<b>Vishal Chhabria</b>: Solving the power sector dilemma

If politics doesn't give way to economics, history will repeat itself for state electricity boards a few years later

The markets have been euphoric about the proposed plan for the power sector, which includes restructuring the debt of loss-making state electricity boards (SEBs) and improving their operational efficiencies. It is, however, too early to rejoice, though it has provided some hope that India’s power sector – a key element if we have to reach our ambitious goals of 9 per cent plus GDP growth – is being given due attention. As things stand now, the new initiatives as well as the recent hike in power tariffs in almost 20-plus states will only help postpone the problems for a few years rather than lay down a concrete roadmap that ensures sustainable growth of this segment within the power sector.

Back in the 2000-2003 period the then NDA-led government had taken steps of cleaning up the dues of SEBs by converting them into long-dated bonds (with about five-eight year repayment schedule) that provided returns of 8 per cent to bond holders (namely, power producers – then mainly NTPC). It also included a mechanism wherein all future purchases of power by SEBs were required to be made against a letter of credit worth 105 per cent of the average monthly purchase bill (these are rough estimates, though). Simultaneously, the APRDP (as it was known then) programme provided incentives to SEBs to undertake reforms and lower their transmission and distribution (T&D) losses which ranged 20-70 per cent across states – a key element responsible for having led to huge accumulated losses at the SEBs, which in turn were unable to repay their creditors and power suppliers. The situation was such that private companies were scared to invest in the power generation capacities since they were not sure how they would be compensated for the power they produced (for sale to SEBs).

Over the years though, some action has been taken including some states privatising distribution activities (like Delhi) leading to better availability of power as well as allowing open access (competition). However, the entire circle has come back with SEBs now having accumulated losses of over Rs 2,50,000 crore and huge short-term debt of Rs 1,60,000 crore as of March 2012. This situation is primarily due to inadequate pricing amid rising costs, non-payment of subsidies by respective state governments as well as continuing high T&D losses—the latter is consequent to technical issues, power theft and political pressures. A large part of the misery can also be attributed to the political establishments’ unwillingness to raise power tariffs in a bid to secure political (vote-bank) mileage.

So, while there are strict conditions laid down this time as well, what’s the guarantee of this cycle not repeating again say in 2022-23 or thereabouts, given that SEBs (which are largely owned by respective state governments) tend to succumb to political pressures (providing free or subsided power, turning a blind eye to power theft and so on)? Even if one assumes that they don’t succumb to political pressures, setting the house in order through tariff hikes and lowering T&D losses will be a mammoth task. And if they fail or falter in a big way, not only will power-related stocks (companies) come under pressure, but it will also put the future growth of the country at risk.

I believe, unless meaningful steps are taken to lower T&D losses, customers may also revolt against steep hikes (the need of the day to cover operational losses) by SEBs. It is not incorrect for customers to revolt if they are made to pay for the inefficiencies of the SEBs, or power stolen from the system. We anyways are already paying between Rs 5-10 for each unit we are consuming today. It is imperative that every customer is billed for his/her usage (the government may want to subsidise certain sections, but it should be forced to pay the subsidy portion in advance on a monthly basis), T&D losses are cut by investing in requisite technology and only then, power tariffs should be decided in relation to costs and reasonable return for SEBs. A mechanism encouraging purchase of power by SEBs through competitive bidding would be welcome.

These can only be achieved by strict governance (looks difficult under current circumstances) or by throwing the sector (distribution utilities) open to competition through a public-private partnership. Given how the central government has at its own will conveniently dumped the subsidy burden on public sector entities (BSNL, oil companies, banks, and many others), enforcing good governance/sane economic practices may be asking for too much.

A public-private partnership in distribution space though would come a long way in resolving the T&D issues. It should lead to better business practices in terms of operations, transparency (through listing) etc. Simultaneously, a strong regulatory environment should be allowed which would take care of the interest of all entities viz, power producers, distributors and consumers, while keeping government interference at the bay.

Given India’s experience, it is also preferable that governments stay out of business and focus on the regulatory aspect. Not that government-run firms are unsuccessful, but a large part of their success is closely linked to their monopoly-like environment or government support in different forms.

There would be examples on both sides, but the case of the telecom sector proves the point. While the government has gained from higher taxes as usage/revenues jumped, telecom players gained from increase in business and consumers gained from availability of quality infrastructure at affordable prices. A similar environment can also be worked out for the power sector.

Until the sector’s financial viability remains independent, meeting the ever-growing needs of India’s rising consumer base will be very difficult, importantly, at cost efficient prices. Even today, many parts of India do not have power and many have power for a few hours in a day. If we have to achieve the current Five Year Plan (2012-17) target that entails setting up 80,000 mw of generation capacity, an investment of over Rs 3,20,000 crore is required—leave aside a similar amount on the T&D side.

To achieve these goals in a fast and efficient way, it would be better if “politics” is separated and “economics” is allowed to rule. Until then, our power problems may not resolve easily and the ghost may come back to haunt us some other day.

In a report last month, analysts at a foreign brokerage noted, “We believe the real benefits of this package will be met only if SEBs improve their financial viability going forward especially through tariff hikes and T&D loss reduction, else this restructuring package may go down the same path as the One Time Settlement Scheme of 2001-03.”