For the consumers as well as utilities, what matters is delivered cost of power

With parliamentary polls round the corner, it looks as if political power seekers are adopting electric power as the mascot for vote-catching. AAP Government started this by announcing a power tariff reduction of 50 per cent for Delhi residents using up to 400 units per month. The subsidy burden could be about Rs.250 crore for a full year. Simultaneously, it ordered the auditing of the books of private power distribution companies (discoms) by the Comptroller & Auditor General, and the audit has commenced since then. Though the former could be termed populist, the latter appears to be an attempt to ascertain the actual cost of supply of electricity and the kind of tariff setting that has been taking place ever since the State Electricity Regulatory Commissions (SERCs) have been assigned this role under the Electricity Act 2003. This is a laudable step.

Within days, the ‘agitation’ for lower power tariff spread to the neighbouring state with Haryana Bijli Andolan Sangharsh Samiti demanding tariff of Rs.2.50 per unit for domestic and Rs.3 per unit for commercial consumers who have their bimonthly consumption up to 1,500 units.

Soon thereafter, Maharashtra Government has announced reduction of electricity tariff by 20 per cent across the State, barring Mumbai with effect from February 1 covering all consumer categories. For residential users, the rate cut will apply to those who consume less than 300 units a month. The subsidy burden would be Rs.8,472 crore a year. Of this, the State government will have to pay Rs.7,272 crore to compensate the State power utility with the balance of Rs.1,200 crore to be borne by the utility itself. Following this, there are shrill demands to reduce power tariff in Mumbai also where private discoms are supplying power. This trend is in sharp contrast to the views expressed by ‘experts’ that continuous increase in tariff is the only way to make the power utilities financially viable. Only then fresh investments could be attracted in the power sector leading to enhancement of generation capacity and copious supply of power. Heeding this typical classical concept, ‘pass-through’ of fuel costs in determining tariff has been allowed.

Supply-side ‘advocacies’

There is strong advocacy to hike power tariff in Tamil Nadu that has faced acute power crisis in recent years. With several power projects yet to take off despite being years in the making, the state is on perpetual ‘power cut mode’! The argument is that Tamil Nadu could yet salvage the situation by investing to augment the state’s power generation capacity.

Quoting ‘experts’ these advocacy groups are pitching for a Rs.60,000-crore spend to set up adequate thermal power stations, with a capacity of around 8,000 MW and augment transmission capacity over the next five years. To make this happen, they want the ‘average tariff’ to be increased to Rs.7 per unit. These ‘experts’ warn that if this is not done Tamil Nadu faces the threat of losing investments to other states and, over time, an exodus of industries.

In all these supply-side ‘advocacies’ and ‘expert views’ there is no thought whatsoever on actual cost of serving the various category of consumers and how these costs can be brought down through performance enhancement, waste reduction and efficiency initiatives, thereby reducing tariff on ‘economic’ grounds and not as ‘populist’ measure.

Conditions to determine tariff

Costing of power and setting of tariff are done by SERCs under Section 61of the Electricity Act, 2003: “The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely, (g) that the tariff progressively reflects the cost of supply of electricity and also reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission.”

There are three conditions precedent to determination of tariff by any SERC — ‘voltage-wise cost of supply’, measurement and calculation of transmission & distribution (T&D) losses, and the quantum of cross-subsidy.

In its order dated July 28, 2011, concerning TANGEDCO, Appellate Tribunal for Electricity (APTEL) had ruled on the above issues: “We have noticed that the State Commission has not determined the cost of supply according to its Regulations……..The State Commission is directed to determine the voltage-wise cost of supply within six months from the date of this judgment to ensure that in the future tariff orders and cross subsidies for different categories of consumers are determined according to the Regulations and the cross-subsidies are reduced as per the provisions of the Act.…”

T&D losses

On the issue of determination of T&D losses, the order says: “…the base level T&D losses of 18 per cent as estimated by TNEB have been retained. These T&D losses, in our opinion, are not correctly assessed…T&D losses have been assumed without the metered data or on the basis of any scientific study to assess the unmetered consumption…” APTEL’s rulings apply mutatis mutandis to all power utilities and SERCs in the country.

Considering all issues, power cost is really ‘voltage-wise-cost-to-serve’ and not lump-sum average. Each voltage level is a product related to the consumers in that category.

Power utilities receive their power supply from various sources and at various voltage levels: extra-high-tension, high-tension and low-tension. Cost-to-serve should be calculated at each of these voltage levels, and tariff and subsidy burden for each category of consumers determined accordingly. Average cost worked out by utilities like TANGEDCO at a single voltage level of 230 kV is wrong, and cannot be depended upon for tariff-setting because cross-subsidy ‘within plus or minus 20 per cent’ of cost-to-serve each ‘consumer category’ cannot be prudently determined.

Similar is the situation relating to estimating T&D losses. In the true-up petition, TANGEDCO had admitted that only 45.35 per cent of the total distribution transformers erected has been metered, and these too have not been “read at the same point of time which is essential for accurate assessment of aggregate technical and commercial and T&D loss.” This means whatever loss calculation given by TANGEDCO to TNERC is mere guesswork!

In the absence of 100 per cent metering and non-availability of voltage-wise-cost-to-serve, TNERC was in a blind alley while processing the true-up petition and determining the quantum of subsidy and tariff. Yet, the Commission bowed to TANGEDCO and sharply increased the tariff without demur. They also paved the way for further increase in tariff in case government is unwilling to foot the additional subsidy bill.

This would mean the power utility can go on violating norms while burdening the hapless consumers without concern for performance, efficiency or reducing cost. This is because ‘costing’ of power based on which tariff has been determined is neither realistic nor true. Situation in other utilities and SERCs is no better.

For the consumers as well as utilities, what matters is delivered cost of power. This can be significantly brought down by various means: higher plant load factor, assured fuel supply and lower auxiliary consumption, on the generation side; extra-high voltage transmission; demand-side management that flattens load curve and manages peak load on the distribution side; need-based energy management through feeder re-configuring on the delivery side; prudential subsidy management to verify and target subsidies; and energy efficiency/conservation measures to minimise wastage, conserve energy, improve power quality and enhance system reliability.

Affordable power

Due diligence is required at each stage so that optimisation is achieved and wastages avoided. Cumulative effect of these measures is reduction in cost-to-serve, and resultant realistic tariff not as populist measure but as socio-economic imperative to make power accessible and affordable to all sections of society. Regulatory commissions should rigorously adhere to this mandate instead of indiscriminately increasing tariff. This is the raison d'être of their very existence.

(The writer is former IAS Officer and Power Utility expert)

More In: Industry | Business