Power tariffs need to be rationalised

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.

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.

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.

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.

Tags: Electricity Act, subsidies, transmission and distribution losses, power sector reforms, access to electricity, tariffs, coal industry