Powerless with power – Will “Make in India” be possible without power reforms?

Powerless with power – Will “Make in India” be possible without power reforms?

FPJ BureauUpdated: Friday, May 31, 2019, 07:06 PM IST
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High power tariffs burden common and industrial consumers, who subsidise agriculturists and economically weaker sections, and also power-theft. Together, these subsidies and theft have created a national gaping hole of around Rs.4 lakh crore, There are three alternatives before states: reduce losses and theft (often mis-declared as agricultural consumption); reduce the subsidies, or increase power tariffs. The third is difficult as Industry is already groaning under power tariffs of Rs.8-12 per kWh.

To discuss this, the FPJ-IMC Forum organized a panel discussion with experts at the Indian Merchants Chamber (IMC), Mumbai. The panel comprised (in alphabetical order) Pramod Deo, Ex-Chairman, CERC; Suhas Harinarayanan, Executive Director & Head of Research, JM Financial; Mukesh Khullar, Principal Secretary-Energy, Government of Maharashtra; Anil Sardana, Managing Director, Tata Power Ltd; and Bipin Shrimali, Managing Director, MAHAGENCO. The event was moderated by R.N. Bhaskar of FPJ with editorial support from Pankaj Joshi.

The welcome address was given by Dilip Piramal, President, IMC, and the Vote of thanks by Deepak Premnarayen, Vice President, IMC.

Given below are edited excerpt. A fuller version is also available

Sardana: Internationally, the industrial tariff in most cases is the lowest, and rest of the tariffs are progressively higher. The basic genesis is that the industry must contribute to economic prosperity and therefore, industries get the most competitive in terms of tariff.

In India, the residential customer benefits from the lowest competitive tariff. In order to make things manageable, industrial tariff is pushed up, commercial tariff is further pushed up, which makes the two almost unsustainable.

Industry bears the brunt of paying higher for the raw material called power. In five largest power consuming industries – steel, cement, chemicals and two others – Indian power tariff to those industries is at least double, if not more, compared to competitive countries.

Pramod Deo, Ex-Chairman, CERC

Pramod Deo, Ex-Chairman, CERC |

How are we going to have any kind of Make in India? Our CERC analysis too shows India’s industrial tariffs are the highest in the world.

The point people need to appreciate is that the tariff setting is done by regulators, which are independent of the government. Yet they have largely pursued a mandate similar to the government, which is to appease the residential customers, the vote bank, and so keep a very large deviation from average cost of supply.

But lately we found the regulator focusing on gaming scenarios of migration economics, which primarily relate to customers migrating from one company to another. That frankly should be based only on efficiency and the type of service the particular distribution company provides.”

Deo: How are we going to have any kind of Make in India? Our CERC analysis too shows India’s industrial tariffs are the highest in the world.

The Maharashtra Distribution Company’s overall budget or what we call as Annual Revenue Requirement (ARR) is Rs.55,000 crore, which roughly comes from 2.12 crore customers. This company has only 16,000 large consumers. They contribute 42% of 55,000 crore.

Drilling further down, to one megawatt (MW) and above demand, customers number 180,000 and they contribute 62%. What is left is 2.10 crore consumers which includes 37 lakh agriculture consumers. They contribute only 38%.

It is not only the small consumer, it is also agricultural consumers. And the mathematics of benefit for them works this way. First, the average cost of supply in Maharashtra today is Rs.6.03 per unit and the average tariff comes to Rs.3.11, so obviously tariff [cross] subsidy has to come.

We call the SEB issue as India’s 7-year itch. First it was 1995, then 2002-2003 and 2009-2010. Now it is 2017-2018. Suhas Harinarayanan, Executive Director, Head of Research, JM Financial

Today, when MERC puts out a tariff, agriculture does not even have to pay average billing rate, because what the Maharashtra government does – as the law provides – is to give an upfront subsidy, and that subsidy is Rs.4,500 crore. And another Rs.4,000 crore plus is the cross subsidy which I talked about.

The initial mandate for the state regulator (MERC) – when we started – was to increase the tariff for agriculture. But from the time of our first tariff order, when we had asked for a mere Re.1 tariff increase, once the Cabinet met, they wanted more members from their side in the MERC, supposedly with a legal background. [They probably wanted to include] politicians on the MERC.

