The Hindu Business Line : Market design for power tariff will aid reforms

The market design for power tariff assumes significance in the wake of the responsibility cast on the State Electricity Regulatory Commission (SERC).

New Delhi , Jan. 7

THE Union Cabinet's recent approval of market design for power tariffs with the intention that power be procured competitively to lower costs, enhance efficiency and prune prices is indubitably a step that would speed up power sector reform in the country.

What is set forth is that the power tariffs progressively reflect the cost of supply of electricity with each State power regulator notifying a target timeframe, latest by 2010-11, by which "tariffs are within 20 per cent of the average cost of supply".

The aim is to cork cross-subsidies and stem all open-ended subsidies, as power has been a highly politicised energy item with State Governments finding it next to impossible to bring even a modicum of cost-consciousness both in generation and in distribution.

The apparent failure on the part of the power utility has left the field wide open to theft and pilferage.

The market design for power tariff hence is all the more crucial in the country as the supply and distribution of electricity to the ultimate consumers/industries including domestic, agricultural and industrial, is the responsibility of the concerned State government/State power utility. Officials involved in the exercise maintain that the market design for power tariff assumes significance in the wake of the responsibility cast on the State Electricity Regulatory Commission (SERC), which determines tariff for retail sale of electricity under the provisions of the Electricity Act 2003.

The tariff for retail sale of electricity mainly depends on the cost of power purchase/generation, operation and maintenance expenses of the licensee and technical and commercial losses in the system.

The SERC is to do a tight-rope walk in that it has to fashion the tariff in accordance with the provisions of the Actand after taking into view the annual revenue requirement of the licensee and considering the suggestions and objections from the public in a transparent way.

The fact that nine States have not yet reorganised their SEBs and with States of Assam and Madhya Pradesh which have already reorganised their SEBs but pleaded for more time to persist with the limited function of trading, has only made the task of the SERCs arduous.

No doubt, under Section 65 of the Electricity Act 2003, the State Governments might grant subsidy to any class of consumers if it so desires in the tariff determined by the Commission.

But this might be a recipe for ruin since many State Governments would drain their resources in cosseting certain sections that may use free or subsidised power even as other legitimate users such as industries and institutions (hospitals) pay through the nose.

It is also interesting to note that the Ministry of Railways is also exploring the possibilities of purchasing power from Independent Power Producers (IPPs) and Power Trading Companies (PTCs), after being smitten by the outstanding arrears of powerhouses to the Railways in hauling coal to the thermal power stations across the country.

The arrears of the SEBs to the Railways till the end of October last, stood at a whopping Rs 1485.24 crore.

Even as the Railways adjust the outstanding dues from SEBs against traction bills payable to the latter, it is of the view that the average rate charged for electric traction is about 421 paise per unit.

"This does not have any relation with the cost at which the electricity is produced in the country," the Railway Minister, Mr Lalu Prasad, conceded in a written response to a query in the Lok Sabha during the winter session.

Currently, the Railways meet its electricity needs for traction purposes from SEBs in 17 States and three power companies viz., Damodar Valley Corporation, Tata and NTPC Ltd.

The Railways purchased 10,133 million kilowatt hour of electricity in 2004-05. It is in this context that the Railways has sought "expression of interest" from IPPs/PTCs to purvey electricity at cheaper rates.

As tariff determination by independent regulatory commissions gets embedded into the system, bulk users like the Railways might gradually shift their traction purchase from the captive SEBs to private power suppliers unless the former get their act together and rebalance their tariffs to reflect cost of supply.

Alongside, efforts need to be intensified to bring down the transmission and distribution (T&D) losses estimated at Rs 20,623 crore in 2003-04 so that the cost of subsidy in extending power to the deserving sections does not get out of hand of the State Governments which otherwise manage their fiscal affairs well.

The bottomline is the National Electricity Policy, which squarely lays stress on ensuring recovery of cost of service from the consumers to render the power sector sustainable and viable, if not profitable so that no stakeholder in the development of the economy feels aggrieved or fleeced.