Can electricity tariffs ever be de-politicised?

Usha Ramachandran

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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