AAP Governance:The dangerous and regressive fight over Electricity pricing

1 Introduction

The Aam Aadmi Party led Delhi Government has (link) slashed power tariffs in Delhi, and is in the midst of an ongoing tussle (link) with Reliance owned discom BSES over the supply of electricity in certain parts of Delhi. The AAP, even before taking the reins of the Delhi Government had long accused the Delhi discoms of overcharging consumers, and had demanded an audit into their activities, something they have now initiated (link).

Meanwhile, Delhi’s electricity regulator, the Delhi Electricity Regulatory Commission (DERC) has raised tariffs (link), and also stated that the Delhi Government cannot “cannot interfere in fixing tariff” (link).

What is going on here? On the one hand is the claim by the AAP Government that discoms are over-charging consumers. They seek to resolve this issue by (a) asking discoms to reduce tariffs by 50 percent, and (b) asking the CAG to audit the discoms to see whether they are overcharging. Added to this mix is the DERC which states that the Delhi Government has no power to reduce tariffs. It can only subsidize consumers if it wants. There is a complex legal and regulatory framework with a complex history that needs to be understood here.

 

2 Electricity regulation in the past

“Electricity” is an entry in List III (Concurrent List) of the Seventh Schedule of the Indian Constitution. This means that electricity can be regulated by both the states and the Central Government. How this works in practice is that purely intra-state generation, production, distribution and consumption of electricity is regulated by the state. Any inter-state aspect of this process is regulated by the Central Government. For example, if a power distribution company in Delhi buys power from a generation company that sells power to 4-5 other states, the terms of the purchase will be regulated by the Central Government.

Until about 10 years ago, electricity distribution in most states was run by state-owned companies (one may remember the infamous DESU in Delhi). Electricity distribution in many states is still run by state-owned companies, but many states have privatised this function to a large extent. More importantly, the process of fixing tariffs for electricity has changed. Why?

State governments have an obvious incentive to keep power prices low. It is a sop given to consumers who then vote for the party in government. How this was being done was broadly the following: the state government would direct the state-owned electricity distribution company to keep electricity prices artificially low. The company would consequently be charging consumers a price lower than the cost of providing them electricity. Since the company never recovered the cost of providing electricity, it basically provided poor quality of electricity. They were essentially loss-making entities, being told by the state government to keep operating as loss-making companies to subsidise consumers. The consequences were poor quality of electricity, and lack of expansion of the electricity supply to all segments of the population.

Most importantly, and conveniently for state governments, the loss from under-charging consumers was borne by the distribution company, and not the state government. State governments, rarely transferred the difference between the cost and the price being charged to the distribution company. So even though discoms became more and more financially unviable, state governments never suffered any financial consequences. They could therefore afford to get away while being fiscally irresponsible, and consumers got low quality electricity at low prices.

Parliament’s Standing Committee on Energy noted in 2002(link):

 

 

3 So what changed?

The condition of discoms throughout the country became acute by the mid-1990s. This extract is from a debate in Parliament in 1998 (link):

 

Starting in 1998, efforts were made to create independent regulators in the electricity sector. These regulators were intended to be independent bodies that would set power prices in a technocratic manner, and be independent of political pressures. This would help discoms charge the cost-price of electricity and make the sector financially viable.

At the same time, a slow process of privatisation of electricity generation and distribution was also initiated. By 2006, the National Electricity Policy of the Central Government explicitly stated that there was a need to attract private investments into the power sector (link)

Private investors require certainty and clarity. Unlike discoms owned by states and the Central Government, they are unable to absorb losses on an endless basis. They therefore require a proper, technical mechanism of price fixation, and require that the government will stand by the price fixed by it. This was the reason for setting up independent regulators.

 

4 Electricity Act and Independent Regulators

In 2003, Parliament passed the Electricity Act (Act) (link). The Act set up independent regulators at the Central (The Central Electricity Regulatory Commission or CERCs) and state levels (SERCs). The Act allows the “Appropriate Commission” to determine tariff according to certain principles laid down in the Act.¹ These include keeping in mind that the generation, distribution and supply of electricity is done on “commercial principles”, competition, rewarding efficiency in performance, safeguarding consumer interest, etc. It also stated that tariffs cannot be amended more than once during a year.² Importantly, the Act states that if the State Government requires a discom to provide a direct subsidy to consumers, the state government will compensate the discom in advance.³

The CERC and SERCs are therefore established as independent bodies, and one of their major functions is to regulate the tariff of electricity. The Act also set up an Appellate Tribunal for Electricity (APTEL). APTEL hears appeals from all orders of the CERC and the SERCs, including orders that fix tariff. State governments and discoms can appeal against orders of the CERC and SERCs if they feel the order is inadequate.

