamline the tariff-setting process, the cost
components are categorised into controllable and uncontrollable
parameters. For discoms, the most significant cost is the power purchase
cost which is "uncontrollable".
Break-Up of Annual Revenue Requirement for FY 2013-14
The
above table clearly indicates that 79 per cent of BRPL, 77 per cent of
BYPL and 75 per cent of TPDDL's costs are on account of power purchase
which is an "uncontrollable parameter". Moreover, all the power is
purchased from government-owned generating stations i.e. central
generating stations, state generating stations and others. Both the
quantum and price (based on long term Power Purchase Agreements) are
stipulated by the DERC. The power allocation done by the DERC is as
follows:
Power Purchase Quantum and Cost Approved by DERC for the Delhi Discoms
Purchase
from Central Generating Stations (CGS) make up for more than 80 per
cent of the power purchase with the balance from State Generating
Stations and other stations, mostly in the public sector. The DERC has
also laid down the Power Purchase Adjustment Formula used, basically to
adjust for intra-year cost variations in power purchase costs, largely
on account of variations in fuel costs, particularly coal and gas which
is a pass through in generation tariffs. As almost 90 per cent of the
power purchased comes from thermal sources, both coal and gas, the
determination of coal and gas prices in the country needs closer
scrutiny.
In the larger regulatory jigsaw puzzle, the fact that a
significant, often 75 per cent or more, of the electricity price that
consumers pay is generation costs, of which a significant portion is
actually fuel costs, there is a danger of succumbing to populist
pressure. Ultimately, unless fuel costs are rationalised and
electricity generation becomes competitively priced, such populist
pressures may end up in poorly targeted subsidies and take back the
regulatory process by a couple of decades. The Government of Delhi
should be aware that as part owner of the Delhi discoms they can
intervene at the Board level and as owners of state-generating stations
as well as stakeholders in the regulatory process, there is ample scope
for meaningful intervention.
The author is Professor & Area Chairperson, Energy Area, Administrative Staff College of India, Hyderabad .
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