Purchase of Power in Andhra Pradesh

The Story

So Jagan Mohan Reddy recently swept back to power in Andhra Pradesh and almost immediately decided to take a closer look at 21 power purchase agreements signed by his predecessor Chandrababu Naidu. Now if you are new to this whole saga here’s a brief that might help you better appreciate what’s happening here.

The power generating companies generate electricity. The Distribution companies buy it off of them and make it accessible to Indian households. Unfortunately, the distribution companies (often referred to as Discoms) are in a state of crisis. Primarily because they seem to be buying power at higher prices and making less money selling them. Why would they do such a silly thing? Well because state governments mandate them to subsidize power since they are owned by the state. And it doesn’t take a genius to figure out that this isn’t a sustainable business model. It only works because the government often bears the loss burden.

So Jagan’s contention is that Naidu’s previous agreements put the state-run distribution companies and through it the governments finances under more pressure. By agreeing to buy power at ridiculously high prices (to favour corrupt individuals) Naidu seems to have thrown the state-run distribution companies to the wolves and Jagan believes that he can remedy this by simply cancelling all the previous agreements.

Many others contend that this is simply a ruse for Jagan to favour his set of cronies. And depending on who you want to believe you can interpret this bit any way you like.

But that’s not the real story here. The real story is that the central government now wants to get involved. Their argument is this?—?If a state Government pulls out of legally binding contracts at the last minute, it will scare away investors, not only from Andhra Pradesh, but from India as a whole. Who would want to waste their time and money pursuing a deal that might not go through? You’re not just bringing disrepute to yourself. You are shaming the whole family and that is unacceptable.

In fact, several investors, including Japan’s ambassador to India had expressed similar concerns. So you can see why the Modi government wants to get involved here. Anyway, after some back and forth, Jagan finally relented. He agreed to not reopen all old Power Purchasing Agreements, but only those in which maleficence is suspected. And with that, we have a small victory for the Central government. But no, they want more. The central government is now mulling to introduce a new law than can prevent state governments from arbitrarily cancelling legally binding agreements at the last minute. This way they wouldn’t have to deal with errant governments behaving like spoilt brats. So yeah, the power struggle in Andhra Pradesh just got a lot more exciting and we will be bringing  you all the latest updates as they unfold.

This article was originally published on Finshots