The Andhra Electricity Tariff Hikes: the Real Face of Reforms

The sharp rise in tariffs for the domestic and the agricultural consumer in Andhra – as high as 245% for some of the consumers as shown in the table below — clearly indicates what is in store for the country under the proposed reform regime. Andhra is important, as unlike Orissa, it has substantial agricultural load. The Cyber Chief Minister, Chandra Babu Naidu,  has sought to cushion the impact of the sharp rise in tariffs by increasing the subsidy to the board by a whopping 1200 crore. By this, the outflow of money for the electricity sector from the AP Government will be higher than the earlier losses of APSEB. It is also interesting that the percentage increase in the rates even after the state government announced additional subsidies is the higher for the lowest slabs than the highest slabs.

Tariff Increase in Electricity Rates

    The crux of the electricity reforms lies here. The argument given for the restructuring of the electricity sector is that the losses of the State Electricity Boards are too high for the state governments. If generation, transmission and distribution are unbundled and privatised, the losses of the SEBs will disappear from the books of the state governments. Of course, to make the reforms palatable, the rider added is that this will not lead to any sharp increase in tariffs and the agricultural sector will continue to receive low cost electricity through explicit subsidies. What is left unsaid is that this is only an accounting sleight of hand: if agricultural and domestic tariffs are subsidised, all that happens is that instead of losses, the same outflow now occurs as subsidies. Hence, everybody’s books look better; but the outflow remains the same.

 If that was the only consequence of unbundling, perhaps there need not have been such a hue and cry. The problem is that despite such subsidies, the tariffs for both domestic and the agricultural sector will see a steep rise – far higher than any such rise in the past. This is in line with what has happened in Orissa. The power tariffs in Orissa have risen by more than 76% in the last two years after these so-called reforms. The question then arises is that if the State government’s outflow to the power sector remains same or higher, why do the consumers have to see such stiff increase in power tariffs? The other related questions is if the outflow from the exchequer remains the same and the consumers pay much higher tariffs, who is getting the money?

Let us take the first question: why do the consumers and the state governments have to pay out higher amounts after unbundling? There are two reasons for higher tariffs. One is that during unbundling, the assets of the SEBs have to be revalued at current market prices. If this is not done, and the assets transferred at book value to the unbundled companies (or privatised ones), this will mean transferring assets of the people at costs far lower than their actual value. However, the flip side of such a transfer is that the revalued capital costs of the plant and equipment have to be paid for again by the consumers. The second reason for higher tariffs for the domestic and agricultural sector is that the regulatory agencies do not take into account the obvious — the theft of electricity by the industry – and fixes tariffs based on their supposed use. Also, as the industry is well organized, its ability to intervene in the regulatory process is far greater than that of other sections of the people.

Let us take as an example the Orissa case. The assets of Orissa State Electricity Board on the books for hydel projects were virtually zero. Hence the cost of hydel power in Orissa was less than 20 paisa. Once a Orissa Hydel Corporation is formed and privatised, a realistic market value of the hydel assets will have to be computed. A simple basis of such a market value is what it would cost somebody to build new facilities to produce power discounted by the life of the plant that has been used up. Thus, if a hydel project has only 20 years of life left, we will have to compute how much power it will produce in the next 20 years and what it will cost us today to put up a similar facility with – a 20 year life span. This is the replacement value of the assets.

Once this is done and the assets transferred to the Orissa Hydel Corporation at this cost, the cost of power is no longer 20 paisa as earlier, but based on the cost of this hypothetical “new plant”. The difference is what the consumers have to pay.

Once the assets are revalued, the tariffs have to rise. However, this does not mean that the tariffs rise equally for all. The AP Electricity Regulatory Commission (APERC) has decided how much each consumer has to pay of the increased tariffs. The industry has got off virtually scot-free, the entire burden of the increased tariffs have been passed on to the domestic and agricultural consumers. After the people showed their anger in no uncertain terms, Naidu has now decided to pay from the state exchequer some part of the increased tariffs. Thus, the power companies, who will soon be privatised, will retain this huge increase in tariffs; the consumers and state government will suffer large net outflows.

