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The underlying imbalance in the power sector persists as policy initiatives by the National Democratic Alliance government have been restricted to sorting out supply-side issues. In the absence of moves to rationalise rates, the upward pressure on the cost of power as a consequence of higher coal and gas prices will lead to a further deterioration of the financial position of electricity distribution companies. ICRA estimates that at the all-India level, the subsidy dependence of state-owned distribution utilities in 2014-15 is likely to be around Rs 72,000 crore.
Of the 29 states, 19 have so far issued tariff orders for 2014-15. The tariff hikes in eight states have been a modest 4-10 per cent. According to Girish Kumar Kadam, vice-president, ICRA Ratings, "The extent of the average tariff hike based on tariff orders issued by SERCs (state electricity regulatory commissions) across the states has been subdued at 5 per cent during the current year so far as against the median hike of 7 per cent approved for 2013-14, which was also much lower as compared with the median tariff hike of 14 per cent allowed for 2012-13."
Regulators are yet to approve any revision in tariffs in Arunachal Pradesh, Bihar, Gujarat, Jammu and Kashmir, Odisha, Uttarakhand and Madhya Pradesh. Further, in Tamil Nadu and Rajasthan, the SERCs are yet to issue tariff orders, which violates the terms of the financial restructuring scheme, under which annual tariff balancing was a prerequisite.
Interestingly, according to the ICRA report, in "states where there has been no revision in tariffs, regulators seem to have assumed a revenue surplus by projecting lower loss levels and power purchase costs. These unrealistic assumptions have in the past meant large truing-up of costs in subsequent years".
Dhaval Patel, AGM at Care Ratings, argues that policy makers must "address the current policy of differential tariffs as rationalising of tariffs for different classes of users is crucial". As industrial and commercial users incur higher tariffs to cross-subsidise agricultural users, rationalising tariffs will require politically contentious hikes for agricultural consumers.
In the absence of hikes commensurate with the increase in costs, higher losses will affect distribution companies' capacity to buy power, implying either consumers will have to bear large tariff hikes or face more power cuts. But Vinayak Chatterjee, chairman of Feedback Infra, is sceptical that the problem can be solved simply by raising tariffs. Chatterjee argues that "even if you raise prices, the full impact of the move may not be felt. Hut by hut, mohalla by mohalla, meters have to be installed".
Various proposals such as the feeder separation schemes popularised by Gujarat are being advocated to solve the power crisis. According to Kadam, "an increased focus on segregation of feeders by utilities for rural supply remains important, particularly in states which have a higher level of agriculture consumption; which in turn would enable the utilities to improve reliability in power supply, as well as control on loss levels to some extent".
But the experience of eight states which have already implemented feeder lines has been mixed. High loss levels continue to exist in Haryana and Madhya Pradesh.
Sceptical that feeder lines are the solution, Chatterjee says, "Feeder lines are palliative at best. They do not address the fundamental problem." Arguing that the existing model is in tatters, Chatterjee proposes to bypass the distribution companies and introduce competition.
Recent reports suggest that the government may be warming up to the idea of introducing more competition in the sector. The Suresh Prabhu committee has proposed the idea of multiple suppliers in the loss-laden distribution side. Proposals have also been advocated for creating a forum of regulators-an association of all state and central level regulators-to constitute a committee to review the functioning of the SERCs and to report this to the central government.
