Regulator as threat: Delhi’s power scene

It’s high time we revisited the approach to regulation and appointment of regulators if they are to serve the public interest

To quickly recount some of the key gains from the privatization of power distribution in Delhi, aggregate technical and commercial losses have come down from around 55% to 15% at present. Load shedding has reduced from 5% to around 0.3%, or from 891 million units in 2000-01 to 43 million in 2012-13. Photo: Priyanka Parashar/Mint 

Delhi’s power sector reforms, which had eliminated outages and enabled the system to meet peak load of 5,653 MW last summer, is on the verge of a collapse. The blame would lie squarely on regulators, with successive incumbents closing their eyes to reality. Their sins of omission and commission brought on by lack of expertise, populism and failure to stand up to the political executive have led to this avoidable situation. Delhi risks reverting to its earlier levels of shortages, corruption and insensitivity to the needs of the city and its citizens, bringing it on par with its neighbouring states.

To quickly recount some of the key gains from the privatization of distribution in the city, aggregate technical and commercial losses have come down from around 55% to 15% at present. Load shedding has reduced from 5% to around 0.3%, or from 891 million units in 2000-01 to 43 million in 2012-13.

Pre-privatization, the system could barely meet the peak load of 2,879 MW. To put this in perspective, but for the improvements made, to meet the present peak load, Delhi would need to buy 12,000 MW, instead of 5,653 MW that it did. This would not only mean an effective doubling of purchase price but a total collapse of the system as it cannot take such loads. What is often forgotten is that Delhi’s per capita consumption is the highest in the country, 1,651 kWh as against the national average of 778 kWh. To give some idea of Delhi’s consumption patterns, the sales of air conditioners were 266,000 units in 2009-10, 366,000 in 2010-11 and 345,000 in 2011-12. On the other hand, the sales of inverters and UPS units were 369,000, 331,000 and 262,000 in the same years, respectively, a vote of confidence for the sector.

Privatization has also had a hugely positive impact on Delhi’s public finances, allowing the government to go on a building splurge of elevated roads, flyovers, hospitals, schools, colleges and universities. Earlier, the sector was a strain on the government budget, with outflows of Rs.860 crore in 1998-99, Rs.1,136 crore in 1999-2000 and Rs.1,337 crore in 2000-01. There were also more than Rs.12,000 crore of unpaid bills to generators, railways and to Coal India Ltd. Extrapolating these figures to the present levels of costs, inflation and consumption levels would give figures that would be beyond normal imagination.

Two key features must be understood in the context of allegations that huge profits are being made by power distribution companies (discoms). One, the gap between peak demand and the lowest demand on a daily basis ranges from 2,000-2,500 MW. In the summers, Delhi has twin peaks, at mid-afternoon and midnight. Almost 80% of Delhi’s purchases are from thermal plants, leaving the discoms sitting on millions of units of surplus power for most of the day.

The alternative would be load shedding, a tactic employed by most states to avoid such huge financial losses. These surpluses lead to the second feature, namely sale of surplus power. Prior to the coming into force of Central Electricity Regulatory Commission’s new regulation (2010) tightening the band within which the system must operate, there were profits to be made from such sales. Since then, the market has collapsed and, as the Delhi regulator DERC has itself acknowledged in its statutory advice to the Delhi government of February 2013, discoms make losses of Rs.1.5-2 per unit on such sales.

Besides its own generation, Delhi purchases around 80% of its needs from public sector generators across the country. DERC notes that there has been a steep hike in power purchase costs since 2009 on account of increases in the price of coal and gas. Faced with this, the regulator unfortunately avoids taking responsibility. One chairman decided on a whim to reduce tariffs, unsuccessfully. As an aside, his so-called order that was held by the high court as being merely an opinion is the basis of AAP’s and other critics’ allegations of huge profiteering by discoms.

The subsequent regulator, rather than hike tariffs, decided to push the problem under the carpet by resorting to a highly dubious accounting device—invented by Indian regulators—called regulatory assets.