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This is political economics. So if you ask me the question, “Is Modi really serious about Make in India?” Then we have to start with the Chief Ministers everywhere, since electricity is for all practical purposes a state subject.

Now let us go back to the 1990s. The National Development Council (NDC) had agreed on two things. First, tariff determination [by independent regulators] will be taken outside political purview. The second and most important point was that agriculture must pay at least 50% of the average cost of supply.

But this broke down, because of Jayalalitha. When the 1998 Bill was brought for setting up the Electricity Regulatory Commission, she said “nothing doing. It shall not be mandatory”. There has been no progress on this since, and in Maharashtra, we have experienced acute shortage during my entire period as Chairman of MERC.

After Enron, no capacity was added. So the result was that we’ve faced shortage of something like 40%. We had the problem of regulating capacity and the more important question of “how do we address this issue of agriculture [consumers]?”

The original thinking was that the cross-subsidy shall be eliminated. But in 2005 the UPA and left parties said, “We can’t eliminate”, so the word was changed to “it will be reduced”.

In the First Tariff Order which MERC had come out with, they said the losses are 34%, and must be brought down to 25%. Obviously, according to the 2002 Order, you can’t bring down losses by 8%. So a sharing formula was derived, wherein 50% would be to the account of consumers and 50% the MSEB would bear.

Shrimali: Any tariff has basically three components; Generation, Transmission and Distribution. Generation does not have losses. But the major components of the expense in power generation are fuel – around 80% of total cost – and freight. Both costs are fixed by the coal ministry and railways respectively, and are out of our purview.

Transmission does not normally carry any expenses except billing charges and maintenances of substations and so on. Distribution is where all tariff issues come up.

In Maharashtra average purchase price is Rs.3-3.25 per unit, and the distribution company sells it to consumers at Rs.6, almost 70-80% away from the purchase price. Operational efficiency is the most important thing in distribution, which comprises technical efficiencies, and administrative or other costs [or inefficiencies].

Transmission losses are 4%-5% but in Maharashtra, we have around 18% of total losses. So that’s 13- 14%, which gets added to the tariff beyond the average purchase price. This is the one issue which the distribution company needs to tackle through technological intervention, competency or operational efficiencies. Collection efficiency is good in urban areas. But there are certain districts, certain clusters of villages – I would not name the districts – which for years together have not paid electricity bills.

So overall, distribution plays the major role.

Deo: Distribution companies are entirely owned by state governments. I joined the IAS in 1972-73 when the Maharashtra Government had decided that there would be no metering for agriculture, it will be on horsepower basis and that was the revolution. That revolution has spread all over India and we have no metering for agriculture.

[The question] in predominantly agricultural districts is – how do you regulate in a power shortage condition. The solution was found in Maharashtra. You don’t supply agriculture [for] 24 hours, but for 7-8 hours. For that you should have a separate feeder and that’s what Modi has been talking about. Therefore in Gujarat now I can supply 24×7 electricity to villagers, and also to small industries [like] dairy, poultry; otherwise they also suffer.

Even with a separate feeder, [there is] still resistance towards automatic meter reading, which is apt and which will finally happen.

The difficulty is, we really do not have a measure of what are the losses – and what is aggregate technical and commercial value. Forget transmission losses, which are 3-4%. They are clearly technical, nothing can be done. The real losses are cases of theft of electricity, wrong billing, no billing. There is also a very interesting category, “consumer missing, permanently disconnected”. Permanently disconnected means he is there, he is consuming electricity, but somebody else is paying for that.

When we talk of the All India figure of 27% technical, transmission and distribution losses, that figure is not reliable. It’s only when you do the feeder separation, then you know what the real losses are.

Khullar: Rural areas are certainly contributing more to these losses. And if I look at the collection efficiency there too the rural areas have a lot to contribute. As of now, around 60% are metered. For the rest – there is a process which the regulator has asked us to implement. So, once that is in place, we are running a good system to really measure the consumption. This will be done in four years.

Deo: Forget legacy [private] pockets like Mumbai, Kolkata, Ahmedabad, Surat. Orissa was the first experiment – the World Bank put in all the resources — but the outcome was a disaster. Delhi was the only place where privatization took place.

What about Bhiwandi? At that time power-looms were the key consumers in that area and they too were treated with kid gloves like agriculture. They did not have meters, but were given billing on horsepower basis. When Torrent took over, the power supply quality was so poor that the looms could not run without interruptions.

