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AUG 30 2012

Distribution dilemma: Standard process of tariff revisions across states can make discoms viable

  • Economic Times, ET Bureau / Hyderabad
  • Created: Thu 30th AUG 2012

The recent widespread power blackouts on two consecutive days have again brought to centre stage the current predicament of the electricity sector in the country. One chief minister appeared to justify the unauthorised overdrawing of power by his state from the northern grid by blaming the Centre for not ensuring adequate supplies of coal for power-generating units in the state.

Admittedly, solving the problem of shortages in coal supplies is one of the big challenges for the sector. Various solutions are being discussed. Coal India would need to be pressurised or otherwise appropriately incentivised to step up production significantly to meet a large part of the burgeoning demand. Short-term solutions such as importing higher-cost, but higher-quality, coal either directly by power producers or on a consolidated basis through the erstwhile canalising agencies could alleviate the problem to an extent.

Since consolidated imports of coal would be more cost-effective, it could be pooled with domestic coal and supplied to power producers at a weighted average price through a central pooling mechanism. In the longer term, stepping up coal production either under existing licences to private players and using unitary charge-based PPP models for new blocks could certainly bring efficiencies in production and reduce shortages. That would need active coordination with the ministry of environment and forests for clearances and concerted action in the areas dominated by left-wing extremists, where many of the new blocks are located.

In tandem with the efforts to step up coal production, it would be critical to quickly put in place a transparent and objective system for the allocation and pricing of domestic gas as any delays to do so would affect gas-based power generating units. While imported gas is also expensive, a system of pooling with domestic supplies and use of costlier fuel to meet peak demand could be put in place. Equally important would be efforts to step up power supply from renewable sources to meet energy demand. Except for solar energy, the other renewable energy sources have achieved grid parity and even the cost of solar energy is reducing at a rapid rate as more and more projects get implemented. Managing energy generation is challenging - but it is certainly not insurmountable, and some of these solutions would certainly help address the country's growing energy demand.

The larger challenge would, however, continue to be that of electricity distribution and it is here that concerted political action would be most needed. It is estimated that the aggregate losses of the electricity distribution entities, the distribution companies (discoms), has grown to around Rs 75,000 crore and is estimated to reach Rs 1,20,000 crore in the next three years. How did this sorry state of affairs come to pass despite the discoms having gone through major restructuring through the APDRP and its modified avatar over the last decade?

One reason has been the sharp increases in the prices of fuel for power generation since supply has not kept in step with the growing energy demands of China and India. Full cost-recovery through regular tariff increases, though, has not been permitted by SERCs on the grounds that these would cause tariff shocks for consumers. Since states are unable to absorb the widening gap between tariff revenues and generation costs due to their own poor financial health, and given the lack of incentive to cut down usage, the losses of discoms have been mounting.

It is obvious that these cost increases can only be sustained over a long period of time by passing them on to consumers through tariff increases. Merely recognising such cost-recovery shortfalls as regulatory assets to be recovered through tariff increases are meaningless in the absence of a time-bound action plan for revision of tariffs. A recent order of the Electricity Appellate Tribunal directing SERCs to carry out annual performance reviews, true-up and recover past expenses and determine the appropriate tariffs to be levied is a step in the right direction. It is critical that a comprehensive scheme of financial restructuring is quickly put in place to rescue these entities from collapse. Equally critical would be implementation of the standard process for tariff revisions, applicable across states, closely monitored either by the Centre or the Forum of Regulators, for a sustainable and viable future for discoms.

While restructuring and tariff revisions are immediate steps to be taken to rescue the sector, it is imperative that for the long-term health of the sector, states should be encouraged to aggressively pursue strategies to improve the efficiencies of discoms. That should be a key condition for any financial support under any scheme of restructuring and implemented vigorously. There is little point in stepping up power generation if half or even a third of the power generated is lost through inadequate metering and theft of power, often with political patronage.


Eastern Region ER Forum of Regulators Regulators Coal China SERC

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