In other words, the regulator accepts certain expenditure but does not factor it in while determining tariff, leaving it to be adjusted in future tariffs. DERC determined a final figure of regulatory assets of Rs.7,014 crore for the period up to 2010-11. To liquidate this, it allowed a surcharge of 8% on tariff by its July 2012 tariff order.

This device is doubly unfair. One, the surcharge was not even enough to cover the carrying costs and has led to the building up of regulatory assets, jeopardizing the ability of discoms to raise funds to cover even their operations. SBI Caps in its presentation to the DERC in December 2012 had stated that the surcharge should be 20% and 25% in the case of the two BSES discoms. Bankers in general made it clear that they would need a realistic amortization schedule for this overhang if they were to extend any line of credit to the discoms. Secondly, it is grossly iniquitous since it makes future consumers pay for the consumption of past consumers. Rather than protecting consumers, the regulator acted against consumer interest. It is understandable for the elected government to feel threatened by raising tariffs to make them cost reflective, but for the regulator to go along not only penalizes future consumers, but as we shall see, compromises all the gains from privatization and the reforms itself.

The double failure to come up with a cost reflective tariff and a realistic amortization schedule created systemic problems as two of the discoms reduced payments to the Delhi government-run generating and transmission companies. Their overdues, as on November, were Rs.2,900 crore and Rs.1,200 crore, respectively. The generating companies have survived because the Tata discom has continued to pay, and on government largesse. But the situation is not sustainable, made worse by the regulator as we shall see.

The discoms estimated that by the end of 2013-14, regulatory assets would have accumulated to Rs.19,505 crore. Finding no way to handle this hot potato, DERC decided to throw this into the lap of the government. It recounted all the facts and then argued for state intervention to offset the capital costs incurred by the discoms—otherwise the Delhi consumer would be loaded with it. While it is true that Delhi discoms have not been able to avail of various capital subsidy schemes and of the fiscal restructuring of the government of India since they are private entities, the whole idea of privatization is that the system should pay for itself. Additionally, the regulator sought to let itself off by referring to the huge public outcry over the last 2-3 years when the commission had increased tariffs.

Realizing that the government would not be able to bail them out, DERC again failed to rise to the occasion. First, it kept deferring to the political executive on account of impending assembly elections and put off coming out with a tariff order. Then, when the position reached almost breaking point, it came up with an order (July 2013) that increased tariffs by a small amount, and instead of coming up with a creditable amortization schedule to deal with the regulatory assets, by a sleight of hand, it reduced the amount. It also did not implement adverse appellate orders that would have impacted the tariffs, putting them off to the future again. (The charge of DERC’s complicity with the government is clear from the latter’s almost simultaneous announcement of increased subsidy to more than offset the tariff hike).

In a complete blow to its own credibility, the DERC adjusted the figure ofRs.4,100 crore that the discoms owed to the Delhi generating and transmission companies. But it did not add these overdues of the latter companies. In other words, this amount has simply disappeared from the books of the sector. Separately, for the transmission company, the DERC adjusted in full Rs.1,035 crore recoverables, but it adjusted only Rs.541 crore out of the total Rs.1,687 crore due to it. Consequently, the one healthy component of the sector is now on the brink, and would be unable to meet its loan obligations and operating and maintenance expenses.

The last blow to the regulator’s credibility is the government’s decision to go in for a Comptroller and Auditor General of India audit. Regardless of the legality of the action, the fact is that law has specifically tasked the regulator with auditing the books of the discoms, without which no tariff determination is possible. While disagreeing totally with the Aam Aadmi Party government’s attitude to the power sector, it is clear that its vote of no-confidence in the regulator is well-founded. It is high time that we revisited the whole approach to regulation and to the appointment of regulators if they are to serve the public interest.

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Shakti Sinha is Delhi’s former power and finance secretary. He is the Chairperson at SAISA. This article first appeared in The Mint. Views expressed are personal.

 

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