CERC got it right, SEB overcharging must end
While introducing competition in the electricity sector has to be central to power minister Piyush Goyal’s ambitious power sector restructuring programme, even the smallest attempt to do this has run into problems with the West Bengal State Electricity Distribution Company (WBSEDCL) challenging the Central Electricity Regulatory Commission’s (CERC) ruling in a case involving the Indian Railways. In the process, the Railways plan to cut costs may also suffer a big hit, as also the plan by various banks to revive the Dabhol power plant and recover the loans made by them to it.
Right now, since electricity companies, mostly owned by various state governments, have to provide below-cost power to farmers and the household sector, they overcharge industrial and commercial customers—under this system, when an industrial/commercial user leaves an electricity company for another one, it has to pay an ‘open access surcharge’ to allow the first company to keep subsidising its agricultural/household customers. The problem, however, is that if the surcharge is too high, customers can never shift to new suppliers and, as a result, there is no competition in the sector, and therefore no incentive to lower costs—it is severe competition, more than anything else that, for instance, brought down tariffs in the telecom sector to amongst the lowest in the world. In the case of the Railways, this is what the CERC sought to fix earlier this month.
Since the Electricity Act of 2003 did not override the Railways Act—which allows the Railways to both generate and distribute electricity—CERC ruled the Railways was a deemed licensee and so did not have to pay the open access surcharge when it moved to lower-cost suppliers. While the Railways spends around R13,000 crore on buying electricity every year, most of these are based on old and high-cost agreements—the Railways, however, never found it profitable to shift to lower-cost suppliers since, once the open access surcharge was added, the tariffs from the existing suppliers were roughly comparable with those from new ones. The Railways need to move to lower-cost suppliers, as it happened, coincided with the banks’ plan to revive the Dabhol power plant. While the plant found few buyers for its relatively high-cost electricity, the costs were lower than what the Railways was paying its suppliers. To that extent, the Railways tying up with Dabhol to buy some part of its annual requirements, after severing its contracts with a few existing suppliers, helped both the Railways—it can eventually save R4,000-odd crore each year once it replaces all existing contracts—as well as the banks that have lent money to Dabhol. With WBSEDCL now challenging the CERC ruling, the matter will now be decided by the Appellate Tribunal and, eventually by the Supreme Court since whichever party loses will go in appeal. Meanwhile, those looking forward to greater competition driving down power tariffs will have to wait that much longer.