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Tariff Revisions - Need of the Hour, Shri Tantra Narayan Thakur, CMD, PTC India Limited

In recent past, stocks of some power companies were downgraded to 'sell' on account of weak 'merchant' tariffs. India has historically failed to meet its power sector targets by a significant margin. Despite tremendous opportunities ahead to meet the fast growing economic demand for reliable and quality power, the power sector continues to be affected by the shortfall on generation as well as inefficient use of resources. The biggest indicator of a poor track record is the inability to meet targets on the power generation capacity addition and inefficient demand-side management. A number of reasons have been cited for the short comings.

In my opinion, the most important concern is the irrational and un-remunerative tariff structure of the distribution utilities. There continues to be a large gap between their cost of supply and the tariffs allowed to be levied. The utilities to curb their losses, therefore, resort to power cuts and load shedding despite availability of power in the market at a competitive tariff. This suppressed demand gives a distorted signal to the market. At one hand, you have power projects that need to be backed down and rampant power cuts and load shedding on the other. The market for short- term sale of power, though growing robustly, still is not very deep. The prices in the short-term market spike seasonally, and in certain periods, are attributed more to short-term considerations such as elections or festivals than to the organic growth in demand due to fast growing economy and changing lifestyles.

Lesser than expected merchant tariffs has pushed project developers to rely mainly on the long-term tie-ups of power. The market for long-term contracts, in turn however, means tying up power primarily with distribution companies / State Power Utilities (SPUs) through competitive bidding more often on long term basis stretching to 25 years or more. The typical SPU, however, remains hamstrung in its operations with limited ability in revising its tariffs that reflects cost of supply. State Governments desire to provide power at heavily subsidized rates to certain sectors especially agriculture and domestic consumers without adequately compensating the utilities is adding to the woes. Only a part of this subsidy is recovered by SEBs through cross subsidisation of tariff from commercial and industrial consumers. As power constitutes a significant component of input costs, such cross-subsidy tends to make the industries uncompetitive in this era of globalisation.

The total power generation in the country last year was over 800 Billion Units. If the average power prices were to increase by Re1 per unit, it would generate additional cash of Rs.80, 000 Crore per annum. Compare this to the cash losses of all SPUs, which are estimated at around Rs. 68,000 Crore. What sounds like the panacea for the SPUs' ills, however, is not easy to implement as an average tariff increase of Re1 per unit may subject customers to tariff shocks. However, we seem to be no longer in a position to avoid these tariff shocks. When prices of all inputs and for that matter, of all essential commodities have increased substantially over the past few years, can we avoid increase in electricity prices?

Multi-year tariff settings by the regulators taking due cognizance of cost of supply and demanding more efficient and reliable performance from the distribution utilities would make the difference and set the sector on right course.

A recent judgement by APTEL directing State Electricity Regulatory Commissions to suo-motu undertake revision of tariff, if utilities fail or delay in filing tariff petition on time, is a progressive step.

Another area of concern has been the competitive bidding process adopted by distribution utilities for procurement of power. Competitive bidding under present guidelines requires commitment to a firm price over a period of 25 years or more. Given the prevailing uncertainties in fuel, environmental clearances, etc., and a higher cost curve that is evolving due to rising input costs even as the project enters its construction phase, how feasible is a firm price of this nature? In the extreme scenario of cascading delays caused by various resource related issues, the projects may even be unviable at tariff discovered through competitive bids.

First, Case-1 bids (bids which are not specific to project location, technology or fuel) are few and infrequent in number; and by now, experience on success rate is at best mixed. Second, the developer, who already faces immense uncertainty on the resource fronts, invests risk capital, and is under pressure to financially close projects and `get on with it'. Quite often, the project developer may quote prices that will be unworkable - all towards the end of a `winner's curse'. Therefore, in many cases, project developers may have bid at near speculative price levels to win competitive bids. In turn, it means that the evolving cost curve is ignored. Alternatively, the prices discovered will be higher than the possible levels; simply because the developers will `price' the risk faced by the project on various counts.

Conclusion

The rising gap between tariff and cost of producing electricity as well as aggregate technical and commercial losses are the main factors for the losses, a report by ICF International with assistance from Federation of Indian Chambers of Commerce and Industry (FICCI) and the power ministry stated. The report said, "Consumer tariffs need to be revised annually by all the states. Increase in fuel cost should be transferred to the consumers regularly (preferably every quarter) across all states." The programmes initiated by the government to improve health of discoms so far focus on reducing AT&C losses, but it alone cannot pull out the discoms from red.

Tariffs must also be revised. Moreover, the tariff hike has to be substantial. Past data shows that tariff was hiked at a CAGR of ~5 % by the SEBs, but it has not kept pace with the rising power costs (~8 % CAGR in the same period) which constitute a major portion of the total expenditure of SEBs. Also, better demand side management can save substantial amount of power. If current situation continues, lenders will stop lending money and generators will stop supplying electricity to the discoms. Even from political point of view, which State Government can afford no supply of power to consumers?