Reviewing the Electricity Act 2003:Real Initiatives Needed-II

IN the earlier part of this article (June 6), we had examined why the cost of electricity has gone up almost three times in the last 10 years. As the major culprit, we had identified the various incentives given to private IPPs, which were also availed off by NTPC and the rise in the cost of fuel, particularly of naphtha. In this context, we had pointed out the adverse impact on the power sector of changing the fuel policy from indigenous coal to costly hydrocarbons. In this section, we will examine the trifurcation of the SEBs and its privatisation crucial element in this generation of power sector reforms. We will also examine the effect of these reforms on rural electrification and agriculture.

TRIFURCATION OF THE SEBs

The arguments for trifurcation of the SEBs – separation of generation, transmission and distribution can be considered the second phase of reforms. They were introduced after the failure of the IPP and the liquid fuel policy. The arguments advanced for trifurcation hinged on three interrelated issues: a) If generation was separated then the cost of generating power would come down due to competition, b) SEBs were inefficient therefore their costs were high, c) Subsidies, specifically to agriculture was the reason that SEBs were financially in trouble. The proponents of trifurcation also pointed out the supposedly beneficial effects of such measures in different countries.

We have already dealt with the reality that competition has not reduced costs of supply anywhere in the world and IPP and merchant power has been found to be extremely expensive. Country after country has either scrapped IPP contracts or is in deep trouble with the use of such high cost power. Pakistan scrapped its IPP contracts; Philippines is in deep financial trouble after signing a set of IPP contracts. UK has seen the cost of fuel drop by more than 50 per cent after changing to North Sea Gas and imported coal and yet registered an increase in power tariffs as the private companies pocketed the savings. Californian disaster three years back shows how easy it is to rig the power market and push up prices. Despite mounting evidence, trifurcation, privatisation and market have been the mantra of the past two governments. All this culminated in the Electricity Act 2003 which well nigh mandated trifurcation, imposed open access and removal of cross subsidies.

COST OF GENERATION

Let us take first the issue of reduction of generation costs due to competition. In India, both central sector and private IPPs are now in operation, the central sector has a substantial presence for more than 20 years and IPPs have started operations in the last 5 years. If we compare the costs of electricity from the private IPPs and NTPC to the costs of SEBs themselves, we will find that costs of the NTPC and IPPs are much higher than that of the SEBs. In 1992-93, it cost the SEBs about 65 paise to produce one unit of power while the central sector costs were about 75 paise. This also reflected that SEBs had older plants and had therefore written off a major part of their capital costs and therefore could produce cheaper power. After 10 years of reforms (2001-02), the cost of generation of unit of SEB power was still in the range of 130 paise while the NTPC and IPP power was of the order of 240 paise: the cost of SEBs generated had doubled in these 10 years while that of NTPC and IPPs had more than tripled! Not only has the so-called competition failed to produce cheaper power, cost of supposedly more efficient NTPC and private IPPs.

If we look not at the cost of generation but the cost of supply of electricity– that is, we also add the costs of distributing and transmission losses to the cost of generation — then the sale cost per unit today (2001-02) is 350 paise as against the sale price of 128 paise in 1992-93. This price has also almost tripled in the last 10 years. The cost of generation today (2001-02) is of the order of 230 paise: we have to add about 120 paise for the other costs mentioned above. Incidentally, at these costs India has one of the highest supply costs of electricity in the world. The average supply cost of electricity internationally is of the order of 4-5 cents as against about 7.5 cents in India currently. The question we have to address is that is the trebling of cost of supply of electricity the result of SEB inefficiency or due to high cost of purchased power?

Neither the government task forces nor the Planning Commission have attempted to examine the question of this troubling rise in the cost of power, which has been much higher than the rate of inflation in the country. Instead, the attempt has been to argue that that the gap between supply cost and the revenue realisation, particularly in agriculture, is the main culprit for the rise of the SEBs, perhaps with some contribution from high T&D losses of the Boards. In other words, we need to cut down transmission and distribution losses while socking the farmers with high electricity tariffs even if it makes agriculture not viable.

PERFORMANCE OF SEBs

If we look at the performance of the SEBs in the last 10 years we will find that their technical parameters have improved remarkably. The Plant Load Factor (PLF), for which the SEBs were blamed in the 70s and 80s, have now risen from 55 per cent in the mid eighties to 70 per cent in 2001-02 with plant availability of the order of 80 per cent. This compares favourably with both NTPC run plants and private IPPs. Not only this, the PLF figures of 70 per cent for coal-fired plants are one of the highest in the world. If we add that India burns very high ash coal, the achievement of the SEBs in improving their generation performance has indeed been remarkable. This is not just a technical parameter; if we can produce more power with the same equipment, and this is what high PLF means, we lower all other costs per unit of power generated except that of fuel. Obviously, the cost per unit of fuel remains constant or changes with the actual fuel cost.

