|Monday, 09 May 2011 00:00|
On the face of things, there’s little in common between the prices of petroleum, oil and lubricant products (POL, in jargon), set to rise now that the state polls are over, and electricity prices in the capital. Both, however, suffer from the same affliction. Since the government never raised prices of petrol and diesel each time global crude oil prices rose, it will now have to raise them by a whopping R8-9 per litre in the case of petrol and R18 or so in the case of diesel, which makes it pretty obvious that when the hike comes, it will only partially cover the actual costs. This is precisely what’s happened in the case of electricity prices in the capital. In the past, to cushion customers from the hike in costs, the regulator didn’t take into account all the costs incurred by the distribution companies (discoms); instead, over the years, a part of this rise in costs was classified as a ‘regulatory asset’, and a lower return was given on this. Since these ‘regulatory assets’ have now risen to R8,300 crore and the total billing of all three discoms in the capital is around R8,000 crore, the government will now have to double electricity tariffs if it wants to wipe out the deficit! Clearly that’s not going to happen, so there will be a partial hike; the ‘regulatory asset’ story will continue and, at some point, will get ready to burst all over again. In this case, the immediate crisis is the discoms saying they have no money to buy power and so the capital will have to get ready for power cuts; in the POL space, similar crises have occurred in the past with oil companies saying they have no money to buy crude for more than a few weeks.
Which is why, when the government finally does get down to raising POL prices later next week, it has to ensure there is an automatic mechanism by which future crude oil prices get reflected in retail prices. Kirit Parikh had pointed out, last year, that while kerosene prices had not been raised since 2002—prices here need to be raised 2.7 times to reflect the market price!—consumer incomes had risen 60% in real terms. So, a 60% hike in prices, while insufficient, could have been made while leaving no one worse off than they were in 2002. In the case of LPG, similarly, where prices need to be doubled to break even, Parikh had calculated prices could be raised by R200 per cylinder leaving all consumers no worse off.
Since prices can’t be raised by such amounts in one go, a multi-pronged strategy has to include reducing government tariffs as well. It seems funny the government should talk of under-recoveries when it collects R14.35 (R4.6 for diesel) by way of excise duty per litre of petrol—that’s 25% (12% for diesel) of the retail price.
In the case of Delhi, the state government collects another R20 (R12.75 for diesel) per litre, or 34% (ditto for diesel) of the retail price by way of sales taxes. While government revenues need to rise, a possible solution lies in converting the ad valorem duties—for both customs as well as for excise—to a specific duty when prices rises above a certain level.