The Telegraph
Since 1st March, 1999
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- The task force’s report on a national electricity policy is inadequate

The electricity task force was formed to develop a national electricity policy and tariff policy that the Electricity Act 2003 requires the government to do. It apparently did not consult the Central Electricity Regulatory Commission (as the law requires). It prescribes on matters within the jurisdiction of electricity regulatory commissions; focusses primarily on Central government policy and is not a “national” electricity policy; it neglects many issues that are the legitimate area of government policy; it omits dealing with issues that required inter-ministry coordination and action. The report seems to be aimed at restoring Central government authority and to marginalize the authority of the CERC, and to some extent of the state governments and state regulatory commissions.

It does not deal with the desirability of making the regulatory commissions staffed by competent interdisciplinary expertise at levels of members and staff or with how it can be ensured that members with a proper mix of experience, not primarily from government service backgrounds, are appointed. A report by the non-governmental organization, Prayas, last year had useful recommendations. It does not suggest ways to ensure that governments follow the law and make selections in time.

There is no attempt to holistically examine the taxation structure and propose how it can be reformed to make taxes on power less onerous, inconsistent and discriminatory.

It requires the ex officio member of the CERC who is the chairman, Central Electricity Authority, a high official of government who has onerous responsibilities, to be more effectively utilized. The chairman, CEA, at no time has been able to participate even moderately in its proceedings. Consultation between the two agencies is essential but not membership. In effect this provision deprives the CERC of the benefit of a fifth member.

The report prefers the development of competition over long term contracts in sale of electricity from new capacities, ignoring that electricity demand consists of high base load demand and varying peak demands. Base load demand cannot be exposed to uncertain supplies and must be covered by firm contracts and should on the whole be long-term so that they are not subject to supply vagaries. The report reiterates that demand forecasts must be made by CEA. It does not take account of effects on demand because of better management. A thieving industry will use less when it has to pay for its consumption. A farmer who has to pay will be more careful in his use of electricity.

It wants demand forecasts and tariff orders to use better information base on transmission and distribution losses instead of making recommendations on funding and agencies to do so. It asks state commissions to collect data in one year, something they have not been able to do so far. Tariff determinations have imposed high expectations of loss reduction that were not achieved, leaving the distribution utilities in worse financial shape.

Hydroelectric generating stations have high fixed costs and long gestation periods. The report could have looked at lowering the high tariff burden of hydroelectric power in the early years after construction. This requires policy decisions on funding periods, guarantees about future interest payments, calculation of discount rates for postponing present incomes to the future and the like. The model of housing loans that have an average interest rate and repayment calculated as “equated monthly instalments” could have been one suggestion.

The report does not consider pricing of non-polluting and renewable energy respectively (nuclear, hydro and gas, as well as wind, biomass, and so on). A social accounting calculation could give varying credits to each of them for purposes of tariffs and on the same basis debit the polluting and non-renewable sources of power. It could also have prepared the ground for emissions trading and dealt with the issue of who will get the proceeds. The Maharashtra Electricity Regulatory Commission has asked that they be credited to the customer and not be taken by the generator. This would remove incentives to supply such power.

The report should have clarified the ambiguity in the law as to the extent of equity holding of a member in a “captive” generation unit to benefit from supplies without a transmission surcharge for open access to it. Otherwise this is likely to lose time in litigation, postponing additional capacity.

The report appears to opt for a cost plus approach to tariffs with guaranteed returns on equity. Power could be an attractive investment for provident and pension funds that are now haunted by low returns on highly rated debt investments and high guaranteed payouts. A method to ensure their capital safety and permitting them to invest in power projects with guaranteed returns would have been a policy recommendation.

The report discusses some forms of competitive tariff determination but then details the elements of cost plus pricing. Alternatives not considered are regional average tariffs for each supplier; retail and wholesale caps but freedom to operators to price as they wish and keep efficiency gains; the Delhi model of auctioning base transmission and collection losses and a programme for bringing them down, with profits from better performance to be shared.

The report revisits tariff norms set out by CERC in a 2000 order. Governments must refrain from stating “policy” on matters that are within a regulatory commission’s jurisdiction. It discusses transmission pricing in detail even though CERC has ruled on a number of transmission tariff petitions and evolved a set of principles codified in January 2004.

It raises depreciation rates, thus front loading tariffs, an issue disposed of three years back by CERC and upheld by the superior court. It negates a development surcharge introduced by CERC without considering possible adverse tax implications for utilities. It permits costs of hedging foreign exchange exposure, taking away managerial flexibility without safeguards against misuse.

The report opts for a ratio of 70:30 debt-equity, a figure never reached by Central utilities in the past, and especially by the National Thermal Power Corporation. The NTPC has not had the human resources to add the generation capacity that such leveraged financial resources would have been used to create. A theoretical ratio is of no help especially when it increases the costs of debt in tariffs.

It is not clear why the report guarantees a return on equity than a return on capital. The latter would have been a challenge to managerial capability of the utilities. The recommended 14-16 per cent ROE has no relation to current costs of capital of around 6 to 10 per cent. There is no estimation of costs of risk for capital and hence return for different types of generation, transmission, distribution and supply.

The report does not examine subsidies not reaching many in the targeted customer groups and many non-beneficiaries enjoying them. It does not examine the possibility of using some other delivery mechanism (like electricity stamps) than imposing the first burden on the utility, with consequent cross-subsidies. The report recommends multi-year tariffs for older and inefficient plants. This must apply to all utilities and particularly to new investments.

It recommends breaking NTPC into regional companies without giving a rationale beyond vaguely “promoting competition”. The recommendation imitates British experience though that has little in common with India.

It does not deal with the ownership of unallocated power in the context of all fixed charges having been paid by the beneficiary states. It discusses alternative fuels for generation without recommending a fuels policy. That would require directing the nation to certain fuels and arranging tax and other ways of moving in that direction. It does not examine futures and options trading in electricity.

The task force has produced a voluminous report but does not meet the requirements of setting out a national electricity policy and the tariff policy for electricity that the government is required to do. It creates jurisdictional confusion on matters already settled in the courts. It encroaches into areas that are for the ERCs to decide. It neglects state issues. It has not been developed through an open process of consultation with stakeholders, state governments and electricity regulatory commissions.

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