Yes, on one account, the SEB performance has deteriorated. The transmission and distribution losses have grown: from 21 per cent in 1992-93 to about 28 per cent today. Much of this change is an accounting one; earlier the practice of the SEBs was to hide the T&D losses under other heads while today the T&D losses are being inflated to make the task of privatisation easier. They are in the nature of hidden bonuses for private companies who can claim fictitious gains from loss reduction and then claim higher profits. Even if we accept that there has been a worsening in terms of T&D losses, it has been offset by the better performance of the SEBs in terms of higher PLF.

If that is so, why is the financial health of the SEBs so poor? The answer becomes apparent if we look at the cost structure of the SEBs. The single largest change in the component in the supply cost of power is purchased power: it is 185 paise out of the cost 350 paise. In 1992, in the supply cost of power, it was only 36 paise out of 128 paise. And we have already shown that this is due to the steep rise in the cost of IPP and NTPC power. As the share of NTPC and IPPs has grown in the total power generated, the condition of the SEBs has progressively worsened. They are in a classic pincer: for every unit of power they have to buy, they have to shell out way beyond their average revenue, while every increased unit of sale is at lower than average revenue. With various incentives given to captive generation, industry is moving away from the grid. With states being denied fund for setting up new power plants, their dependence on IPPs and NTPC and therefore costly purchased power is bound to grow. And so will their crisis.

SUBSIDIES TO AGRICULTURE

Let us take the other arguments advanced for trifurcation. The SEBs are in a crisis because of cross subsidies and subsidies to agriculture. If they are trifurcated and privatised, the state will have to provide explicit subsidies and the private companies will run the system on commercial lines and more efficiently.

This is not the place to discuss agricultural subsidies. Once we have removed Quantitative restrictions under WTO regime, we cannot wish away that there are huge subsidies being provided to agriculture, particularly in advanced countries. Therefore, removal of subsidies in India can make agriculture, the mainstay of the economy, unviable.

One of the many misconceptions about the agriculture sector is that it is receiving a huge subsidy and is responsible for the crisis of the SEBs. We have already shown that the crisis is not so much on the revenue being artificially kept low but the cost of supply of electricity being high. Leaving the cost of supply aside, there is still the issue what should be the cost of supplying electricity to agriculture? In earlier articles, we have shown that the supply being actually made to agriculture is inflated by at least a third. This is to cover theft and other losses in the system. The second is that agriculture gets off-peak power and cannot be charged at the average cost of supply. In fact, there is a strong case for supplying agriculture at the variable cost of power (or the fuel cost). If we take these two into account, the subsidy to agriculture amounts to not more than Rs 8,000 crore instead of Rs. 28,000 crore claimed. Unfortunately, the regulators have made no attempt to differentiate between the kind of power being supplied to agriculture and others and have claimed that agriculture is being subsidised when their regulatory regimes have actually led to high-end consumers and industry being subsidised

If we look at one issue that has almost disappeared from the power sector discussions is what happens to rural electrification after trifurcation? If all the distribution companies run commercially, read making profits as their primary objective, why should they supply power to rural areas or extend rural electrification? The Act 2003 has a simple solution: the rural sector should fend for itself with non-conventional and other energy methods. Missing here is that the cost of non-conventional energy is 3-4 times that of conventional forms; if the rural sector is already unable to pay for high cost power from the grid, how are they going to pay for even higher cost non-conventional power? In effect, the Act 2003 changes the fundamental paradigm of the electricity sector, that electricity is a necessity and the state has the responsibility that all sections have access to electricity irrespective where they stay or which class they belong to. Instead, electricity is being converted to a high cost luxury item for the benefit of only the upper classes. The rest can fend for themselves perhaps with burning gobar or at best gobar gas!

Let us take the other arguments advanced for trifurcation.
Much of this change is an accounting one; earlier the practice of the SEBs was to hide the T&D losses under other heads while today the T&D losses are being inflated to make the task of privatisation easier. They are in the nature of hidden bonuses for private companies who can claim fictitious gains from loss reduction and then claim higher profits. Even if we accept that there has been a worsening in terms of T&D losses, it has been offset by the better performance of the SEBs in terms of higher PLF.