Financial Daily from THE HINDU group of publications
Tuesday, Aug 10, 2004
Power sector reforms may derail
S. D. Naik
Mr Y. S. Rajasekhara Reddy, the new Chief of Andhra Pradesh, marked his first day in office by announcing free power to farmers along with a waiver of dues of Rs 1,200 crore, thus adding to the already bulging fiscal deficit of the State.
Tamil Nadu had already decided earlier to supply free power to farmers and on May 31 this year, Ms Jayalalitha announced a rollback of power tariff for domestic consumers to the level prevailing in December 2001. The decision, which was taken by sidelining the Tamil Nadu Electricity Regulatory Commission, will cost the State exchequer an additional Rs 910 crore a year.
In Maharashtra, following the recent announcement by the Shiv Sena Chief, Mr Bal Thakare that the Sena-BJP combine will supply free electricity to farmers if voted to power, the Chief Minister, Mr Sushil Kumar Shinde, has also joined the bandwagon. Mr Shinde has not only offered free power to farm sector on behalf of the Congress-NCP alliance, but has further stated that his Government was also considering a waiver on electricity dues and interest on farm loans. If the promise is implemented, the State government will be poorer by another Rs 8,000-Rs 10,000 crore per annum.
Free power to farmers
If the new trend of the State governments offering free electricity to farmers and heavily subsidised tariffs to the domestic consumers is not reversed soon, all the efforts made over the past few years to reform the power sector and generating resources for power development on a large scale will go waste.
The most significant changes introduced by the Act included the dismantling of the monopoly power of SEBs, allowing the private sector not only to generate but also to transmit, distribute and trade in power. These changes held out the hope that the Government might be able to realise the ambitious goal of adding one lakh MW of power generating capacity by 2012 besides providing electricity to all villages by 2007 and to all households by 2012.
Under the new Electricity Act, tariff fixation is the job of Central and various State Electricity Regulatory Commissions and they were already on the job of doing so. Now, if the State governments that are to face the electorate in the near future start offering free electricity to farm sector arbitrarily by sidelining the Regulatory Commissions, it will amount to short-circuiting the power sector reforms.
The announcement in the UPA Government's National Common Minimum Programme (NCMP) that the Act will be reviewed has already created a lot of confusion in the power industry. It is feared that the key elements of reforms such as unbundling of State electricity boards (SEBs) may take a back seat. The Union Power Minister, Mr P. M. Sayeed, has indicated that the Electricity Act 2003 would be reviewed with respect to two issues reorganisation of SEBs and separation of transmission and trading utilities.
The uncertainty over the implementation of the provisions of the Electricity Act and the ongoing competitive populism in respect of power pricing is bound to affect the ambitious power development programme that was drawn up by the previous government. As it is, the SEBs have been incurring heavy losses. What is worse, these losses have escalated sharply over the past decade.
Finances of SEBs
Unfortunately, the repeated efforts made over the past decade to improve the finances of the SEBs have failed to bear fruit because of lack of political will and fiscal prudence. For instance, in 1996, a conference of Chief Ministers had adopted a common minimum national action plan for power (CMNPP) in which it was agreed that no sector would pay less than 50 per cent of the average cost of supply. It was also agreed upon that power tariff for the farm sector should not be less than 50 paise per unit and the same would be raised to 50 per cent of the average cost of supply in not more than three years.
However, the States failed to implement the agreement. Though Punjab was the first state to announce power tariff of 50 paise per unit for agriculture in 1996, in 1997, it decided to do away with metering of electricity to farmers and charge a flat rate based on the horsepower of the pump-set installed. This started a dangerous nation-wide trend where state after state began first moving to a flat rate and then, in several cases, to zero power tariff for the farm sector.
Consequently, the power utilities incurred heavy losses and were unable to invest the required resources either in creating new capacities or for proper maintenance of existing facilities. The inevitable result has been inadequate, unreliable and poor quality power. As many experts have pointed out, the interests of the farmers are hardly served by this; farmers now receive power only at night when demand elsewhere is low.
Ill-effects of free power
There are also other ill-effects of free power to the farm sector such as the farmers using obsolete power guzzling pump-sets, not bothering to switch-off the pump-sets leading to enormous wastage of water and growing water-guzzling crops like sugarcane and paddy. As a result, the water table in many parts of the country has been going down at an alarming rate and the poor are even deprived of drinking water.
At the same time, the industrial sector, which pays a much higher rate for power, is not receiving adequate supplies.
Phasing out cross-subsidies
Against this backdrop, the most formidable challenge confronting the country's power sector continues to remain the phasing out of the unacceptably high level of cross-subsidies within a reasonable timeframe. As per the Electricity Act 2003, during the transition period, the concerned State governments are expected to pay out the subsidies. This amount roughly works out to Rs 100,000 crore over a five-year period, or Rs 20,000 crore per annum for 20-odd States.
Moreover, there is a problem of accumulated losses of SEBs and their outstanding dues to Central Public Sector Undertakings (CPSUs). The accumulated losses had increased from Rs 4,500 crore in 1991-92 to Rs 33,000 crore by 2001-02 and the combined dues of 29 SEBs to CPSUs and other Government departments had crossed a whopping Rs 45,000 crore. To avert a major crisis, a tripartite agreement was signed by 24 States with the Centre and the Reserve Bank of India on March 20, 2003 to clear dues totaling Rs 34,400 crore.
For creating new generation capacity of 100,000 crore by 2012 as targeted, along with the necessary transmission and distribution network, the required investment is estimated at Rs 900,000 crore. This does not include the costs of restructuring state utilities and taking care of past liabilities as well as working capital and other expenses during the transition period.
It is evident that given the poor shape of State finances, unless we are able to attract large-scale private investment in the sector, it will not be possible to achieve the ambitious capacity addition target.
However, if the State governments persists with the practice of supplying free power to any group of consumers, it will not inspire private investors to invest on a massive scale in a sick industry.
Thankfully, the Prime Minister, Dr. Manmohan Singh and the Power Minister, Mr P. M. Sayeed, have strongly disapproved the idea of free power to farmers.
According to reports, the Power Ministry is also contemplating to revive the concept of an all-India minimum farm power tariff of 50 paise per unit, to be eventually raised to the level of 50 per cent of the average cost of generation. This needs to be pursued with a missionary zeal to cure the power sector from chronic sickness.
Early unbundling of SEBs is of crucial importance not only to attract more private investment in the power sector but also to deal with the serious problems afflicting the sector such as gross mismanagement, rampant corruption and large-scale power thefts. It is common knowledge that a significant proportion of the so-called transmission and distribution losses are in fact power thefts.
Two years ago, the global consulting firm McKinsey and Company had estimated that India could save $12 billion by 2005 merely by improving efficiency in power generation and removing transmission and distribution bottlenecks, as it will drastically reduce the new capacity requirement.
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