Electricity reforms: what next?

The reforms programme in the electricity sector was initiated largely because of the recognition of the need for large infusions of capital if power shortages were not to grow exponentially. The economic compulsion for such reforms arose, undoubtedly, from the impact electricity shortages would have on industry and commerce. However, it can be argued that the political buy-in came from the realisation that the socio-political consequences of not catering to the minimum needs of the non-remunerative agricultural and residential sectors could be enormous. After nearly ten years of experimenting with various reform models aimed at wooing the private sector, there seems to be the conclusion that the focus on the reform effort was at the wrong end (generation)! Unless the distribution system is strengthened and results in improved cash flows, there can be little private sector interest. Major instruments of reform, such as tariff rationalisation, efficiency improvements, and the creation of competition, were largely ineffective due to lack of good data and monitoring systems and an incomplete political distancing, despite introducing `independent' regulatory commissions (RCs). The reform is, therefore, now being re-focussed on this end of the electricity system. What are the solutions being considered? Who gains? Who loses? What are the longer term implications of the proposals being considered? Accelerated Power Development Programme The options for improving the performance of distribution entities can be classified broadly into technical/management and regulatory options. In the first category would fall the areas of 100 per cent metering of consumers, reducing transmission and distribution losses and improving collection efficiency, apart from strengthening the network itself. The Government increased the plan allocation under the Accelerated Power Development Programme (APDP) with a clear message that such funds would now be linked to the status of power reforms. A number of States are now addressing the problems identified under technical/management options under the APDP. The MoUs the Power Ministry has signed with various State governments lay down a strict time-table for distribution utilities to achieve a break-even status based on a host of time-bound metering initiatives and theft control. A concerted effort in this direction would definitely ensure that the number of free loaders on the system would reduce, and that the paying customers do not end up bearing the farmer's cost too. However, vast sums of tax-payers' money are being set aside for this purpose. It would have served the country well to undertake a few model projects to understand the implementation issues arising from such a programme, and what are the safeguards and monitoring mechanisms that should be in place to ensure effective use of the monies. Additionally, since such exercises are going to be replicated in several States, there should have been a clear provision for sharing analytical tools and capacity-building of the utility staff concerned. There is a need to do away with the traditional approach of quantitative targets aimed at meeting the set deadlines, and seek long-term effectiveness, instead. Tariff rationalisation and the promotion of efficiency and competition come under the regulatory options. However, as the experience of the last few years in the 'reformed' States shows, there is still a long way to go before politics gets sufficiently distanced from tariffs. The Andhra Pradesh Commission has made commendable efforts to reduce the extent of cross-subsidy among various consumer categories, but with electoral considerations coming to the fore, there are signs of political manipulation in the tariff-filing process. Restructuring State electricity boards into corporate entities with a possible view to privatisation has also, unfortunately, not proceeded at the desired pace. Hence, regulatory commissions often find their efforts to introduce competition, even in small measures, often stymied. Frustrated by seeing the various stakeholders in the tariff process going around in circles year after year, the financial institutions and the donor community have started advocating multi-year tariffs (MYTs). On the other hand, to improve their own competitiveness and financial viability, investors and large sensitive consumers have stepped up their demand for allowing third-party sales. Multi-year tariffs In a recent workshop on multi-year tariffs (MYTs) at TERI, there was a consensus among the participants that the RCs should be looking at the broader concept of multi-year framework (MYF) rather than address only the MYTs. There was considerable debate and no consensus on whether the MYTs/MYFs would reduce the challenges posed by inadequate and poor quality data and metering systems. The advantages of an MYF are several: It would clearly define the pathway along which tariffs could be expected to move over a time-frame of 3-5 years, possibly linked to economic developments free of political considerations; It would reduce the number of times tariff proposals would have to be subjected to political scrutiny and, therefore, the vulnerability of the tariff determination process to political and judicial proceedings; It would enable the RCs to set clear targets for efficiency improvements based on which the estimated revenue requirements of the utility would be allowed; By virtue of the above two, an MYF would provide higher levels of confidence to potential investors in the electricity system.The challenge to RCs would be to ensure adequate and informed consumer participation and device mechanisms by which the utility remains accountable over the multi-year frame. Third-party sales The issue of third-party sales (TPS) is, prima facie, one that would provide greater comfort to investors in generation activities and would result in the utility losing its high-tariff customers to such investors. The latter is a phenomenon often referred to as "cherry-picking''. The generation activities seeking TPS could include, independent power producers, captive generators or even those that produce electricity based on renewable energy sources. The objective of such generators would be to get into contractual arrangements with those consumers in the industry and commercial sectors that are cross-subsidising the domestic and/or the agricultural consumers and that have high demands. Such consumers would limit the exposure of private investors to a small number and would also reduce the associated transaction costs. The consumers of such TPS would look forward to lowering tariffs. However, to be assured of higher reliability of supply, for which purpose they continue to be dependent on grid conditions, such consumers would like to see the distribution utilities as a stakeholder in such third-party sales beyond the mere levying of wheeling charges. In other words, TPS would possibly require stringent tri-partite agreements involving the utility and making the issue of transaction costs more relevant. The challenges arising from TPS for the regulatory commissions would be to ensure the financial viability of the existing utilities. The pressures of TPS would manifest themselves in the form of reducing cross-subsidies. As such, the RCs would also have to increase the pressure on utilities to improve efficiencies and reduce costs of supply so as to minimise the upward pressure on tariffs. The Government too may need to increase its subsidy budget depending on the extent to which the demand for TPS increases and the efficiency improvements of distribution entities. Options available to the RC/government to minimise the short-term pressures of TPS include a phasing-in of TPS and the application of a surcharge on TPS - the level of which can be determined by the RC. The reforms processes in the power sector will necessarily take time to show results. Necessarily because we waited too long, and the financial and operational conditions in electricity utilities had declined so far, that it will take a sustained effort to turn things around. The newly established regulatory commissions do not have a magic wand by which the system can be restored to a healthy status in a short period of time. However, we cannot wait for too long as the investors are looking for returns and would probably take their capital elsewhere to invest. It is, therefore, of utmost importance that RCs and the Government work in concert towards developing the sector, while clearly recognising and respecting each other's roles and functions.