The test of true change is in shaking up the status quo, but some monsters are best left undisturbed unless there is a concrete way of taming the beast when it awakens. Similarly, the issue of fixing power tariffs in Delhi and the rest of the country is a complex one and cannot be treated in the same vein as other ‘populist’ poll promises.
When Arvind Kejriwal and his Aam Aadmi Party (AAP) promised to cut tariffs by half, even the BJP leaders — who had promised a 30 percent decrease — raised eyebrows. Political observers and industry watchers wondered aloud how he would achieve this feat with an average 7 percent shortfall in power generation across the country, low coal production, dependency on imports and an ever-increasing demand for electricity. The Economist projects that India’s energy demand will grow by 54 percent by 2020, while the current demand is 10 percent more than supply during peak hours.
Perhaps, Kejriwal and his team had some magical strategy by which they could fix the economy vis-à-vis the dollar-rupee rate and reduce prices of coal and gas imports, generate more power and make energy a profitable enough business to cut electricity tariffs by more than half. Meanwhile, AAP threatens to cancel the distribution companies’ (discoms’) licence (which has been stayed by the Supreme Court) and the discoms threaten outages for as long as 10 hours. As a result, users cling on the short end of the stick.
On 11 February, Kejriwal shook things up further by lodging FIRs against Union Petroleum Minister Veerappa Moily and Reliance CMD Mukesh Ambani, among others, for an alleged “conspiracy to benefit Reliance by doubling natural gas prices”. A daring move, but which will not ultimately yield much for the consumer.
However, to understand that cutting tariffs is not a practical solution, one has to digest two things. Firstly, one has to look at the way the energy sector functions with its rising demand, poor supply and the domestic and international raw materials acquisition for the thermal power sector, which is our largest power supplier. Secondly, and more importantly, one has to know the history of privatisation of power supply in Delhi.
The British-inherited bureaucracy ran the supply of electricity into the ground across the country. In 1997, the Delhi Vidyut Board was created to replace the Delhi Electricity Supply Undertaking (DESU), and finally, through an ordinance in 2000, it was ‘unbundled’ into power generating companies, transmission companies and distribution companies.
As any sector that invites private investment has to be regulated, the Delhi Electricity Regulatory Commission (DERC) was also set up. But, who would enter this loss-making venture and under what conditions?
The government’s response was to assure investors of a 16 percent return on equity. For an investment of Rs 1,000 crore, there was a guaranteed return of Rs 160 crore per annum. The government set up a multi-year control period as well through a projection of how to cut down losses during the said control period and gradually and rationally increase the tariff without harming the consumer through a “tariff shock”.
Until privatisation, the government used to tread carefully on tariff hikes because it could upset the political scenario. A tariff shock through privatisation would mean upsetting the electorate. It was the DERC’s job to monitor this through an equitable regulatory environment where the consumer did not feel the pinch all at once and the corporate investor could grow.
Cutting down on losses meant setting two things in order: proper revenue collection and curtailing theft. In the first year, the target for loss reduction was as low as 2 percent. The regulator said that if the discoms were able to gather more than 2 percent, they could take that to the bank as their profit. But if it was less, the discoms would have to bear the transmission losses. Thus, the DERC was expected to set the power tariff for Delhi.
The revenue collection was raised over a period of time and the target now is above 95 percent. In 2011-12, the billing efficiency was raised to around 99.5 percent.
A key person in the Delhi power sector’s privatisation was the then power minister Ajay Maken. A former Delhi government official says that the plan outlined by Maken in 2002 was to increase tariffs in the first two years of the control period and then stabilise it for the succeeding four years. Following this, the state government wanted the tariff slashed. It was a political strategy and the Congress would take home the spoils.
In 2002, when the Atal Bihari Vajpayee-led NDA regime was in power, the Indian economy was beginning to exhibit signs of climbing astride the global economic upswing. Maken’s strategy might well have worked. What he did not foresee was the turmoil in West Asia, the consequent rise in the price of oil and natural gas, high migration to Delhi and a booming demand for power thanks to the rising fortunes of the middle class.
In 2010, the then DERC chairman Brijendra Singh kicked up a row in passing a historical but controversial tariff-pricing order. Singh claimed that the discoms had generated a surplus by several methods. This included collection of old bad debts, which seemed a logical addition to deciding what was surplus for that year.
Singh reduced the tariff for that year by 23 percent in the order passed in April 2010 for all classes of consumers. It is said that he alone signed the order while the two other members of the DERC not only dissented, but refused to agree to the order and later wrote notes stating the discoms had suffered losses. DERC lawyers contended that when the tariff price was being fixed, the other members had agreed to the reduction in tariff through notings on files but changed their mind later.
The discom, BSES, says that there was a difference of nearly Rs 7,000 crore in the computation of the financial data by the DERC. Singh’s notings mentioned that the BSES had made a profit of Rs 3,577 crore, while the company said it had suffered losses of Rs 3,300 crore.
Singh faced opposition from every quarter and finally a private citizen filed a PIL before the Delhi High Court challenging the veracity of this order.
