Rescue Package for Power Discoms

A mismanaged energy sector is at the heart of India’s fi scal woes. The 2012 package for financial restructuring of power sector losses exemplifi es such mismanagement and merely recycles a 2002 package that did not solve any problem.

Surya P Sethi (spsethi09@yahoo.com) is former principal advisor, power and energy, Planning Commission, New Delhi.

About 75% of Indians either lack access to any form of commercial energy for household use or have limited access to the same, well below levels in several low-income comparators. We continue to subsidise food, health, education, and shelter and fund programmes aimed at empowering the deprived, especially women and the girl child. The need for these subsidies and empowerment schemes would have greatly reduced if we had succeeded in providing modern commercial energy to all Indian households. Adequate access to affordable modern cooking energy and electricity would have improved health and education, especially among women and girls (by relieving them from the daily drudgery of collecting biomass and exposure to unhealthy chullahs); improved and developed skills; raised productivity; and provided alternate livelihoods. Most importantly it would have improved the efficacy of some of the subsidy programmes, thereby empowering the deprived and reducing their dependence on subsidies. One does not have to be a high-flying economist to comprehend the positive impact on human development and consequent fiscal stability both at the state and central levels through a lowering of multiple subsidy burdens.
The complete bankruptcy of our energy sector’s brain trust is evident from the fact that the same bunch of “experts” who had designed the failed 2002 one-time settlement of state electricity board dues amounting to some Rs 40,000 crore are behind the 2012 Financial Restructuring of State Distribution Company Dues totalling roughly Rs 2 lakh crore! I hope that these much acclaimed economists will at least now realise that merely naming a loss restructuring scheme “one-time settlement” does not stop the losses from recurring.
I had exposed the shortcomings of the 2002 one-time settlement scheme to its creators and predicted that it will strike back with much greater ferocity in less than 10 years. And I predict, again, that the proposed financial restructuring of state discoms will buy breathing space through dressing up of the balance sheets of the banks who have funded the current losses; but it will come back to haunt us as an even bigger problem within five years.
The proposed financial restructuring of state discoms suffers from all of the shortcomings of its predecessor as it (a) simply converts half of the bank loans to interest bearing tax-free bonds guaranteed by the same fiscally strained governments that own the bankrupt state utilities while paying lip service to fiscal prudence; (b) reschedules the balance debt of the discoms and attempts to incentivise compliance through an inadequate trickle of new funds attached to a zillion impractical and unenforceable conditions; and, most importantly, (c) demonstrates little understanding of the underlying malaise thereby leaving the real problems unaddressed.
As in 2002, a serious financial restructuring exercise is thus transformed once again into the favourite bureaucratic sport of kicking the can down the road. Attaching conditionalities that are unenforceable and impractical in the prevailing political economy to key elements of the scheme merely provides a camouflage of due diligence to the reality of bureaucratic ignorance and incompetence.
Mismatched Risk and Reward Structure
The first thing that should strike any serious power sector professional is that all central public sector units (CPSUs) that are primarily engaged in generation and high voltage transmission are highly profitable, as are the CPSUs and private sector companies that provide fuel, equipment and services to the power sector. Similarly, transporting fuel for the power sector is also a highly profitable enterprise. The Power Finance Corporation and Rural Electrification Corporation, the dedicated lenders to the power sector, are AAA rated financial institutions. The private sector bulk power producers and private distributors (that serve a few cities) are, by and large, also doing well.
The sector is thus rich for all stakeholders except for the loss-making state discoms that are mandated to service the end users and actually generate bulk of the cash flow that delivers the returns to all the other participants in the sector detailed in the previous paragraph. Another anomaly, explained in greater detail in the following section, that should strike those at the helm is that the generation and transmission companies owned by the state governments do not enjoy the guaranteed regulated returns enjoyed by CPSUs and private players active in these fields and are just permitted to keep their heads above water by the state regulatory agencies. This siphoning of cash from the state-owned utilities that were once held as models for the developing world by the World Bank has left them sick and incapable of delivering their respective mandates. The fiscally strapped state governments who are answerable to the end-consumers are left holding the baby. Truth is that every central scheme or central government-driven bailout package merely attempts to preserve this unsustainable risk and reward structure.
Uncompetitive Bulk Tariffs and Uninformed Regulation
The Electricity Act 2003 sought to create a competitive power market with transparent competition in every element of its value chain, operating under an independent and informed regulatory regime. This has not happened. A measure of this failure is the fact that average bulk power prices at the nine major US electricity hubs ranged between 2.3 and 4.7 cents/kilowatt-hour (kWh) in 2012 whereas the price of bulk power in India averaged 6.5 cents/kWh in 2012. Now, even if the distribution sector in India was as efficient as that in the US with large paying loads at the end of each line, average retail tariffs in India would need to be 25% to 30% higher, in the very least, because of higher bulk tariffs – all else being the same. Thus, Indian consumers with average per capita income of less than 8% of their US counterparts, in purchasing parity terms, must pay up to 30% more for their electricity to ensure viability of the power sector in India! Truth is that the Indian distribution sector cannot be as efficient as the US system given our low level of consumption and the profile of our loads. So, if we want a sustainable power sector with the currently prevailing bulk power prices, India’s average retail tariffs would need to be even higher. This is clearly unsustainable.
The above state of affairs has come to pass despite the fact that coal, which accounts for over 70% of our power generation, is sold at a discount to its true economic value at the pithead. This low realisation not only results in lower royalties for the coal-bearing states but also encourages mining practices that are actually destroying our most abundant though limited domestic energy resource.