Torrent understood the business philosophy, and rather than go and ask for bills, they just aimed at improving the quality of supply. That time itself, there was a big breakdown in the transmission network – nothing to do with distribution – because MSEB had neglected the transmission assets. That was the time Torrent engineers stepped in and the Maharashtra Government gave administrative and police support to Torrent, and Torrent could improve the supply.

So while there was initial resistance from Bhiwandi consumers about giving [distribution, billing and collection] to a private party, it dissolved due to quality improvement in one year. That also coincided with the economic boom, where all the power-loom-walas realized that they could make money. So they started paying, and, from that loss level of 65-70%, today we are talking of 36%. That is the real story, but it cannot be repeated unless you get Government support. I can’t imagine any Chief Minister saying I am going to privatize distribution.

Even the 1998 Electricity Regulatory Commission Act did not talk about privatization at all. It was the 2003 law, which talked about it, but again obliquely.

Even in the so called new amendment, separation of carriage and content, nobody is addressing the political issue. What about the cross-subsidy? If we want electricity supply to improve, there has to be competition.

Sardana: First and foremost, the biggest myth that exists is that the maximum losses happen in rural areas and in agriculture. The second biggest myth is that un-metered electricity by slums causes biggest losses. Both are wrong.

When we took over Delhi we had 53% losses; Rs.1,500 crore was the billing value stolen every year in our area. Today the losses are 9%. The difference is not the downmarket people, but the prominent people; people who matter. It is the large customers who steal electricity. Why? Because it is the staff which connives with them; tells them that if you do not give this, I will be vindictive against you. Therefore, as long as government is in the business of business, you forget about it.

Electricity is not a rocket science. Electricity in Mumbai, Calcutta, Delhi – and other places – can be delivered 24×7. Simple point is, government should take the whip and get the work done by the private sector. If governments themselves get into business and a junior engineer will retire as a junior engineer, he will earn out of the business itself.

Today, if the State Electricity Board delivers electricity for whatever hours, it says “I am obliging you”. This has to change to a service obligation. If you have to deliver to the customer it is your obligation to deliver 24×7. If you don’t deliver, there should be fines on people. [Unfortunately], those fines can’t be put on government employees.

The government can get the best work done out of the private sector. But you cannot regulate a government sector.

Shrimali: The political economy is there and the government has its own priorities. Government intervention is needed, but at what level, and in what context and in what content, that is more important. I do agree that this [distribution] is not the real business of the government. Government has to be there only with market intervention at specific points of time. [But] if the electricity sector were to be totally left to the private sector, then what will happen we don’t even know.

Harinarayanan: In our world we call the whole SEB [state electricity board] issue as India’s famous seven-year itch. In 1995, we first saw the first round of IPPs come. 2002-2003 you had the itch and you had an Electricity Act as a fallout. Again, it came up in 2009-10. So it’s come back again in 2017-18. So this is why we call it India’s Seven Year Itch. This is actually frustrating for investors.

The power sector is obviously the biggest contributor to the NPAs or the stressed assets in banks. Power assets constitute about 9.5% of total advances, while they account for about 34-35% of stressed assets.

About eight years back in Jan 2008, coinciding with what was then the largest IPO in the country – Reliance Power – the valuations for some of the power stocks, for example NTPC, had gone up to nearly three and half times price to book-value. Price to book value is now about half that number. Some of the independent power producers, around those times were tradingat four to six times price to book-value. Some of them don’t have any book value now.

You could give various reasons [for this changed situation] like the loss-making statements, the Boards, the coal shortage. But there is another reason, the demand/ supply situation in the country. From a peak deficit of 12%-14% about 5-6 years ago, the deficit has come to about 1%-2% right now.

Basically there is more power than what is being demanded at this point than it was around 6-7 years ago.

The power deficit could actually fall to nil in the next five years. Now that’s a substantial number, in the sense that you’re falling from 10% about five years back to almost nil deficit in the next five years.

I think investors are watching this space extremely closely and there has to be action this time around. Otherwise, as I said, you know, this 2016 through 2023 – the seven year itch – will revisit us again. Total industrial demand is possibly about 75,000 to 100,000 megawatts. A lot of the new capacity coming up – 2012 to 2017 or probably up to 2019 – will be equivalent to that.

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