Little question of tariff hikes now to cover losses
Given the state will meet much of the proposed R7,200 crore electricity subsidy through its coffers, it is possible to argue Maharashtra’s move to slash tariffs by 20% on Monday will not affect the electricity utilities in the state, much less those in other states. Coming as it does on top of Delhi’s tariff cuts which were, in turn, followed by Haryana, the argument is disingenuous. For one, since the state doesn’t have the money, there is no guarantee as to when payments will be made—in FY10, for instance, around 45% of the subsidy due to utilities across the country were not paid when most states’ finances were in disarray. There is every reason to believe this will happen again if cash-strapped states make promises beyond what they can deliver—in Delhi, while the tariff cuts amount to a mere R20 crore per month, the state’s budget has a healthy surplus. Indeed, given how the Delhi power tariff cut led to similar demands in other states, and how Haryana’s R600 crore cut was much higher than Delhi’s, and Maharashtra’s much higher than Haryana’s, the fear of the AAP virus spreading is a real one.
More important, with the gap between power costs and tariffs a little over R1.1 per unit in FY12—this resulted in losses of around R93,000 crore for all utilities in FY12—the need of the day is to hike tariffs all around. But in an atmosphere of tariffs coming down, how are tariffs to be hiked by such large amounts in other states? Indeed, the Financial Restructuring Plan (FRP) approved by the Cabinet for the power sector mandates regular hike in tariffs to take care of this revenue gap. In Uttar Pradesh, for instance, tariffs were upped by 18% last year and 9% this year while in Punjab, they were raised by 12% last year and 9% this year.
Though R30,000 crore of the R93,000 crore gap in FY12 was provided for by state governments by way of subsidies for the farm sector, the gap is all set to grow each year—the power utilities, between them, have already wiped out their net worth which, by FY12, was minus R32,000 crore, making the sector completely non-financeable. In the case of Maharashtra, for instance, the costs of purchasing power have been rising by around 35-40 paise per unit each year while Monday’s tariff cuts range between 38 paise to R2.38 per unit. While the cost hikes are higher in other states like Delhi, once you add in the R70,000 crore of ‘regulatory assets’ across the country—a one-time fixing of this alone requires electricity tariffs to be hiked 70-80 paise per unit—which need to be discharged, that’s a long journey ahead. What complicates this further, as our page 1 graphic shows, is the large cross-subsidies which ensure industry and services are over-burdened already, leaving little room for further hikes in their tariffs—industry accounts for 27% of units sold in Tamil Nadu, for instance, but 52% of revenues are got from here. This is something the banks that have agreed to the FRP need to factor in.