The problem can be eradicated only if the State Government liberates the three discoms from its controls and gives them the much-needed freedom
In 2018, the Delhi Electricity Regulatory Commission (DERC) issued an order requiring the Delhi Government to give subsidies to its preferred consumers, primarily households, ‘directly’ by crediting it to their bank account using the direct benefit transfer (DBT) mechanism instead of routing it through the three power distribution companies (discoms) namely BSES Rajdhani Power Limited (BRPL), discom for South & West Delhi; BSES Yamuna Power Limited (BYPL) — discom for Central & East Delhi; and North Delhi Power Limited (NDPL) — discom for North Delhi which is the existing practice. The order was never implemented and is now reported to have been withdrawn quietly.
Under the Electricity Act, of 2003, the State Electricity Regulatory Commissions (SERCs) are mandated to fix tariffs chargeable from different categories of consumers besides ensuring compliance with various provisions of the Act. Now, if a directive issued by the SERC (in this case, DERC) is not complied with and even forced to withdraw, it speaks volumes about the prevailing mess in the electricity distribution business in the National Capital.
At the outset, let us highlight a few basic facts regarding how discoms arrange electricity for supplying to consumers, their tariff-setting process and how the subsidy comes into play.
Under the extant arrangements, the discoms purchase power from the public sector undertakings (PSUs) such as the National Thermal Power Corporation (NTPC), etc., and independent power producers (IPPs), under power purchase agreements (PPAs) which are mostly long-term contracts up to 25 years. A tiny fraction of the demand, not more than 5 per cent is purchased from the electricity exchange.
The discoms are expected to sell electricity to the consumers at tariffs –duly approved by the regulatory commission – that are set in a manner such that the revenue generated from sale at these tariffs fully cover the power purchase cost plus the cost of wheeling, and distribution. This is necessary to ensure that they maintain their financial viability and remain in robust health. The requirement is mandatory under the Electricity Act, of 2003.
The SERCs rarely follow this cardinal principle while approving tariffs which are invariably set at levels that fail to generate revenue sufficient to cover discoms’ power purchase and distribution costs. They recognize that the gap exists but don’t do anything meaningful to plug it on a sustainable basis. Far from that, they allow the discoms to book this gap as receivable in their balance sheet - giving it a fancy name Regulatory Assets (RA).
It is an act of legitimizing a highly irresponsible act. No wonder, this has led to a proliferation of RAs over the years. As on June 30, 2022, these were Rs 88,720 crore. This could be much higher even exceeding Rs 100,000 crore if claims bogged down in legal disputes at the appeal level or in higher courts are also included. In Delhi, the current RAs are around Rs 20,000 crore.
Why does a gap between the cost and revenue arise?
This has to do with the top political brass in the State establishment directing discoms to sell a major slice of electricity to households (HHs) (besides farmers in several states), either at a fraction of the cost of supply or even free. This results in under-recovery on such sales which is aggravated by aggregate technical and commercial (AT&C) losses - most of it is plain theft. In a bid to offset the losses, discoms charge high tariffs on supplies to industries/businesses (in Delhi, this is Rs 16 per unit). Yet, overall they incur a loss.
When discoms give power to the target group free or an artificially low tariff under orders from the State government, the latter is obliged to reimburse the former shortfall in realization from sale vis-à-vis the cost of supplying it. But, most states don’t reimburse or do it partially. Even when they do, this is after considerable delay.
As a result, discoms are trapped in a vicious cycle of increasing losses and ballooning RAs. This has even prompted the SERCs to often take recourse to ad-hoc and arbitrary measures to boost revenue; for instance, in Delhi, there is an eight per cent surcharge. Even as this exacerbates the burden on paying customers, the problem remains.
The problem can be eradicated from its root if only the State governments liberate the discoms from state controls and give them the much-needed freedom to set a tariff on supplies to ‘all’ consumers based on the cost of purchase and distribution. As for the subsidy, they can give ‘directly’ to the target beneficiaries under DBT.
With this, discoms will be able to recover their full cost on sales to HHs and farmers. With no under-recovery on such sales, they need not charge more from industries and businesses thereby making power affordable to them. Unshackled from state control, they would also be able to rein in power theft. RAs and losses will be a thing of the past even as discoms turn into financially viable entities.
Under DBT, it will be easier to make way for the de-licensing of the electricity distribution business, breaking the monopoly of a few players and injecting competition leading to more choices and resultantly lower tariffs for consumers.
Imagine the gains the Indian economy would have reaped if only all SERCs had ensured the implementation of DBT in the respective states. But, ALAS! none has done it. DERC issued an order to this effect but that has remained on paper.
In Delhi, all consumers other than those who are the beneficiaries of largesse granted by Kejriwal dispensation (read: no charge from HHs consuming up to 200 units a month and Rs 800 from HHs consuming between 200 and 400 units) could be staring at a steep hike in tariff of up to 100 per cent as in a recent order, the Supreme Court (SC) has directed the DERC to let discoms recover their RAs. DERC has decided to contest the order but for now, Delhiites face a real threat.
The non-compliance with the 2018 order of DERC, could point towards something more serious. The order essentially meant that discoms would charge beneficiaries/ consumers the full amount as per the cost of supply, hence, the Delhi government didn’t need to reimburse them. But, the order wasn’t implemented.
This meant that discoms continued to supply power to the beneficiaries free of charge/subsidized tariff. But, it would appear that the Delhi government didn’t reimburse them for the shortfall in realization vis-à-vis the cost. Could it be that this ‘uncompensated’ amount since 2018 is sitting as RAs in their balance sheets?
Alternatively, even if discoms get full reimbursement of the shortfall from the government, yet they have huge RAs, this too is preposterous. The state of affairs points towards serious irregularities in the handling of power subsidies. This requires a thorough investigation into the accounts of both discoms and the Delhi government and required action taken to deal with the RAs instead of making consumers pay for them.
Delhi is not alone when it comes to messing in the discoms. The malady is gripping most of the states. At the core of it is their uncompromising stance to give free/heavily subsidized electricity and routing the same through discoms. Unless this serious flaw in approach is addressed by adopting the DBT mode for giving subsidies both in the letter and spirit, the discoms will remain in dire straits perpetually.
(The writer is a policy analyst)
