<b>Vinayak Chatterjee:</b> Power play in Delhi

The Aam Aadmi Party's power and water subsidies for vulnerable sections in the capital are well targeted

The Aam Aadmi Party (AAP)'s three deliverables uppermost in the public mind are the Jan Lokpal Bill, reduction of electricity tariffs by 50 per cent and free water upto 700 litres per day to households. Of these, the maximum noise and rancour has been with regard to water and electricity. Those who had voted AAP to power were demanding implementation of this promise. The power distribution companies and Delhi Jal Board were crying blue murder vis-à-vis their financials. The opposition parties were waiting to see this fall by the wayside, and the Delhi Electricity Regulatory Commission (DERC) was taking umbrage at the political intrusion into the holy realm of tariff setting. Now, both the decisions have been announced - 50 per cent subsidy in electricity tariffs for zero to 400 kWh (units) per month consumption category, and free water for upto 20 kilolitres of water consumption per household every month.

It is established wisdom that a certain amount of targeted subsidy benefitting the bottom of the pyramid is recommended for most societies transitioning from tardy state-delivered utilities to market-driven models. There are, indeed, many pricing models and templates available among utility experts and development economists that support differential pricing across user segments based on income-level, ability to pay, extent and nature of consumption et al in emerging markets. What has gone largely unnoticed in the current hullabaloo is that even under the Congress government in Delhi, there existed an electricity tariff subsidy of Rs 1.20 per unit in the zero to 200 units consumption category, and Rs 0.80 in the 201 to 400 units category; and that the Delhi government spent about Rs 550 crore annually for making good these subsidies.

The key issue here is that if power and water are to be subsidised further, then Delhi's finances should be able to shoulder the additional burden. The Economic Times, on January 3, 2014, estimated the combined additional annual burden to be around Rs 1,750 crore and wryly observed that "Delhi is projected to generate a budgetary surplus of Rs 9,713 crore in 2012-13". Thus, this combined incremental impact is by no means a fiscally earth-shattering extravaganza, as is being made out in certain quarters.

It was quite clear from the beginning that a 50 per cent across-the-board reduction in power tariff was not going to happen. In India's rancorous democracy, such promises, including physically climbing electricity poles to restore connections, are necessary for pre-poll visibility and attention, particularly for a new-born political party. The annual revenue of Delhi discoms is Rs 15,000 crore. A 50 per cent reduction, viz a Rs 7,500 crore "hit" is patently outside any sane fiscal perspective, let alone regulatory sanction.

But it is crucial that the discoms get the subsidy cheque without fail every month from the government. The Delhi discoms are collectively sitting on unrecovered cash flow from genuinely required tariff increases that have been historically denied and lumped into a category called "regulatory assets." Between the two discom groups, the amount is in excess of Rs 20,000 crore. Surely, another basket of delayed subsidy cheques from the government cannot now be dumped on the discoms, who have, contractually been committed a 15.5 per cent return on equity; and have effectively seen no return on equity to date. The key point in this instance is that when the government is willing to "subsidise" power by writing out a cheque, the regulator need not go through the normal tariff-review-cum-setting exercise.

Part of the additional fiscal burden could have been minimised if there was a large chunk of technical losses still available to further reduce costs and pass on this benefit. But the many years of "loss reduction" efforts have happily brought down losses to 17 per cent from an embarrassing high of 57 per cent in 2002; and the discoms rightfully claim that it is this effort that anyway has led to a tariff increase of only 70 per cent over the last 10 years, whereas cost of procurement has grown up by 300 per cent.

For this massive clean-up of Delhi's power distribution system, demonstrated by this huge reduction in technical losses, AAP and the people of Delhi must necessarily thank Sheila Dikshit's steely resolve to implement a highly controversial but eminently required decision to hand over Delhi's distribution to private companies. The enormity of what was achieved in the power sector will be visible to AAP, where it attempts now to do the same with the water sector, and take on the entrenched water-tanker-mafia and its well-known links with petty babudom and local politicians. Fifty per cent "non-revenue" water supply is AAP's starting challenge for water reform; lower than what Dikshit had to contend with in her journey for electricity distribution reform.

Are there other possibilities for reducing Delhi's electricity tariff?

Reviewing power purchase costs is certainly worth a try. Delhi's state generators are the highest, as can be seen in the table.

Auditing discoms is another possibility though quite unlikely to bring a wondrous solution to reducing tariffs. The bulk of the cost of the discoms relates to purchase of power. And the power is purchased from government-owned suppliers such as NTPC, NHPC and DVC. Cost of power procurement is 80 per cent of total costs. Even if disputes and discrepancies exist on capex procurement, they will be too insignificant to reduce tariffs, considering that the Rs 20,000 crore of unrealised liquidity labelled "regulatory assets" and committed to be released to discoms in future years can only come from increased tariffs; NOT from reduced tariffs! A Comptroller and Auditor General (CAG) audit is unlikely to offer conclusions before four months, though the audit process would be useful politically for delaying any further substantive announcements.

In any case, the jury is out on whether CAG should at all be auditing the books of private companies. The discoms are 51 per cent privately held; 49 per cent of the equity is held by the government of Delhi. The point is that, effectively, the CAG would be auditing the performance of DERC, whose mandate it is to oversee and govern the sector, including verifying the claims of the discoms. Can CAG audit regulatory effectiveness?

In a larger frame of reference, AAP's decisions have had three positive fallouts:

One, political parties are waking up to the attractions and economics of targeted subsidies even as part of a general movement towards market pricing of utilities, along with the hard realisation that fiscal space has to be found, or even created, to fund such subsidies.

Two, moves such as these create positivism and an enabling environment that greatly help in achieving the difficult "distribution reforms" and "de-mafia-isation" of water and electricity, thereby making it possible now to aggressively implement an honest metering/billing/collection regime.

Three, it has effectively moved the political discourse away from the traditional vote-bank politics of caste-creed-religion to the nitty-gritty issues of daily living - water and electricity.

Thus, all things considered, AAP's power and water decision is streets ahead of the irresponsible and humongous populist freebies dished out by India's traditional political parties over decades in the name of the poor.
Good luck to AAP.
The author is the Chairman of Feedback Infra."vinayak.chatterjee@feedbackinfra.com"; Twitter: @Infra_VinayakCh