India faces a serious challenge, of
providing secure and equitable energy resources for future growth. Being a
versatile form of energy, electricity plays a key role in the country’s economic
development. Mounting transmission and distribution losses and deteriorating
financial health were important drivers for initiating reforms.
The Electricity Act, 2003, was, in
fact, was a result of a number of good objectives. It was hoped that by creating
independent regulatory bodies, the government’s age-old prerogative of designing
and deciding electricity tariffs, keeping in mind its political constituencies,
would come down. In other words, the new model would help operate the regulated
entities on sound commercial principles and in a consumer-friendly manner. It
was also expected to whittle down the huge backlog of financial losses.
EXPECTATIONS BELIED
But we have not been able to
insulate the functioning of regulatory institutions from political economy
linkages. As part of the reforms blueprint, it was envisaged that dependence on
the government for subsidy support would come down in future. However, the
results have been just the opposite. The subsidy requirements of restructured
companies increased significantly in the post-reform period from Rs 14,000 crore
in 2002-03 to Rs 34,000 crore in 2009-10, which is either not paid fully or on
time, eventually affecting the cash flows of electric utilities.
One of the reasons for this
situation is the direct or indirect unwillingness shown in correcting tariffs in
the past. While prices of almost everything, including essential commodities,
have gone up, electricity rates have not been revised appropriately with respect
to rising cost of electricity production.
The conventional practice followed
by regulators to avoid any appreciable tariff increase has been to defer part of
revenue requirements by parking them as “regulatory assets”, which need to be
recovered in future. Why should a consumer pay for electricity charges in future
for the electricity consumed by someone else in the past? It’s only recently
that some regulators have realised this problem and allowed price increase.
PRICING MECHANISM
Instead of free or subsidised
power, the state should pursue a rational pricing mechanism, in combination with
improved service and delivery of power. Section 61 (g) of the EA 2003 stipulates
tariff to progressively reflect the cost of supply of electricity, and reduce
and eliminate cross-subsidies within a period to be specified by the
commissions. Fundamentally, it makes great sense, but its operationalisation in
letter and spirit along with the freedom to indicate and provide subsidies to
any consumer or class of consumers becomes very weak.
Of course, we can’t completely
ignore some disadvantaged class of consumers in our society, but regulators are
yet to spell out a roadmap for gradual reduction of cross-subsidies. It is now
important to define the timeframe, rather than leave such important provisions
vague.
There is an urgent need for
regulators to gradually reduce the level of cross-subsidy and ensure that tariff
to various consumer categories reflect cost. This should, however, not be at the
cost of quality and reliability of supply. It is important to understand that if
the costs are not met, the discoms will reluctant to arrange for additional
power.
There will also be a significant
impact on the financial viability of the utilities --- in particular, the
distribution companies. All States have set up independent regulatory
commissions and have also initiated a tariff revision exercise, but reduction of
cross-subsidies and movement of tariffs towards cost of supply has been rather
slow.
Regulatory institutions should act
as a driving force for the development of sector by not only formulating a
long-term vision, but also by defining the means for translating the vision into
reality.
INTERLINKED ISSUES
It would also be wrong to entirely
blame the power sector for its poor performance. Given its inter-sector
dynamics, urgent and bold actions are also needed in other synergetic sectors,
particularly in the coal industry. Of late, fuel supply, land and environmental
issues have assumed significant importance, and are also being critically
debated. The government should consider infrastructure sectors as a whole, and
we need a better model to substitute the current system of regulatory
governance.
Thus, after 21 years of power
sector reforms, we still continue to have energy and peak shortages to the tune
of 8.5 per cent and 10.6 per cent, respectively. Also, only two third of total
households have access to electricity. There are also concerns about
availability, quality of supply and service. It is time for some serious
introspection and corrective action on part of all.
- Umesh Shanmugam
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