The sad truth is that the prevailing policy and regulatory regime governing various elements of the electricity value chain encourages uncompetitive bulk power tariffs that are continuing to rise to even higher levels of unsustainability. We have failed to create an efficient and well-regulated power sector built upon a foundation of transparent competitive markets for all inputs and outputs across each element of the electricity value chain. Unlike their compatriots worldwide who regulate markets, Indian regulators are primarily attempting to regulate the government and government-owned corporations.
The Indian power sector regulatory framework grants the world’s highest level of post-tax returns to the shareholders of power sector utilities. These high equity returns are currently guaranteed for the CPSUs who were covered by the tripartite agreement that served as the backbone of the 2002 one-time settlement scheme. These returns primarily support highly inefficient CPSUs and a non-competitive private sector under a cost plus regime that allows mandated recovery of all approved costs. The regulatory regime enforced by the Central Electricity Regulatory Commission (CERC) for these select entities also applies legally to the state generation and transmission utilities. However, given the pressures that state regulatory agencies face in keeping consumer tariffs within reasonable limits they, at best, allow full recovery costs to the state-owned generation and transmission companies and permit the state distribution utilities to book huge losses.
Raising tariffs to levels that allow identical high returns promised under the prevailing regulatory regime even to the state-owned utilities is all the more difficult under the prevailing tariff regime that is riddled with cross-subsidies. The customers that fund the cross-subsidies are already paying among the highest tariffs in the world. Raising their currently unsustainable tariffs further will only raise the reward for theft of electricity, thus boosting this free enterprise while driving electricity even further beyond the reach of the bottom half of my fellow Indians.
Even where power generation projects are awarded on a competitive basis, the concessions signed are, knowingly or unknowingly, saddled with so many infirmities that they are often renegotiated or exceptions are made, resulting in effective burdens on the sector that go way beyond the tariffs bid out by the competitors. Such poorly structured concessions/contracts considerably increase the scope for crony capitalism and rent extraction.
Misdirected Resources
The facts highlighted here have, over the years, resulted in disproportionately high investments in generation, less than the technically required level of matching investment in transmission and an almost complete neglect of essential investments in distribution beyond the simple expansion of the system. Any power sector expert should know that in India, the power distribution segment requires more than the normative level of investment typical of a more industrialised society. This is so because: (a) the combined load of all households in a typical Indian village is less than the load of a single middle-class home in the suburban US; (b) even the paying industrial and commercial loads are relatively much smaller than similar loads in more advanced countries; (c) the tariff regime is riddled with cross-subsidies requiring separation of feeders and metering for effective management and control; and (d) there is an overall shortage of power and peculiar pressures of load management given the realities of our political economy. However, even normative levels of distribution investment have gone missing since independence.
The distribution sub-sector that, today, needs the maximum attention is totally unable to support such investments. A few states have made such investments despite their fiscal pressures but even they need to do more. However, they are unable to generate the required surpluses. The tariff increases and efficiency gains at the state utilities primarily guarantee the protected returns of bloated CPSUs and the private sector both of whom have gradually raised their stake in the sector and are, today, the dominant force because of being rewarded selectively with the highest regulated returns in the world. All this is at the cost of the state utilities charged with the primary responsibility for servicing end users of electricity but progressively rendered unable to do so because of a misguided policy and regulatory regime.
All of the above is further compounded by the poor governance that afflicts both the central and the state public sector units engaged in the power sector with the state-owned units being relatively worse. Poor vision, poor planning and procurement practices, high degree of political interference in all commercial decisions and human resource management, and, above all, the lucrative arbitrage offered by a tariff regime that ranges from free power to power priced at rates not charged anywhere else in the world has led to a grossly inefficient and distorted sector wherein available data is completely unreliable and doctored to obfuscate massive corruption, poor productivity and a culture of mediocrity.
In Conclusion
I have primarily highlighted the power sector issues here within the context of the proposed financial restructuring of the dues of the state discoms and the broader concerns of fiscal stability both at the centre and the state levels. The distortions in the oil and gas sector and the coal sector are no less potent in threatening India’s fiscal stability and undermine our attempts to provide even basic levels of energy access to our people. A fact that might come as a surprise to our elitist planners, but best reflects our loss of touch with the reality of India, is that traditional biomass together with the animal and human draught energy constitutes the single largest source of energy in India by far. We put out an erroneous guestimate of how much traditional biomass we use as a nation year after year in our Plan documents and we are blissfully ignorant about the extent of animal and human draught energy that powers the world’s third or fourth largest economy. Those who tell us that nuclear energy is the answer to India’s energy woes are simply fooling themselves and the people of this country. I can safely say that at least till 2050 and possibly till even later, that is not even remotely likely.
The Indian electricity and energy sectors are simply unsustainable in their current form. Schemes that tinker around the edges while preserving the current policy and regulatory superstructure provide limited policy space. Fiscal stability and our promise of basic energy access to our people demands a more comprehensive and a more serious rethink. The first step in that direction is to get rid of the vested interests that are advising the government on key policy initiatives. These are the same people who have brought us to the current abyss. They benefit from preserving the status quo. The honorable young and articulate power minister and the Fourteenth Finance Commission will do well to take note.