To power up villages, put money in consumer's pocket first

Efficient and large-scale electricity distribution needs cash transfers scheme more than financial engineering.

 |  5-minute read |   15-10-2015
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The recent announcement of plans to restructure the financial burdens of electricity distribution companies have proposed to take away the liabilities from the books of these companies by states, and the central government in smaller proportion, and then issue bonds. This will clear the mess that these companies have on their balance sheets, which has made them largely insolvent and thus ineligible for further borrowings.

The financial condition of the distribution sector has been a cause of concern for the electricity sector. The other significant challenge, that of fuel or coal, to be precise, seems to have receded due to low global coal prices and better production from Coal India Limited, both enhancing availability and procurement options. Owing to financial constraints, however, distribution companies are not picking up available power even as tariffs are low. They prefer to disconnect loads than to buy more power to meet the demand. There are a few long-term power procurement tenders being floated, under Case 1 and Case 2 models, leading to power generation capacities remaining stranded, even though some of them have bid aggressively and won coal blocks in the recently held auctions. Statistically, this has led to a perception that there is no demand and peak power deficits appear lower, casting aspersion about the fundamental that per capita electricity consumption is low and growing population and its aspirations would cause a consistent growth in demand.

How have these financial burdens piled up? According to the 2012-13 data, average cost of supply (ACS) was INR 5.01 while the average revenue realized (ARR) was INR 4.18 with a resulting loss of INR 0.83 per unit of electricity supplied. This clearly indicates the unsustainable business model. Causes of the gap are also well know and documented, from technical losses to a lower extent to power theft and pilferages to larger extent, and keeping tariffs artificially low when costs are high, leading to inefficient usage as well.

Energy is a political industry and tariff setting has been a political instrument in the states. Cost reflective tariffs as envisaged by the Electricity Act, 2003 has remained largely ignored due to interferences from state governments in the timing and extent of tariff hikes. The option of educating the consumers about costs of power supplies does exist but unfortunately it has an infinite timeline, while the problem of distribution companies choking the entire industry requires solution now.

For the immediate, it may be good to indulge in financial engineering so that the distribution companies get borrowing capacity and thus their appetite to buy power to serve the demand. This in essence is making the taxpayers pay for the sins of the consumers. Necessary at present, it may be, however, if left at that, it would begin the process of accumulating losses yet again and the malignant financial burdens will resurface in a few years. Financial Restructuring Plans (FRPs) of the past not been successful for this short-sightedness.

To balance the political expediency and financial viability of distribution sector, as also the entire electricity supply chain, it is better to put money in the pockets of consumers and make them customers who have the willingness and ability to pay. The cash transfer schemes can be utilized to target the section of population that political leadership believe lack affordability. This would allow for tariffs to be rationalized and reflect the costs of fuel and capacities in the entire supply chain, providing adequate returns to the investors. Investors may then look for further opportunities and loosen their purse strings. This, therefore, will be a medium to long term solution so that the cycle of financial restructuring and ballooned liabilities can be broken, financial viability of electricity supply chain can be restored and investment environment can be created for further investments.

Putting money in pockets of consumers is also likely to result in competition in the last-mile connectivity and service. Distributed networks in the rural areas may also find a bigger market while the distribution companies will seek to improve availability and service quality to retain customers.

The proposal of separating the carriers with those of electricity supply services in electricity distribution may be further studied. Concerns regarding the roadmap and implementation need to be carefully examined, more so when there are stakeholders who continue to doubt if unbundling of the electricity boards has really been a success. Open access, again an Electricity Act 2003 objective, will get an encouragement through this separation, bringing in competition in distribution sector, which will cause better service quality. The risk profiles of electricity supplies being different from the creation of assets and infrastructure, typically, indicates the likelihood of better performance in each segment once they are separated.

These plans certainly need to be coupled with greater private sector participation - from distribution franchise models to outright privatisation. Government ownership creates a back-door channel for government intervention in tariff setting, which gets loaded on to the inefficient operations and investment decisions. It is time that private entrepreneurship is given its due in the sector that has customer interface, and that requires an attitude to serve, when putting money in the consumers' pockets empowers them to demand better service.

Putting money in consumers' pockets attempts to keep political interferences in electricity at the minimum. The growing awareness in consumers that it costs to supply electricity at their pumps and plug points, the tendency to use electricity efficiently gets a boost. And with greater education, the state governments may intend to draw up a plan to reduce the cash transfers when they perceive that the capacity and willingness to pay is rising. This, of course, may be a truly long-term plan.

Writer

Dipesh Dipu Dipesh Dipu @ddipu

The writer is an energy, natural resources and infrastructure expert. He was awarded Young Mining Engineer of the Year 2007 by Mining Engineers' Association of India. He is also on the editorial board of Mining Engineering Journal of Mining Engineers' Association of India and on the editorial advisory board of Mining India magazine.

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