The Telegraph
Since 1st March, 1999
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- Electricity being a concurrent subject, tariff policies are woolly

Consumers expect government’s electricity tariff policy to improve availability and quality while bringing down tariffs. This last is an unreasonable expectation when coal, oil and gas prices, the main cost as fuels for generating electricity, are rising. There is also unrestrained growth of supplies of electricity below cost to farmers, rural, poor households and thieves. These have to be paid for by those who pay their bills. Electricity tariffs will not come down in the foreseeable future.

The Electricity Act 2003 requires the government to issue a tariff policy. The policy is honest in intention but woolly about execution. Nearly all its recommendations will raise tariffs but there is little about how they will be implemented. Electricity is a concurrent subject in the Constitution. Many of the problems of the sector can be traced to the inability of state governments to run these hugely expensive investments in electricity and meet their capital and running costs. State governments put bureaucrats as CEOs of electricity undertakings. Populist pandering with free or subsidized supplies to a vague population called the 'poor' or 'farmers' with little attempt to identify deserving recipients results in lower receipts than expenditures.

All state governments now have electricity regulatory commissions to independently determine electricity tariffs. Each commission has its own methodology and procedures with little consistency among them. The new act gives the CERC a national role in relation to the SERCs on laying down principles for generation and transmission tariffs. By also requiring SERCs to decide through the statutory forum of regulators on the principles for distribution tariffs it seeks consistency. The SERCs are mainly filled with members and technical staff that are retired government servants. Most SERCs prefer the old system. They want to decide for themselves without a countrywide set of principles.

This draft tariff policy improves on earlier drafts. It distinguishes clearly between government policy and policy that regulators must lay down in interpreting legislation and government policy. It recognizes that government policy must restrict itself to laying down broad principles and directions that will remain unchanged. Within the act and this policy the regulators will stipulate rules and regulations. The policy requires regulators to determine tariffs for three to five years at a time. Since fuel prices change often and will be incorporated in electricity prices, it will not give price stability to the consumer, only the producer.

The draft policy like the act requires introduction of competition. For new projects the government has already issued rules for tariff-based bidding for projects and similarly for procurement of power by distribution licensees. However while the act allows parallel wires for transmission and distribution, the policy contradicts it by calling them 'natural monopolies', meaning they cannot be so duplicated.

The draft does not lay down rates of return or depreciation, as earlier drafts sought to do. These were and will continue to be determined by the CERC or in the forum. But it must recognize the higher risks in electricity distribution versus generation and transmission.

The draft says that return in a cost-plus-tariff determination shall be on equity, not on total capital employed. It also lays down a debt equity ratio of 70:30. Any higher equity is to be reimbursed the lower interest costs and not the return fixed for equity. This also eliminates scope for managerial autonomy in deciding the optimal mix between debt and equity and finding the best sources for each. The utility must be free to decide how much debt and equity it will use. Returns should be on capital employed as a whole.

With privatization in the offing, there will be premiums paid for buying existing generation or transmission and distribution assets. In the cost-plus regime, tariffs should enable returns on the premiums.

The policy redefines accounting principles by asking the regulator to fix depreciation rates that will enable repayment of debt liabilities. Depreciation is meant as an aid to replacement of used assets, not for repaying debts. But the policy avoids the earlier mistake of allowing, 'accelerated' or higher rates of depreciation for such repayment.

But it also requires depreciated assets to be reflected in lower tariffs. This is iniquitous and contradicts the principle of return being on equity. In no other industry is a depreciated asset required to have its reduced depreciation necessarily passed on through lower tariffs.

The draft stipulates a multi-year tariff structure (first five years for generation and three for transmission and distribution). But the SERCs have failed to get baseline data to establish desired performance standards. The utilities have not supplied reliable estimates of capital expenditures required to achieve minimum service standards. The CERC had introduced the 'availability based tariff' on interstate electricity transactions, as a commercial mechanism to bring frequency on the grid to acceptable levels. The policy wants this to be introduced within states. For this to happen effectively within the state, all suppliers and distribution companies connected to the grid must give 24-hour prior forecasts of supply and demand for each 15-minute interval. There must also be real time measurement from minute to minute of all supplies and usage, to and from the grid.

The policy recognizes that non-conventional sources of power might be more expensive and hence only a modest percentage can be stipulated to be in grid supplies. At present government incentives for wind power allow the generator 100 per cent depreciation in one year, that is, for investment and not performance. This encourages entry of non-power companies. Instead the policy should have moved from high depreciation as an incentive for wind power to one based on performance so as to encourage actual generation. Operating norms are to be determined by regulators for tariff purposes. These need to be varied, depending on the age, location, and so on of each plant.

The policy suggests incentives and disincentives to the Central and state transmission utilities, the operators of the transmission system, on indicators such as system availability, and so on. But profit-seeking enterprises are today the system operators, power grid for interstate transmission and state boards for intra-state transmission. Transmission operation should be with independent non-profit entities.

State governments are to reimburse subsidies to the distribution enterprises. If they do not, the unpaid subsidies would be added to next year's tariffs. There is no commitment that the state governments will not interfere in such tariff increases. On subsidies, the policy wants them to be direct, targeted, capped for deserving users and transparent. None of this is new but no one has been able to make state governments implement the ideas.

The policy flatly says it considers free electricity to be undesirable and expects reasonable recovery from all consumers. It wants the state to reimburse such costs to consumers in cash directly. There is no indication of what the regulator should do if states do not cooperate.

The policy, if implemented, will lead to higher tariffs. So state governments may not allow implementation. The curse of the 'concurrent' subject continues to rule electricity tariffs.

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