Forget a 50% reduction, AAP has to ready for a near doubling of tariffs over a few years
It is impossible to know which that precise moment was when the aam aadmi in Delhi decided to plump for the Aam Aadmi Party (AAP), was it when Sheila Dikshit condescendingly said she hadn’t eaten onions for a week or was it when a series of CAG reports came out on various Congress scams? Was the Jan Lokpal Bill supposed to stop 2G-type scams or was it to prevent the aam aadmi from getting rooked every day? It was obviously a combination of many things, but the most evocative photo image of just what the AAP would do for suffering Delhiites was its chief Arvind Kejriwal donning his Gandhi topi and, with a pair of sturdy pliers, simply disconnecting electricity meters to ensure harassed citizens got the free power he felt they deserved. And, such was the moral authority of Kejriwal, the narrative must have been, the government never even dared to arrest him. The plank was so strong, even the BJP’s chief ministerial candidates were forced to say they too would reduce power costs in the capital—and since the BJP was playing catch-up, the 30% cut it promised was lower than the AAP’s 50%. Why vote for an imitator when you can vote for the original?
Over a period of time, as realisation grew that the AAP could well be in power—to be fair, no one gave the AAP a chance, and how wrong everyone was—so it decided it would play the middle ground. No more mass bypassing of electricity meters, an audit has been promised of all distribution companies (discoms), electricity meters will be checked by independent agencies and any discom not accepting the audit would find its licence revoked. And, in a measure that probably makes more sense, competition would be introduced in the sector. To put this in perspective, and there is little doubt the Congress is to blame for not pushing this, ‘open access’—to use electricity jargon—was something that was mandated in the Electricity Act of 2003 and had to be implemented within 5 years. We’re nearly in 2014 and there is no sign of ‘open access’.
This cosy monopoly probably ensured discoms didn’t spend as much time and effort to become more competitive—just see how competition in the telecom sector has lowered prices. So, for instance, power sector losses are still 17-20% in some Delhi discoms—if this was brought down to 10% levels seen in some cities, this would reduce power tariffs by as much as 10% or so. But this problem goes beyond Delhi, no state government has even asked its regulator to do this—indeed, by law, the regulator has to do it anyway.
Which is why, the next best thing to the AAP’s performance in the capital—for those who believe in the party and its just-legislate-it ideology—is that it has decided to sit it out for now. Were the AAP to come to power, or the BJP for that matter, it would realise that things are a lot more complicated. Going by the orders by the Delhi Electricity Regulatory Commission (DERC), the costs at which the discoms buy the power is itself higher than the tariff charged to the customer. For FY14, the tariff order of the DERC points out that for BYPL, the average billing rate will be R5.17 per unit as compared to the average cost of supply of R6.54—the figures are, respectively, R6.23 and R6.2 for BRPL and R5.17 and R6.31 for NDPL. So unless you assume the costs of purchases are doctored—interestingly, all the power is bought from PSU power plants—it is difficult to see how power tariffs can be brought down to anywhere near what the AAP or the BJP is promising. Nearly three-fourths of the power bought by the three Delhi discoms—one owned by the Tatas and two by Anil Ambani—is from NTPC. Indeed, the amount has been certified by various electricity regulators, but it would be interesting to see what an audit reveals.
The other thing the audit will show is, to lapse into electricity-speak again, nearly R20,000 crore of ‘regulatory assets’. Normally the way things work is that once the discoms give their estimates of costs for the year, the regulator allows them to charge a certain tariff—if the costs are R1,000 crore and 100 crore units of power are to be sold, a tariff of R10 per unit will be approved. Since the advance estimates can be quite different from the reality—say there is a surge in power purchase costs later—this is fixed up by later ‘truing up’ the accounts. But since a tariff of R10 is very high, no one wants to pass this on to customers. So, the regulator will tell the discom that R600 crore of expenses will be recognised—that will give a R6 tariff—and R400 crore will be shifted to a category called ‘regulatory asset’. An interest cost will be paid on this and, over a period of time, say when losses fall or when power prices fall, this can be paid back.
Regulatory assets in Delhi were around R1,000 crore in FY09 but went up to a whopping R20,000 crore by FY13. Given Delhi’s power consumption of 2,600 crore units a year, a one-time hike to wipe this out would mean a jump of R7.5 a unit or roughly doubling of tariffs. Servicing this at a 12% interest cost per year means a 90 paise extra cost of power each year. Since the regulatory asset has to be cleared within a 3-4 year period, a near-doubling of tariffs will take place whether or not the AAP likes it.
The solution, and again this is where the Sheila Dikshit government either wasn’t proactive or wasn’t effective, was to get the Centre to allocate a coal mine—it did so for so many less deserving—to the state or to a JV of the state and the discoms which would allow it to buy power at between R2 and R3 a unit to let the final power tariff settle at around R4-5 a unit. But since getting a coal block allocation can’t possibly send 23 lakh hearts aflutter—that’s the Election Commission number for the AAP voters—disconnecting electricity meters probably made a lot more political sense.