There was thus a very conscious move towards creating a legal framework where electricity prices were to be set by an independent body acting in a technocratic manner. It was hoped that this would lead to private investment and competition, and create a more efficient power sector in India.

5 State of the power sector today

The provisions of the Electricity Act, 2003 have not been implemented in letter and spirit. Electricity tariffs are not revised and set properly, SERCs are not independent enough, and state governments have done a half-hearted job of privatizing the state-owned discoms. The Chairman, CERC told Parliament’s Standing Committee on Energy in 2012 that the state of State Electricity Boards (SEBs or discoms) is almost as bad as it was in 1998.⁴ The Tamil Nadu State Electricity Board was reported to be bankrupt (in 2011) (link).

The CERC Chairman told Parliament’s Standing Committee on Energy in 2012 that:

In response to a question raised in Parliament, the Power Minister stated that the situation of state owned power companies was so bad, that,

The answer clearly lies in a continued move towards more technocratic tariff setting, and getting state governments to cede control over state-owned discoms/privatise the electricity sector. It is in this context that we must study the conflicts over the prices of electricity in Delhi.

6 The Delhi electricity price fight

Delhi privatised its electricity distribution some time in 2002 (link) As per a news report, during the last 10 years, “cost of power has increased 300%, mainly because of higher coal prices and a rise in the financing charges due to higher interest rates, while the rate at which it is sold to retail consumers has increased by only 70% during the period…” (link). Whether the increase in prices is correct needs to be determined through a process of audits and reviews. However, some points need to be made:

 

1. Electricity prices in Delhi are set by the Delhi Electricity Regulatory Commission (DERC), and not by the Discoms or the State Government. The DERC follows an extremely transparent method of determining tariffs. It involves stakeholders in every stage of this tariff determination process (a recent order can be accessed here).
2. The Delhi Government is legally not permitted to direct discoms or the DERC to reduce tariffs. The reduction or increase in tariffs is dependent on the process followed by the DERC under the Electricity Act, 2003.
3. If the Delhi Government thinks the DERC has erred in setting the tariff, it is free to go to the APTEL and challenge DERC’s order.
4. It is free to order an audit of the discoms, and then take a decision on the functioning of these discoms after the results of the audit are published.
5. If the Delhi Government still thinks that the electricity prices are too high, it is free to subsidise consumers. There is however, one crucial difference between a subsidy the Delhi Government would give now, as opposed to before discoms in Delhi were privatized. Before privatization, the Delhi Government could have forced state-owned discoms to absorb the losses. Today, the burden of funding this subsidy has to be borne by the Delhi Government. According to news reports, this subsidy will force the government to cough up an additional Rs. 201 crore in the lastquarter of 2013-14… (link). This subsidy is apparently being paid for by scrapping infrastructure projects. Notably, there is no rational basis (yet) for claiming that electricity is over-priced by 50 percent. And as pointed out earlier, even after all the tariff hikes in the recent past, the cost of electricity in Delhi is far higher than what consumers pay for it.

As point 5 shows, once the government bears the burden of the subsidy, taxpayers have a very real stake in the game. We may decide that it is fine for the government to subsidise electricity. But at what cost? We are discussing not just a financial cost, but the cost of trying to bulldoze legal institutions such as the DERC into submission on the basis of a simplistic claim of corruption without any actual evidence (yet) of over-priced electricity. We are also discussing the cost of going back to a regressive era where we consumers received poor quality electricity at low prices because elected governments were playing a cynical game of charging less for less. The current fight over electricity pricing goes to the heart of what kind of institutions we build for the future.

 

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1. Section 61

2. S. 62

3. S. 65

4. Oral evidence of Chairman, CERC to Standing Committee on Energy in its 30th Report on Functioning of Central Electricity Regulatory Commission (CERC), August 2012.

5. Ibid.

6. Unstarred question no.1635 on Provision of electricity at economical rate, by Shri Wakchaure Bhausaheb Rajaram, answered on 07.03.2013, Lok Sabha.