Tariff policy to enforce UDAY: Power Minister RK Singh to go tough on DISCOMs

By Suranjana Roy

In a recent letter to all states, Union Power Minister RK Singh emphasises on the escalating aggregate technical and commercial (ATC) losses incurred by the state-owned electricity distribution companies, leading to a situation where states “will not be able to pay for the power which they purchase”. This comes as a massive contrast to the ambitious Ujwal DISCOM Assurance Yojana (UDAY) scheme which aspired to revive the power distribution sector in India. There are many states where ATC losses still range from 20 percent to 50 percent, while the UDAY has reduced the losses from 26 percent to 21 percent overall. The ATC losses are indicative of the operational inefficiencies of the DISCOMs and UDAY making it seem much less of a permanent solution to the financial mess in the sector.

In order to ensure UDAY target compliance, the government will mandate a new tariff policy wherein only 15 percent of the losses will be considered for tariff determination. Additionally, cross-subsidization will be rationalized to only 20 percent. Cross-subsidization refers to a practice where higher prices are charged to a certain group of consumers to subsidize lower prices for another group. Reduction in cross-subsidy implies that the industrial and commercial consumers would now pay a lower tariff for domestic and farm users to get electricity at subsidized rates.

UDAY: Failing to bring a new dawn?

Ujwal DISCOM Assurance Yojana (UDAY), launched by the Government of India in November 2015, was a financial revival scheme for the power distribution sector. Under its bailout package, state governments were allowed to take over 75 percent of the debt of the DISCOMs, and pay back lenders by selling bonds. The DISCOMs would issue bonds over the remaining 25 percent. UDAY insisted on reducing ATC costs to below 15%. However, reports suggest that the DISCOMs underutilized the funds to clear their debts, with no urgency to improve efficiency. The increased use of renewable energy also added to the costs as it replaced low-cost coal. The gap between average revenue realist (ARR) and the average cost of supply (ACS), thus, widened in states like Karnataka, Madhya Pradesh, Haryana, Punjab, etc.

Meeting the targets: Tariff Caps

As stated above, the new tariff policy will consider only 15 percent of the losses for tariff determination. Therefore, if a DISCOM incurs losses more than 15 percent, the excess will have to be absorbed by the State Electricity Board (SEB). This would ensure the ATC losses due to inefficiency would not be passed not the consumers. “There is no justification for the consumers to be asked to bear the cost of inefficiency and theft. The technical losses generally vary from 2.5 to 6.5%. There is no reason for any losses beyond that. We had agreed that the losses will be brought down to less than 15% by December 31, 2018,” said R K Singh. The letter further added that the loss-making areas could be given to franchisees which purchase power in bulk against a commission per unit.

Reducing cross-subsidies is another measure introduced. If additional subsidies have to be given, Singh suggests, the states should give this to consumers directly through cash transfers. This would result in clear accounting and hence strive to improve efficiency.

Interesting times ahead

Whether this will help in making UDAY a permanent solution in the power distribution sector or will lead to the implementation of another (and similar) scheme to supplement UDAY, we do not know. The question of implementation arises when the government plans a new mandate, while at the brink of the 2019 elections. Will the centre be stringent on the DISCOMs or relax the terms and conditions of UDAY on the states? Will the government banks keep lending SEBs to meet the losses, irrespective of being viable or not? We could only wait and see whether the government sticks to its terms. If not, yet another power sector bailout is on its way.

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