In 2011, the Delhi High Court nullified this tariff decrease order. The DERC should have at least approached the Supreme Court, but by the time the decision came in 2011, Singh had retired. The DERC did not want to challenge the high court order probably because two of the discoms — BSES Rajdhani and BSES Yamuna — are owned by one of the most powerful industrial houses in the country: Reliance.
This brought to an end an ambitious endeavour to reduce the power tariff.
To the power mess, BSES responded by saying that it has reduced the loss of power distribution by 40 percent and has saved the government around Rs 30,000 crore.
Tariff pricing is a complex process that requires the guidance of finance experts. While choosing such advisers, the DERC overlooked a basic legal principle of avoiding bias. Bias or likelihood of bias could arise out of personal, pecuniary or professional relationships between an adjudicator and an affected party. However, the DERC chose consultants who were also the financial advisers and accountants of companies that held a controlling interest in the discoms.
A source in the DERC says that there have been times when the DERC members have mechanically just forwarded the consultants’ recommendations for tariff pricing without conducting proper due diligence and physical verification of several assets.
Though these private consultants are always present at hearings and lawyer briefings, because they alone know how the figures work, the DERC chairman denied this to TEHELKA. He said the consultants are from a State institution: the Administrative Staff College of India.
During his tenure, Singh also found that RIL had purchased equipment for Rs 800 crore but sold it to BSES at a cost of Rs 1,428 crore. This issue is still pending before the Supreme Court.
It was around the same time that gas prices soared by around 85 percent and the price of coal imports jumped 60 percent. There was little or no increase in the power tariff and generating companies such as National Thermal Power Corporation (NTPC) could not give ground in matters of power generation charges.
In fact, Delhi’s tariff was lower than the national average by a large margin and the mess was settling in deeper.
The process of tariff settlement requires companies to present an annual revenue requirement (ARR), which they do at a higher rate than required. The DERC hears the discoms’ presentations and then makes its orders putting it lower than the real rate. It is almost like bargaining for vegetables because the discoms go into appeal and the appellate tribunal usually raises the rates ordered by the DERC. But, the DERC does not always appeal that order at a higher court, thus creating a questionable hike in tariff and the DERC has to shell out cash to the discoms based on the ARR agreed upon by the appellate tribunal.
Based on these negotiations, the discoms have ended up owing around Rs 2,000 crore to the generating sector, around 75 percent of which is owned by the government through NTPC and other companies.
In fact, there are several orders by which the DERC should have paid large sums of money to the discoms, but despite there being no stay on the payment of these dues, the DERC has not paid up. The dues have accordingly accrued in favour of discoms who owe money to the generating companies. There are several apex court judgments that say that the DERC should have paid up.
DERC chairman PD Sudhakar says that these are being cleared up now and there is only a delay in working out minor calculations in some cases. This added to the misgovernance and maladministration in the energy sector. Now, if Kejriwal pushes out the existing private players, who would come in to bear the accrued purchase losses?
In the national energy scenario, there is no one willing to take responsibility for the generation cost or the price regulation. So, both the industry and consumers are left in the lurch.
In hydel power, there are reports of floods and destruction. Coal is being imported due to State mismanagement of the deposits. Importing coal is tough and the actual requirement could choke up the ports. The government is lethargic in developing renewable and alternative energy generation. Nuclear energy is faced with protests. This leaves the entry of new private players doubtful.
In August 2011, there was a tariff hike of 22 percent, but still the companies were unable to pay the generating companies. In January 2012, the DERC found discrepancies in the figures provided by the discoms in relation to power purchase among other things and asked them to pay the dues of the generating companies.
During the discoms’ appeal, the appellate tribunal gave an unprecedented direction to the DERC chairman, asking for his personal affidavit justifying the January 2012 order. The DERC meekly complied, probably because it does not act independently. It is a parking lot for retired bureaucrats who are habitual obedients of the government through long years of civil service.
While they are loyal to the government and easily swayed by its diktats, which are usually politically motivated, they don’t have the capability to work out the detailed issue of tariff and often end up delegating this task to private consultants.
Sudhakar says that the tariff is difficult to control until the generation costs decrease, because 80 percent of the tariff is based on generation costs. “The government can also give subsidies just as in the case of kerosene, LPG or diesel,” he says.
The tariff also includes fuel adjustment charges. A PIL is doing the rounds, which claims that the DERC allows fuel adjustment charges in cahoots with the discoms. TEHELKA found that the PIL ignored that it is actually a statutory cost and allowed by at least 17 other states.
The discoms have also taken bank loans worth thousands of crores and if they are removed, the interest bearing cost, fuel adjustment charges and other dues will fall upon new players or the loans would become unrecoverable, thus jeopardising public money.
But, what do the discoms have to fear by a CAG audit? If they have nothing to hide, they should be willing to open their books since revenue collection is involved in the business of electricity distribution.
Kejriwal has taken this whole mess head on, but there is little he can do since the problem is much beyond the scope of the Delhi government’s jurisdiction.