What is the cost of the reforms on the AP state government? The calculations by the consultants employed by AP show that the state government will have to shell out Rs. 20,000 crore for these reforms in the next seven years. This, in addition to the pension liabilities of over Rs. 4,000 crore for the SEB employees. However, these figures are gross underestimates. The subsidies that the AP government will have to pay for agricultural tariffs are certainly going to be much higher than computed by the so-called consultants. As also the amount that the state government will have to pay their staff after transfer of services to the new companies.

If might appear that the reason for such high losses to the state government due to the power sector is due to the price of electricity being maintained at very low levels for the consumer. The truth is that the Indian consumer is paying higher than international rates for the power that they receive. Internationally, power can be produced between 4-5 cents a unit. If we add a reasonable cost for its transmission and distribution, it should not cost the consumer more than 7 cents. The consumers today are being asked to pay tariffs that are well beyond these figures: in the highest slab, the tariff fixed by APERC is close to 16 cents. The average tariff is well above the international costs of electricity. This is in spite of per capita incomes that are one of the lowest in the world.

Naidu has denied any responsibility for the rise in tariffs. According to him, this has been done by APERC that has statutory powers to fix tariff. What Naidu is concealing is that the consequences of unbundling and setting up a Regulatory Commission had been pointed out by the CPI(M) at the time that these changes were being brought in. If the unbundling does not have the objective of privatisation, there would be no need to revalue the assets. Further, at that time, the Act could have reflected that the State Assembly will fix the tariff guidelines and the Regulatory Commission will fix tariffs based on these guidelines. To compound the above, the Government accepted all the claims of TRANSCO regarding revenues and costs and failed to protect the subscriber before APERC. Not only that, they themselves argued for a 20 % hike in tariffs based on the TRANSCO figures. Once all these figures are accepted, the only way that the tariffs could remain low was if the state government had agreed to the subsidy of 2250 crore asked for by TRANSCO. Once this subsidy was fixed at 1345 crore, the rise in tariffs inevitably followed.

The important question that need to be addressed is that if the theft of electricity continues at the rate of 45% of all electricity produced, should this burden be transferred exclusively to the consumers? Secondly, if this is the level of subsidies, what have been the gains of the so-called reforms? The third, if the people are not benefiting from the reforms, who are the beneficiaries?

For an answer to these questions, let us turn to the Orissa case. Here, the reforms are well under way. The OSEB has not only been dismantled, but also privatised. The figures coming out of Orissa are instructive. The losses in transmission and distribution, which were supposed to improve after unbundling and privatisation, have increased from the SEB days – from 25% to 48% ! Further, the cyclone has brought out the contradictions inherent in the reform process. The Orissa cyclone saw a massive damage to the distribution system. The privatised distribution company, which is now owned by AES Transpower, an US multinational, first wanted the Government to pay the costs of cyclone damage. Failing this, they have now been given loans by the state government to bring the distribution system back and an increase in rural tariffs to pay back these loans. Even after this, by Government’s admission, electricity has not been restored in 800 villages even till today. AES Transpower is saying privately why should they restore rural electricity, which is loss making anyway.

The other interesting aspect of the Orissa reforms is that AES Transpower has taken over both generation and distribution. One of the arguments for unbundling is that it promotes competition in generation as generating companies become separated from transmission and distribution companies. However, if the same private company owns both, apparently laws of competition are not violated. Only if they are state owned are such laws of competition violated, this is the logic of the Orissa reforms!

The Andhra and the Orissa cases have shown the real face of the power sector reforms. Earlier, the UPSEB engineers have given spirited resistance to these so-called reforms. The people of Andhra are now in a struggle to roll back these policies. The need of the hour is to bring the people and the workers in the electricity sector together to fight these anti-people and anti-worker policies. At stake are the assets of the electricity sector that are valued at over Rs.500,000 crores. This is what multi-nationals like Enron and AES Transpower are eyeing. It is these designs, worked out in collusion with Kumaramangalams and Chandra Babu Naidus that we have to defeat.